PAGENO="0001" / fl / ~ / MECHANIJSMS FOR FIINANCJING 1ECONOM~~ IIC GROWTh ANID 1DI~VQI~gF OCT 15 HEARING BEFORE THE TASK FORCE ON COMMTJNITY DEVELOPMENT AND NATURAL RESOURCES OF THE COMMITTEE ON THE BUDGET HOUSE OF REPRESENTATIVES ONE HUNDRED SECOND CONGRESS FIRST SESSION JULY 12, 1991 MEMPHIS, TN Printed for the use of the Committee on the Budget Serial No. 2-2 0 U.S. GOVERNMENT PRINTING OFFICE 44-629 WASHINGTON : 1991 For sale by the U.S. Government Printing Office Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 ISBN 0-16-035535-4 /R7L ~S~b/13 :, O3~~ PAGENO="0002" COMMITTEE ON THE BUDGET LEON E. PANETTA, California, Chairman RICHARD A. GEPHARDT, Missouri JAMES L. OBERSTAR, Minnesota FRANK J. GUARINI, New Jersey RICHARD J. DURBIN, Illinois MIKE ESPY, Mississippi DALE E. KILDEE, Michigan ANTHONY C. BEILENSON, California JERRY HUCKABY, Louisiana MARTIN SABO, Minnesota BERNARD J. DWYER, New Jersey HOWARD L. BERMAN, California ROBERT E. WISE, JR., West Virginia JOHN BRYANT, Texas JOHN M. SPRATT, Ja., South Carolina DONALD J. PEASE, Ohio CHARLES W. STENHOLM, Texas ROBERT J. MATSUI, California BARNEY FRANK, Massachusetts JIM COOPER, Tennessee LOUISE McINTOSH SLAUGHTER, New York LEWIS F. PAYNE, JR., Virginia MIKE PARKER, Mississippi BILL GRADISON, Ohio Ranking Republican J. ALEX McMILLAN, North Carolina WILLIAM M. THOMAS, California HAROLD ROGERS, Kentucky AMO HOUGHTON, New York JIM McCRERY, Louisiana JOHN R. KASICH, Ohio HELEN DELICH BENTLEY, Maryland WILLIAM E. DANNEMEYER, California JOHN MILLER, Washington JIM KOLBE, Arizona CHRISTOPHER SHAYS, Connecticut RICHARD JOHN SANTORUM, Pennsylvania BILL PAXON, New York TASK FORCE ON COMMUNITY DEVELOPMENT AND NATURAL RESOURCES MIKE ESPY, Mississippi, Chairman *LEON E. PANETTA, California *BILL GRADISON, Ohio *RICHARD A. GEPHARDT, Missouri *J ALEX McMILLAN, North Carolina BERNARD J. DWYER, New Jersey **HELEN DELICH BENTLEY, Maryland ROBERT E. WISE, JR., West Virginia RICHARD JOHN SANTORUM, Pennsylvania CHARLES W. STENHOLM, Texas LEWIS F. PAYNE, JR., Virginia LYNNE RICHARDSON, Associate Staff and Task Force Director JANE WALLACE MCNEIL, Associate Staff *Ex Officio. * *Ranking Republican. (II) PAGENO="0003" CONTENTS Statement of: Page Bowie, Harry J., President, Delta Foundation, Greenville, MS 46 Byars, Raleigh H., State Director, Mississippi Small Business Develop- ment Center, University of Mississippi 49 Cash, Ann, Regional Vice President, National Mississippi River Parkway Commission, on Behalf of Minnesota State Senator John Bernhagen, Commission National Chairman 6 Dobbins, Olivia, on Behalf of the Black Business Association 31 Eastland, Hiram, Attorney, Eastland Law Offices 63 Ford, Hon. Harold E., a Representative in Congress from the State of Tennessee 2 Gray, Robert, President, Griffin Lamp Co., Shelby, MS 43 Haney, William Billy, Executive Director, South Delta Mississippi Plan- ning and Development District, Greenville, MS 40 Hawkins, Wilbur F., President, Lower Mississippi Delta Center 9 Holeyfield, Mabra, Vice President, Secured Capital Developers, Memphis.. 29 Lawyer, M. Scott, Bank Consultant/Investment Banker 61 Luboti, Wesonga, Regent Investment Corp 28 Manning, Mark, Economic Development Director, South Delta Mississippi Planning and Development District 41 Perry, James, Executive Director, Mississippi Presidential Council on Rural Development, accompanied by John Sullivan, Chairman, Missis- sippi Presidential Council on Rural Development 11 Richardson, Randall, State Director, Tennessee Farmers Home Adminis- tration, U.S. Department of Agriculture, accompanied by James B. Huff, Sr., State Director, Mississippi Farmers Home Administration and Frank Shoemake, Chief, Farmers Home Community Business Pro- gram in Mississippi 65 Rockefeller, Winthrop P., Chairman, President's Council on Rural Amer- ica 13 Rowe, Gary, Director, Minority Business Development Center, Memphis ... 32 Sumner, Randall C., Vice President, The Federal Reserve Bank of St. Louis 15 Surgeon, George, President and CEO, Elk Horn Bank and President, Southern Development Bancorporation 56 Vindasius, Julia, Director, The Good Faith Fund 58 Welch, E. Bobby, Director, Memphis Economic Development Center 34 Prepared statements submitted by: Bowie, Harry J 120 Byars, Raleigh H 126 Cash, Ann 75 Dobbins, Olivia 171 Gray, Robert 117 Haney, William Billy 113 Holeyfield, Mabra 109 Lawyer, M. Scott 159 Luboti, Wesonga 105 (III) PAGENO="0004" Page Iv Perry, James . Richardson, Randall 167 Rowe, Gary 110 Sumner Randall C 100 Welch, E. Bobby 239 Additional information submitted for the record by: Durbin, Hon. Richard J., opening statement 4 Hawkins, Wilbur F., prepared statement with attached Delta Commission Recommendations 79 Jones, Ed, chairman, Board of Directors, Lower Mississippi Delta Devel- opment Center, prepared stat~MfiuIiarstar,..Hon...James..L.,..apening.statement 5 Rockefeller, Winthrop P., prepared statement with attachment entitled Rural Economic Development for the 90's (A Presidential Initiative) 172 Schillinger, Ronald P., Schillinger & Associates, marketing consultants, letter dated July 11, 1991, re Delta Regional Investment Fund with attached development report, entitled Development of A Master Plan for the Historic Restoration of Cairo, IL 201 Shepherd, Malcolm T., manager, Madison Madison International, Jack- son, MS, prepared statement 236 Surgeon, George: Exhibit 1.-Article from News and Views on Community Affairs entitled Southern Development Provides Examples of Innovative Community Development Lending 137 Exhibit 11.-Southern Development Bancorporation (Annual Review, 1989) 139 Prepared statement 133 Vindasius, Julia, prepared statement with attached exhibit, Sidelines, Spring 1991 152 PAGENO="0005" MECHANISMS FOR FINANCING ECONOMIC GROWTH AND DEVELOPMENT FRIDAY, JULY 12, 1991 HOUSE OF REPRESENTATIVES, TASK FORCE ON COMMUNITY DEVELOPMENT AND NATURAL RESOURCES, COMMITTEE ON THE BUDGET, Memphis, TN The Task Force met, pursuant to notice, at 9:30 a.m., in Shelby County Commission Chambers, 160 North Main Street, Lobby Floor, Memphis, TN, Hon. Mike Espy, chairman, presiding. Mr. ESPY. Good morning to all of you. It's an honor to be back here in Memphis in Harold Ford's district, Shelby County. Glad to be surrounded by colleagues from Minnesota and Illinois and all of you who decided to drive from points South this morning to this hearing. I believe it's going to be interesting. I know that it will be important. So we're going to welcome you to the House Budget Committee's Community Development and Natural Resources Task Force hear- ing. This is the second hearing in a series of planned hearings called Investments in America's Hometown. The concern of the Budget Committee Task Force, frankly, is that a very valuable resource, small towns and close-knit neighbor- hoods that provide our family support and sense of belonging, is being lost. Can that trend be reversed? Should that trend be re- versed? The trouble found in most major cities today-high crime rates, traffic congestion and stressful lifestyles-suggests the trend should be reversed. The enthusiasm of people active in community development projects-local entrepreneurs and tourist bureaus- suggest that the trend can be reversed. So we are looking at ways through this series of hearings to save, revitalize, and stimulate growth and opportunities in our local communities. In the first hearing we had in Washington we heard a number of recommendations. For example, reauthorizing and revamping the Economic Development Administration (EDA) administered by the Department of Commerce; increasing funding for Community Deve- lopmenr Block Grants (CDBG), which is a program that we all know is administered by HUD; shifting more SBA resources and expertise to rural areas including the certified development compa- nies and minority business enterprise programs; upgrading the community and business programs of the Farmers Home Adminis- tration (FmHA); funding the Rural Partnership Investment Fund (1) PAGENO="0006" 2 authorized in 1990; and, establishing financial institutions or mech- anisms to serve regional economic development activity. The. issues to be discussed today will include venture capital funds, sources of risk capital, equity capital, private and public in- vestment partnerships, grants, loans, loan guarantees, technical as- sistance and business management counseling, leadership training and a host of other mechanisms that will return viability to a lot of small communities. We have four Members of Congress in attendance today, and I really do appreciate it. I personally appreciate the fact that the gentleman from Illinois and the gentleman from Minnesota would take time today to attend this hearing in Memphis. There are other places that they could be and the fact that they would take time to stop through Memphis I know I appreciate and I'm sure that Congressman Ford does as well. He'll express that apprecia- tion at his time in just one second. Over 20 witnesses are scheduled to testify today as a part of four panels. Panel I will provide an overview of the economic develop- ment potential in local communities, particularly a region that we call the Lower Mississippi Delta. Region. Panel II will provide in- sights on current economic development efforts in the Memphis area. Panel III will share experiences with economic development in Mississippi and panel IV will discuss involvement of financial in- stitutions and other organizations in economic development op- tions. I'm looking forward to hearing these options, ideas, and sugges- tions. And I thank you all for your willingness to come today to testify before this Budget Committee Task Force. A couple of housekeeping matters before I turn it over to Con- gressman Ford, then to Mr. Oberstar and Mr. Durbin. We have a number of witnesses today. We're sure that you are all excited and want to give us your all; but, the fact is that you cannot because if you do we'll be here until next month. So, we're going to ask that you summarize your written testimony in no more than 5 minutes, please. We will appreciate you limiting your oral testimony, as I said, to about 5 minutes. Give us a summary highlighting your major points and please be assured that your full and complete written statement will be included in the hearing record along with any additional materials which you wish to submit. With that, let me turn it over to Congressman Ford. We're de- lighted to be here. STATEMENT OF HON. HAROLD E. FORD, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TENNESSEE Mr. FORD. Thank you very much, Mr. Chairman. Mr. Chairman, I want to thank you as the chairman of the House Budget Task Force on Community Development and Natu- ral Resources for coming to Memphis and bringing Members of your Task Force to this city. And I'd like to welcome my col- leagues, Mr. Durbin and Mr. Oberstar, who I traveled with this morning down from Washington and would like to say to the two of them that I've had an opportunity now to represent this area for the past 17 years as a colleague of you guys in the House. And I PAGENO="0007" 3 must say that economic development has certainly been in the forefront of my 17 years as a Member of that body, and I guess the topic of creating a regional fund to make capital more accessible to small businesses is a very applicable set of issues and items that we certainly would like to discuss in this area. The theme for the hearings is Investments in America's Home- towns, I guess mechanisms and financing economic development. I must say that you, Chairman Espy, hope to draw attention to the new approaches for community development in rural as well as urban areas. And I must say, being a part of the urban setting, that it is very timely that the Budget Committee would come here to the city of Memphis like you're going other places, and also hearing from witnesses in the Congress. The Lower Mississippi Delta Commission Report concluded in short that the small business sector will play a key role in shaping the delta's economy in the next 10 years. Jobs, wages, and healthy community depends upon small businesses which in many areas of the delta encompasses anywhere from 90 to 100 percent of all en- terprises. And the Commission's recommendations, Congressman Espy, intend to focus these hearings today centered around what the Commission was able to report back in its findings. And as we look around, not only here in Memphis but through- out this Nation, the limited resources of the limited dollar capital to oftentimes small businesses as well as African Americans and women in this country, certainly has been a downfall for stability in our neighborhoods, stability in our communities. When we look at the high crime rate, the drug problems which we are faced with, oftentimes we want to use instruments that do not go to the core of the problem. I commend you and the other committee Members of the Budget Task Force for having the foresight to come out into the rural areas and urban areas and talk about enterprising ventures that can, in fact, make neighborhoods grow and bring about stability in communities that has been long overlooked for the past 10 years that I know that I've served in the House of Representatives. I hope that this Budget Committee Task Force will send a strong, not only recommendation, but also allocate whatever formulas are needed in order to get a message to all of our colleagues in the House as well as our colleagues over on the Senate side, and also send a clear message to this Administration that we must focus more if we're going to protect the children and the families and the stability of our communities in this country. This Task Force and recommendations that will come from this Task Force certainly will go a long way and play a major role in economic development in this country. Thank you, Mr. Chairman. Mr. Espy. Thank you, Mr. Ford. I appreciate that statement, and I associate myself with those words. Just let me tell the audience that we could go anywhere and have this hearing anywhere else in the country; but, we decided to come to Memphis, TN for a couple of reasons. One, its strategic and geographic location as the cross- roads of the mid-South. That means a lot to us when we talk about options to revitalize middle America. PAGENO="0008" 4 But the other reason, frankly, is because of the leadership of Congressman Harold Ford. He is wise, and he has given us excel- lent support from his position as a Member of the Ways and Means Committee. Because of this wisdom and because of this leadership, we decided to come and hopefully, have a little bit of it rub off on us. To come here and sit beside him. So thank you, Mr. Ford, for what you've done and the leadership you have provided. We appre- ciate you allowing us to come. Mr. FORD. Mr. Chairman, just two little seconds. I want to com- mend you and your staff for the makeup of the different panels, and to see and to know many of those who will be testifying today and know and be familiar with their organizations and their inter- est. I'd like to applaud you and the committee Members, as well as the staff, for assembling such a broad segment of our community as well as the State of Mississippi. And I certainly would like to wel- come all of you who are from the State of Mississippi. As you might know or already know, Memphis is the capitol of Mississippi, so you're right at home. Don't worry about it. Mr. Espy. Thank you, Mr. Ford. - Let's turn now to my colleagues on the Budget Committee, senior colleagues on the Budget Committee, Jim Oberstar from Minneso- ta, and Dick Durbin from Illinois. Mr. OBERSTAR. Thank you, Mr. Chairman, it's a pleasure to be here again in Memphis, although I must say it's been a rather long interval since my last really substantive visit to this community. I want to join you in welcoming our witnesses, and all those who are participating in the hearing. I want to also join Harold Ford in con- gratulating you on initiating a series of hearings and inquiry into economic development, the tools that are available for both urban and rural development and to look beyond traditional investment tools that are used by development organizations on a regional and local basis. Harold Ford and I came to Congress in the same term and have served side by side all these years, rarely cast a differing vote. He has been a very great ally for us on the Public Works Committee and the House Ways and Means Committee in developing tax in- centives to match those of the direct investment funding for eco- nomic development initiatives. I guess all of my 28 years in Washington as a staff member and as a Member of Congress has been spent in the field of economic development. I was fortunate to have been part of the team that drafted the original Public Works and Economic Development Act of 1965, and the Appalachian Regional Development Act as well. It was a delight to see a long time friend and participant in the professional business of economic development, Pete Perry, who is recognized nationally as one of the most thoughtful and effective people in the field of economic development. I know he's going to have some very good thoughts for us. One or two reflections. When I chaired the Economic Develop- ment Subcommittee of the Public Works Committee and held hear- ings at the outset of the Reagan Administration's efforts to abolish EDA and abolish the Appalachian Regional Commission, we had hearings in Washington and throughout Appalachia. And among the witnesses whose testimony sticks out in my mind is that of PAGENO="0009" 5 Tilda Kemplan with the Mountain Community's Child Develop- ment Center at Duff, TN, who said to our committee, "Gentlemen, when you go back to Washington please try to look over the top of the dollar and don't see George Washington but try to see a child, a child that somewhere will not have the opportunity to have any health services or any nutritional services, or any educational op- portunity, or any developmental skills. When you go back to Wash- ington look for that child and try to put that dollar to invest in their future." And Charlie Turner who was then mayor of Sneedville, TN said, "When I came on the scene in 1961 as mayor of Sneedville it was a community that had a trodden down spirit, hopelessly looking around for something to sustain them and they couldn't find it. People would come here," he said, "and when we told them that we had no railroad and no airport and no paved road we would just see them deflate and they'd turn around and go away and make their investment some place else." He said, "we were so far down we had to look up to see bottom, and then along came the Appa- lachian Regional Development Commission and helped us build." He took us into a place where the city council met, which served as the city hall-it rea]ly didn't have a formal city hall but this was the place where they met, a big town hail. And on back of the desk, I'll never forget the little sign, it said "God never put nobody in a place too small to grow." And if you keep that in mind you're going to be able to find a way to grow, to put the tools together and to do the job. And the Appalachian Regional Commission was one of those essential tools of the Federal Economic Development Ad- ministration, one of those tools. And now we need other devices and means to help create em- ployment opportunities for people. We find our worth in our work. The series of hearings that you're holding are really designed to put the worth back in the human being and create those employ- ment opportunities for the future. And out of this I hope we'll be able to fashion sound budget priorities for the future for economic growth and development. Mr. Espy. Thank you, Mr. Oberstar. Perhaps we should call you William Wadsworth Oberstar because of that eloquence. We appre- ciate that. Dick Durbin of Illinois. Mr. DURBIN. Thank you very much, Mr. Espy. John Kennedy is famous for some of his statements he made during his Presidency. And one that I recall-Harvard educated Kennedy received an honorary degree from Yale and said he had the best of both worlds, an education from Harvard and a degree from Yale. I feel similarly honored today to be on the Budget Task Force with my seatmate and friend, Mike Espy, in the hometown of my friend Harold Ford. Harold Ford has spoken out for America's families throughout his congressional career. Mike Espy, a relative newcomer to Con- gress has made his mark already as an aggressive advocate, not only for his district but also for rural America. He and I sit on the Budget Committee, we are a distinct minority in terms of Members who represent rural constituencies. We try to get a word in edge- PAGENO="0010" 6 wise with our urban and suburban friends and to make sure that rural America is not forgotten. I represent a district that is just a little above the Lower Missis- sippi Delta, but I am on the Mississippi River. Mr. Oberstar is, too, for that matter. Mr. OBERSTAR. Starts in my district. Mr. DURBIN. So we've got the Mississippi from one end to the other covered today, and I know we're going to cover some very im- portant issues. And I thank you for inviting me. Mr. Espy. Thank you, Mr. Durbin. Let's move on then to our first panel: Ann Cash, who is regional director of the National Mississippi River Parkway Commission; Wilbur Hawkins, president of the Lower Mississippi Delta Center; John Sullivan, chairman of the Mississippi Presidential Council on Rural Development, who is accompanied by James "Pete" Perry, executive director of the Mississippi Presidential Council on Rural Development; Winthrop Rockefeller, chairman of the President's Council on Rural America; and Randall Sumner, who is vice presi- dent of the Federal Reserve Bank of St. Louis, who is accompanied by Sandra Braunstein-good to see you again, Sandra-program manager, Community Affairs, Division of Consumer and Communi- ty Affairs, Board of Governors of the Federal Reserve System, and Linda Wilson. We appreciate your being here today, and so let's start with Ms. Cash. Again, please summarize your testimony and try to get it down to about 5 minutes if you can. STATEMENT OF ANN CASH, REGIONAL VICE PRESIDENT, NATION- AL MISSISSIPPI RIVER PARKWAY COMMISSION, ON BEHALF OF MINNESOTA STATE SENATOR JOHN BERNHAGEN, COMMIS- SION NATIONAL CHAIRMAN Ms. CASH. Mr. Chairman, Members of the Task Force, my name is Ann Cash of McGehee, AR, southeast Arkansas, and I'm a re- gional vice president of the National Mississippi River Parkway Commission. I am providing testimony today on behalf of Minneso- ta State Senator John Bernhagen, national chairman of the Missis- sippi River Parkway Commission. Senator Bernhagen regrets that he cannot be here today, but he and our executive director, John Edman, are at this moment meeting with the Governor of the State of Mississippi in Jackson regarding a Mississippi River internation- al marketing program. The Mississippi River Parkway Commission appreciates the op- portunity to provide testimony to this House Budget Committee Task Force on the topic of "Investments in America's Hometowns." Our organization has been working in the 10 Mississippi River states to stimulate economic growth in rural and urban communi- ties through the development of highway programs, historical pres- ervation and recreational projects and the implementation of do- mestic and international tourism marketing efforts. While our ac- tivities may be small in scale and funding, they demonstrate the effectiveness of public and private partnerships in enhancing the economic viability of a region. PAGENO="0011" 7 In this testimony I would like to update you on the activities of the MRPC, particularly in our efforts to study the economic poten- tial of the Mississippi River Valley. I'd also like to provide you with some of the specific thoughts of Senator Bernhagen on the po- tential role of a development bank or investment fund for the Mis- sissippi River. In addition to serving as Chair of the National Com- mission Senator Bernhagen serves as executive director of a rural Community Development Corporation located in Hutchinson, MN. First, I'd like to provide you with a little background on the Mis- sissippi River Parkway Commission. As you may know the Com- mission is a quasi-governmental organization of the 10 States along the Mississippi River that exists to promote and preserve the re- sources of the Mississippi River Valley, and to develop the regional scenic by-way known as the Great River Road. In existence since 1938, the Commission consists of individual State commissions es- tablished in each of the 10 States either by statute or Governor's executive order that together comprise the National Commission. Our organization's historic main goal is to develop highway and amenity projects along the Mississippi River through the Great River Road program. We have accomplished much toward this goal with the expenditure of over $1 billion in Federal, State and local funds on various Great River Road projects involving historic pres- ervation, the development of scenic overlooks and bike trails, road reconstruction and resurfacing, bridge replacement, and interpre- tive centers. And as much as has been completed, however, the job is only half done. An estimated $1 billion is still needed among the States to complete the' projects and plans associated with this pro- gram. While working to complete our Great River Road projects and plans we have also undertaken many new efforts to bring about a greater domestic and international awareness of the entire Missis- sippi River Valley. We have for several years developed programs with State and local tourism industry partners in order to raise a greater awareness of the tourism potential of the region. Although funding for these programs has been limited we have done much to increase tourism interest along the Mississippi River in the 10 States. We have further launched an international marketing program with the tourism offices of the 10 Mississippi River States designed to increase the awareness of our region as a new destination for international tourism travel. We currently have the financial par- ticipation of 8 of our 10 States in this international marketing pro- gram that is currently focusing on Japan. We are also currently discussing the possibility of a new joint international marketing initiative between the Federal Government and the States through the United States Tourism and Travel Administration. Perhaps the greatest partnership involved in our efforts to con- duct a Mississippi River Fair in Osaka, Japan in 1988. This tour- ism, trade and cultural exchange between Japan and the Mississip- pi River States involved private industry, state tourism, involved agriculture and economic development agencies, the Federal Gov- ernment and the Commission. Funding for this effort was extreme- ly difficult to obtain as there was no central organization or fund PAGENO="0012" 8 to draw from to get this program off the ground. With much strug- gle, however, the program was a success. As part of our continuing efforts to provide a greater awareness to the resources of the region we are currently involved as key members of the Mississippi River National Heritage Corridor Study Commission. This Commission, which is comprised of members of the Mississippi River Parkway Commission in the 10 States and five Federal Agency representatives, is charged to do an inventory of the resources of the Mississippi River. The Commission is due to complete a report to Congress within 3 years that will include rec- ommended boundaries of a possible corridor designation as well as recommendations on ways to increase economic development in the region. The Corridor Commission is now selecting a contractor for the study and will be gathering information from throughout the Mis- sissippi River States. The Mississippi River Parkway Commission has already begun to assist in this effort by requesting each of the States to furnish information regarding the types of economic de- velopment programs and incentives for economic development that they provide. There is much to learn from each other in developing innovative programs to meet our local needs. We will, if it would help, be willing to provide this information to your Task Force for your review. / Senator Bernhagen is particularly interested in the economic de- velopment goals of the Corridor Commission and the Task Force, particularly due to his capacity as executive director of his Commu- nity Development Corporation. He has had experiences with eco- nomic development programs in Minnesota that are perhaps simi- lar to other rural areas in our region and that may be helpful for this Task Force's deliberations. He has asked me to share with you his specific thoughts. A neighboring community to Hutchinson wrote a grant to the State to help revitalize their main street commercial area. The funds from this grant were to be matched with local dollars to do commercial rehab and apartment housing, primarily for low and moderate income people-is the time off? Mr. Espy. Just summarize, please. Ms. CASH. Let me give you this one thing and I'll conclude here with it. Mr. Espy. All right. Ms. CASH. The funds from this grant were to be matched with local dollars to do commercial rehab in apartment housing primari- ly for low and moderate income people in a main street targeted area. Basically the funding for the project was 15 percent deferred loan, 42.5 percent zero interest loan and a 42.5 percent private money. The program was successful only to a point. The grant was for $800,000 of which $200,000 had to be turned back because of lack of interest from business owners. They didn't feel they wanted to put in that remaining 42.5 percent. In the Senator's community he set up a similar program except that the last 42.5 percent came from a local revolving loan fund which they loaned out at 8 percent for a 10-year term. Not only did the Community Development Corporation run out of money, but there's a waiting list for additional applicants. They could do 27 PAGENO="0013" 9 buildings out of 85 in this targeted area. And the Senator felt like this might be something that the committee would be interested in looking into. He strongly feels that a revolving loan fund or a development bank, as you have suggested, would pay great dividends in bringing prosperity through new jobs, businesses and tourism to the Missis- sippi River Valley region. In essence anyway that the Mississippi River Parkway can help you we will be glad to do it. If you would like to be in contact with Senator Bernhagen we will be most happy to assist you. And I thank you for your time. [The prepared statement of Ms. Cash may be found at end of hearing.] Mr. Espy. Thank you, Ms. Cash. Please give Senator Bernhagen our regards. Ms. CASH. Thank you. Mr. Espy. Mr. Hawkins. STATEMENT OF WILBUR F. HAWKINS, PRESIDENT, LOWER MISSISSIPPI DELTA CENTER Mr. HAWKINS. Chairman Espy, Congressman Ford and Members of the Task Force on Community Development and Natural Re- sources of the House Budget Committee. I'd like to, first of all, wel- come you here this morning to Memphis, which is not only the cap- ital of Mississippi but the capital of the Lower Mississippi Delta Region. As you are aware, in 1988 the U.S. Congress saw fit to create the Lower Mississippi Delta Development Commission. For 2 years we studied the problems and conditions here in the Mississippi River Valley area, and we were told at the onset that there was not a need for another study, that the river area had been studied to death and that we only needed more capital. Well, we found throughout that process that there were a number of things that we did not know about this region and it was an educational proc- ess for the organizations and individuals in the region. After we published our final report which was called the Delta Initiatives, we were reviewed and scrutinized by many of the repre- sentatives of the media, the citizens and organizations that had participated in our process. The Commission published the report that contained over 500 recommendations that covered 68 issue areas. One of the most central things that we found throughout the process of the Commission was the fact that there is tremendous capacity that exists within local organizations, within local commu- nities throughout the region. However, Federal policies, programs and activities often work to the detriment of this region. You have my prepared testimony and I will not go through in its entirety, but I would like to just challenge you with respect to ca- pacity, capital and priorities. I think that you will find that this region has capacities that are untapped that can benefit not only this nation but the world at large. We have grown many of the crops that have gone all over the world to feed and to clothe people of many nations, but at the same time we find that we're wrestling with an absence of priorities within this country. PAGENO="0014" 10 Just yesterday I read where the Administration had proposed not only to lift the sanctions on South Africa but also to increase the $40 million that was designated to $80 million for the purpose of housing, economic development and education. And if you think about that and you look at the conditions that exists within this region you will find that we have conditions that are far beyond third world conditions in other countries throughout the world. So I challenge you on your priorities. When I talk about capac- ities, the Lower Mississippi Delta Development Center was a suc- cessor to the Commission and was founded by the seven states for the purpose of promoting economic development in this region. It has chosen as an operational center not to be involved in the direct development within the region, and there are several reasons why. First of all we do find that the organizations and initiatives that are undertaken by the people throughout this region only need strengthening in large measure, that we do not need a lot of dupli- cation. We do not need a lot more bureaucracy, so the center essen- tially serves as an advocate for the Delta. Beyond that, I think we can serve the Members of Congress and this region very well in terms of thrashing through issues, helping to bring together the collaborative organizations and the collabora- tive roles that are necessary to promote economic development on a very narrow and focus basis. We find that many organizations are actually involved in their special initiatives, and if broadened to look at the regional, national and global perspective we can, in fact, shorten the time curve. But when we talk about capital, it is important for you to under- stand that there is capital within the region but it is regulated cap- ital, it is capital that comes to the region in the form of welfare payments. In Arkansas we have one county that receives over $25 million a year in transfer payments. But what we really need within the region is developmental capital. Capital that can go beyond just meeting the basic needs of the people. And what we found in our report is that there was a call throughout the region for some type of regional development, fi- nancing organizations such as the regional development bank, a re- gional trust fund, etcetera. And contained in my testimony is a de- scription of what the United States Government did. Congressman Oherstar, you alluded to the creation of the Appa- lachian Regional Commission in 1965. If you will go back to 1933, you will also find that the Tennessee Valley Authority was created by an act of Congress. And from 1933~ until 1965-or 1955 or 1958, the U.S. Government built what is now a $6 billion industry in terms of utility. Today TVA receives $135 million annually. And last year the Congress authorized $150 million for the Appalachian Regional Commission. And what I say is that it's a matter of priorities, and I say that we continue to do from the delta, that we need help within the region. And anything that you can do to help the region is greatly appreciated. But also make sure that you set a priority with respect to areas throughout this country, particularly rural areas that are lacking in resources. Thank you. [The prepared statement of Mr. Hawkins may be found at end of hearing.] PAGENO="0015" 11 Mr. Espy. Thank you, Mr. Hawkins. We turn now to get the Ad- ministration's perspective on these problems. John Sullivan and Pete Perry. Mr. SULLIVAN. Chairman Espy, Congressman Ford, my name is John Sullivan T'm Chairman of the Mississippi Presidential Coun- cil on Rural elopment. Also I'm Division Administrator for the Federal Highway Administration, and Pete Perry, our Executive Director, is going to make our presentation. Mr. Espy. All right. Surely. STATEMENT OF JAMES PERRY, EXECUTIVE DIRECTOR, MISSIS- SIPPI PRESIDENTIAL COUNCIL ON RURAL DEVELOPMENT, AC- COMPANIED BY JOHN SULLIVAN, CHAIRMAN Mr. PERRY. Thank you, Mr. Chairman, and to the Members of the House Budget Committee for the invitation extended John Sul- livan of the Federal Highway Administration and myself to appear before you here today on behalf of Mississippi Presidential Council on Rural Development and share with you goals and objectives this council is working toward in Mississippi. And thank you, Congressman Oberstar, for your kind comments earlier. It's good to see you again. As Mr. Rockefeller will describe in his statement in a few min- utes, the President's Initiative on Rural America announced in January 1990, outlined six recommendations for rural economic de- velopment for the 1990's. The creation of State rural development councils was one of those six recommendations, and was imple- mented with the establishment of eight pilot State councils in late 1990. An interesting aspect of this effort has been that flexibility has been a guiding principal for this project. Each State council has been encouraged to develop its own approach to its formation, to its membership, goals and to the issues that it faces. The complex fac- tors that affect rural communities and the diversity of economic and social conditions in rural America call for State and local strategies, not national strategies. This flexibility that is one of the key cornerstone concepts of this initiative has been both a blessing and at times a headache. As the council has struggled to work out its own organizational aspect and its operational needs, the normal approach of having answers dic- tated from Washington has been absent, allowing each council to do as it sees fit for its own needs and its own purposes, but it has caused us to spend an inordinate amount of time in organizational efforts. This process, though, has provided an extra benefit in that the pilot councils are rapidly taking ownership as we organize our- selves, define our missions, assess the status of our States and draft strategies to meet our needs. A key aspect of forming the Mississippi Council was a desire to secure a diverse membership of Federal, State, local and private sector representatives. To insure that we could implement the deci- sions of the council, we have maintained our membership at the level that can control or influence governmental program policy, including the managers of those Federal and State agencies who have responsibilities for rural development in Mississippi, along PAGENO="0016" 12 with representatives of local governments, utility companies, pri- vate enterprises, and organizations that are active in rural develop- ment. Currently we have 62 members, 16 from the Federal Govern- ment, 21 from State government, 12 representing local govern- ments, and 13 private sector and organizational representatives. As we continue to consider the tasks before us we will expand our membership as we deem appropriate at the time. The mission of the Mississippi Council is to improve the quality of life in rural Mississippi through addressing the economic, infra- structure, medical, educational and environmental needs of Missis- sippi's rural people. To achieve this mission, it is our intent to de- velop and implement a strategy for the efficient and the effective employment of rural development resources within the State. As you are aware, these resources consist of a broad range of Federal, State, local and private programs that were created with one or more goals in mind aimed at assisting or alleviating perceived defi- ciencies. However, these programs are generally created and pro- mulgated in a "one size fits all" method, oftentimes with little or no attention to the needs and desires of the people they were cre- ated to help. Hopefully, the Council can effectively devise a strategy that will direct these programs to the areas most in need and modify pro- gram policies, guidelines and regulations to fit those identified and prioritized needs-a dramatic departure from the current situation where program beneficiaries have to adjust their needs to fit the particular program requirements of the resources that are avail- able. The Council hopes to identify and work to remove the legislative, regulatory and policy barriers that exist in current programs of the Federal and State governments. Also we intend to identify and re- solve gaps, and to identify and resolve duplications and overlaps within these Federal rural development programs. For this Initiative to succeed, an unusual amount of cooperation will be required between the various players involved-between the executive and the legislative branches of the government, as well as between levels of government. Also, the traditional turf protec- tion-between agencies and across the levels of government-will have to stop. This effort should act as a model for other rural areas, particu- larly the Lower Mississippi Delta Region. It is intended that this concept will expand to the other States and territories over the next few years, and that they can learn from the experiences of our pilot efforts. And as part of the Lower Mississippi Delta Region, I feel that our experiences in Mississippi will be extremely helpful to those other States that are also part of the region, and that some of what we accomplish in the coming months will par- ticularly benefit them. In closing, your invitation specifically asked for recommenda- tions regarding funding levels to the management of Federal com- munity development programs. It is my opinion that if we succeed in this effort that the effectiveness of many of these programs could be enhanced, increasing the positive benefits of these pro- grams without the necessity of an increase in funding and probably PAGENO="0017" 13 with a decrease in administrative costs. Furthermore, without this cooperation any increase in funding could result in an increase in spending without any corresponding benefit increases. Also, acknowledging that the funds available in many of these areas are limited, the ability to accomplish the desired results could be increased if the agency managers and the program spe- cialists that are charged with overseeing the implementation of the programs, as well as the appropriators and the legislative over- seers, would allow the programs to be more responsive to the actual needs and allow flexibility in their implementation. Further, allowing the funds to be directed to those areas and individuals most in need and less able to provide for themselves, as opposed to spreading these funds like melted butter throughout the country, insuring that all areas get a little coverage rather than bulk assist- ance going to a few areas, would result in a much better actual re- sults from these expenditures. Thank you, Mr. Chairman. We'll be glad to respond to any ques- tions you may have. [The prepared statement of Mr. Perry may be found at end of hearing.] Mr. Espy. Thank you, sir. We'll withhold all questions until each panel has made their presentation. Mr. Rockefeller, we appreciate you being here. STATEMENT OF WINTHROP P. ROCKEFELLER, CHAIRMAN, PRESIDENT'S COUNCIL ON RURAL AMERICA Mr. ROCKEFELLER. Thank you, sir. Mr. Chairman, Members of the Task Force, on behalf of Governor and Vice-Chair Orr, and my fellow council members it is a distinct pleasure and honor to appear before you today as Chair of the President's Council on Rural America. I appreciate this opportunity to share with you all the Council's visions and objectives for the rural America through the next cen- tury. Rural America is, if you will, a nation within a nation with a population of 57 million. It is as large as France, and yet at the same time many of those 57 million live in conditions that can only be described as third world. If you would, Mr. Chairman, permit me to recount a brief Christmas carol of times in the not too dis- tant past. While discussing the Council with a colleague the other day, he mentioned that he and his family used to deliver Christmas grocer- ies to poor families in the Arkansas Delta. He spoke of one house, too familiar, about a dozen people living in one room. Their sole source of heat was half a 55-gallon drum sticking out of the floor with a fire burning therein. Their so-called sanitary facilities amount to only a path out back leading into the field, not even to an outhouse. There are still many families in the delta living in such suffering. We are one country, Mr. Chairman, and yet many of our fellow Americans are living in conditions which would cause us to feel pity were we to see those same people in a developing country on the 6 o'clock News. In the past we attended to the urban and rural issues as two distinct areas. The 1930's and 1940's were decades PAGENO="0018" 14 which America recognized that it had to rebuild its countryside after the devastation of the dust bowl. The 1960's and 1970's were the decade of intense concentration on our urban problems. The 1990's must be a time during which we pay the attention necessary to both urban and rural needs. It is generally recognized that the world has become more of a global community. We can, therefore, hardly afford to have a philo- sophical devide in this within our own country. As the American agriculturalist has to check the market report from around the world each morning upon arising, we too, must recognize how closely coupled the different segments of America really are. For example, as America has become more mobile, so have the problems. At one time we thought the drug problem was mainly confined to the cities. Today, however, drug dealers wholesale their poison out of rural America. Why? Because there's not enough law enforcement officers in rural America to prevent it. The President is well aware of the dependence between rural and urban areas, and the years of neglect of rural areas which must be overcome. Because of this he has created the Rural Economic De- velopment Initiative, of which we, the President's Council, are one segment. One essential task for the Council is to debunk the myth of uto- pian in America. You asked me to offer you mechanisms for financ- ing economic growth in small communities such as is in the Lower Mississippi Delta Region. Let me start by saying the solution cannot be found in just another giveaway program emanating from Washington. It must be a community initiative stemming from the grass roots. It cannot be dependent upon enticing a new smoke- stack which generally takes jobs from another region that needs them too. Nor should the Delta just be a stepping stone before a company moves offshore. One solution is to add value to those products grown or extracted locally. Another is to be fortunate enough to have the physical en- vironment that proves conducive to tourism. Then, of course, the problem becomes one of the chicken and the egg-which comes first, the tourist boom or the infrastructure. Economic development in the delta is unfortunately not just a matter of another program or handout, it must be based, upon a sound plan which evolves from quality research as to what the area can offer or do. It must, to echo the other speakers, fit the area. Vicksburg is quite different from Helena, and the plan for the one most probably will not serve the other. And none of this can happen without a well-educated populous. I'm not saying that college is a solution for everybody, far from it, but we must seek alternative educational opportunities for those who seek them. The decade of the 1990's has been referred to as the decade of the service sector. But are we building skilled technicians, crafts- man and artisans who are truly in the service trades? I'm sure most of you have sought out the services of a plumber or an electri- cian on occasion. Sometimes, I'm not sure, I think it's easier to find a brain surgeon than it is to find a good plumber. Speaking of brain surgeons and health care, our rural hospitals are foundering under the plethora of regulations, and yet when it comes time to PAGENO="0019" 15 pay the bill they only receive a fraction of that paid to their urban counterparts. And above all let us not forget one of the main reasons that many of the 57 million of us choose to live in rural America. Thus far our rural environment is still, for the most part, not totally de- spoiled. We must be sensitive to that environment and the effect we will have upon it future. But at the same time we must not reg- ulate rural America to the point that it takes all the pleasure out of living there. Please don't forget that although an outhouse may be considered a point of source solution-for many that may be the only option. In conclusion, Mr. Chairman, I know that most of this ground has probably been plowed before. The President's Commission report has made many detailed suggestions, but unless they're im- plemented, that report will just be one more pile of paper in a Gov- ernment warehouse. I've included on that line, The White House Rural Development Initiative and some previously prepared re- marks which I'd like to include into the record for your later perus- al. We, of the President's Council, plan by next year to have some more concrete policy recommendations to offer. Again, thank you for the opportunity and we'd be pleased to answer any questions also. [The prepared statement of Mr. Rockefeller may be found at end of hearing.] Mr. Espy. Thank you, Mr. Rockefeller. We move now to our representative from St. Louis, Mr. Sumner. STATEMENT OF RANDALL C. SUMNER, VICE PRESIDENT, THE FEDERAL RESERVE BANK OF ST. LOUIS Mr. SUMNER. Thank you, Mr. Chairman, and Members of the Task Force. My name is Randall Sumner, vice president and com- munity affairs officer for the Federal Reserve Bank of St. Louis. I'm pleased to be with you today to describe successful strategies for community development that have been utilized by bank hold- ing companies and their subsidiaries. Through outreach programs sponsored by the community affairs functions at the Federal Reserve Banks, we strive to assist bankers and management of bank holding companies in their efforts to ad- dress local community credit needs. Our role is one of suggesting alternatives to help meet specific credit needs that have been as- certained by local community partners. These credit needs differ from one community to the next, and the programs designed to meet them are as varied as the needs themselves. Though no one approach will work for all communities and all banks, there are several strategies that have achieved success in lo- cations throughout the country. It is these strategies that I would like to briefly share with you this morning. Before discussing particular programs, I would emphasize that selection of a program should come only after the particular need to be met has been well defined. That is, the solution should not be placed ahead of the problem. The development vehicles I will dis- PAGENO="0020" 16 cuss have all been successfully utilized, though they may not be ap- propriate for all communities, banks or bank holding companies. In your invitation to present testimony to the Committee's Task Force, attention was drawn to development efforts involving many parties in a community, including banks and other financial and nonfinancial organizations. Though not the only model of such development efforts, bank holding company community development corporations, or CDCs, have played just such a role in several communities within the States that encompass the Lower Mississippi Delta Region. Since 1971, the Federal Reserve has permitted bank holding com- panies to invest, under certain circumstances and guidelines, in projects primarily benefiting economically disadvantaged communi- ties. Bank holding companies have used this limited authority to help provide housing and job opportunities for low and moderate income persons, to assist in the development of small and minority businesses, and provide essential services to otherwise deprived communities. As you can see the Federal Reserve allows bank holding compa- nies some latitude to tailor their investments to meet the disparate needs of disadvantaged communities. However, community invest- ment proposals are examined to determine whether the investment meets the "community welfare test," and whether the size of the investment is appropriate to its purpose and prudent for the insti- tution. Also considered is the amount of community involvement in the project to be supported by the particular investment. The definition of community development is part of Regulation Y, which specifies permissible nonbanking activities. Essentially it states that investments designed primarily to promote community welfare will survive the community welfare test. Examples include new or rehabilitated housing, jobs created through a variety of commercial and industrial development or health and educational services, all targeted on low and moderate income persons and areas. Bank holding companies are also provided latitude with respect to the for-profit or not-for-profit status of their community develop- ment subsidiaries. Both forms of incorporation are permitted. CDC's seeking investments or grants from foundations, usually in- corporate as a not-for-profit status, though the majority of such in- vestments are made on a for-profit basis. CDC's may be established with a variation of management as well as the for-profit or not-profit status and different types of capi- talization. Some CDC's, and many that we're seeing today, are ac- tually consortiums in which multiple participants, including banks, bank holding companies, foundations, nonbanks such as electric utilities and local government play key roles in the investment and management of the CDC. The diversity of participation not only in- creases the chances for success, but also maintains a focus on the needs of the particular community involved. Though few examples of CDC's that are going on right now within this particular area, the specifics are in the prepared testi- mony, but I would point out that these newer CDC's are truly joint efforts of banks, bank holding companies, rural electric coopera- PAGENO="0021" 17 tives, and many other players that bring together their expertise to meet local community credit needs. You will be hearing this afternoon about a CDC in Arkadelphia, AR that we have worked with over recent years. I won't go into that now since you'll be hearing about it this afternoon, but I think you'll find the opportunities created to be very interesting. CDC's are effective development vehicles and consortium CDC's can bring additional bank and nonbank investment and expertise to the table. There are also other traditional vehicles that can be utilized. Bank holding companies may invest in limited partner- ships and also make direct investments in community development activities as described in my prepared statement. A number of vehicles are available. We encourage bank holding companies to consider these possibilities and work with them as they submit their applications to engage in these activities. Thank you very much. [The prepared statement of Mr. Sumner may be found at end of hearing.] Mr. Espy. Thank you, Mr. Sumner. I had a discussion yesterday with David Broder, who's a Wash- ington Post columnist. The discussion was principally on other matters, but we got into the purpose for this hearing. During our discussion I told him that within this area that we call the Lower Mississippi River Valley we have about 8.2 million people, substan- tial poverty, and with regard to involvement in income transfers, we, as the Federal Government, presently give about $2 billion of welfare to residents within the region. And he thought I had mis- spoken. I said no, it's about $2 billion a year that we give in wel- fare, benefits and payments. Well, it doesn't take a rocket scientist to note that, within the context of income transfer, the prospects for economic development really isn't very bright. So, we need to try some new things. Just as Mr. Hawkins said, with regard to other Federal outlays. I'm just a little bit concerned about a fund that I found out about quite re- cently. We give to Poland about $250 million into a vehicle called the Polish-American Development Fund, to aid in their transfer from a planned economy to a free-market system. A direct invest- ment fund which is managed by an individual in a bank holding corporation out of Chicago. So, I went up and met with them to gain, for myself, a greater understanding into how this is being done. We called in the Delta report sometime ago for the same type of investment fund and, I can say, it was met with some criticism. Some mild criticism and some very severe from some Members of the Banking Committee who point blank said that we have enough capital in the region presently-we just don't have the ideas. So I want to ask the panelist a general toss-up question, which certainly could be answered by you, Mr. Sumner, or Mr. Hawkins and then you, Mr. Rockefeller. The question is about the access to capital situation. Is it true that the problem is not capital, that we have enough capital in the region? What's your understanding of the capital situation within the area? Anyone first-Mr. Hawkins, you're aware of this criticism. PAGENO="0022" 18 Mr. HAWKINS. Mr. Chairman, I'm very much aware of the criti- cism. What I have to say in response to your question is there is capital here within the region, but you have to recognize that in large measure the capital that is here is invested in other parts of the country because it returns a higher investment and has a higher rate of return. Second, what I would like to say is that there are extreme short- ages of capital when it comes to rural enterprise development such as microenterprises and minority business development. And I think the third comment that I would have is that access to capital for nontraditional industries and enterprises within this region is really a difficult situation to address. I do know that I'm working with various loan funds now. The Tennessee Valley Authority has recently announced the creation of a $15 million small and disad- vantaged utilization fund. What we have found throughout the troubles in the Delta Region is that there's an unwillingness in large measure for financial in- stitutions to invest in start-ups, acquisitions or anything that is outside of the traditional, primarily industrial or agricultural arena. And for that I think that an infusion of external capital will help leverage existing capital within the region and give more flexible rates to entrepreneurs within the area. Mr. Espy. Thank you. Mr. Sumner, would you have an opinion? Mr. SUMNER. Mr. Chairman, I cannot speak to the adequacy of capital in the region on a macro basis, but suffice it to say the cap- ital that is available does tend to be fragmented among many dif- ferent institutions. That's why, in my judgement, we're seeing a success in some of these community development corporations that bring a number of diverse players to the table. That is, bring the capital available from banks and bank holding companies, combine that with capital available from nonbanking institutions as well as sources of funding from foundations and other entities in the pri- vate and public sector. Mr. Espy. Yes, Mr. Perry. Mr. PERRY. I'll speak just a second on public funding capital. I'm going to avoid the question of capital from the banks, but having dealt from a couple of different Federal agencies and looked real hard at public funding that exists in this country, there's a great deal of public capital available in this country. It's amazing how many different ones there are; just in revolving loan funds. For ex- ample, EDA, the Economic Development Administration provides grants for that, as does CDBG ARC and now FmHA also. Plus there are some local public funds that are being created too. The problems tends to be from what we've seen in two indepth studies that were done over the past few years on this issue, is not the availability of capital so much but it's the type of capital. Even in these public programs we have created them in such a sense that now they tend to try to become banks. They're created gener- ally as funds for those that cannot get money from banks, but they tend to try to create a track record that shows they are good. They try to keep a zero default rate and make only secure and solid loans. They try to provide low cost capital. And the cost of capital, coming from a private small businessman's standpoint, is not PAGENO="0023" 19 really the issue. It's the availability of being able to borrow for the start-up businesses Mr. Hawkins talks about, the new type busi- ness, the ability to borrow. If you need to borrow money for real estate, the banks don't want to loan on long terms. The public funds do the same thing, they'll loan long term but they will not loan working capital. A small start-up business has a real problem with working capital. Then even our public agencies write in regulations that keep the amount of money that can go in working capital so we can keep a good return and look good on the books when they go back to re- quest more funds. We don't make the risky loans, but-and I don't pretend that the public funds ought to be making risky invest- ments but they ought to be going beyond where the banks are, helping the local small town bank with it. For example, the bank could make the secure loan of 60 percent on the real estate and the public fund loan the difference, but we're not doing that. And it's a great deal because of legislative re- quirements and programmatic policy requirements from the execu- tive side that has created that. The other real frustration is that there are five or six of these revolving funds and all the people who have these funds generally have some money from each of the five or six. You have SBA funds, EDA funds, CDBG funds, ARC, and they all have to be ac- counted for differently, with a different set of books. And when the lenders make a loan and it'll come out of three or four different funds, so the poor borrower has to make three or four different ac- countings. They all have slightly different programmatic require- ments of objectives they're trying to reach, and so the poor borrow- er has to "lie" on all the different applications as to what the pur- pose is, while the real reason he's borrowing is to make his busi- ness work. But whether it is the jobs, low income or whatever, if we could get rid of some of these cotton-picking regulations and let one loan come out of those five or six funds, consolidate them all into one and be able to loan there would be a lot more availability of cap- ital. And do away with the different purposes-we all know what the purposes are, depending on which committee it comes out of or which agency it comes out of the purpose tends to have a slightly different meaning. If we could get rid of some of those conflicts I think it would help solve an awful lot of problems. There's a lot of money out there in these public funds, and they could help lift some of the foundation money into private for-profit funds. But the struggle is the regula- tions that we put on behind them. Mr. Espy. Thank you. Questions from Mr. Ford. Mr. FORD. Thank you very much. Mr. Chairman, let me thank the panelist. Each one of the panel- ist did a super job in addressing what those problems are in rural as well as urban areas. I am not a member of this Task Force, I want to once again thank the Chairman and the Members of the committee for allowing me to participate. I do have a couple of questions or observations to a couple of the witnesses. Mr. Hawkins, you talked about the Tennessee Valley Authority in which we're all very proud of the TVA in this particu- PAGENO="0024" 20 lar area. You mentioned about the $150 million in congressional appropriatidn. I didn't quite follow you. Are you suggesting that those funds that we can allocate to TVA should be redirected or similar funds should be focused, whether it's for Lower Mississippi Delta Valley or some other mechanism that might be created through hearings of this nature today? Mr. HAWKINS. Mr. Ford, to answer your question, my illustration there was to show that there are similar examples of the Federal Government having supported rural development historically. Those regions have benefited significantly from concentrated effort, and a central source of funding on the part of the Congress. Mr. FORD. Could they do more? Mr. HAWKINS. They could, in fact, do more. The 219 counties that the Tennessee Valley Authority-that the Delta covers, overlaps 66 of the 201 counties that the Tennessee Valley Authority covers. So that is one. We do not have any overlap territory that the Appa- lachian Regional Commission covers. What I think has to be done is some type of formula that would be looked at that really says where are the priorities of this Nation, you've had over 50-some-odd years of success with the Ten- nessee Valley Authority, over 20-some-odd years of success with the Appalachian Regional Commission. And I think there are other areas within this country that need the same type of support. I don't necessarily favor more Federal total government, Federal, State relationships, but I do see the need for the creation of more public/private relationships. And I think therein lies where some of the TVA, the ARC and some of the other Title 5 Commissions can actually help this region organize and leverage resources in a better fashion. Mr. FORD. How do you relate the TVA to the public/private entity? Mr. HAWKINS. Well, the Tennessee Valley Authority, from 1933 through the 1950's, as I eluded to earlier, received Federal dollars for the construction of its utility program. Today the TVA private sector, the utility operation, operates as a private governmental corporation. It is a $6 billion corporation, wholesaling electricity to its 201 county areas, 160 distributors or so. And then those distrib- utors actually retail that wholesale electricity to their customers. My point is that is a-- Mr. FORD. But now this $150 million is a total-- Mr. HAWKINS. It's $135 million that they receive for appropriated programs in 1991, fiscal year 1991. My point, Mr. Congressman-- Mr. FORD. And the $150 million you mentioned is not a part of that $135 million? Mr. HAWKINS. No, it isn't. It is the-TVA uses as operating re- serve or will use as operating reserve for this loan fund. My point is that just distinctly that if you look at the history and the prece- dent the Federal Government has used to create a public/private partnership in the TVA, similarly the TVA can also use its techni- cal resources and its expertise to help a region like the Delta to do the same. And I think that the Congress can also, through your infinite wlsdom and your leveraging capabilities, direct more of the exist- ing agencies to do just that. PAGENO="0025" 21 Mr. FORD. All right. Mr. Rockefeller, let me also welcome you to Memphis. One or two observations in your testimony before the committee, I totally agree with you and the problems that exist with rat infested shacks in rural areas. Many of those conditions exist right here in urban areas, I can speak for my own hometown here in Memphis, TN. But you also after addressing some of those problems that exists in rural areas you talked about the solution cannot be found in just another giveaway program emanating out of Congress. You say it must be a community initiative stemming from the grassroots. You go on and you talk about Federal Government just cannot have some, you know, smokestack. Then you talk about some of the solu- tions to these problems. When you say another giveaway program, I've been there only a short time in the Congress and I hear witnesses who testify before many, many committees in the Congress, and often times they talk about giveaway programs. And I think in terms of giveaway pro- grams, I think of the $500 billion losses with the savings and loans in this country that we are able to find through taxpayers dollars to bailout. When I think in terms of giveaway programs we can think in terms of huge dollar amounts that taxpayers are faced with. And when we see that these ills that exist in rural areas as well as urban cities throughout this country, often times I get confused talking to my colleagues in the House of Representatives. And when I see a very distinguished scholar like you and the one who is from a neighboring State here in Arkansas, and knowing of your commitment and your ability I just want to make sure that I un- derstand what you're speaking of when you talk about these give- away programs. Because if they give it away like they have given out the S&L's then maybe we ought to give it away to some degree. But I would like to just hear your response to that, Mr. Rockefel- ler. Mr. ROCKEFELLER. Mr. Ford, perhaps you place too much cre- dence on my education. However, I did not speak of the-when I referred to the smokestacks I was speaking from the fact that it's incumbent that we do not seek to solicit or draw an industry from another segment of the country to our part of the country, which usually ends up being at the other segment's expense. Perhaps my use of the word giveaway was somewhat enthusias- tic or over enthusiastic. The point I was trying to make there, sir, was that the only prospect for the future for the growth and ren- ovation, if you will, of rural America must be as-I believe as Mr. Hawkins said, a collaborative partnership, a collective effort where- by the community has to have the involvement. There must be a community initiative, a community interest in pulling one's self up. The Federal Government, the-- Mr. FORD. But how do we get there? I mean, give us some-how do we get there? I mean, how-I live here in Memphis, I'm not from a rural area, it's difficult for poor communities to pull them- selves up when you have an insensitive maybe local government and State government as well as our Federal Government. I mean we must have those initiatives in order to give the type of help to communities that communities can, in fact, pull themselves up. PAGENO="0026" 22 Mr. ROCKEFELLER. Absolutely, sir. It is, as you say, a collabora- tive effort with Federal, State and loca, but there must be a local commitment. Perhaps I didn't phrase myself correctly. There must be a local commitment to doing something. We cannot wait for the solutions to be handed us, be it from Washington, be it from Nash- ville or Little Rock. We have to be directly involved in our own fu- tures. Mr. FORD. You're not suggesting that we can do this without Fed- eral funds or without public dollars? Mr. ROCKEFELLER. Not at all, sir. Mr. FORD. Not at all, okay. Mr. ROCKEFELLER. But I think it is crucial and it is essential that the local community. And Mr. Sumner spoke of the banks, the Alcorn Bank in Arkadelphia was-if you'll allow me to correct you, part of the Winthrop Rockefeller Foundation funding. And the pur- pose of that-it was an extension of the South Shore Bank in Chi- cago. The community and the private sector-well, the private sector and public sector are not-for-profit sector working together to pull themselves up, to pull themselves out of an acceptable cir- cumstance, if you will. Mr. FORD. Thank you. One final question, Mr. Sumner. Mr. SUMNER. Yes. Mr. FORD. Is the Community Reinvestment Act-we have con- cerns in this area, and I'm sure it's true in the rural areas. What type of oversight from the Reserve, or if there's any at all? I'd like to make sure that these financial institutions who might see invest- ments or loans or whatever in areas, but don't see that big return on their dollar or lose interest in certain projects that would go a long way in addressing many of the problems that we're faced with. And more so than even African Americans who are totally from a community perspective, an economic development perspec- tive, are completely turned down before they even get to the door. Are there any variables within the Reserve that suggests oversee- ing of this? Mr. SUMNER. The Community Reinvestment Act, of course, is di- rected at all banking regulators, including the Federal Reserve. It does require us to assess a bank's record of meeting credit needs within its local community, including the needs of the low and moderate income areas. Those assessments are made on a routine basis, and the bank's performance ratings are now public. Mr. FORD. So it's just an oversight? Once that oversight takes place, I mean when you see that there's a financial institution in any particular given area that is not meeting whatever the point system would be, are there recommendations that are-- Mr. SUMNER. In the process of acting upon an application sub- mitted by a bank or a bank holding company one of the elements we consider in deciding at whether or not to approve that applica- tion-and I stress it's just one of the elements, is the bank's record in its Community Reinvestment Act performance. That's where the oversight really comes into play. Mr. FORD. Thank the panelist. Thank you, Mr. Chairman. Mr. Espy. Thank you, Mr. Ford. Mr. Oberstar. Mr. OBERSTAR. Thank you, Mr. Chairman. I, too, appreciate the testimony of the panel. Ms. Cash, I just want to point out that the PAGENO="0027" 23 House Public Works and Transportation Committee is in the final stages of drafting the new transportation bill that will `guide our highway transit policies for the balance of this decade. And princi- pal among the new provisions in that bill will be a Scenic Byways program to continue the work of the Mississippi Parkway Commis- sion, which is the granddaddy of them all, if you will, started in the 1930's, and a cooperative effort among the ten states and the Prov- ince of Ontario that joined in this initiative. And, of course, the Natchez Trace Parkway which goes through a good deal of Tennessee, Mississippi and Alabama, which has also been a very, very successful scenic roadway generating millions of tourism dollars. So you can take some comfort knowing that long years of effort have paid off and we're going to see a sustained pro- gram. I expect an initial authorization of some $25 million out of the Highway Trust Fund to continue this very modest, but I think very effective program. Mr. Perry, I think your contribution focusing from your many years of experience on flexibility is a very important one. You talk about several aspects of the EDA, ARC, Community Development, Farmers Home Administration, programs each having a slightly different focus, all of them aimed at economic development, each providing funds for a different purpose with a different authoriza- tion. Are you suggesting that the Congress ought to melt those all into one single program with a broad charter for economic develop- ment, and allow the administration of that program to fit its fund- ing to local initiatives? Mr. PERRY. Mr. Oberstar, as my personal opinion I think I prob- ably would say that melting of-not necessarily all of those but a good many of them carry more benefits than it would harm. When the President's Initiative first started as a working group that was my conclusion that we ought to come up with one agency rather than 25 that did economic development in this country. I was shot down generally by saying that I was a dreamer in thinking that we could ever get such a thing done, and we ought to aim for something a little more possible, getting it done both on the executive side and the legislative side. I mean we felt like it would be a big problem to try to meld these programs from both legislative and agency sides. I think that there's a good bit' of it that could be combined very easily with a lot of benefits and would be much better. My frustration comes from probably being part of the problem at times, at least, but in the different agencies. Some poor mayor from a small town with 5,000 people comes to you and wants to put a water line in from point A to point B. And he goes to EDA and EDA says we've got to have jobs, so he finds the jobs. He goes to the FH who says you've got to have rural residents. He goes to CDGB who says you've got to have low and moderate income people. He goes to EPA and the people there tell him of the regula- tions they're going to put up. Well, the mayor ends up lying to all four agencies, and tells them all what they want to hear-he goes out and finds somebody that tells him they're going to put in jobs but he can't if he doesn't have the water line-and he goes to find some rural residents. All PAGENO="0028" 24 he wants to do is get water from A to B and serve everybody he can~ Also, you've got four different applications, you've got four dif- ferent reporting, accounting requirements, you've got different rules and regulations you've got to do. For instance, Farmer's Home won't let you put any more than lets say 2-inch lines, and EDA won't let you put in less than 6 inches-but yet we can all fund the same project. One agency could help solve a lot of that. Short of one agency we're hoping that this effort with this Presidential Initiative and State Councils will internally change those things that aren't statu- tory-we'll just work out ourselves and keep up with those of us who used to make these stupid rules, and tell us why they're wrong. And where we have statutory problems, we will come back to Congress and try to remove the statutory limitations that stop that. I think there could be some benefit if they were all in one agency. And the administration of these various programs-as you know I've testified before on EDA, it's a shame to have a $180 million program and spend $25 million to administer when you can take the same $180 million and drop in any one of those programs, and either save the $25 million or put it in the programs. And that's not to speak of the administration-obvious it's just a great deal of administrative costs. So some melting-and it would be tough and it would take a lot of effort but I think it would be well worth it, and then be able to target those funds as you wanted them as the need would be. If it's in the Lower Mississippi Region, if it's in Star County, Texas or wherever it happens to be that you want to target those funds let them go out of that agency. Mr. OBERSTAR. Well, to a great extent that's what we've attempt- ed to do in the H.R. 10, the rewrite of EDA programs which has success in passing the House, but not the Senate. Mr. PERRY. But that only deals with EDA, that does not deal with all these other programs. Mr. OBERSTAR. Well, but what we tried to do within the context of EDA was to simplify the programs and eliminate the rigid cate- gories that developed and give greater flexibility. And I would like to do that on a multi-program basis. I think in the context of a growing Federal budget we could do it. The fear of many of my col- leagues and my own concern is that if you put all these programs into one pot it grows, gets to be a rather sizeable amount of money, and then the budget cutters come along and say, ah-ha, there's where we can chop. If it's a series of small programs they're not so likely to be cut. What you need is some coordinating, central coordinating effort perhaps at the absent a massive reorganization coordinating effort to do exactly what you were saying. And I've attempted to get that kind of initiative underway. Short of doing that each Member of Congress makes his staff into an economic development coordinat- ing council. Mr. Sumner, the regulations that some years ago were modified to allow bank holding companies to not only invest in community development corporations but also be development entities them- selves, has been successful in some areas of the country. What ex- PAGENO="0029" 25 perience have you had? You've cited a couple of initiatives in your testimony. What other successes have you seen of the effect of that regulation change? Mr. SUMNER. The examples cited in the testimony are rural com- munity development corporations. As the testimony sets out they involve multiple partners in most cases. That is the--- Mr. OBERSTAR. What about bank holding companies, what initia- tives? Mr. SUMNER. Banks and bank holding companies have formed partnerships in other areas including right here in Memphis. Three banks are involved in a community development corpora- tions that address housing needs in the Memphis area. We have seen similar in Chicago, and other more urban areas, particularly along the lines of housing where the holding company is permitted a direct investment under the 1971 Amendments to the Bank Hold- ing Company Act. So these have-- Mr. OBERSTAR. And these are investments that are collateralized, that are very carefully scrutinized, that are loan based and pre- sumably very carefully monitored by the bank holding company be- cause they're subject to review by the Regulators. Mr. SUMNER. Right. The amount of the investment is monitored, and the nature of the investment is monitored not unlike a direct loan made by the bank. Mr. OBERSTAR. How much money is being invested in such initia- tives by bank holding companies in your region? Mr. SUMNER. I'm sorry, I don't have any aggregate figures with respect to total. Mr. OBERSTAR. See, if on the one hand the public policy posture is avoid the giveaway programs, read grant, read government, Fed- eral Government loan. Then the alternative is investment by the private sector, and that's why the Congress opened up the door in 1971 for bank holding companies to make those investments to see what the private sector would do, see what the collateralize lenders would do, what kind of investments they would make. Some areas have been very successful, others just a trickle. And Mr. Rockefeller, I must say that your testimony is long on guidance and planning and organization. At the end of the day to get invest- ments you need money. And if the money isn't coming from a pri- vate sector then somehow there has to be some Federal, State and other public investments to make those initiatives succeed. Jobs don't materialize out of thin air-takes dollars to do it. It's not the kind of program, frankly in my 25 years or so of experience, but it's the oversight of that program and the management of that pro- gram in insisting that it's well run. I don't like to hear programs characterized as giveaway pro- grams to downgrade the whole range of public assistance initia- tives. But I'd rather see tough monitoring and rigorous oversight of the operation of those programs to see if they work and work effec- tively. Thank you Mr. Chairman. Mr. Espy. Thank you Mr. Oberstar. Mr. Durbin. Mr. DURBIN. Thank you Mr. Chairman. I want to relate a person- al experience I had in my district and ask if some of the members PAGENO="0030" 26 of the panel might be able to give me a little guidance on how they would react to the situation. Several years ago a plant closed in a very small town in my dis- trict, a plant which employed several hundred people. The whole county went into a panic. This was an important employer that meant a lot to the community and a lot to the county. It scared us to death to think that all these people would leave and all the chil- dren would leave. We enlisted every level of government, every private agency, every bank, every group we could think of to try to find someone to occupy this plant. We brought together every incentive package known to man, tax incentives-you name it. And we found a com- pany. As luck would have it the company decided to cut its ribbon a week before the election, the ceremony was eight deep with poli- ticians trying to get in the picture cutting the ribbon. The Gover- nor came in by helicopter-we were all there, big smiles on our faces, we'd saved the plant, back in business. About 5 months later I was driving through this town and decid- ed to stop at this plant and take a tour. And I went inside to find, not inhuman working conditions but pretty rough working condi- tions, to find that the people working there were being paid 10 cents more than the minimum wage, that there were virtually no health benefits available, certainly no discussion of pension bene- fits and a very unclear picture as to whether there was much in terms of family leave or vacation on the horizon for these folks. Most of the workers were 18, 19 years old, fresh out of high school with no college, no training. They were there and working unable to even purchase a car with the limited amount of money they were making. They certainly couldn't live on their own or get married or consider anything else we can put as part of the Ameri- can dream. That plant lasted about 6 or 8 months. And it raised a question in my mind as to whether or not we should be holding up any kind of a standard, any kind of guideline, yardstick when it comes to these efforts to attract businesses to communities. I don't know if that company made any money as a result of that experience-maybe it lost some money and tried and didn't make it. But we really were ready to do anything in our power to get workers back in that plant and it showed, because when it was all said and done I don't think we helped the commu- nity, I don't believe we helped the employees there. There's some people who say maybe these are skeptics, maybe they're right, that we waste a lot of time in resources in just that sort of effort. That the money is better spent on infrastructure, which my colleague, Mr. Oberstar is acutely aware of with Public Works Committee, and I work on with the Transportation Appro- priation Subcommittee. Some say putting the money in education and health care has a heck of a lot more to do with the quality of life and whether a good business will want to come to a communi- ty. Mr. Hawkins, what do you think? Mr. HAWKINS. Congressman Durbin, first of all my first comment that came to mind is ESOP. On the front end there should have possibly been explored an opportunity for employee stock options. Secondly, I think that local ownership of that company would have PAGENO="0031" 27 helped in a large measure, because I think if you look throughout this country the only industry that cannot pick up and go in hard times is the utility industry. But beyond that if you take a second look, local ownership has a tendency to stay in a community and ride out the good times and the bad times. And I think a lot of times we tend to look to recruit existing in- dustry from other areas. We try to look at how do we bring in the big smokestacks to rural areas, we build spec buildings, we do a lot of the things that your home area has done. But we have not fo- cused our attention upon providing capital, technical assistance so that we can develop those local industries, those microenterprises and make them self-sustaining initiatives within their own commu- nity. And then education, health care and all of the other things take place. I think that when you look at the fact that many times we have companies, particularly within the delta that are owned by foreign investors, they're owned by people from outside this region. And then when it comes time for economies or even hard times in terms of the bottom line, the profitability in those firms, you find them shutting the ones in rural areas like the delta. My point to that is is that if, in fact, local ownership were in place-there were perhaps 50 or any type of majority, minority ownership with local versus foreign areas or other capital, that marriage would have been struck. And then in difficult times it would be easier to buy out that percentage as opposed to buying out the whole operation. Mr. Espy. Mr. Rockefeller, what do you think? Mr. ROCKEFELLER. Well, sir, I have to concur with Mr. Hawkins. It does take the infrastructure, the capital. I harken back to some of the studying that we've done on the Council to the story of the Carolina's which has one of the lowest unemployment in the nation, lowest unemployment rates in the nation and has probably one of the highest working poor percentages in the nation. I don't have the solution for it, sir, I wish I did. But I think the direct local involvement is a possible solution to the sort of problem that you had with your plant. Mr. DURBIN. Mr. Espy here, I think, made a valid point earlier about the money that comes into this region and my region too, in the form of welfare payments. And, how, if we put some of that money into investment in people early on perhaps we could create a work force that would attract a business that would pay people enough to come off welfare and see a future. I'm fearful that we're operating on a margin in many of our rural areas in America, and think that the creation of a job per se is the answer to the problem. Thank you. Mr. Espy. Thank you. And thank you, Mr. Durbin. I really appre- ciate all the testimony that we've heard today. We obviously could keep you here another hour, but we're unable to do that. We've got three more panels to move through. So, if I could just ask that we could dismiss this panel and move to the second one. Mr. FORD. Mr. Chairman, would you yield at this time, if you don't mind, please? Mr. Espy. Sure. PAGENO="0032" 28 Mr. FORD. Mr. Chairman, I'd like to welcome this panel. I hap- pened to be familiar with the whole group that's here and I want my colleagues in the Congress to know that this panel that has as- sembled here now has been a group that has worked on economic development for quite sometime in this area. And there would be very, very little economic development in this city if it was not for the people I see that appear on this particular panel at this time, in the Memphis area. I salute each one of them. I want ~ou to know that Chairman Espy and the other Members of this committee hopefully will take these recommendations back and will help strengthen us in an urban setting here in this city. And Mr. Welch, Ms. Dobbins, Mr. Rowe, Mr. Holeyfield, thank you very much. Mr. Espy. Thank you, Mr. Ford. Let me just assure the witnesses here that we're not just here to hear you and leave. There will cer- tainly be some follow-up. Your testimony, both written and oral, will be presented to the full Budget Committee and to our col- leagues. We do appreciate your presence here and we will note your recommendations. Why don't we start with Mr. Luboti. Let me repeat the instructions. We have several other witnesses, two other panels behind even this one, and if we could just ask that you try to summarize your written testimony and to present yourself in no more than 5 minutes, please. Be assured that your written testimony will be made a part of the record. STATEMENT OF WESONGA LUBOTI, REGENT INVESTMENT CORPORATION Mr. LuBOTI. Thank you, Chairman, and those attending. I'm here on behalf of Regent Investment Corporation. We propose that Memphis as a city and its metro areas would benefit much better from a development bank. A development bank offers a variety of opportunities that other banks do not offer. First, we have to look at Memphis and its metro area, and the kind of population that we do have. The population is composed of mainly disadvantaged persons, whoever they may be. Those per- sons do possess, as we believe, and as I believe, the talents and po- tential to participate and contribute to the economic development of the region. However, they are faced with such an obstacle that not only in- cludes technical skills but capital in particular. We propose that a development bank can work in conjunction with the State and Fed- eral Governments whereby the Federal Government can also make a set amount of financial support without changing any existing rules. I'd like to give an example on this investment. If we look at the Federal Government, we spend billions of dol- lars by administration, and yet we complain about the waste. And if we look around we still find certain people, the disadvantaged people are not able to borrow the SBA loans. What bothers me on that is that those people cannot really borrow or the banks do not consider them what we call prime business opportunity. However, a development bank would offer the individuals the opportunity to go into business when it's at its prime level. PAGENO="0033" 29 All businesses that do succeed have to be established within their prime phases, and all businesses that do fail are only established in phases that are contrary to what we call economic implication. Without going into economic terms, if the Members of Congress, particularly those who come from this area, want to see the disad- vantaged persons who possess the talents and potential to succeed succeed, we're going to what we call experimental methods where- by local investors can put together the capital. And on the other hand, the Federal Government in connection with the local and state governments can offer certain amount of money for experimental purposes in that the good face of itself could not only produce the results that we are seeking. I'm not trying to be theoretical in nature but a practical way. In this area there's a nonexistence of what we refer to as true venture capital for new industries and for enterprises owned by individuals that are a part of the disadvantaged group in our community. Rarely banks are interested in lending the money. More often banks, what we call banks-I call them traditional banks, but the banks are more or less interested in loaning to the affluent, a few, and to the big corporations. They're not interested in earning $5,000 to $10,000. They see that as a waste of time. And actually it costs them more money as they argue to make analysis or apprais- al of such small loans. A development bank can go out of its way and take its time to look at a small person, small need and work with that person from the conception of the idea to the maturity of that idea. Not only its maturity but to constant encouragement in order to repay the amount borrowed. Such repayment can benefit others who might want to borrow in the future. And we offer our support to all of those in this area who are interested in establishing a development bank. Actually, we do believe that we are going to be able to do it be- cause all of you and all of us are here because we are interested in economic development of our region. Thank you. [The prepared statement of Mr. Luboti maybe found at end of hearing.] Mr. Espy. Thank you, Mr. Luboti. We move now to Mr. Holey- field. STATEMENT OF MABRA HOLEYFIELD, VICE PRESIDENT, SECURED CAPITAL DEVELOPERS, MEMPHIS, TN Mr. HOLEYFIELD. Thank you, Mr. Chainman, and other distin- guished panel members. It's an honor for me to be here on behalf of Secured Capital Developers. Our company is involved in manag- ing venture capital funds and loan funds of a wide variety which includes Farmers Home Administration and various foundations. And it has given us the opportunity to manage funds not only for urban ventures but also for rural ventures as well. And I think from that perspective we have a deep interest in this particular subject. The need for locally based and managed revolving loan funds was established in the early 1960's. It was shown that conventional lending institutions were not responsive to the needs of the lower 44-629 0 - 91 - 2 PAGENO="0034" 30 income communities. In fact, the practice of "red lining" was quite common. As a result, those communities most in need of economic development were barred from consideration. Federal and local governments along with several large founda- tions responded with the development of a variety of loan funds and programs designed to provide capital to businesses in dis- tressed areas. Because of the current problems in the banking industry, the need for continued support in this area is even more acute. Loan approval requirements at conventional institutions are such that minority businesses in particular have a difficult time qualifying. The most difficult requirement is that the applicant has to have collateral equal to the value of the loan. Managing loan funds targeted to minority businesses or dis- tressed communities is significantly different from managing loan funds for a bank. A bank loan officer essentially examines the credit history and collateral of an applicant. A business plan is re- quired but it is not given as much weight as the collateral that's offered. A great business plan and weak collateral will not produce a loan approval at most banks. Given the fact that applicants to revolving loan funds will not normally meet collateral requirements, the managers have to be more skilled in evaluating business plans and the skills of those in- volved in the business. In many instances the manager will have to provide some level of technical assistance in order to assist the ap- plicant in qualifying for a loan. This means that if a loan fund is going to be successful, funds will have to be available to pay a highly competent staff. Even a competent staff cannot change the fact that a higher per- centage of loans will end up in default, than would normally be the case in a conventional institution. Given this fact, realistic goals must be established at the beginning. These goals, which might in- clude failure rates as high as 25 to 30 percent, must clearly be un- derstood by the funding source. Failure to set realistic goals often results in revolving loan funds establishing loan criteria similar to banks in an effort to reduce the failure rate. Once this is done the revolving loan fund becomes irrelevant. What we must understand is that one of the major problems facing the minority business community is a lack of his- torical involvement in business. This lack of history makes it even more difficult to succeed. While revolving loan funds will experi- ence a higher failure rate, even failures contribute to the develop- ment of entrepreneurs who will eventually succeed. Another problem that I want to mention is the fact that many of the funds that were originally designed to provide equity capital very seldom do so in a form that's going to help the business. More specifically the MESBICs, for instance, they have the flexibility to provide equity capital but in most instances when they make a loan the equity that they take usually is a result or is aside from the fact that they made a loan and they got an equity participation based upon the fact that they made this personal loan. The original intent was to reduce the front end debt service pay- ments that businesses experience in a start-up situation, but what really happens is that they have a debt and they've given away a PAGENO="0035" 31 part, of the business in addition to that. So we think that there is a need for additional capital for locally based organizations, but the flexibility that was originally intended that also needs to be ad- dressed in the regulations. And I think there needs to be more un- derstanding on the front end from the funding sources that they need to use these flexibilities and also not penalize those who manage these funds for taking a chance and actually making an equity investments and giving them the flexibility that they need. This concludes my presentation. Thank you. [The prepared statement of Mr. Holeyfield may be found at end of hearing.] Mr. Espy. Thank you, Mr. Holeyfield. I understand, Ms. Dobbins, you're appearing for Ron Mann. Ms. DOBBINS. That's correct. - Mr. Espy. All right, why don't we move to you at this moment, then to Mr. Rowe and to Mr. Welch. STATEMENT OF OLIVIA DOBBINS, ON BEHALF OF THE BLACK BUSINESS ASSOCIATION Ms. D0BBIN5. I'd like to say thank you, Mr. Chairman, for the op- portunity to appear before this panel representing the Black Busi- ness Association. We serve as a representative on many fronts for the causes and problems of our members and other socially and economically disadvantaged businesses in the region. Our mission is to positively advance the black community through upgrading its economic opportunities and position. In December 1989, we began a series of meetings with local lend- ing officers, the local FDIC, other organizations and individuals in the financial field. From these meetings the BBA and others real- ized it was time to bring the community together to create an inno- vative plan truly capable of addressing the sizeable problem. We are currently working with the Shelby County Community Rein- vestment Coalition on a joint CRA responsive proposal. This pro- posal will become a part of the CRA package at the local banks. No. 1, we believe that they should create a comprehensive busi- ness development plan to be produced by and have input by the banking community, local government, the county government, the BBA, the Black CPA's, the local universities, LeMoyne College, Shelby State Community College, Memphis State University and all concerned organizations. Two, we believe that there should be funding for an economic study of the African/American community for its access to busi- ness and housing requirements. Three, we request that the local lending institutions with CRA requirements join with the Tennessee Valley Authority in creating a capital pool that will provide debt, equity capital for businesses, especially those located in target census tracks, capable of provid- ing entry level jobs and training opportunities for disadvantaged residents. This fund would coordinate the diverse loan funds and also provide technical and management support programs that's currently available in the Memphis, Shelby County and Lower Mis- sissippi Delta Region, but until this point it's somewhat underuti- lized. PAGENO="0036" 32 The plan would also link the products and land resources of North Mississippi to the distribution capabilities of Memphis. In es- sence, what we're looking for there is the government to play a role in priming the pumps from the local banks to fund such a pro- gram. Such a program would be able to create jobs. We see that Memphis could act as a vortex to distribute the goods produced by Mississippi. Four, that the local lending institutions would establish financial and technical assistance partnerships with community based groups and organizations that seek to revitalize target neighbor- hoods and provide housing. In essence, with that point what we would like is for the bank to provide some of this expertise. We'd look at major corporations and banks as having the technical wherewithal to help a small neighborhood CDC. In brief, the minority businesses need assistance from the Feder- al Government in the form of business development grants to help buy equipment, programs to provide low interest loans and assist with bonding, timely information on government sponsored busi- ness seminars. Removal of the barriers that make it more difficult for black businesses to compete, increase minority participation in hearings, panel discussions and committee's that pertain to busi- ness economic development. Requirements of a community rein- vestment plan for majority of corporations participating in govern- ment contracts, this should include joint ventures between majority and minority companies on public sector projects and private sector projects. Incentives to contractors, contractor associations to train and assist minority firms and to train socially and economically disad- vantaged individuals. Incentives to majority corporations for joint ventures in both the public and private sector contracts. And in- centives to local banks and majority corporations that adopt a neighborhood. Memphis and Shelby County has demographics not found in any other region of the United States. The minority population has in- creased to 55 to 60 percent in Memphis, and 42.7 percent in Shelby County, yet there remains a vast disparity in economics. According to the 1984 ED & A figures we have 39.8 percent of TVA's subre- gion minority population, yet there still remains a problem. Mem- phis is, therefore, in the ideal situation to share ideas on improving the economic climate of the region. I thank you. [The prepared statement of Ms. Dobbins may be found at end of hearing.] Mr. Espy. Thank you. Mr. Rowe. STATEMENT OF GARY ROWE, DIRECTOR, MINORITY BUSINESS DEVELOPMENT CENTER, MEMPHIS, TN Mr. ROWE. Mr. Chairman and Members of the committee, on behalf of the Memphis Minority Business Development Center op- erated by Banks, Finley, White and Co. CPA's, and funded by Mi- nority Business Development Agency, U.S. Department of Com- merce, I thank you for this invitation to testify before the House Budget Committee Task Force on Community Development and Natural Resources. PAGENO="0037" 33 I wish to make it clear that I am speaking as a director of the Minority Business Development Center and not as a spokesman for the U.S. Minority Business Development Agency. The Memphis MBDC is part of network of 100 centers nation- wide. The Memphis MBDC serves the standard metropolitan and statistical area to include Memphis and Shelby County, Tipton County, Crittenden County, Arkansas, and De Soto County, MS. The Center provides management and technical assistance to in- dividuals and firms in the areas of marketing, finance, construction assistance and management to improve the gross receipts, profits and net worth of the firms are also assisted. All firms and individ- uals seeking assistance from the BDC will be provided with initial general counseling and referral assistance free of charge. Subse- quent services would be on a fee for services basis. The Memphis MBDC develops and maintains an inventory of mi- nority vendor firms qualified and capable of selling their goods and services to public and private sector, and to broker or match these minority firms with public sector procurement and private sector contract opportunities, both foreign and domestic. The Center identifies qualified minority individuals and firms with the potential to start new businesses and expand existing businesses and to broker or match these individuals and firms with new business ownership opportunities. In addition, the Center identifies capital sources for investment in or lending to minority firms or potential entrepreneurs. The Center is an integral partner in stimulating economic devel- opment in Memphis and the mid-South. The annual report of per- formance during the period of April 1, 1990 through March 31, 1991, reflects a culmination of partnerships with the public and private sector. The Center assisted a total of 147 minority businesses providing 1992 billable hours of management and technical assistance. The Center packaged a total of 23 financial proposals with the potential dollars approved totalling $2,603,949. The Center assisted minority firms with procurement of contracts valued at $9,871,100. This in- formation is generated on a quarterly basis and submitted to the Minority Business Development Agency, the Atlanta Regional Office. The Center maintains an aggressive advocacy and outreach pro- gram constantly linking with public and private corporations and minority firms. The following organizations provide examples of partnerships established with the Minority Business Development Center. We are part of the Shelby County Community Reinvest- * ment Act Coalition. The Memphis MBDC has been a part of the Shelby County Community Reinvestment Act Coalition since 1988. The Shelby County Community Reinvestment Act Coalition is rep- resentative of community and advocacy groups representing the spectrum from the NAACP to the National Association of Real Estate Brokers. In the period from 1988 to the present, the Center has participated with the coalition in negotiating community rein- vestment agreements with First Tennessee Bank, Sovran Bank, Union Planters Bank and First American Bank. The Center also has an active Loan Review Committee. The Memphis Minority Business Development Center has established a PAGENO="0038" 34 working relationship with local lending institutions to serve on a local loan review committee. The purpose of the Loan Review Com- mittee is to review and analyze loan proposals before they are pre- sented to lending institutions to identify the strength and weakness of the proposal. The committee has caused loan approval rates to increase. We are also a part of the Business Assistance Consortium. The mission of the Business Assistance Consortium is to increase the opportunity for economic progress and independence of minority businesses. The 12 members of the Business Assistance Consortium will promote business development and an economic environment in which minority businesses can better develop our talents and skills to achieve better lives for our community, and in so doing, contribute to a stronger economic base. We also have developed the Memphis Area Neighborhood Devel- opment Corporation. This corporation is organized and controlled by local residents to develop the economy of their own community. The Community Development Corporation is, in fact, a new tool created by the people in low income areas to gain influence over the economic conditions of their lives. To get their influence to make fundamental changes in their communities the Memphis area Neighborhood Development Corporation will identify and de- velop local skills and talents, own and control land and other re- sources, start new businesses and industries, increase job opportu- nities, sponsor new community facilities and service and improve the physical environment. We are taking these steps to continue this reinvigoration and le- verage the resources within all sectors more effectively to address these needs strategically. This testimony highlights many of the initiatives now underway within the Memphis MBDC. We thank you for the opportunity to appear here today and bring into focus much of what the Memphis Minority Business Development Center is doing on behalf of minority businesses. We'll be pleased to answer any questions after the hearing. [The prepared statement of Mr. Rowe may be found at end of hearing.] Mr. Espy. Thank you, sir. We'll have some for you. Mr. Welch. STATEMENT OF E. BOBBY WELCH, DIRECTOR, MEMPHIS ECONOMIC DEVELOPMENT CENTER Mr. WELCH. Thank you, Mr. Chairman, Members of the task force. The Memphis Economic Development Center is a joint venture between the city of Memphis, the Chamber of Commerce and the Black Business Association. Our major thrust is threefold. First we serve as an incubator to new and start-up businesses. Secondly, we provide technical assistance to existing business as well as those start-up businesses. And thirdly, we are involved in education and training via a public service activity which manifests itself in the form of seminars in all areas of business disciplines. This morning I was asked to speak specifically to the incubator concept. That is what I shall do. PAGENO="0039" 35 Using a business incubator is a way for new companies to get cost effective rental space, share office services and have access to expertise and management and technical assistance. The number of businesses using incubators over the past 2 years have increased over 200 percent, mainly because new firms starting in incubators have an 80 percent chance of success. This rate is a stunning con- trast to the figures compiled by the Small Business Administration which show that 80 percent of all new businesses fail within the first 5 years. The lack of access to capital for the Memphis Economic Develop- ment Center for business expansion has not effected the quality and scope of our service. The MEDC has continued to provide op- portunities for low and moderate income persons through technical assistance and training, public service and office space for new business start-ups. The incubator concept is not anything really new. Small busi- nesses have substantially contributed to the economy in job cre- ation, innovation and productivity. As small homegrown businesses are becoming an important focus of local economic development ef- forts, the small business incubator has become an increasingly pop- ular economic development tool which helps improve the success rate of new firms: Incubators are buildings characterized by low rent structure, availability of centralized services and administrative support serv- ice, receiving and shipping facilities, conference rooms, computers and word processors, and other business services. The arrangement reduces business failure by making them able to survive the criti- cal stages of early business development. This is achieved by pro- viding the business a means of reducing overhead costs. It also seeks to graduate their tenants to conventional quarters when they have become economically and financially viable. Housed in my written report will be steps for the formation or development of incubator facilities. Mr. Chairman, in finality we believe at the Memphis Economic Development Center that only new businesses and the expansion of existing businesses which create jobs will eliminate most of the social ills or some of the social ills in our community. I think you would agree that in America oftentimes disadvantaged businesses do not get involved in the early stages of owning their businesses. That is specifically why we are there to train and educate the dis- advantaged citizens in our community on the need for developing their own businesses. And some specifics for funding an incubator is housed in my written report. Mr. Chairman, on behalf of the tenants of the Memphis Econom- ic Development Center, thank you for allowing me the opportunity to talk with you this morning. [The statement of Mr. Welch may be found at end of hearing.] Mr. Espy. Thank you for testifying, Mr. Welch, as well all the rest of the panelist today. I represent an area where the largest town is about 50,000 people, and the average size town in my district in the Lower Mis- sissippi Delta Region is about 12,000 or 15,000 people. But as I sit and listen, there are many, many similarities within the problems experienced by Memphians and those experienced by the folks I PAGENO="0040" 36 represent who want to go to the bank to try to get a loan. Problems of access to capital, high risk ventures, and a rather hesitant lend- ing community, are all the same. Hopefully, out of this hearing we can come up with recommendations that will enable both of us to move forward. I have a couple of questions. One, for Ms. Dobbins-I'm really en- thused to hear that you are able to get the banks in the area to agree to accept a comprehensive Community Reinvestment Act package. Now, did I mishear you? Regarding this package that you described, is it a proposal going to them or one in which they were involved from the outset in developing? What's the status on that fact? Ms. DOBBINS. The final draft is in our hands for proofing now to submit to the bank. They've been in negotiation, as Mr. Rowe has mentioned, with the Shelby County Community Reinvestment Coa- lition. Based on our meetings with the local FDIC we believe that everything is in line. And by the fact of bringing all the organiza- tions together saying that is what we want, we feel it stands a very good chance of being accepted by the banks. Mr. Espy. But the banks have been involved from the outset? I mean, are they also involved in financing the planning aspect of the proposal? Ms. DOBBINS. This is being done currently on a volunteer basis by all our organizations. And now we believe that we do need staff people to finish the planning, so that's one of the steps we're asking them to fund a study and further planning. Mr. Espy. Right; and if they don't accept this proposal? You heard earlier Mr. Sumner from the Federal Reserve Board, in answer to Mr. Ford's question. In my opinion, he did not hold out much hope for leverage of community groups against commercial banks that have to comply with the CRA. I mean, what do you plan to do? They could get this proposal and pretty much put it in file 13, couldn't they? Ms. DOBBINS. Well, we believe that it's created, that there is money available in the banks. But there needs to be a comprehen- sive way to get it out. Mr. Holeyfield mentioned about going to a bank and needing the equity, and we believe that if we create such a plan they should go along with it. Mr. Espy. I have another question that I'm curious about and I'd like to get your opinion. We are faced with a Supreme Court which certainly is more conservative. If President Bush's current nominee is confirmed, I think that's just about going to do it in terms of put- ting the cork on the conservative side of questions involving affirm- ative action and minority development. Certainly with regard to the Court's recent decision in Richmond v. Crosen, I think-this is a personal opinion-it hurt the prospects for minority development and the degree to which counties and municipalities would be re- quired to assist development of local development concerns. What are you doing here in Memphis to overcome the burdens of the Richmond v. Crosen case? What prospects do you see for what we'll all have to do nationally to overcome that decision? Mr. ROWE. If I may, Mr. Chairman-- Mr. Espy. Yes. PAGENO="0041" 37 Mr. ROWE. Here in-Memphis, TN and the surrounding area we have approached the local government and specifically the county government to discuss the possibility of funding a disparity study. This study is necessary to justify the need for any type of minority participation programs. To date I do understand there is support in the county to fund this program, however, there is some hesitancy on the part of other government entities to buy into it. We believe that we will get the funds for the disparity study and prove that there has been historical discrimination against minori- ty owned firms and use a program, a participation program t&in- dude, again, minority firms and the purchasing process. Mr. Espy. Mr. Welch, would you as a representative of thé~.city, have an opinion on that question? Mr~WELCH. It is not within my bailiwick, if you will, to deal with that but I will give you my personal observations about it. First of all let me say this, to a large extent, Mr. Chairman, I don't believe in minority set asides primarily because they have not worked, first of all. And I think that something new needs to be dealt with. Primarily what I do personally when I talk to people is that I want them to operate in the open market. -L think it goes without saying that there's something wrong in this city, county and State when there's a serious lack of minority participation in business contracts. So to that end I strongly feel, as Mr. Rowe does, that something should and needs to be done. Now whether or not it can be legislated I really don't know, because I'm not in that end of it. But I can assure you that there needs to be some kind of inter- face between your particular area and the legislative branch of our government, and the traditional lending institutions in which some things as it relates to traditional lending constraints could be waived for disadvantaged businesses. I think it's a sad state of af- fairs that we have to seek dollars to do a disparity study when in our hearts we know what's really up. But, again, I think it's government playing games with us, and I think it's fair time in this country that the gentlemen like your- selves who have been elected to look over and oversee some of the ills of our community to take a lead in making it known to the tra- ditional lending institutions starting at the Federal Reserve that some things need to be changed. As business people we see the fallacy in the savings and loan sce- nario, we understand currently there's a banking crisis in all that. And, you know, we are sitting here wondering what and why are we here. And at some point in time may be the people who serve our country as public officials would have to start looking at some of the things that we are discussing here in a realistic manner. And, again, to reiterate my posture as it relates to Mr. Rowe's answer, I do feel that there is something wrong. I do think it's wrong that we have to beg to be told again that we do not partici- pate in the process. I think the disparity study is frankly a slap in the African-American's businessman's face, but it's something that we're told that we must come up with. I think you gentlemen could serve as lobbyist in that particular arena by letting people on high know that that is unfair and we need to be about the business of making America what it really is-and that is the home of the brave and land of the free. PAGENO="0042" 38 Mr. Espy. And home of a Democratiö president perhaps. Mr. Oberstar. Mr. OBERSTAR. Thank you, Mr. Chairman. Yes, I think the last part said it all. It may be kinder and gentler but heart is still hard and in the wrong place. What comes through for me with this panel is very basic ap- rroach to business development, combining the elements. You've aefined what is needed to generate jobs to promote business oppor- tunities among minority enterprises, and I may say coming from an area where minority means made of Americans. I have six Indian reservations in my congressional district. The problems are verj~sirniiar to those you're describing here today. Difficulty of getting access to capital, whether it's debt or equity capital, record of experience, track record of previous experience in business opportunities, and most instances a lack of trained man- agement personnel. A great amount of resources can be developed, but the tools to develop those resources are missing. One of the really exciting thoughts that I hear today is the concept of Ms. Dobbins of community reinvestment coalition where you're obvi- ously working to bring together all the resources of the community to bear on the different aspects of small enterprise development. We have to-you have to have training. I think, Mr. Luboti, that comes through with your testimony as well as Mr. Holeyfield, man- agement assistance from the lender or from the investor, manage- ment assistance to that small enterprise to help keep them on track. That's one of the problems that so often comes up. You have the skills, you have the resources to produce on a contract or devel- op a product, but the management skill is lacking and the lender or investor can provide that kind of assistance. And if you're developing those resources then the Federal Gov- ernment ought to find a way to assist in that initiative. And I think as each of the panelist have said they want to be participants in the market place, they also need some of those tools to be suc- cessful. And I think the history of small enterprise development is that where it fails is in that consistent management of contracts, and with just a little bit of technical assistance and guidance those small enterprises cannot succeed. I think you've really touched on a very important theme, one that we ought to be helping with. Thank you.. Mr. Espy. Thank you. Mr. Durbin, do you have any questions? Mr. DURBIN. I don't have any questions, no. Mr. Espy. All right, thank you. I'd like to know a little bit more about Mr. Luboti's development bank. Could you give us just a minute on that? Mr. LUBOTI. Yes. First we have to meet the requirements in the State of Tennessee. The State of Tennessee requires that any bank, development, commercial or whatever, financial institution must have capitalization of $5 million. We believe that such capital should come from private individuals before we can seek assistance from local governments or Federal Government, because a bank should be owned by individuals. What we're doing is putting together minorities that are interest- ed in using their savings to open this bank so that in turn we can show to the local governments and Federal Government that we PAGENO="0043" 39 are prepared as individuals to take the risks in the community de- velopment of Memphis and its metro area. That's where we are as of now. We are very close to $5 million, but when we get there I think you will hear from us very soon. Mr. Espy. I want to ask each panelist very quickly. If you had to rewrite the Federal Minority Business Development programs- don't say we need more money, we know that-what would be the top three changes, improvements that you would enact? Mr. Holey- field? Mr. HOLEYFIELD. First of all with respect to funds that's available for Venture Capital Funds we would put a requirement that a cer- tain percentage actually be in the form of equity injections as op- posed to debt. The other thing, that I would want to hit on is a question that you raised a few minutes ago with respect to affirma- tive action programs being under siege at this point, I think that a lot could be gained by focusing on the area of removing obstacles to small business participation. Quite frankly if a small business, be it for a project that is also bid on by a larger business, that small business in many instances has an advantage in that they don't have the overhead expenses that the larger business has. But if you look at the constraints often in the form of higher bond requirements and other require- ments that are not germane to the particular situation you'll find that it's such that the small business person on the basis of those requirements cannot compete. But if you were to remove the obsta- cles to participation and allow them to participate for that piece of business they can actually do you will find that you can get greater participation at a lower price. Thank you. Mr. Espy. Thank you. Mr. Rowe? Mr. ROWE. If I was to add anything it would just basically be one thing, and that's enforcement. I think a lot of the programs that are coming out of your Federal Government has no real enforce- ment to make these programs work. So I would put enforcement as the number one thing to do. Mr. Espy. Ms. Dobbins? Ms. D0BBIN5. More partnerships between the public and the pri- vate sector, and tagging this on to the question about the banks, those lending institutions and those corporations that stand to gain from government contracts or holding government funds should be willing to invest in commUnity and help build that business base. Mr. Espy. Mr. Welch? Mr. WELCH. Ditto to my colleagues. That's about all I can say. Mr. Espy. All right, and Mr. Luboti? Mr. LuB0TI. Maybe one day it will come when the Congress can eliminate the SBA, and put it in the private hands so that we can practice the free market without having to depend on the bureauc- racy. I strongly believe in that, that we as the minorities can also benefit from the free market. Mr. Espy. We do appreciate these recommendations and appreci- ate the testimony from the panel. We put out a call to Mr. Ford to come back. He was called away on business and I was hoping he could make it back in time to question the panel-all of which are local to this community-but I don't believe he's going to come back in time. PAGENO="0044" 40 So, let's dismiss this panel. We have about 20 minutes or so in the schedule for lunch, so why don't we recess for about 20 to 30 minutes? We had also instructed the afternoon witnesses to come about 12:30, so we have some time built in the schedule that we could use at this point. Let's recess this hearing and reconvene about 12:30. AFTERNOON SESSION Mr. Espy. Let's call the hearing back to order for our third es- teemed panel, mostly from the Mississippi area. I do appreciate all of you making the drive up today. Malcolm Shepherd called this morning and expressed his disap- pointment that he would be unable to make it. He did send his tes- timony, which will be included in the record and provided to the Members of Congress. [The prepared statement of Mr. Shepherd may be found at end of hearing.] Mr. Espy. We do have William "Billy" Haney, executive director of the South Delta Mississippi Planning and Development District out of Greenville, who is accompanied by Mark Manning, economic development director from the South Delta Mississippi Planning and Development District; Mayor Robert Gray, president of Griffin Lamp Co. in Shelby, MS; Harry Bowie, Delta Foundation in Green- ville; and Raleigh Byars, State director for the Mississippi Small Business Development Center. We do appreciate all of you coming. As we said to the panel this morning we've had a pretty long day and there's even another panel which will present after this one. We have your written testimony, and if you could just summarize your oral testimony. Please try to limit it to about 5 minutes. We will certainly include your written testimony in the permanent record of the hearing. With' that, Mr. Haney, please proceed. We do appreciate you coming, sir. STATEMENT OF WILLIAM BILLY HANEY, EXECUTIVE DIRECTOR, SOUTH DELTA MISSISSIPPI PLANNING AND DEVELOPMENT DISTRICT, GREENVILLE, MS Mr. HANEY. Mr. Chairman and Members of the Task Force, I'm Billy Haney, executive director of South Delta Planning and Devel- opment District headquartered in Greenville, MS. I also serve as chairperson of the Mississippi Association of. Planning Develop- ment Districts. I'd like to thank you, Mr. Chairman, for the opportunity of ap- pearing today to testify, but I'd also like, to express my personal ap- preciation for your strong support of all the initiatives which serve to improve the quality of life for the people living in our State. South Delta PDD serves six counties and 35 municipalities locat- ed in the heart of the Mississippi delta, long considered one of the poorest areas in the poorest State in the United States. The area we serve is approximately 210 miles long and 45 miles wide, repre- senting 3,502 square miles of primarily rural areas. In addition, this area represents a total population of 163,786 persons, which is a decline of 13,775 people from the 1980 census. PAGENO="0045" 41 Our area, regretfully, has inadequate infrastructure, substandard housing, per capita income well below both the State and Federal level, school dropout far above the State and national level, teen pregnancy rates out of sight, and then illiteracy rate which is com- parable to some of the third world countries, and many other social and economic problems. However, today we're trying to look at economic development, so basically this information is just to provide for you the playing field in which we're trying to establish economic development. Our six counties have a total labor force of 66,290 persons with 6,600 of them being unemployed, which represents an average or about 9.956 percent of those being unemployed. The counties indi- vidually range from a low unemployment of about 9 percent all the way up to 15.5 percent unemployment. So basically all these statistics present a thumbnail picture of the economic development arena. However, the flip side of the coin is where our interest is today, and that's in economic development. I'm not a native of the Mississippi delta. I grew up in northeast Mississippi in the Tupelo area, and in my lifetime I can remember when that area had a similar economy of despair. I can see it as it grew through an economy of repair until it's today the economic yardstick for economic development in the State of Mississippi, and I think probably the Southeastern United States. I took this job in Greenville because I wanted to be a part of this revival in the Mississippi/Delta area, and I know with the help of people like you we're going to get there. Most of my staff are in Greenville for the same reason. We are transplanted planners and administrators by profession, but we're change artists by dedica- tion. What has been done in the past? Mark Manning of our staff will present just a brief sketch of the current programs that we have operating. STATEMENT OF MARK MANNING, ECONOMIC DEVELOPMENT DI- RECTOR, SOUTH DELTA MISSISSIPPI PLANNING AND DEVELOP- MENT DISTRICT Mr. MANNING. Mr. Chairman, I'm not going to regale you with the statistics of the Mississippi delta. I'm sure that you, in particu- lar Congressman Espy, know them better than I do. Mr. Espy. We've beat them over the head with that already. Mr. MANNING. To sum it up it's very easy to say. We live in the poorest counties in the poorest State in the richest nation God has ever created, and there's something wrong with that. We've got to do what we can to address it. We do have a number of current programs that thankfully the Federal Government has seen fit to implement over the years. They're in your testimony and I won't bother you by reading them, but very quickly they are Economic Development Administration, Small Cities Community Development Block Grant Program, Small Business Administration, so forth and so on. What I would like to talk about is the need for capital assistance in the Mississippi delta. South Delta Planning and Development was fortunate enough in the last several weeks to receive an an- PAGENO="0046" 42 nouncement that we are able to borrow-and I emphasize borrow- $1.25 million from the Farmers Home Administration to relend in our area for small business development. Over the years we've been pretty successful with the loan pro- grams that we have had. I think initially our Economic Develop- ment Administration RLF began with a capitalization of a little over $1 million, and in 12 years we've turned that into $3 million capitalization and have created-I can confirm at least 1,500 jobs. However, obviously when you're talking about an area where the per capita income is so low that's a very small drop in a very large bucket. We are committed to economic development in the delta. I'm sorry-- Mr. Espy. No, sir, I'm just saying you have a separate 5 minutes so you're speaking on your own time now. Mr. MANNING. Okay, excuse me. The bottom line is there's a tre- mendous need for capital assjstance in very small business, in what I would call microloans from $500 to $10,000. Along with that as- sistance there's a great need for technical assistance in the busi- ness development. A prudent investment is something that will pay off for the Federal Government over many, many years, and it's not something to be seen as a giveaway by the Federal Government but an investment in the future. Thank you. Mr. Espy. All right, very good. Did you want to reclaim your time, Mr. Haney? Mr. HANEY. Please, if you don't mind. Mr. HANEY. You've seen what's been done with those tools which are out there available, and I'd like to stress the need that basical- ly what we need are more of these tools. We also need some assist- ance in some of the existing programs where program guidelines can be developed at the local level. As long as an agency has physi- cal responsibility and a proven track record we feel like that the best decisions to assist locally can be made locally. We feel like in our economic development programs the timing is a major factor. Irregardless of how good the project is if we cannot fund it in a reasonable length of time* we lose the program, and in most cases the business doesn't reap the benefits. While job cre- ation and the improvement in quality of life are important there should be less emphasis on job creation and more emphasis on cap- ital input. In our area of the delta a lot of times we deal with projects which may deal with the improvement of a product toward a fin- ished product, but realistically that type operation does not create a lot of jobs. It creates capital-creates capital investment but it does not create jobs as such. Districts such as South Delta have found immense benefits de- rived from~ an infusion of ideas received at the national level. And one of these such organizations is the National Association of De- velopment Organization. This organization has assisted us greatly because it represents the very basic network for improving econom- ic opportunities and ~uality of life in America's small metropolitan rural areas. PAGENO="0047" 43 Congressman Espy, I would just like to tell you how much we ap- preciate your support in the past and your continued support in the future. In closing, our area has existed on handouts long enough. We do not need, want nor do we support giveaway programs. Instead we seek opportunities to truly create long term investment in both the people and the economy of the Mississippi delta. By borrowing $1.25 million to create a loan fund for economic development, we and others are committing ourselves to the future of the Delta. We simply ask you to help us by continuing programs so important to our area and to refine and simplify these same programs as the op- portunity arises. Please allow me to close by expressing our appreciation for your sincere interest in our work, and any chain such as an economic chain is no stronger than its weakest link. Thank you. [The prepared statement of Mr. Haney may be found at end of hearing.] Mr. Espy. Thank you, Mr. Haney and Mr. Manning. Mayor Gray. STATEMENT OF ROBERT GRAY, PRESIDENT, GRIFFIN LAMP CO., SHELBY, MS Mr. GRAY. Thank you, Congressman. To all the Members of the U.S. Congress who make up this panel, especially you Congressman Espy, my Congressman. It's an honor to have been asked to come here this morning, and may I say prior to starting to Congressman Ford, just prior to my coming here I went by the South Memphis Senior Citizen's Center and they made me promise, when they found out that I was going to be here with you today, to tell you that they really appreciate the job you're doing out there for them, and it's really a nice facility. Thank you. Mr. Espy. I really like this panel. Mr. FORD. You weren't up here politicking today by any chance, were you? Mr. GRAY. No, no, no. I have no vested interest, just went by to see some friends. Mr. FORD. All right, okay. Mr. GRAY. I believe today we were asked to talk on mechanism for financing economic development. My presentation, which will be brief, will be geared toward maybe provide some comments on why I feel we should go forward with developing a mechanism, whether it be a regional development bank, or whatever. Let me begin by saying that something must be done and some- thing must be done, in what I feel, a very timely fashion to arrest the deterioration and disintegration of rural and small town Amer- ica. I believe rural and small town America is the backbone of the entire economy of this country. Therefore, its health and viability should and must be protected whatever the cost. I truly do believe that the deplorable and deteriorating economic conditions of rural America are contributing to the destruction and decay of big city America. Therefore, if we solve the problems in the small and rural towns of America we begin to solve the many problems in our major cities. PAGENO="0048" 44 Someone or some institution must be willing to invest in rural America. While there may be some degree of attitudinal changes recently major corporations have been unwilling to invest in rural America for the most part. They always cite such excuses as low skill levels of work force, which is a farce, population make-up, par- ticularly where the minority make-up is a significant part of the population. There's a corporate buzz word called red lining, which means that if the population in a particular area consists of 30 per- cent or more of minorities it's a no-no as to whether or not they would move into that particular area. Banks and other commercial lending institutions are not willing to invest in rural America. In fact, banks are taking money out rather than putting money into these communities, that is the rural communities. The Community Reinvestment Act is not work- ing or is not being enforced. We realize that there is a banking crisis in this country at the present time, and the regulatory agen- cies for the financial institutions are tightening down on these in- stitutions. This is causing havoc in the business community. Rural and small town America is paying more than its fair share of these con- ditions. Rural America did not cause these conditions, and neither did legitimate small businesses cause these conditions. I say that fraud, cronyism, graft, the buddy-buddy system that exists in the financial institution world, and yes, racism that exists in banking, caused these banking crises. Big banks in big cities are still lending money, but rural banks in small communities are not. Rural banks are investing their monies with the big boys rather than investing in small businesses in their own communities, which gave rise to their very existence in the first place. In other words there's no loyalty to those communities. Government guaranty programs do not work. The only time a bank in our area-and when I say our area, I'm talking about the Lower Mississippi Delta area, the only time that the banks will honor a guaranty is when the project didn't need a guaranty in the first place or some friend they want to pay a favor to without undue risk. I wager to say that if an investigation could be conducted on the various government guaranty programs, I feel that some startling findings would appear as to who has received these funds and what their connections are with the various lending institutions. There- fore, banking in rural America is far too conservative, far too crony oriented and far too profit oriented, as well as far too racist. It would seem to me that if you had the full faith and credit of the U.S. Government guaranteeing 90 percent of a loan then a bank should feel comfortable. But that is not the case in our area. In fact, I've had banks tell me that they wouldn't consider a loan even at 250 percent guaranty. So that program, to my knowledge, is not working. I don't understand why, but on the other hand until recently, until the crisis came about, I know of banks making loans in the several million dollar range unsecured to friends and cronys. In fact, just recently one bank in our area settled for 20 cents on the dollar for a several million dollar loan. And when I say several million, I'm talking upward of $20 million. PAGENO="0049" 45 I say that if that same institution had invested $1 million in 20 small businesses I feel that at least 16 of those businesses would have prospered and been able to repay these loans. I say that this is cronyism at its best. We are not advocating giveaway programs or investing unwisely. We are merely saying let's play on a level playing field, give my project the same consideration that you give John Doe, give us the same opportunity to develop and become a part of the economic main stream as you do our counterparts. History tells us that this is not going to happen with our tradi- tional institutions of finance. The Reinvestment Act has not made them do it. There are various other laws to eliminate discrimina- tion, have not made a difference. Then why should we expect any- thing different to happen now, especially with the present crises that exist in the banking system. An institution of finance must be developed, be it a regional de- velopment bank or call it what you may, that is willing to make its resources available to all, using the same set of rules and stand- ards. It's no secret,, gentlemen, why this area, the Lower Mississip- pi Delta, lags far behind other parts of the country. It is because such a large segment of the population is left out of the economic mainstream, namely black people. No nation or no area can sur- vive, let alone prosper, with such a significant portion of its popula- tion shut off from the area's resources for economic prosperity. It's no different in black people here in the Lower Mississippi Delta than those in California, Connecticut, Maine, Massachusetts or New York. The difference is we make up such a significant part of the population. But let me caution you here in your efforts that developing such an institution, a regional development bank, and putting the same people in place to operate will be no different than what we have today. There are programs in existence today that could work, such as the guaranty program, if the people in charge had the right attitudes, the mentality and most of all the work ethics to make it happen. What usually happens is that people who are put in place to run these agencies and organizations that have been created by the government to address some of the problems that we face today, they usually take on or develop the local banking mentality or they do not understand the real business world. Many times they are people who have failed in the private sector and who have a vendetta or have an envy built in whether they realize it or not. Mr. Espy. Mayor, could I ask you to suspend for a minute? Could you move on to a summary, or we could move on to the next wit- ness and come back to you during Q and A? Mr. GRAY. Okay, I'm almost through. I'm about finished. Mr. Espy. All right. Mr. GRAY. Therefore, in lieu of this testimony I urge you, the U.S. Congress, to forge ahead in bringing into reality a develop- ment bank to serve as a vehicle or resource to address the econom- ic conditions of all the people on an equitable basis, rather than the select few which traditional financial institutions are serving. We realize that existing institutions are going to be in opposition to such an undertaking, but these existing institutions are not will- ing to address the problem. We know that heat is going to be brought upon you for undertaking such an activity, but we encour- PAGENO="0050" 46 age you to move forward and do that. And if you fail to do that, all of the hearings like this, all of what I say or what you say is noth- ing more than rhetoric. Thank you very much. Mr. Espy. Well, thank you. I appreciate you being here. Harry Bowie. STATEMENT OF HARRY J. BOWIE, PRESIDENT, DELTA FOUNDATION, GREENVILLE, MS Mr. BowIE. Congressman Espy and other gentlemen on the panel, I am president of the Delta Foundation in Greenville, MS, and in my report I say a few words about the beginning of Delta and its work in the area. Delta has accomplished some significant goals, but the goals and accomplishments pale in significance to the problems that still exist in our region. And the delta's primary area is the delta of Mississippi and spills over into Arkansas, works throughout the whole of Mississippi and Arkansas occasionally and in Tennessee occasionally and certain parts of Alabama. It is significant though-and I want to say this, that we've been able to create businesses that have been successful. Even more im- portantly we have been, with our Rural Development Loan Pro- gram, required to make loans to individuals and companies that are not bankable. We have to make "bad" loans, if you will, but we have to find good reasons to make those loans. It is significant that our first revolving loan fund has revolved twice and it's on its third revolution making loans to businesses that are not supposed to be bankable. For the most part they were, as you said Robert, minority businesses that could not get through into the normal systems. In some cases there were valid reasons and in some cases there were not. Mr. FORD. In other words there were risk clauses; is that correct? Mr. BOwIE. The risks were too great for the commercial banks to take, but we did it, we worked with them, we provided some techni- cal assistance and they're operating and doing business. The Con- gressman knows of a number-Robert Gray is also one of the ones that we loaned money to because he could not borrow money from the commercial banks. I'll say that, just in passing, Robert has touched on a couple of things that are very important. One of the great needs in our region, not just the Mississippi Delta but the surrounding region, is the need for development capital. That's a very, very difficult com- modity and resource. It's particularly vexing in the minority com- munity where there's not been a growth in capital and capital cre- ation that's necessary; and yet as Robert so aptly put it, it is simply impossible for our region to develop if we leave behind 40 percent of the people. We cannot solve the problem by giving them deadend minimum wage jobs. The minority community must be brought into the mainstream as well as other members in our com- munity. It is significant to note that we cannot build the region by simply bringing in outside companies. We continue and we should contin- ue to try and attract new industry into the region. The majority of PAGENO="0051" 47 the development that will occur in our region, however, will occur through the development of plants, the expansion of existing busi- nesses, the creation of businesses by people who live here, and the use of resources and people in our own communities. One of the strategies that we needed to consider is how we bring more venture capital and seed capital into the region to help initi- ate these developments. The reality of large businesses avoiding communities that have a larger percent of minority residents was documented by studies done at the University of Texas back in the late 1960's, early 1970's. These studies detailed the economic rea- sons why businesses tended to avoid areas which were majority mi- nority. Now one idea that we've discussed-and I don't want to knock it-Robert is supporting it and I think we need to look at it very carefully though, is that of a Regional Development Bank. I'm not certain that's the best idea at this point, and my reason for that is that each State has developed differently. In Tennessee, Congress- man Ford, for example there are several MESBICs that exist, and there are some venture funds that exist. There are two or three in Louisiana. There's only one in Mississippi, one MESBIC, and I don't think we have an SBIC active in the State any more. We had an SBIC in the past, but not now. Mississippi does not have enough institutions of the type. Arkansas, until the people in Arkadelphia came along, didn't have any. Because each State has developed differently, each has slightly different needs. If we do a regional bank it has to be tied into the flexibility and the differing needs of those States; or we may need to look more carefully at the existing SBIC, MESBICs and unregulated venture funds that exists in those States and see how we can bring more funds and more seed capital to help build this existing network of institutions that have been initiating eco- nomic development over a period of time, rather than attempting to impose a regional idea, concept, or solution on differing prob- lems in different States. We have to look at that. That's telling me to hurry-- One other thing is that the Defense Department has developed a Mentor Protegee Program in which network larger businesses and minority businesses, in order to assist minority businesses obtain Defense contracts. You may want to look at the problems faced by new and emerging minority business and find out if there are not certain kinds of incentives that you can give that would involve larger majority businesses working in a business relationship with someone like Robert to help him with different problems that he may have on the technical side of his business. I want to commend to you the Community Development Pro- gram. It's a program that's funded with approximately $21 million. Congressman Espy, we've been able to call upon you. You have been a strong supporter of this program. This* is a very unique pro- gram in that it allows the Federal Government-to truly target money toward poor communities and depressed communities, and involves community development corporations in the use of those moneys so they can target those funds toward the poor and unem- ployed. PAGENO="0052" 48 One other condition is that 75 percent of the people employed by this program must meet the standard of poverty; they have to have been laid off and for not working or some other poverty status when you hire them in businesses that are directed toward bring- ing those people into the mainstream. This is a unique program-and I'm trying to stay within my 5 minutes. Mr. Espy. Yes, sure. Mr. BowIE. You need to take a hard look. Another important issue that's coming up is the microlending proposal. There's some talk about SBA coming into that field and looking at it. Senators Bumpers and Mitchell are proposing legisla- tion around microlending. As I said earlier, almost 80 percent of the jobs would be created by small and medium size businesses. Then you need to be looking at what you do that enables those kinds of jobs to be built up and expanded. In my report I talked about some statistics from the SBA loan funds, and it shows how little of that money has gone to those busi- nesses and yet they're the key to growth. Yes, there is a high fail- ure rate among small businesses, we know that; but they still create the jobs and many of them succeed and they do more in the long term than bringing in the one megabusiness which almost in- evitability imports 75 percent of its management and clerical staff from some place else into the region. It provides some lower level jobs in the region. We have an idea about this microlending demonstration pro- gram, and we want to see up to $20 million in grants be made available through the Small Business Administration to implement a 5-year demonstration. Grants should be made to intermediary or- ganizations, private, nonprofit corporations generally referred to as Community Development Corporations, with a demonstrated record of achievement in business lending and providing assistance to small businesses. These intermediaries will operate the loan fund and provide technical assistance; it is very important to provide technical as- sistance. Generally we're talking about loans that might not exceed $35,000 which would be the kind that would help get these busi- nesses off the ground. It's $15,000, $25,000, $35,000 which is often the threshold of need even though many times you need above that. That's the kind of fund level we think is necessary to spur the expansion and development of smaller businesses and intermediary businesses in our area which would be the backbone in creating jobs. I'm not going to read all this. We want you to look very carefully at what we're saying concerning the program and the kind of re- serves we're talking about. We think it should be a grant program, but if not that, then we ask you to look at the Intermediary Loan Program administered by the Farmer's Home Administration in which money is loaned out at 1 percent. The money is paid back, the staff does not get a grant t9 run it, but on the arbitrage they pay for the staff and the technical assistance, the loan lost reserve and the other things necessary to operate the program. There's a proven history of loan funds being able to do that and operate in that way and still keep the funds moving perpetually. PAGENO="0053" 49 We ask you to seriously consider this idea. I also want to point out because it's very critical, and not just because Delta has a company that makes folding attic staircases, that we need in housing starts, so do continue with your efforts to fund rural housing. The need is great. During the Reagan years we cut that program by 50 percent. We have enormous housing needs, it's a spur to economic develop- ment. I hope you'll consider it. I had more to say but that red light is blinking and you're en- couraging me to stop. [The prepared statement of Mr. Bowie may be found at end og hearing.] Mr. Espy. Yes, sir. Only because your testimony is so interesting we want to move and conclude the first part of the testimony and begin the questions so we can interrogate you later. Mr. Byars. STATEMENT OF RALEIGH H. BYARS, STATE DIRECTOR, MISSIS- SIPPI SMALL BUSINESS DEVELOPMENT CENTER, THE UNIVER- SITY OF MISSISSIPPI Mr. BYARS. Thank you. Mr. Chairman, Members of the Task Force, it is an honor and distinct pleasure to be here today. I ap- preciate the invitation to speak before you. Also it's indeed a pleas- ure to have the Task Force here in the mid-South. I'm the State director of the Mississippi Small Business Develop- ment Center and we're charged with providing assistance to exist- ing and small businesses in all 82 counties in the State of Mississip- pi. I appreciate the comments Mr. Oberstar made earlier on the Management and Technical Assistance Program. I want to address that issue and some other issues. The agenda says that I'm from the University of Mississippi, but I'm not a college professor, I'm the director of a service delivery program for the State of Mississippi. The SBDC Program is a national program in all 50 States of the nation, however, the budget for the national program is only $70 million. The SBDC is a grassroots management and technical as- sistance program for the small business community of a nation in Mississippi. And it's really a joint partnership between the Federal Government and the States in the program. Specifically in Missis- sippi the agreement is between the Small Business Administration and the University of Mississippi to manage the program in all 82 counties of the State. Why is the program on the campus of the University of Missis- sippi? Well, basically we're a satellite program that's attached to the university essentially to keep down overhead to save both Fed- eral and State dollars. We involved ourselves there at the universi- ty with the services they provide for us in order to do that, such as personnel, accounting, purchasing, transportation and like services. It also involves the university and the community college system in local activities such as involvement with small businesses and fi- nancing programs. We manage 14 Small Business Development Centers in the State, each serving from 6 to 10 counties in the local area. So these serv- ices are really being made in local, rural areas and towns and cities. And as you well know, Mr. Chairman, Mississippi is almost PAGENO="0054" 50 all rural, and we also have three SBDC's in your second district in the Delta. What do we do for small businesses? Two major services that we offer, No. 1 is counseling, advice, if you will, and business management training program to help train entrepreneurs and ex- isting business managers in areas that they feel that they need im- provement in. These services are free to existing businesses and also to new business start-ups. What are the services that we provide to the small business com- munity? We have small businesses that do business plans to start a business, we offer assistance in personnel training, accounting, marketing, production and other related type business manage- ment services. We offer international trade assistance of small business clients that are interested in exporting or importing estab- lished import or export business. We can help that small business get started. Also we provide procurement assistance for those businesses in- terested in selling to the government, the Federal Government or State and local departments. For example, recently in northeast Mississippi we conducted a procurement conference that involved the NASA Rocket Motor Construction facility, which we had over 200 participants interested in selling their products or services to the government. In our training program which are basically three, six or nine hour programs, we offer training and how to start a business. We're not training entrepreneurs but we're trying to give them the basic skills and ideas about how an individual starts a business and what process he or she should go through to do that. How much counseling do we do annually? Approximately 49 per- cent of our counseling services are for start-up businesses. On the average we'll spend approximately 9 hours of counseling and train- ing with a small business. We don't recommend any businesses to our clients. We're only able to evaluate a business if they come to us with a proposal to start a business. In the letter inviting me here it mentioned a problem with equity capital. Briefly I'd like to address that problem. I began the work in the SBDC program approximately 10 years ago and served in a service center for eight years before I moved over to the State office. The problem-I experienced that problem with working with small businesses back in 1981 and it still exists today. The basic problem, as it's been discussed earlier with other speakers, was that 20 or 30 percent equity is required by a finan- cial institution for even to have an application considered by the loan officer. The evaluation doesn't go beyond the process of look- ing at equity injection or risk capital or whatever you'd like to call it. So the real value of that business or whether that business is needed in the market place is really never evaluated because the evaluation process doesn't get beyond the venture capital or the in- jection capital rather. One other problem, as also mentioned earlier, the requirement for 100 percent collateral. So if the injection capital problem doesn't stop a proposal then the collateral situation may stop a pro- posal. But what I've seen in the past couple of years-- Mr. Espy. Mr. Byars, I have to apologize to you because I failed to activate the clock. I've been told that you've gone about 6 mm- PAGENO="0055" 51 utes. And I'm only doing this because I know that we have a couple of colleagues on the panel who might have to, in half an hour or so, rush for an airplane or make their way toward the airport. So if you can move to summarize I'd appreciate it. Mr. BYARS. I was about to finish. Mr. Espy. All right. Mr. BYARS. What I've seen in the past couple of years is a move- ment in change in philosophy of the financial institution. Now this is not an across-the-board movement, but I've seen activity in the Federal and State programs, and also in some of the banks to begin to look at a business more closely. The ability of that small busi- ness to generate revenue in cash flow so that they can service a loan that is made to the small business person. There will continue to be a need or requirement for venture cap- ital and equity capital, but I think there is a movement among the financial institutions to evaluate a business on the merits of that business. At least I've seen this in some areas in our SBDC pro- gram. Briefly we have a pilot program that was initiated by a bank and also a Federal Agency in Pike County to initiate a procedure where the bank will provide the equity injection for that business loan. And the equity injection provided by the bank would be put on standby until such time that the small bank or the small business rather, could make payments on the main loan from the bank and also the equity injection loan. This is a procedure that I think has some merit and we're going to look at it for about a year and see if that will provide some addi- tional help. [The prepared statement of Mr. Byars may be found at end of hearing.] Mr. Espy. Thank you, sir. I appreciate your testimony. Let me congratulate each and every panelist, not only for coming up here this morning but providing great testimony. And to Mr. Gray, let me agree with you in your acknowledge- ment of the racial, negative racial history that we've had in our State and in this region. Let me describe it to my colleagues this way. We've heard a lot today about the genius of the ARC and TVA. You know those programs started in the 1930's and the 1960's. When President Roosevelt in the 1930's went to the Tennes- see Valley area and said "Oh, there's poverty here," the TVA sprang from his imagination. The TVA, we know has done a whole lot to promote economic development in that region. In the 1960's when President Kennedy campaigned in West Vir- ginia, he said "Oh, there's poverty in this area of Appalachia." Then there sprang from his imagination the ARC. Well, there has always been great poverty, grinding poverty in this area. It's just that when anyone who might have been progressive at that time came here to acknowledge the deprivation and poverty, there were others in the body of politic and in the Halls of Congress that said, "Wait a minute, if you send money down here it will come with too many strings attached. You know, equal opportunity, equity in doing something for those who might have been at the bottom and might have been of another racial stripe." The great irony is that now, we have this tremendous, tremendous budget that precludes a PAGENO="0056" 52 lot of options that we might have now that our racial situation is improved. That's the problem we have-knowing that we cannot do another ARC and knowing we cannot do another TVA; but trying to find some innovative solutions to prime these areas. That's what I wanted to ask Mr. Haney. You mentioned first in your testimony that having come from the Tupelo area, which is northeast Mississippi, is in the ARC service area. Is that why the Tupelo area has done better than the so-called delta? Mr. HANEY. I think probably the two major factors that have contributed to the success of that area, the first would have to be a combination of ARC in conjunction with the furniture industry re- alistically. It was two things that happen to come together at the right time and they fit real, real well. And ironically today every- body-on unemployment in that area there. Everybody almost who's looking for a job has a well-paying job based upon produc- tion. And I suspect those two items contributed greatly to their suc- cess. Mr. BowIE. Congressman Espy, could I-- Mr. ESPY. Sure. Sure, please. Mr. BowIE. It's absolutely critical that we understand the demo- graphics is a major factor in this development. Tupelo and North- east Mississippi has a population that almost mirrors the national population in terms of its minority populations. It has prospered, east Tennessee has prospered, northwest Arkansas has prospered and the Cumberland Plateau Region of the South has prospered. It is not an accident that prosperity, that is, the sun belt did not shine in the black belt. The sun belt is seen shining in those parts of the South in which there has been an extremely small minority population and that is a principal reason for the development of those regions. In saying this I do not take away anything from the leadership of the people in Tupelo and that area who took advan- tage of those opportunities and made progress happen. But we should not miss the element of demographics. Absolutely critical. Mr. Espy. Which leads me into my question to you, Harry. You mentioned the microenterprise proposals and-again, let me de- scribe to my colleagues, it doesn't rise to the level of the $35,000 base that you mentioned, Harry. There is a microenterprise project which was funded as a demonstration project as a part of the Jobs Training Partnership Act (JTPA) and with the Levi-Strauss Foun- dation. Last year it provided a woman named Ms. Robbie Rabun, who was an AFDC recipient, in fact, she happens to be white, with $5,000 in seed capital. Also, the project required her to attend self- esteem classes and business and technical development classes which were supervised by an MBA from a local university. The project, in just 13 or 14 months time, enabled her to move from AFDC into entrepreneurship. She now owns her own business, which is a car detail service, but it's hers. She moved in a little bit over one year from making $411 a month on AFDC into an inde- pendent situation where she now makes about $1,800 a month and is off welfare. She feels a lot better about herself. She's no longer relying on government resources except to the extent, my colleagues, where she's saying now that she's inelligible for Medicaid. So one illness will knock her out and send her back to where she came from. PAGENO="0057" 53 That is what we need to look at, but I'm endorsing this microenter- prise suggestion. Mr. BOwIE. There are many levels of it. There are many levels of it, and you're talking about one that more nearly models what they call the Bangladesh Project, the one that started in Pakistan, in which they were talking about making loans of $500 to $1,000 to help people get into individual businesses. And there are several in this country: There's the Good Faith Fund in Arkansas that's doing this and there was one in New Mexico that has been very success- ful, and also in Arizona. And these programs that loan $1,000, $2,000, $3,000, and $4,000 have been very successful. And we're talking about those but we're also talking about a notch above those in terms of that other level of small business that's going to create businesses of 15, 20, 25 employees, and we think they're crit- ical to the development of our region. Mr. Espy. Thank you. I reserve the rest of my questions and move to the other panel. Mr. Ford. Mr. FORD. Mr. Chairman, I will yield to my colleagues. Some might have flight schedules and let me yield to them for the con- venience of those Members. Mr. OBERSTAR. Mr. Chairman, I really don't have a question for the panels. I think the panelists all presented very clear and thoughtful testimony. Bill Haney's remarks about the ARC and EDA warmed my heart. I spent a great deal of time of my public service shaping that program, developing it, saving it from the Reagan budget ax, and trying to keep it alive and targeting its funds both ARC and EDA, targeting those funds in a more effective way. You've certainly seen how those funds can work, leveraging those monies, putting them to the broadest public benefit. And I think the comments from other members of the panel are very, very helpful for our purposes. And I think as Chairman Espy said, the tragedy facing us on the Budget Committee is that, as you've noted, while there are now different attitudes about race and investment and demographics, now we see huge budget deficits constraining the availability of Federal funds to provide for those disadvantaged populations the kind of investment that had been made so successfully elsewhere. And our challenge is that the EDA program which was at $900 million in the last Carter budget, wasn't just trend on the margin. We didn't just cut the increase as is now being done with defense budget. We're not really-having to really cut defense, it's been cutting the increase. We cut the meat, the muscle, the heart to that program down to $250 million. That's real dollars, because that was a two-thirds reduction. And cut it further in subsequent years, so that EDA's funding today is in constant dollars probably 90 percent less than it was in the last Carter Administration budget. How can you do real economic development when you don't have the money to invest? Now in the South Belt District where you've had the benefit of 20 years of experience of EDA, you know how to make the investments, you know what the tools are, you know what the management skills require, you know how to leverage those dollars, but the dollars are not there. PAGENO="0058" 54 And what we're simply doing in this budget process is not rob- bing from Peter to pay Paul-we're robbing from Peter to pay Peter. We're just taking it out of one pocket and putting it right back in the same pocket and we're not increasing the funding. And what we have to do in this budget process is try to set some prior- ities. You've given us some good ideas and some good incentives for prioritizing investment in the future. Mr. Espy. Thank you, Mr. Oberstar. Mr. Durbin? Mr. DURBIN. Thank you, Mr. Chairman. A couple of years ago I took a trip to a country which could truly be termed God forsaken in the truest sense of the word-the country was Bangladesh. And I was there with another Member of Congress. We were the larg- est-two of us were the largest congressional delegation to ever visit Bangladesh. People don't usually put that in their itinerary for places to stop off. We went outside Dakar and drove for several hours, in a four- wheel vehicle, into an area of backroads where the roads ended. We got out of our vehicle and hiked for another hour over hand- made trestle bridges, finally coming upon a tiny little village and the village consisted of lean-to's and shelters. There was one, I guess, larger building there that we went into where we saw ap- proximately 40 women lined up in neat rows all dressed in the most brightly colored sari's you've ever seen holding children. And they were standing there looking in wonderment at these white face people who had come to visit them. A translator asked them if they had ever heard of the United States of America. They had never heard of it. We were in a bank- ing meeting for the Grameen Bank in Bangladesh. Each one of the women in that shelter had been loaned $100, $200 or $300 to buy a milk cow, to develop some basic cottage industry to feed her chil- dren. I think what Mr. Bowie referred to earlier was this very ex- perience of Grameen Bank. The key to it, as I saw it, was first it was grass roots. It wasn't a question of someone from the capitol calling this village and saying here's what you need. The people there decided what they needed to survive. But secondly and equally important this Grameen Bank - and I think the next panel includes someone representing a spinoff there, this Grameen Bank represented a group effort. It wasn't just one borrower and one lender, there were groups of bor- rowers working together to help one another. When you talked, Mr. Bowie, earlier about your success of taking clients too risky for regular banks, and proving that they could make it, I'll bet you a nickel the biggest element there is the fact that you have confidence in them and you work with them. You don't give up on them, you don't tell them before I'm going to hand you the money and good luck and if you don't make the payment you'll hear from our lawyers. My guess is there's more to it than that. And I hear some of the examples Mr. Byars and others, this counselling and this involvement whether you're dealing with the farmer in my part of the world or small business man in your part of the world, there's a key element here and one that's really lack- ing. It isn't the brand new idea in Washington. It's the old idea of neighbor to neighbor helping one another out, getting people on PAGENO="0059" 55 their feet and the success story that Congressman Espy told earli- er. I'm sorry I may not be able to stay for the later testimony. But when you made reference to it I remembered that scene that will stick with me for a lifetime. Thank you. Mr. Espy. Thank you. That's a perfect way actually to introduce the last panel. I do, though, want to compliment this panel and apologize that we don't have more time to hear from them. Mr. FORD. Mr. Chairman, let me just compliment. Mr. Espy. Sure. Mr. FORD. I want to just make one observation here and raise a question to Mr. Haney. Mr. Espy. All right. Mr. FORD. I want to compliment the panelist as well, and it's very clear the information that the Budget Committee's Task Force is receiving today. Hopefully this will spark this Budget Committee as well as other committee's in Congress to move forward. But Mr. Haney, I just want to ask one question. You mentioned handouts and giveaway programs. Let me just clearly define what we're talking about. I am not on this committee and I happen to Chair the Human Resources Subcommittee in the Congress, and often times I hear all about these handouts and giveaway pro- grams. I want to make sure that I understand what you're saying. Mr. HANEY. We have found through experience that it seems the programs work better where people are not only personally in- volved in the programs, but financially involved in the programs. We've been very successful of late working with the banks, even though they do have a real hesitancy in our area because of the problems they've been experiencing with the towboat industry and agriculture in making loans. But what we've done is provide the technical assistance to be able to utilize existing Federal and State programs to provide funds that we can subordinate to the banks and assisted in making them make loans and using our funds as gap financing to make them make loans they were not ordinarily making. When I said give- away, I'm saying that I don't think that just handouts is the answer, but I think funds that could be used to try to create an environment where the existing funds could work better would be better than just strictly giveaway programs as such. It was just a terminology that I used. Mr. FORD. Okay. That's all. Thank you very much, Mr. Chair- man. Mr. Espy. Well, then let's introduce the last panel and again say we do appreciate testimony from this panel. The last panel actually would incorporate models expressed in the testimony earlier, models like the Grameen Bank from Bangladesh. We would like to call the last panel George Surgeon, president and CEO, Elk Horn Bank, and president, Southern Development Bancorporation; Julia Vindasius, director of the Good Faith Fund, a nonprofit subsidiary of the Southern Development Bancorpora- tion; Scott Lawyer from Memphis, consultant and investment banker, accompanied by Hiram Eastland, an attorney from the Eastland Law Offices; and Randall Richardson, State Director of Tennessee Farmers Home Administration, accompanied by James PAGENO="0060" 56 Huff, of the Mississippi Farmers Home Administration, and Frank Shoemake, chief of the Community Business Development Pro- grams in the Mississippi FmHA. We welcome the last panel of the day. The witnesses scheduled to testify on this panel will present the bottom line-whatever is the bottom line-and that is, what is the situation out there in terms of access to capital, how do development banks work, and whether we need them in our region. We have some banks already ongoing and we'd like to hear a current situation-a report from them. Let's start with Mr. Surgeon, president and CEO of the Elk Horn Bank. As I said to the other panels, please try to limit your testi- mony to about 5 minutes. We do have your written testimony which we will include as a part of the permanent record of the hearing. STATEMENT OF GEORGE SURGEON, PRESIDENT AND CEO, ELK HORN BANK AND PRESIDENT, SOUTHERN DEVELOPMENT BAN- CORPORATION Mr. SURGEON. Thank you, and good afternoon. My name is George Surgeon, I'm president and chief executive officer of South- ern Development Bancorporation and its bank subsidiary, Elk Horn Bank and Trust Co. in Arkadelphia, AR. Mr. Bowie, in the earlier panel, has already made most of the points in my presentation. I will therefore be very brief. Whenever I've had an opportunity to discuss development banking with other bankers I've often been told that what Southern Development Ban- corporation does in rural Arkansas really doesn't count. It doesn't count because what Southern does is so radically different from other bank holding companies. And, in fact, there's some truth to this. First of all, Southern's shareholder group really is unique for a small bank holding company. Southern shareholders include major Arkansas investors and corporations such as the Winthrop Rocke- feller Foundation, Stephens Group, Inc., Systematics, Arkla, Ar- kansas Electric Co-Operatives. Southern's shareholders also include major national foundations and investors such as the Ford Founda- tion, the John D. and Catherine T. MacArthur Foundation, Aetna Insurance Co., and Metropolitan Life Foundation. As you can imagine, these entities do not ordinarily invest in the illiquid securities of small country banks in rural Arkansas. The reason they invested in Southern is because Southern's corporate mission is unique. Southern was created to catalyze economic de- velopment in rural Arkansas for the benefit of low and moderate income Arkansans, not to maximize earnings. That is not to imply, however, that we take our responsibilities to our shareholders or to our depositors lightly. And, in fact, Elk Horn Bank has received the highest ratings for safety and sound- ness from several independent bank rating agencies over the past several years. Also, to facilitate the achievement of Southern's eco- nomic development goals and to help underwrite the extraordinary costs of doing development in a rural setting, our shareholders PAGENO="0061" 57 have agreed to limit the financial returns on their investments to the inflation rate for an indeterminate period of time. Southern's approach to rural economic development centers on building Arkansas from the inside out. The specific strategy that Southern has adopted focuses on assisting in the creation and ex- pansion of small locally owned businesses that either produce goods and services that can be exported outside of Arkansas or that produce goods and services that substitute for goods and services consumed in Arkansas, but which are produced elsewhere. The premise is that these small locally based firms will, over time, create more jobs and be better employers than larger nation- al firms. Small local companies should also be more likely to stay in Arkansas and not move to the Pacific Rim or Eastern Europe to chase marginally lower wage rates or marginally more attractive government subsidies. We also believe that this strategy will not only improve the standard of living in rural Arkansas, but will also expand the ownership of wealth and thereby create more stake- holders in rural Arkahsas. In his invitation to provide testimony this afternoon, Congress- man Espy suggested that I share some of my experiences in com- munity development as they may relate to the proposed Delta De- velopment Bank. Over the past several years I've had the opportu- nity to learn many lessons about community development in the rural South, most of those lessons have been learned the hard way by making mistakes. The four that stand out as most crucial when we think about conceptualizing a Delta Development Bank are as follows. First, de- velopment banking is a business. To be successful at development a bank must approach and manage its development activities as it would any other bank product. The development programs implemented by the Delta Develop- ment Bank must be strategically integrated within a sound busi- ness plan to create synergy, to reach scale, and to achieve operat- ing efficiencies. Otherwise the scope of the Delta's problems and the immense size of the region will easily dwarf the bank's capital base. Second, you cannot do it by yourself. To have the measurable impact on the lives of the 8.3 million residents of the delta would require a development bank with a capitalization in the billions of dollars. Barring that level of Federal support, the Delta Develop- ment Bank will have to forge public/private partnerships with all entities that are currently involved in economic development in the Delta. Third, you cannot do it all. Again, barring several billions of dol- lars in capitalization, the Delta Development Bank will have to target its activities, both geographically and programmatically. And finally, development doesn't travel well. There have been numerous tomes written about community development, including several on community development banking. However, what works well in Chicago, Minneapolis, and New York might not work at all well in Pine Bluff, in Memphis, in Greenville and might be totally inappropriate or irrelevant in Arkadelphia, in Tunica or in other smaller Delta communities. PAGENO="0062" 58 The organizers of Southern Development Bancorporation raised a lot of money to capitalize Southern Development Bancorporation. In the 3 years that Southern has been operational, it has originat- ed almost 200 investments for more than $7.5 million. We take great pride in these accomplishments. However, Southern's invest- ment performance pales in comparison with the need in the com- munities we serve and with our goal of catalyzing economic devel- opment throughout rural Arkansas. We know that the only way that we'll be able to achieve our goals will be in partnership with other development organizations, such as Arkansas Capital Corporation, Arkansas Development Fi- nance Authority, Arkansas Industrial Development Corporation, the U.S. Small Business Administration, the Farmers Home Ad- ministration, and hopefully before long the Delta Development Bank. Thank you. [The prepared statement of Mr. Surgeon may be found at end of hearing.] Mr. Espy. Very good. I thank you, sir. Ms. Vindasius. STATEMENT OF JULIA VINDASIUS, DIRECTOR, THE GOOD FAITH FUND Ms. VINDASIUS. Thank you very much for letting me share some of my experiences with my enterprise development. I'm delighted that Mr. Durbin has also seen the Grameen Bank. It's pretty inspi- rational. We began operations in the Good Faith Fund in May 1988, con- currently with the start-up of Southern Development Corporation. We're headquartered in Pine Bluff, AK, about 50 miles southeast of Little Rock on Highway 65, and we serve a seven-county target area in southeastern Arkansas. We've got about 10 staff and four field offices outside of Pine Bluff, McGehee, Lake Village, Hamburg and Monticello. The Good Faith Fund targets low income residents making very small short-term loans for self-employment projects and activities using peer group support techniques pioneered by the Grameen Bank of Bangladesh. Through the delivery of self-employment credit and services, The Good Faith Fund's mission is to both raise the income levels and entrepreneurial levels and skills of low income residents in the rural communities in our region, and to widen the profile of would-be entrepreneurs to include women, mi- norities and other dislocated workers. The key to our mission is to focus on low income enterprising people and poverty alleviation. Good Faith Fund operates by bringing credit and services espe- cially to the doorsteps of our local residents. Our outreach to pro- spective customers come in the form of training workshops for people interested in self-employment, the organization and facilita- tion of borrowing groups in our target area, and subsequent lend- ing and administration of small loans and technical assistance to the microentrepreneurs. At the Good Faith Fund borrowing groups of four to six people self-select to provide mutual support and assistance and to serve as a preliminary loan committee for loans to its members. The Good PAGENO="0063" 59 Faith Fund staff facilitates the formation of borrowing groups, but individuals are responsible for meeting with, screening and form- ing their own groups. After the initial orientation and training session the borrowing groups are certified, reviewing and approving loans proposals from their members. Each group choose a chairperson and a secretary and opens a group savings account to which they all contribute at biweekly meetings. Groups of borrowing groups or centers meet in towns on a biweekly basis. Consensus, mutual support, membership responsibility and accountability and feedback over a long time ho- rizon are central to our process. At this time Good Faith Fund is working in five towns in the region. We have about 40 members. Approximately 58 percent of our membership is female and 89 percent is African-American. Since we started the program we've disbursed 55 loans, totalling over $133,000. Our average loan size is about $1,200, and our maxi- mum loan limit is $5,000. We've lent money to upholsterers, cater- ers, home-based seamstresses, day care operations, cleaning serv- ices, video production shops, repair services of all kinds, hog farmer, gift and accessory traders, crafters, Mary Kay representa- tives, and auto detailers among others. Several of our customers have been on public assistance and are working themselves off, particularly off food stamps as a result of their self-employment activity. And we have many members who have chosen to belong to the Good Faith Fund in order to take ad- vantage of the network, training and the technical assistance that's available through membership. Profiles of some of our recent mem- bers are in our quarterly newsletter that I've attached to my testi- mony. Peer group lending is subset of the field of microenterprised de- velopment lending. Unlike small business development programs Micro Enterprise Development Programs distinguish themselves by reaching out to poor communities and poor individuals. It seems like in the last couple of years allegiance of new peer-group lending programs have started operating around the continent and I've mentioned a few of them in my written testimony. I'd like to reiterate the lessons that George Surgeon suggested and then focus on a few specific to the Good Faith Fund. First, that we have to operate in the most business like fashion because our customers, poor though they may be, demand professional service. Secondly, targeting resources is very critical to any development effort. Thirdly, partnerships with banks and with schools and with other institutions is very important for us to achieve our develop- ment objectives. Fourth, staff training and professional develop- ment is very important. It's really important to have the most cre- ative minds, put their heads together for the difficult development problems that we face. And finally as George mentioned development doesn't travel well. Investing and testing strategies is just as important as imple- menting those strategies. If I leave only one message with this testimony I guess it's to urge you to remember the fine gradations of small when you think about small business, and to shed some of the conventional wisdom about growth. Very few of our customers operate growth business- PAGENO="0064" 60 es, that is those businesses that are measured by profits investment and jobs created. Rather the Good Faith Fund's target has been survival enterprises or supplemental income activities. A common wisdom is that growth means increases in sales and numbers of employees. However, at the micro end of the continuum, income is generated in many and diverse ways. Growth for these businesses means expanding into any number of income generating activities. I have an example of one of our customers borrowed $150 to purchase fabric and supplies for her home-based sewing business. She has an early morning paper route and she's also the primary income earner for her family as her spouse is often out of work. And as she nears the end of her loan she is thinking about borrowing again to operate a snow-cone ma- chine for the summer for the kids in the neighborhood. What's important to remember is that these businesses, though they're not small businesses the way we think about them, are a critical part of the local economies in which we work. They empha- size existing talent and are a viable and rational alternative to low- wage jobs or, in many of our delta communities, no jobs. Like many other microenterprise development programs, Good Faith Fund targets women. Statistics suggest that women are in- creasingly likely to start a business, yet women have less access to resources, including credit capital, and most critically, information. We focus additionally on the fact that women are also most likely to live in poverty and, therefore, raise children in poverty. Internationally and domestically development loan funds and business assistance programs often target women because of the fact that they are less risky and more reliable borrowers. Savings are also a critical component to our peer group lending program. While different programs emphasize savings in different ways, the premise is that the poor can save and can collective, as a group, accumulate wealth more rapidly than they can individually. We consider our biggest success stories, not the loans necessarily that the Good Faith Fund gives out, but the loans that groups give out to the membership. There are land mark events which demon- strate economic power that is possible when individuals unite and are given a supportive opportunity to accumulate wealth and rein- vest. [The prepared statement of Ms. Vindasius may be found at end of hearing.] Mr. Espy. Thank you. Could I ask you, what's your default rate in the Good Faith Fund? Ms. VINDASIUS. It hovers currently about 15 percent. Mr. Espy. Fifteen percent. Is that a lot better than commercial default rates? Ms. VINDAsIu5. Well, actually most banks operate hopefully at under 2 percent. But that's a delinquency rate, it's not actually a default rate. We have written off a fair number of loans before, but we're trying to keep our delinquency and defaults as low as we pos- sibly can. * Mr. Espy. I know that my colleagues have to leave and run for the airport. I'd like for them to make any brief closing comments. Mr. OBERSTAR. I want to compliment all those who presented tes- timony today. I know it takes a lot of time to develop the written PAGENO="0065" 61 document, you invest many hours in doing it, and you arrive at the committee Hearing and are told you've got five minutes to make a presentation. And I want to assure you that those are five or six or seven well invested minutes. You emphasize the highlights, the breast of the testimony-I've learned to speed read and have read through everything that's been presented today and I'm very im- pressed with the quality of presentation, the sincerity of those who made their contributions. I've learned a great deal today and want to compliment all of you who are engaged in both growth and de- velopment of local economies. Mr. DURBIN. First, let me say, Ms. Vindasius, I'm glad to hear your testimony, especially since I told the story earlier not realiz- ing that you patterned after Grameen. But at the Grameen Bank meetings they do calisthenics and chant their 12 commandments. I doubt that you do that part, but it sounds like you've picked up on the basic principal and I'm glad to hear it's working successfully for so many people. Thank you, Chairman Espy, it's been a good hearing and I've learned a lot. Mr. Ford, great hometown and thank you for having us. I appreciate it very much. Mr. FORD. Come back again. Thank you. Mr. Espy. I wish our colleagues Godspeed and have a safe jour- ney to Illinois and Minnesota. See you Tuesday. We'll continue then with Mr. Lawyer. STATEMENT OF M. SCOTT LAWYER, BANK CONSULTANT! INVESTMENT BANKER Mr. LAWYER. Mr. Chairman, members of the panel, ladies and gentlemen, I appreciate the opportunity to be here today. I won't quote from my prepared text. I think the reason I was invited to be here is because I think I'm the only person in the room that's chartered a minority bank in the last year. We've, in fact, chartered two African-American banks, one in New Orleans, one in Los Angeles, to serve the minority communities in both those cities. We're currently looking at the possibilities of charting up four more and are working with the FDIC, the RTC, the other banking agencies. As we're all aware with the savings and loan debaucle and the hundreds of failed banks that will occur over the next several years, there's ample opportunity for minority banking to be regen- erated. And I think to address some of the problems that have been discussed here today along the lines of whether loans are bankable or their degree of risk in a given economic community very much tracks the racial components of that community. Therefore, it's our position that one of the best ways, to address the capital needs in these minority communities are the creation of minority commercial banks. And this can be done, the programs are in place in certain instances, however, they need to be expand- ed to allow for the creation of minority banks. The concept of the use of MESBICs or SBIC, versus commercial banks limits the size and type of the loans that can be made in mi- nority communities, what can be done vis-a-vis the use of a minori- ty bank. Therefore, we feel that the pending Banking Reform bill 44-629 0 - 91 - 3 PAGENO="0066" 62 currently before the Congress, should be amended to include seven points. For this I will quote from prepared testimony. (1) The RTC's Interim Capital Assistance Program, which was originally adopted as a provision of FIRREA, needs to be amended to include all commercial banks, savings and loans and branches whether those were formerly minority banks or not. This would in- clude a mandate to the Office of the Comptroller of the Currency to expedite chartering processes which now take up to four months for minority investor groups. (2) To remove an impediment, they need to extend the repay- ment period for the Interim Capital Assistance Program, which is now a period of 9 months which is totally unrealistic to try to come up with millions of dollars, to at least 36 months and with long- term permanent financing available if the performance of the new bank is satisfactory. (3) They need to amend the Community Reinvestment Act to give credit to majority owned institutions and their holding companies for the purchase of preferred stock from minority owned institu- tions and their holding companies. And to allow for the purchase of this preferred stock to be in the form of pretax dollars. The pre- ferred stock purchase should be required to meet bank regulatory standards of Tier 1 capital. (4) Require by statute the allocation of 25 percent of all asset sales by the FDIC and RTC to be offered first to minority institu- tions on a negotiated basis rather than on a current bid process, which favors large majority owned financial institutions. (5) To allocate 25 percent of all FDIC and RTC management con- tracts to minority owned financial institutions and companies on a negotiated basis as opposed to the current bid process. If the con- tracts cannot be awarded successfully on such a basis then have them bid through the normal process. With regard to this particu- lar point of the program we are also urge that you amend the Com- munity Reinvestment Act to give credit to majority owned institu- tions that either subcontract with minority owned institutions or companies when the majority owned institution is awarded the con- tract, or who assists minority companies when the minority compa- ny is awarded the contract. (6) We would also urge you to amend existing tax laws to permit minority owned institutions that purchase failed institutions to assume the tax loss carryforward of that failed institution to avoid payment of undue taxes on minority businesses, particularly a brand new minority bank. The tax carryforward is available, it would take one simple amendment to amend the tax law. That would stimulate additional capital in the minority community. (7) Amend tax laws to permit the use of accelerated depreciation on all fixed assets and leasehold improvements purchased from the FDIC or RTC by minority owned institutions. All seven points of this program are critical to revitalizing mi- nority ownership of financial institutions which realistically best serves the needs of minority communities as opposed to paying lip service. I would go back to Mr. Hawkins' testimony, his earlier testimony with regard to Community Development Bank. We worked with the chairman and his staff in this regard. We feel that this is a PAGENO="0067" 63 very, very viable project. It will supplement and be-as Mr. Sur- geon points out, a very, very key element in this region. But inso- far as minority communities outside this region and within this region we would urge these amendments be made of the existing laws and policies of the FDIC and the RTC for the creation of new minority owned commercial banks. Thank you. [The prepared statement of Mr. Lawyer may be found at end of hearing.] Mr. Espy. Thank you, sir. Mr. Eastland. Mr. FORD. Mr. Chairman, before the next panelist-I don't want the panel to think that I'm going to be rude, I have a media event right outside the door. I am the Congressman from this area, so they often and frequently want to talk with you. But one thing before I leave, Mr. Lawyer, I serve on a tax com- mittee in the Congress and your testimony there I'm going to carry a copy of it back with me to give it to some of my tax counsels on the Ways and Means Committee. It is an area that we have had some dialog with on the committee and hopefully we can take this portion of it back to our Oversight Committee in the Congress as well as Mr. Rangel's subcommittee that maybe we can get some testimony in this area and see how we can move. Because we have suggested to RTC in the past and we have suggested certain things, but now I'm more concerned about maybe some of these reform areas in the Tax Code give minority financial institutions some type of tax incentives that would be necessary that would be very helpful for reinvesting in the development in the African-American communities. Mr. LAWYER. I recently met with Mr. Rangel in the New York delegation and shared some of these concepts, not all of them, with him so he would not be totally unfamiliar. Mr. FORD. I'm going to take your testimony back. Not that I'm not going to take the others, but that's on my committee. I'll be right back, Mr. Chairman. Mr. Espy. Very good. Mr. Eastland, would you care to make any comments on Mr. Lawyer's testimony? STATEMENT OF HIRAM EASTLAND, ATTORNEY, EASTLAND LAW OFFICES Mr. EASTLAND. Just a few, as I assisted in preparing Mr. Law- yer's testimony and was asked to accompany him I don't have pre- pared remarks. But I want to thank you, Mr. Chairman, for chair- ing these hearings and focusing on our area. As a somewhat young Mississippian from your district, I particularly want to thank you, my Congressman, for creating this national focus on the Mississippi Delta region. As you have stated, a new generation of Mississippi- ans, white and black, are prepared to move forward, working to- gether shoulder to shoulder to confront age-old challenges facing the delta. We are proud to be a part of a new Mississippi, and I appreciate the remarks and the leadership you have shown in this regard. PAGENO="0068" 64 I am encouraged also by the remarks of Mr. Oberstar stating that this Task Force should go back to Washingtom with a determi- nation to set this area as a national priority. I know you and I have long both felt such action is needed and justified. Likewise, I am encouraged by the confidence Mr. Durbin has in new ideas. I think we have all learned that just throwing money at problems is not the answer. Ideas and the correct ap- proach to economic and social problems do count just as much as money. I hope that when you go back to Washington, the Congress will listen to the progressive ideas discussed here today, such as the minority assistance program, the regional development bank, and ideas and suggestions like those of Mr. Surgeon with respect to community development banks. The justifiable and appropriate access to the additional financial markets and funds provided by the minorities assistance program we have discussed today could have major significance for the eco- nomic empowerment of minorities. The proposal could help place minority management in the mainstream of national banking ac- tivity, working with minority and majority interests to formulate community economic development policy in everyone's interest. As you have often said, Mr. Chairman, economic policy which strengthens our weakest links, economically strengthens the com- munity and the country as a whole. Ideas like the regional development bank and the community de- velopment banks can also be most valuable in financing communi- ty economic growth and development. We may even want to consid- er expanding the concept of community development banks, as I have discussed with you before. With hundreds of savings and loans institutions currently being "resolved" by the Resolution Trust Corporation, it seems a perfect opportunity for the Govern- ment to act now as a catalyst in the creation of more community development banks nationwide. While to date I have seen no pro- posals which ask to incorporate a community development bank concept with RTC resolution policy, fortunately there are several models such as the Southern Development Bank Mr. Surgeon has testified about, and David Osborne has written about, that could be used to set up qualifying criteria encouraging a certain amount of community development bank expansion in conjunction with RTC resolution. As far as Federal capital for ongoing programs within communi- ty development banks, there may be a number of Federal and State programs already existing which could be drawn upon. For seed capital for the start-up of community development banks, we might consider something similar to the Government purchase of pre- ferred stocks which we have suggested for the regional develop- ment bank legislation. As you are aware, we have suggested utiliz- ing temporary Government financing patterned after President Roosevelt's Reconstruction Finance Corporation which is paid back to the Government as the preferred stock is retired. Obviously, such a microcommunity development bank approach could work perfectly with the regional development bank proposal, which could itself provide a further source of funding and assist- ance to community development banks through participation in various projects. PAGENO="0069" 65 I appreciate the opportunity of being here, Mr. Chairman, and I look forward to working with you in any way possible to assist in creating ideas which will expand the economic potential of the Mis- sissippi Delta. In addressing this challenge, your Task Force and the Budget Committee can be critically instrumental in creating a brighter future for millions of Americans, and in strengthening the country as a whole. As you have recognized, Mr. Chairman, there was much talk about the Mississippi delta back in the 1960's. The time has come for action, for a more unified Mississippi and Amer- ica to now combine our common experiences and talents and take concerted action together based on what we have all learned-to continue to create a more perfect union. Mr. Espy. Thank you for making the comment. Mr. Richardson. STATEMENT OF RANDALL RICHARDSON, STATE DIRECTOR, TEN- NESSEE FARMERS HOME ADMINISTRATION, U.S. DEPARTMENT OF AGRICULTURE, ACCOMPANIED BY JAMES B. HUFF, SR., STATE DIRECTOR, MISSISSIPPI FARMERS HOME ADMINISTRA- TION AND FRANK SHOEMAKE, CHIEF, FARMERS HOME COMMU- NITY BUSINESS PROGRAM IN MISSISSIPPI Mr. RICHARDSON. Thank you, Mr. Chairman. The Farmers Home Administration appreciates the opportunity to be a part of this hearing today. With me today are James Huff, State Director, Farmers Home Administration in Mississippi, and Frank Shoemake, Chief of the Farmers Home Community Business Program in Mississippi. We have submitted a prepared statement for the record, which goes into detail about our programs. In the interest of time I'll give a summary of our programs and speak specifically about our community and business program and the intermediary relending program that you asked about. The Farmers Home Administration has been a silent partner in the growth and development of rural America for about 50 years. Our programs improve the quality of life for all rural Americans. Over the years Farmers Home has invested more than $23 billion in community and business loans and grants, and almost $59 bil- lion in the rural housing programs. Two million American families have a decent affordable place to live because of our housing pro- gram. This program has an immediate and dramatic impact on the lives of families, most of whom do not have a decent place to live without Farmers Home assistance. Six hundred thousand farm families own and operate their farms because of our farm programs. Thousands of communities have clean drinking water, waste treatment, libraries, fire protection, town halls, rehabilitation centers, hospital additions and other fa- cilities essential for a community to have a better quality of life because of the community programs. Thousands of Americans can live and work in their hometowns and not have to move to urban centers to find employment because of businesses which are financed by Farmers Home guaranteed loans. More specifically Farmers Home community and business programs fall into three primary categories: Water and waste, com- munity facilities, and business and industry. PAGENO="0070" 66 Funding allocations for the fiscal year are $500 million for water and waste direct loans; $35 million for water and waste guaranteed loans; $301 million for water and waste grants; $100 million for community facility direct loans; $25 million for community facility guaranteed loans; $100 million for business and industry loans; $31.5 million for intermediary lending loans, which is a new pro- gram; $20.8 million for rural development grants; and $2.6 billion for rural housing. Mr. Chairman, you asked about the intermediary lending pro- gram under which we lend a nonprofit corporation or public entity up to $2 million at one percent interest for the 30-year payback. The intermediary through a revolving fund relends to local busi- nesses in rural areas at a rate that is less than that which is charged by commercial lenders. This gives the business a better chance of survival due to less pressure on cash flow to meet debt service. This program involves local lenders because the loans to the ultimate recipient is limited to the lesser of 150,000 or 75 percent of project costs. Involving local lenders and business people also puts credit decisions in the hands of people with finance and business experience and brings a loan decision to the local level not in our State Office. In Tennessee we've closed one intermediary relending loan for $2 million and have issued a letter of conditions on another one for almost $1.9 million. We advanced the funds to the intermediary on a 30-day need basis. We have made two advances totalling $1,030,000 involving eight recipients which will create 290 jobs for our cost per job of $3,551. Funds from other sources total about $1.5 million for the eight projects, meaning our loan funds account for about 40 percent of the total involved in the projects. That's a good mix of public and private funds aimed toward eco- nomic development. Here in Tennessee we have an investment of $1.7 billion. Bank- ers call it a portfolio, we call it an investment in people. It's easy to sit here and talk about it. I've provided a book that's typical of what we offer here in the State of Tennessee. This program in Henry County, TN and northwest Tennessee indicates that there's a better quality of life in that county because we have some modest housing programs, some farm loans, some community development loans and also business loans that provide employment to people. Mr. Huff and Mr. Shoemake are here and available to answer questions about Mississippi. We appreciate the opportunity to be here. [The prepared statement of Mr. Richardson may be found at end of hearing.] Mr. Espy. Thank you. I would now invite Mr. Huff and/or Mr. Shoemake to make any contribution they would care to make. Mr. HUFF. Thank you, Mr. Chairman. I will not, in the interest of time make a formal statement, but I do want to thank you for allowing us to be here. I want to thank you and the panel for your interest in rural America and I want to thank you for what you do for Mississippi. It's good to be here. Mr. Espy. Well, the esteem is mutual. I don't mind reiterating the compliment and cdmpliments I pay to you personally and your office. And, let me just say to you, that I've said the same to Mr. PAGENO="0071" 67 Madigan in your behalf because I have been a very vocal critic of the Farmers Home Mississippi operation in the past. Since you've stepped up to helm, I think you've done a magnificent job paying attention. I appreciate it and I don't mind saying so. It's on the record and able to be duplicated and disseminated. So, I think you will have it. Mr. Shoemake? Mr. SHOEMAKE. I just echo Mr. Huff's comments and say we ap- preciate the job you and your staff are doing for us. Mr. Espy. Thank you. It's not always the case that I'm here alone, but I'm not alone. You are speaking in fact, through the transcriber here, to the entire Congress. So, to me, we've had a very excellent hearing, the testimony has been great. The testimo- ny that I've heard today constitutes the basis for some exciting things that we're going to try to do in the region. Hopefully things we can do in the region. I mentioned earlier about something called a Polish-American Enterprise Fund, which was a congressional reaction to events in Poland and in Eastern Europe. The fund is our way to try to help them convert from a planned economy to a free market system. We, in the Congress, appropriated the funds quite easily-I had to go back to the records to really try to document the discussion. Further, $260 million of the fund is being managed by a person with whom you're familiar, a member of the South Shore Bank in Chicago. Appropriation of money to the fund was done quite easily. But the political atmosphere was right for that and certain Members recognized it and steered it through. I think the political climate is beginning to warm to these kind of ideas and through the expertise of a lot of Members, even those appearing today, we're going to try to do the same thing; but we need some help. We need a lot of help to try to do it. That's why I'm glad to hear from Mr. Surgeon, Ms. Vindasius, Mr. Lawyer and Mr. Eastland in particular on this part of the question because we need reform. Now I had a chance to go to the South Shore Bank 2 weeks ago and talk to Mr. Bennett, Mr. Grzywinski and others there that had so much to do, in my opinion, with the development of the Arkan- sas bank. But, in your testimony you said that development bank- ing doesn't travel well. What, in your opinion, is the difference be- tween the operation in a very urban province of Chicago and a very rural province Arkansas? Mr. SURGEON. I think there's one major difference, and that is the problem that we faced in the inner city of Chicago was really not economic development. For example, Chicago has a population of 9 million in the larger metropolitan area. It's surrounded by one of the fastest growing counties in DuPage County in the United States. There's a lot of jobs being created every day. The problem we faced in South Shore was one of creating decent housing in one small community, and also trying to recreate market forces that had just gotten out of kilter in one part of a larger economy that was generally pretty healthy. In rural Arkan- sas and in the delta area we don't start with a healthy economy throughout the general area. We're not dealing with pockets, small pockets or small areas where market forces don't work. We're deal- ing with an entire region where market forces aren't working. PAGENO="0072" 68 Mr. Espy. And to Ms. Vindasius, in your operation of the Good Faith Fund, if you again could talk about the level of default and delinquency, as a percentage of commercial bank experiences. Also, could you mention the extent to which the successful applicants to the Good Faith Fund were removed from public assistance. I would appreciate knowing a little bit more about it. Ms. VINDA5Iu5. This kind of banking, this Mircoenterprise Devel- opment Banking is very human and tractive intensive. It's very- you have to-in banking terminology it's the difference between personal banking and ATM machines. And we started the program really being a replication of Grameen. Bank, testing and experi- ment and we had to learn some hard lessons. One of them was that our target area, even though we were trying to be very careful about targeting, was probably too large for the two staff that we had. So we've made a fairly significant investment in hiring a lot of staff and it has made a big difference in us being able to control delinquency and default. And I'm not a banker by background and so it took me a little while to get smart about banking. I think we've gotten delinquency and default problems under control. And for the most part the peer groups really do serve as a way of not so much pressuring others to make their payments, but supporting them through difficult peri- ods of times so they can make their payments. And we spend a great deal of time troubleshooting and problem solving with our borrowers. A lot of mention has been made during the testimony about tech- nical assistance and management assistance, but those kinds of as- sistance programs are very expensive to do. Mr. Espy. What is the service area of the Good Faith Fund? Ms. VINDA5Iu5. We're about 5,000 square miles, about 200,000 people, so it's really not a very large population but geographically quite disbursed. Mr. Espy. I'm trying to get an idea of the ratio service area to staff. It would seem to me that you'd have to have intensive man- agement and a bunch of MBA's or business trainees. How do you gauge the number of employees that you can hire against the serv- ice territory and the universal pool of applicants? Ms. VINDA5Iu5. I don't think we know yet what the universal pool of applicants are. I think that we haven't even begun really to scratch the surface. I don't think the percentages are as high as we might imagine, but I don't know quite what they are. We have made a pretty big investment and we've got-in staff, so now we've got about-I think the idea is to have one staff person being able to service 50 customers or something like that. That's actually not a very big ratio. Right now our staff to customer ratio is much, much lower than that. That would be the ideal. Mr. Espy. If we try this on a Federal level-I'm quite sure that we would have to offer our colleagues in the Congress who are mostly from urban areas-because the Congress is becoming more urban-an analysis of the cost/benefit ratio. That's why I asked about the public assistance rate. The young woman I mentioned earlier in Mississippi, in 13 or 14 months went from AFDC to independence. So I'm asking again about the public assistance aspect. PAGENO="0073" 69 Ms. VINDAsIus. We just spent about 18 months researching wel- fare demonstration programs, and we are about to embark on a fairly large partnership with votech and adult ed programs in the Department of Human Services in the area to do a welfare demon- stration program along the lines of what you described. In rural areas where there really are not very many jobs, job training pro- grams sort of miss the mark. And so what we're trying to do is see if we can provide self-employment opportunities for people on wel- fare. And there is a great-in Arkansas I think the lady that you mentioned was in Mississippi; is that right? Mr. Espy. Yes. Ms. VINDASIUS. Arkansas really jumped on the Family Support Act in 1988, and really tried to push those recommendations. And so there is a fair bit of gray area in the State policy to allow for self-employment for transitional benefits while a welfare recipient chooses or opts for self-employments. I think it was even more diffi- cult for the woman that you mentioned in Mississippi because the State did not push on the Family Support Act clause, and we still are trying to get some Federal waivers to allow for income and asset waivers for people to get transitional benefits while they're going through the start-up phase of their business. We'd still like to do it. Mr. Espy. You service a 5,000 square mile area. Here we're talk- ing in our region-gosh, I don't know-we have about 8.3 million people from southern Illinois to southern Louisiana. So, I have a toss-up question that touches on the central point of targeting. We're at the crossroads of deciding whether we're going to try this or not. We've already been criticized in some of the commercial banking areas. That's why I endeavor to call this a "fund," not a "bank" and I point up quite candidly the Polish-American Fund for which we found money. Is this too grandiose an effort to start, Mr. Lawyer? A Delta Re- gional Investment Fund, is it feasible? Is it reasonable? And last, this may be an unfair question, but whatever comments you would have I'd appreciate. What level of Federal direct investment would be doable? As we know, it might not be the right atmosphere-we know the S&L situation, we know the commercial banking situa- tion, we know that there's criticism of Government sponsored en- terprises, and we know the great problem with Federal loan guar- antees. I'm asking, because you've done a little research on this matter, is this feasible, reasonable, and what level of Federal support would be appropriate? Mr. LAWYER. Well, first of all, Mr. Chairman, it is very feasible to do this. There are too many models nationwide to tap into to have the expertise. You mentioned South Shore and we have one expert sitting right here, and we have a lot of people who could lend assistance in credibilities to such an effort. Mr. Espy. But we don't have a Winthrop Rockefeller. Mr. LAWYER. Well, we don't have him. Unfortunately somebody got to him first. You know, it's realistic to talk about doing this, but it's not realistic to talk about it without Federal assistance. And as we originally envisioned the program when talking with PAGENO="0074" 70 and working with your staff, the drafters back last February, the model that we came up with which is best suited for this type of situation. And this is, again, in the context of a bank at that time, could be the same thing is true for a fund, would be along the lines of the Reconstruction Finance Corporation. The superagency formed after the Depression was used to recapi- talize this country, even recapitalized the banking system. And it did so by buying preferred stock in institutions that had gone bank- rupt or out of business or whatever the terminology was at that time. And what we were proposing in this case would be that the Federal Government buy preferred stock in the cooperative bank, the fund or whatever the institution might be, and that over some period of time-we don't know what amount of time until we test the water so to speak, but we would replace that preferred stock with common stock that would be issued to various State agencies, private investors, foreign investors, various corporations and Mr. Rockefeller if we could get him interested in this program. But that those moneys could be replaced. And the Treasury would only hold the preferred stock of this entity for a limited period of time. Given some of the comments I've heard today I would think that we should be looking at something in the neighborhood of $250 mil- lion. Mr. Espy. All right. Mr. Eastland, do you have any comments to make? Mr. EASTLAND. Just to say in working with your staff on possible ways to finance the regional development bank concept, the pri- mary reason we have felt the proposal is feasible is that the pre- ferred stock concept allows the Government to get its money back. We appreciate your comments about the political environment that we're in as far as budgetary restraints. We have also heard remarks from some of the witnesses about avoiding political per- ceptions of so-called Government handout programs. But from a political standpoint, the Government will get its money back. The role of the Government with respect to the re- gional development bank is simply the Government acting as a cat- alyst. So many people agree today with the role of Government as a government/private enterprise-type role, with the Government simply acting as a catalyst. It's not a role to which anybody can point fingers, calling the proposal another so-called Government handout. The regional development bank proposal is a sound in- vestment. It can be structured in a way that it is responsibly fi- nanced with limited Government intervention, and the regional de- velopment bank is in an area of the country that is certainly de- serving. Mr. LAWYER. Well particularly, if I could, in light of the fact that yesterday the bill passed the Senate that we're going to spend $2 to $3 billion to launch another space station. And here we're talking about something that's one-tenth that amount, and as you point out it affects the lives of 8.3 million people in all these States. Mr. Espy. Just to respond, actually the House Appropriation Sub- committee on HUD, VA, which is the committee of jurisdiction over the space station, actually cut the increase by $2 billion. The Administration, through the Vice President and through some PAGENO="0075" 71 others in the Congress, was successful in restoring the cut of $2 bil- lion. So, I do understand what you're saying. Let's move to the Farmers Home representative. I have a couple of questions. One, although we don't have anything written on this so-called Delta Fund, I'd be interested in getting a reaction from the outset from the Farmers Home representatives. Second, we know that Farmers Home is currently undergoing reorganization to separate the farm lending function from the rural development function, to consolidate the community development, business, in- vestment, water, sewer programs and all that. How is that going and what would be the real impact on rural development? A lot of people feel that's going to put the emphasis more on physical infrastructure, a water or sewer system as opposed to human infrastructure. I just want to know how is it going from the Mississippi and Tennessee experience. Mr. HUFF. I'd be glad to address it with the knowledge that I have. In the 1990 farm bill, as you know, created a new agency known as the Rural Development Agency which I think is targeted to kick off on October* 1. The way it's going to impact Farmers Home, from what we gather, is everything pertaining to communi- ty programs and business and industry will be shifted to that agency. I will be involved in some of the planning of that. They've cre- ated a committee that will start a transition plan to do that. The number of people that's involved, for instance, to show you the magnitude of this, will be in the neighborhood of 925 Farmer Home employees will be moved into RDA. And I don't know exactly how that's going to be structured, I don't know that it has been decided at this point. But the budget for that program will be moved from Farmers Home the new year, 1991, into the new Rural Development Admin- istration. And how. that's going to be done and exactly how it's going to be organized, to my knowledge, has not been decided but will be in the next few weeks and months. Mr. Espy. Thank you. Mr. Richardson? Mr. RICHARDSON. Congressman, we're still in the stage just as Mr. Huff is. That program in Tennessee constitutes about 10 per- cent of our total program. Our largest program is housing, and that's. about a billion dollars. About half a billion is in farm pro- grams; community and business programs are only about $170 mil- lion. That's a lot of money, that program has always run well. We think we'll probably lose 17 to 18 people to that program. The pro- gram is run very well right now where it is, but we'll go on with what we do get from Congress and the Administration. Mr. Espy. Well, I take that as a notice. The last question that I have is for Mr. Lawyer. You were very clear and I appreciate the specificity to which you testified on the banking reform. And, you know, Mr. Ford, of course, mentioned he will take the recommen- dation to his Ways and Means Committee subcommittee. But what I really want to know is, do we think the overall theory to allow more nonbanks into the investment market is going to improve access to capital. You would think that it would, but on the other hand, everybody out here says we have enough capital already-it's just the problem of risk and risk takers. In PAGENO="0076" 72 fact, we're in a recession and, even though the interest rates are decreasing somewhat, the extent to which the bankers are willing to be more moderate has not been forthcoming. So they're just as conservative as they've always been. Should we expect that the nonbank banks will be as conservative? That won't do a thing to increase capital or access to capital for minority entrepreneurs or women. How do you feel about it? If any of the other panelist want to comment, please do so. Mr. LAWYER. That's exactly one of the points that I make in the written testimony. One of the major aspects of the Banking Reform Act is to allow companies that are not traditionally in financial re- lated services to own banks. There have been prohibitions in the past, say for insurance cbmpanies to own banks. Some of that is broken down. But to have a manufacturing company to have a piano making company. It's a famous case, the Baldwin Piano Co. out of St. Louis, to have them own a bank was prohibited by the Bank Hold- ing Company Act. Quite naturally there's a lot of stored up capital in companies other than financial services businesses, and that is more particularly true in the minority community where you find that-let's take the funeral home business, for example, or insur- ance companies. There's a lot of capital in those minority business- es that if it could be brought out of that business, that funeral home business, for instance, and then put into a bank to capitalize that bank we could have a new minority bank. Unfortunately the tax laws prohibit the dividending of that cap- ital out because you have to pay income tax on it. So the actual dollars available left to capitalize a new financial institution would be dramatically reduced. If, instead, the minority owned business or a coalition of minority owned business that had capital available could charter a new financial institution. We would see, I believe, a lot more women owned and minority owned businesses. Now, this is almost exactly the case with the minority bank that we created and chartered in New Orleans last year. There were a number of community development funds, one of which at least was represented here today, who agreed to make capital available to this new African-American bank in New Orleans. And they were able to do that but only on a limited basis because of the prohibi- tions of the Bank Holding Company Act. Having that portion of the act amended as part of the banking reform bill is critical, I think, another critical aspect as far as mi- nority communities are concerned. But in order for this to really be a Banking Reform Act and for it to have an equivalent effect on minority community members it would be critical of those seven points that I went through today for those to be included as amend- ments to the banking reform bill. Otherwise, the minority commu- nity is going to continue to be disenfranchised by from financial services. And that is exactly what's happened over the last 3 years, and it will continue to happen at a much more alarming rate. As these institutions have failed, even the majority of the institutions that had branches in what have now become minority neighborhoods, quite conveniently those branches are not picked up by the institu- tions who require the failed institution. So the number of offices PAGENO="0077" 73 serving the minority communities across this Nation has dropped disproportionately to the overall number of institutions that have failed. Mr. Espy. I appreciate it. Well, we had announced that we would try to conclude by 2:30, and we're about 10 or 12 minutes over that. So, by way of summa- ry, let me make a couple of points. One, is I do appreciate all of you coming. I know it takes some time and effort to get here just in terms of pure transportation. Further, the time the thought and the trouble that it takes to prepare testimony, to have it typed, to have it faxed to Washington in the appropriate numbers, is some- thing you don't have to do. I really do appreciate everyone and ac- knowledge that appreciation. These things are not simple to do. Let me assure you, though there's a lot of followup and follow- through. We are definitely preparing a proposal for the next budget year. That is why we're doing it and I'm thrilled that the colleagues who joined me this morning decided to come, because they don't have to come. We're on a recess for a weekend. They have their own districts to go to-Minnesota and Illinois-and it takes some time to get there from here, and they didn't have to come. You know, there's no special obligation one Member owes to an- other to come to any field hearing. We ought to really take note of the fact that these two gentlemen came because they're both my senior on the Budget Committee. They're one removed from the Chairman. Mr. Durbin serves as a Member of the Appropriations Committee, plus a Member of the Budget Committee, which has a lot of meaning on the kind of things we're trying to do. Mr. Oberstar is the chairman of a subcommittee of the Public Works and Transportation Committee. We've been trying to get him on the delta region's proposals on the new highway bill. So we tried to bring him here to show the extent to which we need eco- nomic development to be pursued through infrastructure. I am sure he knows that which is why he decided to come. Mr. Ford, of course, is on the Ways and Means Committee. So they listen, they can speed-read, but more than that their staffs will read your pres- entations, and will cull through the testimony. We will take the recommendations forward to the rest of the members of our panel. A word about the atmosphere. We have a lot of trouble, I mean, no doubt about it. We have a $300 billion budget deficit and that's an on-record deficit. That has nothing to do with the off-record S&L situation, and the disaster bill which was also off-record, and the Desert Storm funding for which hopefully our allies can help pay and I think they are. But we're still going to have a residue of debt there. But, I think, the atmosphere makes it all the more necessary that we move toward grandiose self-help projects. For instance, for first time ever, in the Congress we passed Hope 1, which was a Jack Kemp inspired proposal to allow public housing tenants to own their own units. That could be in Chicago, it could be in Ten- nessee, or it could be in Mississippi. The Congress now collectively conceived the benefit in asset development. It creates self-esteem, creates collateral, develops assets, and it accomplishes the overall goal of reducing the Federal outlay on vouchers and welfare. PAGENO="0078" 74 That's what this is all about. We're trying to take this attitude, not just for housing, but applied to other traditional welfare reform proposals. To try an individual development account proposal, where the Government can match whatever the low income resi- dents could save, as long as, what they save is -applied to college, housing, or job training. I think such proposals are moving forward as a result of a lot of the Delta Commission initiatives, such as the overall idea of an investment fund. Again, we're still in the initial stages of developing the invest- ment fund idea. The fact is, though we get $2 billion of Federal dol- lars into this region in welfare, in my mind is not really helpful. It's immediately helpful in the near term, of course, but on a long- term basis, both in terms of self-sufficiency and Federal outlay, it is not helpful. I think the same kind of justification that we can make for Hope 1, can be made for welfare reform through propos- als like an investment fund, which can be leveraged for other things. I think the time is right for it. It won't happen soon, but if we pushed through a Polish-American investment fund with very little discussion I think, we can do it. I think that we can do it. We bailed out Lockheed, we bailed out Chrysler, we bailed out the sav- ings and loans, and we may have to bailout some of the banks. We have credits now for Soviet Union, which I think will pass. I think it's about time to perhaps raise the decibel level of our rhetoric and say what about us; what about our region. Let's deal with some Grameen Bank models on a regional basis and use what you've been doing in the Good Faith Fund as a model. There's evidence for it. You don't need another demonstration project. We can use you who testified today because you've done it privately and it's working. If we can work out an appropriate level of Federal investment to try to do an investment fund, modeled after what you're doing in Arkansas and what they've done in South Shore and in New York, we would like to work it out, particularly if there's some return on our investment. I think the time to do it is now and if we get Mem- bers like the other two to my left that were here, to help us to do it I think is very worthy. Let me thank all of you for coming and testifying. By way of housekeeping if anyone in the audience wishes to submit written testimony or other materials related to today's hearing topic, the record will remain open for 2 weeks for receipt of such materials. They should be mailed to the Budget Committee, House of Repre- sentatives, Washington, DC 20515. If you need further information on issues related to this hearing or any other hearings scheduled by this Task Force, please feel free to contact me or to speak to staff persons assisting here today. I do appreciate you coming. This is the beginning of a very excit- ing role. Thank you. The hearing is concluded. [Additional information submitted for the record follows: PAGENO="0079" 75 PREPARED STATEMENT OF ANN CASH Mr. Chairman, Members of the Task Force: My name is Ann Cash of McGee, Arkansas and I am Regional Vice- President of the National Mississippi River Parkway Commission. I am providing testimony today on behalf of Minnesota State Senator John Bernhagen, National Chairman of the Mississippi River Parkway Commission. Senator Bernhagen regrets that he cannot be here today, but he and our Executive Director John Edman are at this moment meeting with the Governor of the state of Mississippi in Jackson regarding a Mississippi River International Marketing program. The Mississippi River Parkway Commission appreciates the opportunity to provide testimony to this House Budget Committee Task Force on the topic of "Investments in America's Hometowns". Our organization has been working in the ten Mississippi River states to stimulate economic growth in rural and urban communities through the development of highway programs, historical preservation and recreation projects, and the implementation of domestic and International tourism marketing efforts. While our activities may be small In scale and fund1ng~ they demonstrate the effectiveness of public and private partnerships in enhancing the economic vitality of a region. In this testimony I would like to update you on the activities of the Mississippi River Parkway Commission, particularly in our efforts to study the economic potential of the Mississippi River valley. I'd also like to provide you with some of the specific thoughts of Senator Bernhagen on the potential role of a development bank or investment fund for the Mississippi River. In addition to serving as Chair of the National Commission, Senator Bernha~n serves as Executive Director of a rural Community Development Corporation located in Hutohinson, Minnesota. First, I'd like to provide you with a little background on the Mississippi River Parkway Commission. As you may know, the Commission is a quasi-governmental organization of the ten states along the Mississippi River that exists to promote and preserve the resources of the Mississippi River valley and to develop the regional scenic By-way known as the Great River Road. In existence since 1938, the Commission consists of individual state commissions established in each of the ten states either by statute or Governor's Executive Order that together comprise the National Commission. Our organization's historic main goal is to develop highway and amenity projects along the Mississippi River through the Great River Road program. We have accomplished much towards this goal with the expenditure of over $1 billion in federal, state, and local funds on various Great River Road projects involving historic preservation, the development of scenic overlooks and bike trails, road reconstruction and resurfacing bridge replacement, and interpretive centers. As much as has been completed, however, the job is only half done. An estimated PAGENO="0080" 76 $1 billion is still needed among the states to complete the projects and plans associated with this program. While working to complete our Great River Road projects and plans we have also undertaken many new efforts to bring about a greater domestic and international awareness of the entire Mississippi. River valley. We have for several years developed programs with state and local tourism industry partners in order to raise a greater awareness of the tourism potential of the region. Although funding for these programs has been limited we have done much to increase tourism interest along the Mississippi River in the ten states. We have further launched an international marketing program with the tourism offices of the ten Mississippi River states designed to increase the awareness of our region as a new destination for International tourism travel. We currently have the financial participation of eight of our ten states in this international marketing program that is currently focussing on Japan. We are also currently discussing the possibility of a new joint international marketing initiative between the federal government and the states through the U.S. Tourism and Travel Administration. Perhaps the greatest partnership involved our efforts to conduct a Mississippi River Fair in Osaka Japan in 1988. This tourism, trade, and cultural exchange between Japan and the Mississippi River states involved private industry, state tourism, agriculture, and economic development agencies, the federal government and the Commission. Funding for this effort was extremely difficult to obtain as there was no central organization or fund to draw from to get this program off the ground. With much struggle however, this program was a success. As part of our continuing efforts to provide a greater awareness to the resources of the region, we are currently involved as key members of the Mississippi River National Heritage Corridor Study Commission. This Commission, which is comprised of members of the Mississippi River Parkway Commission in the ten states and five federal agency representatives, is charged to do an inventory of the resources of the Mississippi. River. The Commission is due to complete a report to Congress within three years that will include recommended boundries of a possible Corridor designation as well as recommendations on ways to increase economic development in the region. The Corridor Commission is now selecting a contractor for the study and will be gathering information from throughout the Mississippi River states. The Mississippi River Parkway Commission has already begun to assist in this effort by requesting each of the states to furnish information regarding the types of economic development programs and incentives for economic development that they provide. There is much to learn from each other in developing innovative programs to meet our PAGENO="0081" 77 local needs. We will, if it would help, be willing to provide this Information to your task force for your review. Senator Bernhagen is particularly interested in the economic development geals of the Corridor Commission and the Task Force partly due to his capacity as Executive Director of his Community Development Corporation. He has had experiences with economic development programs In Minnesota that are perhaps similar to other rural areas in our region and that may be helpful for this Task Force's deliberations. He asked me to share with you his specific thoughts. A neighboring community to Hut1chlnson wrote a grant to the state to help revitalize their main street commercial area. The funds from this grant were to bs matched with local dollars to do commercial rehab and apartment housing primarily for low and moderate income people in a main street targeted area. Basically, the funding for the project was 15 percent deferred loan, 42.5 percent zero interest loan, and 42.5 percent private money. The program was successful only to a point. The grant was for $800,000 of which $200,000 needed to be turued back because of a lack of interest of business owners who didn't feel that they wanted to put In the remaining 42.5 percent. In Senator Bernhagen's community he set up a similar program except that the last 42.5 percent came from a local revolving land fund which they loaned out at 8 percent for a ten year term. Not only did the Hutchinson Community Development Corporation run out of money, but there is a waiting list for additional applicants. They were able to do 27 buildings out of possible 85 in the targeted main street area. The* initiative has led to a major discount store expanding in the area, a grocery store considering the same, and an overall renewed sense a economic vitality. More could have been accomplished if more funds were available. Senator Bernhagen's feelings are that a revolving loan fund or development bank as you have suggested would pay great dividends in bringing prosperity through jobs, new businesses, and tourism to the Mississippi River valley. He has suggested that perhaps the only realistic way of determining an appropriate level of funding would be to survey selected numbers of representative communities to find out what they perceive their funding needs to be and work from there. In conclusion, the Mississippi River Parkway Commission has had a great history in developing and encouraging a wide variety of partnerships with the federal government, private industry, and the states, in working to enhance the economic vitality of he region. Help is needed in rural and urban areas in our region for community development, main street revitalization, parkway development, and even international tourism marketing. We stand ready to work with you in any area where we may be of assistance. PAGENO="0082" 78 Once again Mr. Chairman, we appreciate the opportunity to provide testimony to this task force here today. On behalf of the entire Mississippi River Parkway Commission In the ten River states, we applaud your efforts to stimulate rural and urban regions of the country like ours. PAGENO="0083" 79 PREPARED STATEMENT OF WILBUR F. HAWKINS Chairman (Mike) Espy, Mr. (Harold) Ford and members of the House Budget Committee Task Force on Community Development and Natural Resources, I an pleased that you have cone to the Lower Mississippi Delta region and for the opportunity to provide you with comments and perspectives on "Mechanisms for Financing Economic Development." In October, 1988 the Congress passed the Lower Mississippi Delta Development Act to study the economic development needs of the seven state, 219 county and parish region stemming from Carbondale, Illinois down the mighty Mississippi River, through the boot heel of Missouri, western Kentucky, rural west Tennessee, the Arkansas and Mississippi delta on into New Orleans, Louisiana. I am pleased to have been the executive director of the Commission and now serve as President of the successor body, the Lower Mississippi Delta Development Center. The Delta Center is a non-profit corporation created by the seven delta states of Illinois, Missouri, Kentucky, Tennessee, Mississippi, Arkansas and Louisiana. We, are chartered in the state of Arkansas with our corporate. offices located in the same facility where the Delta Commission was located. Governed by a 14 member board of directors, each director was nominated by their respective governor. The Delta Commission's Call to Action expressly called for the states to establish and fund an interim organization to act as an advocate for the Delta Initiatives and that this temporary organization be composed to reflect the ethnic, gender and geographic makeup of the region. Further more the call stated that this organization remain in place until such time as a permanent entity is established. A second component of the call was that the Congress address the issue of an appropriate entity to monitor the progress of the Delta, to ensure successful implementation of the Commission's recommendations, to provide for joint federal state participation and to address funding mechanisms. The Delta Center faces a monumental task of trying to facilitate implementation of the over 500 recommendations in 68 issue areas as presented in the final report of the Commission while competing with limited state resources and priorities. We PAGENO="0084" 80 have been able to survive but the economic development of the Delta hinges upon an organization serving in the unique capacity as we do. The Lower Mississippi Delta Development Center, serves as a think-tank for exploring options to issues, programs, and policies that impact regional development. We look for resources that the region can acquire that don't necessarily cost extra money. For example, instead of two Delta institutions of higher education competing for one grant their efforts were combined and successfully acquired funds for the creation of the Memphis State university/southern Illinois University at carbondale Center for International Business Education. As a result, this venture resulted in one of 16 such designated centers in the country. Another example is that the Commission recommended that more federal facilities be established in the region. Through the collaborative efforts of the states we were successful in having three new federal prison facilities identified for construction in the Delta. These facilities will bring significant economic development to places like *Forrest City, Arkansas, Yazoo City, Mississippi and Pollack, Louisiana. We have developed an extensive data base of information and have networks organized among various organizations such as tourism, higher education, community development, agriculture, environment and natural resources to name a few. These resources can be mobilized for the development of the region but we need adequate resources to to a quality job. During the course of the Commission's study and deliberations, it became quite clear to me that conditions within the Mississippi Delta region were worse than those that prevail in some Third World countries. Since the release of our report over 15,000 copies have been distributed not only within the region but to countries as far as Taiwan and South America. Our report has been praised as a simple action plan, one by which each individual, organization and level of government can take action to improve this region. Many of the issues for which we developed recommendations will bring benefits for the nation as a whole. Our process was simple, we involved people in addressing the problems we face, as well as the solutions. We recognized the need for more resources while at the same time challenging existing governmental and private sector organizations to eliminate duplication, increase efficiency and promote holistic solutions to resource shortages. PAGENO="0085" 81 However, the United States is clearly without a domestic policy and if, you as Members of Congress do not balance the military and foreign spending with domestic spending, I am afraid that the United States will follow the Communist bloc nations in their inability to feed their own. For many years, the communist nations spent their resources on developing strong military/industrial complexes and today, they cannot provide adequate housing, health care and food for their own people. America can be different, we have abundant natural resources and one of our best resources is our human capital. I consistently raise the question, what will the quality of life be like for the child that will be born in the year 2000? Today, based upon their plights I am afraid that for many, there is little promise for a bright future in which all children of the Lower Mississippi Delta can fulfill their potential. Federal policies often work to the detriment of rural areas and simple changes can enhance development. Earlier this year, Health and Human Services Secretary Louis Sullivan announced the Administration's Healthy Start Initiative that will focus upon reducing infant mortality within the country. Initially, the administration proposed $171 million that would be targeted toward the top ten urban cities in terms of their infant mortality rates. Within the Delta region, a predominantly rural area, we have rates that exceed Chile, Cuba, Malaysia and French Guiana. Two simple words in issuing the federal guidelines have the potential of aiding the Delta significantly. Those being "and rural". Original wording proposed only urban areas for funding consideration. If you think "and rural" in your deliberations and in development of legislation, significant improvement will be made. It was through working with the organized 24 Member Delta House Caucus and the Delta Senate Caucus of 14 Members that the issue was brought to the attention of.caucus members and a formal letter drafted to Secretary Sullivan. We are optimistic that more changes of this nature can take place, benefitting not only the Delta but rural areas throughout this country. What is needed now is for the Congress to clearly understand how important an institution such as the Delta Center is to the overall development of the Lower Mississippi Delta. First, there are many sub-regional and special interest groups, each focusing upon their geographic, subject or issue area; however, the Delta Center is the only recognized body that serves as an advocate for broad regional advocacy and implementation of the Delta Initiatives. Second, if supported we can set the pace for regional economic development for the next century. It is quite clear to us that the PAGENO="0086" 82 era of creating federal-state regional organizations such as the Tennessee Valley Authority (TVA) and the Appalachian Regional Commission (ARC) are over. What is clearly upon the horizon and within our grasp is the need for establishing stronger public/private partnerships within the Delta. We certainly need federal support and for some reason the Congress can see fit to fund entities such as the TVA for $135 million and the ARC for $150 million in Fiscal Year 1991 and has tremendous difficulty in clearly understanding that we are not asking for a hand out but a helping hand up. That is why the Delta Commission intentionally went out of existence and is seeking to firmly establish capacity within the existing regional development organizations, and not through creating another bureaucratic agency. Perhaps, our job would have beem easier had we gone this route but, I am not certain in ten years we would be more competitive than the Appalachian region. But, I am certain that with a strong public/private partnership similar to what the federal government did in 1933 in creating the TVA we can create industries, jobs and can fund our own social development needs such as housing, health care and education. In 1933, the Congress created the TVA and today, it is a $ 6 billion utility industry. From 1933 until the early 1950s the federal government invested in creating a strong and viable industrial and agricultural infrastructure in the Tennessee Valley. In 1958, the TVA began repaying the federal government for the investments it made in the utility system. The TVA repays the federal treasury approximately $120 million annually in interest and principal annually and will do so until the total debt is repaid. The TVA region continues to receive some $135 million from Congress to support resource development in an area similar in size to the Delta but, with a significantly higher per capita income today than in 1933. The 7 state 219 county Delta region overlaps 66 TVA counties. I shared this precedent with you to help you the Members of Congress to understand that you can use the same approach in assisting the Delta develop. Furthermore, I ask that you understand the seriousness of your responsibility to your constituents and to this nation as a whole. We cannot afford to send aid to foreign nations and not take care of our Third World here at home. This country supported Poland, Germany, Asia and other nations as they seek to overcome adversity, famine and political turmoil and has virtually ignored the developmental needs right here at home. This year you have responded to the needs of the Kurds, and the Administration most recently announced it would seek to double asistance to South Africa from $ 40 million to $80 million for housing, economic development and education programs. Once again PAGENO="0087" 83 I ask, What about us? What about us? What about us? We need aid but we do not need additional welfare aid that diminishes human dignity, worth and contributions to society, we* need developmental aid. It is an investment in the long-term economic stability of this country just as military investments are viewed as contributing to our global military stability. While I could talk all day about the imbalances that exist between international and domestic priorities, I am specifically recommending that the Congress support the development of the Delta region by providing an small, but adequate funding floor that would assure the Center's existence while establishing its public/private partnerships. One such public/private partnership that the Commission called for is the creation of a regional development bank. The task of bringing this recommendation to a reality requires careful deliberations among the existing financial institutions, developmental organizations and the thrashing out of issues of funding, focus and opportunities in improving our national and global competitiveness as a region. The Delta Center could provide the following: * Assemble the national and regional leaders needed to address organizational issues. The Center could assemble these leaders and ensure objectivity because of our independence and broad regional perspective. * Based upon existing data and research already compiled we could reduce the time and overall costs associated with organizing a regional development fund or other appropriate entity; and, * We could develop realistic scenarios the would provide for the repayment of any federal investment that the federal government would invest in the capitalization of a regional development fund. The Central challenge facing the Delta is the challenge to develop a strong business and industrial sector that will enable the region's economy to be one of growth and vitality in an increasingly competitive environment. " A vibrant business industrial and.commercial sector lies at the heart of regional expanded opportunities, the region will continue to under-utilize its human resources and export the best and brightest of its workers to other areas of the nation." Goals and recommendations are designed to accomplish the following objectives. o Increase access to capital to promote business investment and activity. o Build entrepreneurial skills in the financing and management PAGENO="0088" 84 of regional enterprises. o Build and strengthen technical competence in the production of goods and services. o Establish a strong manufacturing base, particularly in value- added goods. o Foster a regional spirit of entrepreneurship and creativity. o Foster a climate of innovation and cooperation in the engagement of labor in productive processes. o Foster economic, development that builds upon the region's strengths and assets. o Expand into new markets. Progress in the attainment of each of these objectives during the upcoming ten-year period will substantially advanced the Delta region toward its quest to become a full partner in this nation's progress. Capital is not extremely scarce in the Delta, however, lending practices in commercial institutions are generally perceived as conservative. Government programs are usually undercapitalized and too fragmented in nature to have a significant impact. Insufficient training in the preparation of financial packages or inadequate knowledge . of existing programs often hinder entrepreneurs and lenders alike. A financing mechanism is needed to leverage existing dollars and encourage greater collaboration and more joint ventures among existing entities. Low capital investment in the Delta is clearly demonstrated by the lower loan/deposit ratio of the region's banks. The Delta region as a whole has substantial assets in its banking system, and these assets currently total about $78 billion. The regional loan/deposit ratio is 73.6%, which is beli,w the national loan/deposit ratio of 79.5% and suggests a more conservative lending pattern within the region. The lower loan/deposit ratio could also indicate lower loan demand; however, in each of the Commission's public hearings, Delta business persons addressed the need for greater access to capital and encouraged the Delta Commission to recommend the establishment of a regional funding entity to work with banks to increase the amount of capital available for regional investment. Indeed $3.5 billion in additional investment would take place on an annual basis if the Delta's banks loaned at the national rate of 79.5% (reflecting a 6% increase). Even a 3% increase in the loan/deposit ratio would mean almost $1.8 billion in additional investment within the Delta. In general, Delta state government recognize that long-term, low- interest, fixed rate financing and venture capital are critical to PAGENO="0089" 85 economic development, and thus, strive to provide essential public financed programs for economic development projects. The levels and categories of funding among state programs, however, differ widely. For example, differences exist in the maximum amount of loans or loan guarantees which states are currently authorized to provide. In addition-, most of the states in the Delta region under-utilize local and state general obligation bonds to support economic development, and there is a need to increase the number and scope of active, adequate publicly, funded seed or venture capital programs. Finally, it is difficult to determine the extent to which businesses and industries within the rural areas of the Delta have adequate access to the- financing programs offered by their state governments. A number of federal programs exist which provide economic development financing for Delta firms; however, these programs, currently do not fill the gap of unmet business financing needs. The Federal government, in cooperation with the state governments and the private sector, should establish a regional development bank that guarantees local bank financed loans, provides equity and near equity loans to Delta businesses as well as fixed asset financing and also provides equity financing to community based loan pools. Delta development bank monies should be targeted to assist small and minority businesses, firms in need of venture capital to expand or respond to new markets created by increased value-added opportunities and firms in need of export credit to engage in international trade. Such a banking entity would aggressively seek joint ventures with existing lending institutions and programs in the public and private sectors. Legislation has been introduced in the 102nd Congress that would authorize funding for the Center to adequately address the creation of a regional development fund/bank while at the same time allowing us to serve as the advocate for the recommendations as contained in the Commission's Final report. I have included the specific recommendations of the Commission as an attachment to my formal testimony and would ask that you accept the written testimony of one of your former collegues and our Board Chairman, the Honorable Ed Jones, who served in the Congress for 20 years and continues to serve this region well. Mr. Jones asked that I express his personal appreciation for your being here today and regrets for his absence due to health considerations. PAGENO="0090" 86 8 an attachment to my formal testimony and would ask that you accept the written testimony of one of your former collegues and our Board chairman, the Honorable Ed Jones, who served in the Congress for 20 years and continues to serve this region well. Mr. Jones asked that I express his personal appreciation for your being here today and regrets for his absence due to health considerations. Thank you for the opportunity to address your task force and I certainly hope you understand our sincerity and commitment to the economic development of this region. Thank you. PAGENO="0091" 87 ENTREPRENEURIAL DEVELOPMENT Capital Ten Year Goal: By the year 2001, $2 billion a year in additional capital will become available for business investment and development in the Delta. Situation: Capital is not extremely scarce in the Delta; however, lending practices in commercial institutions are generally perceived as conservative. Government programs are usually undercapitalized and too fragmented in nature to have a significant impact. Insufficient training to the preparation of financial packages or inadequate knowledge of existing programs often hinder entrepreneurs and lenders alike. A financing mechanism is needed to leverage existing dollars and encourage greater collaboration and more joint ventures among existing entities. Recommendations: o The Federal government in cooperation with the state governments and the private sector should establish a regional development bank that guarantees local bank-financed loans, provides equity and near equity loans to Delta businesses as well as fixed-asset financing and also provides equity financing to community based loan pools. Delta development bank monies should be targeted to assist small and minority businesses, firms in need of venture capital to expand or respond to new markets created by increased value added opportunities, and firms in need of export credit to engage in international trade. Such a banking entity would aggressively seek joint ventures with existing lending institutions and programs in the public and private sectors. A not-for-profit subsidiary of the Delta development bank should be established to work with Small Business Development Centers, institutions of higher learning and other entities to develop and implement economic development finance training programs for entrepreneurs, bankers and other lenders, particularly in rural areas. o Congress should authorize the Economic Development Administration (EDA), the small Business Administration (SBA), Farmers Home Administration (FmHA), the U.S. Export-Import Bank,and the Overseas Private Investment Corporation to provide Delta set-asides to assist with the establishment of a regional development bank. PAGENO="0092" 88 o Congress should implement a ten-year extension of industrial development bond programs to facilitate long-term financing and planning on the state and local level in the Delta region. o Congress should require EDA to reduce the amount of funds a private investor from the Delta must raise to be eligible for financial assistance from 15-20% to 5-10%. o The SBA should increase the number of its Small Business Investment Corporations (SBIC' s) and Minority Enterprise Small Business Investment Corporations (MESBIC's) in the Delta. PAGENO="0093" 89 TECHNOLOGY DEVELOPMENT Telecommunications Ten Year Goal: By the year 2001, the region's research institutions will be linked into the proposed national high speed network of super computing centers, thereby giving businesses in the Delta access to the nation's super computers. Situation: There are many small private computer networks among universities and research institutions in the region and across the country. However, these networks are not standardized, which sometimes makes communications between them cumbersome and slow. A fiber optic network would give Delta research entities and their business networks immediate access to the best and fastest computers in the world. Hecommendation: o Congress and the President should approve and fund the construction and operation of a national high speed data network of super computing centers that would yield a national standard for all other networks to follow. PAGENO="0094" 90 ENTREPRENEURIAL DEVELOPMENT Human Resource Development Ten Year Goal~ By the year 2001, Delta entrepreneurs and managers will incorporate a solid understanding of global needs, flexible system production techniques, and "cutting edge" developments in business management practices in their strategies to compete globally. Situation: In general Delta businesses are not competitive enough to meet the challenges posed by an international economy. Most Delta business persons agree that the region needs skilled labor in order to progress. But few managers also recognize the need for or have access to the kind of technology, training, and resources that will strengthen their skills and expertise as managers. Adjustments must be made at all levels of society if America is to maintain a strategic place in the global economy. Within the business sector, these adjustments will affect management as well as labor. Thus, efforts to improve the basic skills of workers must be complemented by on-going efforts to enhance the skills of entrepreneurs and managers. In the economy of the future, local Delta managers must operate with an appreciation of the global economic and social trends that impact business productivity. Changes in the workplace will also be necessary if businesses are to maintain competitive advantage in the marketplace. These changes will require a more flexible system of producing goods and systems of organization that enable greater linkage and coordination between tasks assigned to labor and tasks assigned to management. Recommendation: o The U.S. Department of Education should fund proposals to establish International Business Education Centers in the Delta through a consortium of institutions of higher education. Such centers would enhance the language, cultural and business skills of students and provide assistance to Delta businesses seeking to enter international markets. PAGENO="0095" 91 BUSINESS AND INDUSTRIAL DEVELOPMENT Small Business Development TEN YEAR GOAL: By the year 2001, financial and technical assistance programs for the small business sector will reflect that sector's dominant role in the Delta's economy. SITUATION: Any long term business development strategy must involve building upon the potential of the Delta's dynamic small business sector. The important role of small business in the Delta is reinforced by the reality that in many areas 98-100% of all enterprises are small businesses. Some states, in cooperation with the Small Business Administration (SBA) and institutions of higher learning, have significantly increased their support for small businesses, particularly those in the Delta. Yet existing federal and state programs are still not able to meet the needs of the Delta's small businesses. In the international economy of the twenty-first century, small businesses will face even greater competition, therefore, increased assistance and support must be targeted to this sector if it is to play a continuing role in the Delta's economic development. RECOMMENDATIONS: o Congress should revise tax laws to promote continued and greater use of industrial development/revenue financing on a tax-exempt basis for small industry. o Congress should authorize federal agencies to target 5% of funding under the Small Business Innovative Research Program (SBIR) to small businesses in the Delta. o The SBA, state governments, and institutions of higher education should aggressively promote the SBIR program and give particular support to projects and proposals which focus on international trade and the needs of small businesses in rural areas. o The SBA, state governments, and institutions of higher education, should increase the number of Small Business Development Centers in the Delta and strengthen their institutional capacity to better monitor clientele for possible intervention before failure to increase the range of services available, particularly in the area of procurement assistance. PAGENO="0096" 92 o Directors of SBDC programs in the Delta states should meet annualy to develop strategies to better coordinate activities in order to improve the strength and vitality of the small business sector in the Delta region. o The SBA should establish a Delta region set-aside in its Section 8(a) Procurement Program and explore the feasibility of merging existing procurement centers with SBDC5. o The SBA and other federal agencies should streamline paperwork and procedural requirements for small businesses competing for government contracts. o The federal government, in cooperation with state governments and the private sector, should establish a Delta development bank that provides loans and loan guarantees and underwrites the bonding of small businesses. PAGENO="0097" 93 BUSINESS AND INDUSTRIAL DEVELOPMENT Minority Business Development TEN-YEAR GOAL: By the year 2001, a 25% increase will be achieved in the number of minority businesses and the number of jobs generated by minority businesses will be increased in the Delta by 80,000. SITUATION: Minority businesses remain an untapped market for economic development in the Delta. For example, approximately 40% of the total population is African American; yet, the involvement of African Americans in the business sector is far less substantial. Recent data indicates that factors limiting the growth and income of minority businesses include the size of their market shares, available capital, human expertise, and exclusion based on race or sex. Government procurement policies could provide and excellent vehicle through which minority businesses can play a more meaningful role in the region's economy. If sufficient resources were made available just to meet the 5% minority small business contract award goals of the Department of Defense (DOD), the region would realize benefits of more than $3 billion and 60,000 jobs over the next five year period. This number could be quadrupled if the Delta's minority firms adequately participated in other government sponsored procurement initiatives. Community development corporations (CDCs) have been shown to be viable nontraditional mechanisms for addressing many of the problems faced by minority businesses in particular. In the development and implementation of a regional strategy to boost minority business income and jobs, consideration must be given to the expanded involvement of CDC5 and other nonprofit institutions. RECOMMENDATIONS: o Congress should extend Section 1207 of the Defense Authorization Bill that mandates a goal of 5% for the award of defense contracts to minority firms, which includes historically Black Colleges and Universities (HBCU5), to apply from 1992 to -2001, particularly with respect to the Delta region. 0 Congress should authorize the Department of Defense to provide a Delta set-aside within the minority procurement program mandated under Section 1207 of the Defense Authorization Bill. 44-629 0 - 91 - 4 PAGENO="0098" 94 o Congress should authorize all federal agencies to implement a uniform minority business certification process for all business programs. o Federal agencies should streamline the paperwork and procedural requirements for minority businesses competing for government contracts. o Federal agencies should provide greater assistance in promoting the economic/business development goals of federally recognized Native American communities. o The federal government, in cooperation with state governments and the private sector should establish a regional development bank to work with CDCs in providing loans and loan guarantees for minority business development, as well as to underwrite the bonding of minority businesses. o The SBA should expand activities through its Small Business Development Center Program to provide increased assistance to minority businesses in the Delta. o States should mandate a comprehensive review, with substantial input from state departments of economic development, the private sector in general and minority business persons, of all minority business programs, to assess their efficiency and appropriateness to the broad needs of the minority community. o States should initiate statewide internal purchasing programs which gives priority to minority manufacturers and business vendors. o States and the private sector should encourage minority business participation in business development programs and networks such as Adopt-a-Business initiatives, Regional Purchasing Councils, mentor-protege programs, and the National Alliance of Business. o Institutions of higher education should establish a regional policy research network to develop job generation and capital acquisition strategies to enhance the competitiveness of minority businesses in the Delta. PAGENO="0099" 95 TECHNOLOGY DEVELOPMENT Technology Transfer TEN YEAR GOAL: By the year 2001, the region will take full advantage of the provisions of the Technology Transfer Act of 1986 to encourage business development and expansion. SITUATION: The Federal Technology Transfer Act of 1986 was designed to provide greater freedom to federal laboratories to allow licensing agreements and other legal arrangements with private industry to encourage use of government owned technology for the benefit of the American economy. The Food and Drug Administration's National Center for Toxicological Research in Jefferson, Arkansas is the only federal laboratory in the Delta. Some progress has been made in overcoming bureaucratic and regulatory hurdles concerning the National Biotechnology Cooperative Project, but issues such as financing and staffing have yet to be resolved. RECOMMENDATIONS: o The U.S. Food and Drug Administration and Congress should approve and fund the National Biotechnology Cooperative Project. o The Federal Laboratory Consortium should target funds to begin or strengthen its members' technology transfer efforts in the Delta. PAGENO="0100" 96 BUSINESS AND INDUSTRIAL DEVELOPMENT Alternative Fuel Industry TEN YEAR GOAL: By the year 2001 a viable, self-sustaining alternative fuel industry will be created in the Delta. SITUATION: The nation has slowly slipped back into a position of dependence on foreign sources of energy. This not only threatens our economic freedom, but also makes our military strategic interests vulnerable. Basic directions of research and development for renewable energy sources already have been established. Many are based on agricultural crops that hold potential as alternative crops that can be grown in the Delta. Other renewable sources such as solar, wind and photo-voltaic cells have received a three-year commitment from the Department of Energy for funding. (See related Alternative Fuels recommendations under Natural Resources.) RECOMMENDATIONS: o The Department of Energy (DOE) should target at least 3.4% of funds authorized for non-nuclear alternative energy research in the "Renewable and Energy Efficiency Technology Competitiveness Act of 1989" consistent with institutions' and businesses interests in the Delta. o The U.S. Department of Agriculture should promote opportunities within existing farm programs that can be used to expand ethanol or natural gas based energy production. o States, universities and private industry should establish a network that encourages research and development joint ventures to establish -a strong alternative energy supply industry. o States should target any remaining money from "oil overcharge" funds for joint research and development efforts to create an alternative energy industry. (See glossary). o States should identify tax and other mechanisms to support the development of an alternative energy supply industry in the region such as tax exemptions on research and development activities. o Industry should give funding consideration to joint ventures between universities and private sector participants. PAGENO="0101" 97 PREPARED STATEMENT OF JAMES L (PETE) PERRY Thank you Mr. Chairman, and members of the House Budget Committee, for the invitation for Chairman John Sullivan and myself to appear here on behalf of the Mississippi Presidential Council on Rural Development and share with you the goals and objectives this Council is working to reach in Mississippi. As Mr. Rockefeller will describe in his statement, the President's Initiative on Rural America announced in January, 1990, outlined six recommendations for "rural economic development for the 90's." The creation of state rural development councils was one of those six recommendations, and was implemented with the establishment of eight pilot state councils in late 1990. Mississippi, as one of those pilot states, formed our council under the guidance of a group of thirty federal and state agency officials led at that time by Jim Huff, State Director of the Farmers Home Administration. An interesting aspect of this effort has been that "flexibility" is a guiding principal for the project. Each state council has been encouraged to develop its own approach to its formation, membership, goals, and the issues it faces. The complex factors that affect rural communities and the diversity of economic and social conditions in rural America call for state and local strategies, not national strategies. Efforts to assess local conditions and design appropriate solutions will be focused at the state and local level. This "flexibility" has been both a blessing and at times a headache. As the Council has struggled to work out its own organizational aspects and operational needs, the normal approach of having answers dictated from Washington has been absent, allowing each council to do as it sees best for its own needs and purposes, but causing us to spend an inordinate amount of time in organizational efforts. This process has provided an extra benefit in that the pilot councils are rapidly taking ownership as we organize ourselves, define our missions, assess the status of our states, and draft strategies to meet our needs. PAGENO="0102" 98 A key aspect of forming the Mississippi Council was a desire to secure a diverse membership of federal, state, local, and private sector representatives. To insure that the we could implement the decisions of the council, we have maintained our membership at the level that can control or influence governmental program policy, including the managers of those Federal and State agencies who have responsibilities for rural development in Mississippi, along with representatives of local governments, utility companies, private enterprises, and organizations active in rural development. Currently we have sixty-two members -- sixteen from the federal government, twenty-one from state government, twelve representing local government, and thirteen private sector and organization representatives. As we continue to consider the tasks before us, we will expand our membership as we deem appropriate. Also, in exploring the needs and strategies for our efforts, we are including others who have expertise, special knowledge, or concerns in specific areas that we are considering as participants in the Council's work, even though they may not be members. The mission of the Mississippi Council is to improve the quality of life in rural Mississippi through addressing the economic, infrastructure, medical, educational, and environmental needs of Mississippi's rural people. To achieve this mission, it is our intent to develop and implement a strategy for the efficient and effective employment of rural development resources within the State. As you are aware, these resources consist of a broad range of federal, state, local, and private programs that were created with one or more goals in mind aimed at assisting or alleviating perceived deficiencies. However, these programs are generally created and promulgated in a "one size fits all" method, oftentimes with little or no attention to the needs and desires of the people they were created to help. Hopefully, the Council can effectively devise a strategy that will direct these programs to the areas most in need and modify program policies, guidelines and regulations to fit those identified and prioritized needs -- a dramatic departure from the current situation where program beneficiaries have to adjust their needs to fit the particular program requirements of the resources available. We hope to identify and work to remove the legislative, regulatory, and policy barriers that exist in current programs of the federal and state governments. Also, we intend to identify and resolve gaps, duplications, and overlaps within these rural development programs. PAGENO="0103" 99. For this Initiative to succeed, an unusual amount of cooperation will be required between the various players involved: the executive and legislative branches of government as well as between levels of government. Also, the traditional turf protection -- between agencies and across levels of government -- will have to stop. This effort should act as a model for other rural areas, particularly the Lower Mississippi Delta Region. It is intended that this concept will expand to the other states and territories over the next few years, and that they can learn from the experiences of our pilot efforts. As part of the Lower Mississippi Delta Region, I feel that our experiences in Mississippi will be extremely helpful to those other states that are also part of the Region, and that some of what we accomplish in the coming months will particularly benefit them. Further, I would note that the report of the Lower Mississippi Delta Commission is one of the many documents our Council's committees are using as we evaluate the needs, desires, and resources of our state and its rural citizens. We do not intend to duplicate those efforts, but rather to build upon them and where appropriate, develop and put into action an implementation plan for them. Your invitation specifically asked for recommendations regarding funding levels and management of federal community development programs. It is my opinion that if we succeed in this effort, the effectiveness of many of these programs could be enhanced, increasing the positive benefits of these programs without the necessity of an increase in funding and probably with a decrease in administrative costs. Furthermore, without this cooperation, any increase in funding could result in an increase in spending without any corresponding benefit increase. Also, acknowledging that the funds available in many of these areas are limited, the ability to accomplish the desired results could be increased if the agency managers and program specialists charged with overseeing the implementation of the programs., as well as the appropriators, would allow the programs to be more responsive to the actual needs and allow flexibility in their implementation. Further, allowing the funds to be directed to those areas and individuals most in need and less able to provide for themselves, as opposed to spreading them like melted butter throughout the country, insuring that all areas get a little coverage rather than bulk assistance going to a few areas, would result in a much better actual results from these expenditures. Mr. Chairman, this concludes my statement, and I would be pleased to respond to questions. PAGENO="0104" 100 PREPARED STATEMENT OF RANDALL C. SUMNER Mr. Chairman and members of the Committee, I am pleased to appear before the Committee today to describe successful strategies for community development that have been utilized by bank holding companies and their subsidiaries. Through outreach programs sponsored by the Community Affairs functions at the Federal Reserve Banks, we strive to assist bankers and management of bank holding companies in their efforts to address local community credit needs. Our role is one of suggesting alternatives to help meet specific credit needs that have been ascertained by local com- munity partners. These credit needs differ from one community to the next, and the programs designed to meet them are as varied as the needs themselves. Though no one approach will work for all communities or all banks, there are several strategies that have achieved success in locations throughout the nation. It is these strategies I would like to share with you this morning. Before discussing particular programs, I would emphasize that selection of a vehicle to meet a development or credit need should come only after careful selection of the need to be met. That is, the solution should not be placed ahead of the problem. The development vehicles I will discuss have all been success- fully utilized, though they may not be appropriate for all com- munities, banks or bank holding companies. In your invitation to present testimony to the Committee Task Force, attention was drawn to development efforts involving many parties in a community, including banks and other financial organizations. While not the only model of such development efforts, com- munity development corporation (CDC) subsidiaries of bank holding companies have played just such a role in several communities within the states that encompass the Lower Mississippi Delta region. Since 1971, the Federal Reserve Board has permitted bank holding companies to invest, under certain guidelines and limita- tions, in projects primarily benefiting economically disadvan- taged communities. Bank holding companies have used this limited authority to help provide housing and job opportunities for low- and moderate-income persons, assist in the development of small and minority businesses, and provide essential services to other- wise deprived communities. PAGENO="0105" 101 As you can see, the Federal Reserve allows bank holding com- panies some latitude to tailor their investments to meet the dis- parate needs of disadvantaged communities. However, community investment proposals are examined to determine whether the in- vestment meets the "community welfare test" and whether the size of the investment is appropriate to its purpose and prudent for the institution. Also considered is the amount of community in- volvement in the project to be supported by the investment. The definition of community development in Regulation Y, which specifies the nonbanking activities considered proper and permissible for bank holding companies, refers to "investments... designed primarily to promote community welfare." Board decisions have generally held that an investment that directly and primarily benefits economically disadvantaged persons and com- munities meets the community welfare test. Examples of such benefits include new or rehabilitated housing, jobs created through a variety of commercial and industrial developments, or health and educational services, all targeted on low- and moderate-income persons and areas. Bank holding companies are also provided latitude with respect to the for-profit or nonprofit status of CDC sub- sidiaries. BOth forms of incorporation are permitted, with the decision usually based upon the need for additional partners. CDCs seeking investment or grants from foundations, for example, usually incorporate as not-for-profit corporations. However, the majority of holding company CDCs and other equity investments have been for-profit ventures. One question we are frequently asked regarding formation of CDC5 concerns the size of the investment permitted the bank hold- ing company. As proposed community development activities are diverse, the Federal Reserve takes a flexible approach in its evaluation of equity commitments. Although no minimum or maximum levels are established, the Board does expect that the financial commitment will be appropriate to the nature and scope of an- ticipated investment activities and prudent with respect to the size, financial condition, and capitalization of the holding com- pany. CDC5 may be established with many variations on management, for-profit or nonprofit status, and capitalization. Some CDCs are consortiums in which multiple participants, including banks, bank holding companies, foundations, nonbanks such as electric cooperatives, and local government play key roles in the invest- ment and management of the CDC. This diversity of participation not only increases the chances for success, but also maintains a focus on the needs of the particular community being served. PAGENO="0106" 102 Although I am speaking to opportunities available to bank holding companies, I would note that the Comptroller of the Cur- rency permits national banks to establish bank CDC subsidiaries. Also, some states have enacted legislation permitting state char- tered banks to engage in similar activity. Several examples of currently active bank holding company CDC5 include a CDC in western Illinois with multi-lender and public participants, a CDC in Kentucky that has formed a partner- ship with a city government, and two CDC5 in Arkansas developed by Southern Development Bancorporation. Tn-County Development Corporation, Jacksonville, IL Tn-County Development Corporation in Jacksonville, Il- linois, is a multi-investor, for-profit CDC which serves three counties in western Illinois. The CDC was formed in 1989 to retain and create jobs, help new and existing businesses, and ex- pand the tax base. Investors in Tn-County include eight banks, a local Chamber of Commerce, and a rural power cooperative. In addition, two other utilities have made contributions to the CDC. Tn-County provides both equity and subordinated debt financing and technical advisory services to local small businesses and encourages public sector participation in economic development projects. By providing gap financing, equity invest- ments, and small seed capital loans, Tn-County CDC is ac- complishing its goals. Through the CDC's initial project, a loan to a music company assisted location of a distribution center in Jacksonville. This 40,000 square-foot facility is expected to create 40 new jobs within two years. BMC Realty and Investments, Inc., Benton, KY BMC Realty and Investments is a for-profit CDC established by a bank holding company. The CDC entered into a limited partnership with a nonprofit tax exempt subsidiary of the city of Benton, Kentucky. This CDC and the city's subsidiary will each invest up to $100,000. The partnership financed the construction of two industrial "spec" buildings on land owned by the city. The primary purpose of the CDC is local job creation resulting * from utilization of the industrial buildings by new businesses. Southern Development Bancorporation, Arkadelphia, Arkansas PAGENO="0107" 103 Southern Development Bancorporation in Arkadelphia, Arkan- sas, has established two community development corporations. The first, Arkansas Enterprise Group (AEG), is a nonprofit corporation that operates a number of small business assistance programs for rural areas of Arkansas. AEG provides financial, technical, and marketing assistance to new entrepreneurs and micro enterprises to help them increase their probability of suc- cess and generate employment opportunities. The second, Opportunity Lands Corporation (OLC), is a f or- prof it CDC that renovates and develops low- and moderate-income housing and commercial property serving small businesses in lower-income Arkansas communities. The CDC's activities are part of a comprehensive program of the holding company and its bank subsidiary, along with several monbank subsidiaries to help stimulate long-term economic development of targeted unemploy- ment. OLC has begun developing three low- and moderate-income housing projects and has renovated a vacant 100,000 square foot store creating a successful small business incubator. CDC5 are effective development vehicles and consortium CDC5 can bring additional bank and nonbank investment and expertise to the table. However, other vehicles, including more traditional concepts, should not be overlooked when considering ways to meet community credit needs. In addition to lending by subsidiary banks, other forms of investment are available to holding companies. Limited partner- ships and direct investments are but two examples. The advent of a federal tax credit for business investment in low-income housing has made the limited partnership vehicle more attractive to businesses and corporations. Limited partners are essentially passive investors and rely upon the the financial strength, experience and character of the general partner. Examples of bank holding company participation include in- vestments by one holding company of almost $5 million to limited partnerships that developed 12 housing projects with a total of more that 500 housing units for lower-income families and the el- derly. Bank holding companies may also invest directly in community development projects. For example, additional equity may be provided for a neighborhood housing project or commercial redevelopment venture, making it possible for the sponsor to qualify for debt financing and move forward. Community development investments may not be suitable for every bank holding company. The vehicles I have described are but several of many options available. The choice depends PAGENO="0108" 104 upon many corporate and community factors, each of which nay vary over time. companies that have made such investments though have found them to be valuable supplements to those products and serv- ices that are more traditionally employed to help meet community reinvestment needs. Thank you for the opportunity to testify before the Coin- mittee. PAGENO="0109" 105 PREPARED STATEMENT OF WESONGA LUBOTI THE PROPOSED DEVELOPMENT BANK FOR THE MEMPHIS AREA WOULD BE A SPECIALIZED PRIVATE FINANCIAL INSTITUTION WITH SOME FORM OF PUBLIC AND NON-PROFIT FINANCIAL SUPPORT THAT WOULD ENABLE THE BANK TO SUPPLY MEDIUM- AND LONG-TERM FUNDS FOR THE CREATION AND EXPANSION OF INDUSTRIAL AND NEW ENTERPRISES TO BE ESTABLISHED AND OWNED BY THE LOW INCOME AND THE DISADVANTAGED PERSONS OF THE AREA WHO POSSESS THE TALENT AND DESIRE TO ENTERPRISE. THE DEVELOPMENT BANK AS FINANCIAL MECHANISM IS CLOSER TO BEING ESTABLISHED IN THE MEMPHIS AREA BECAUSE THE EXISTING BANKS USUALLY FOCUS ON THE CONTROL AND REGULATION OF THE AGGREGATE SUPPLY OF MONEY. MOREOVER, THE EXISTING BANKS SET LOAN CONDITIONS THAT OFTEN ARE INAPPROPRIATE FOR ESTABLISHING NEW ENTERPRISES OR FINANCING SMALL-SCALE PROJECTS. THEIR FUNDS MORE OFTEN ARE ALLOCATED TO `SAFE BORROWERS' (i.e. ESTABLISHED INDUSTRIES AND BUSINESSES OWNED OR RUN BY WELL-KNOWN LOCAL FAMILIES). TRUE `VENTURE CAPITAL' FOR NEW INDUSTRIES AND ENTERPRISES OWNED BY INDIVIDUALS THAT ARE PART OF THE DISADVANTAGED GROUP RARELY FINDS APPROVAL. IN ORDER TO FACILITATE INDUSTRIAL AND ECONOMIC GROWTH AMONG THE LEAST ADVANTAGED PERSONS, THE DEVELOPMENT BANK SEEKS TO RAISE CAPITAL, INITIALLY FOCUSING ON THREE MAJOR SOURCES: -INDIVIDUAL LOCAL INVESTORS -NOT-FOR-PROFIT ORGANIZATIONS -LOANS AND GRANTS FOR LOCAL, STATE, AND FEDERAL GOVERNMENTS IN ADDITION TO RAISING CAPITAL, THE PROPOSED BANK THAT CURRENTLY IS BEING ORGANIZED BY LOCAL RESIDENTS IS IN THE PROCESS OF DEVELOPING SPECIALIZED SKILLS~ IN THE FIELD OF INDUSTRIAL AND FINANCIAL PROJECT APPRAISAL. THE BANK WILL GO FAR BEYOND THE MODERN BANKER'S ROLE OF LENDING MONEY TO ONLY CREDIT-WORTHY CUSTOMERS. IT WILL TRAIN AND EDUCATE PROSPECTIVE PAGENO="0110" 106 ENTREPRENEURS. THE BANK WILL HAVE AN ACTIVE ROLE IN THE SUCCESS OF THE BORROWERS OR ITS CLIENTS. THE ACTIVITIES OF THE BANK WILL ENCOMPASS DIRECT ENTREPRENEURIAL, MANAGERIAL, AND PROMOTIONAL INVOLVEMENT IN THE ENTERPRISES THEY FINANCE. HENCE, THE BANK WILL PLAY AN IMPORTANT ROLE IN THE IMPROVEMENT OF THE QUALITY OF LIFE OF THE LEAST ADVANTAGED. INDEED, THE PROPOSED DEVELOPIIENT BANK FOR THE MEMPHIS AREA WILL NOT BEHAVE LIKE SOME OR MOST OTHER FINANCIAL INSTITUTIONS THAT REFUSE TO CONSIDER LOANS OF LESS THAN $20,000 TO $50,000. THEY OFTEN ARGUE THAT SMALLER LOANS DO NOT JUSTIFY THE TIME AND EFFORT INVOLVED IN THEIR APPRAISAL. AS A RESULT, THESE FINANCIAL INSTITUTIONS ALMOST TOTALLY REMOVE THEMSELVES FROM THE AREA OF ASSISTANCE TO SMALL ENTERPRISES, EVEN THOUGH SUCH ASSISTANCE IS OF MAJOR IMPORTANCE TO THE ACHIEVEMENT OF BROADLY BASED ECONOMIC DEVELOPMENT THAT OFTEN CONSTITUTES THE BULK OF ASSISTANCE NEEDED IN THE PRIVATE SECTOR. AS SUCH, SMALL SCALE ENTREPRENEURS, OFTEN LACKING TECHNICAL, PURCHASING, MARKETING, ORGANIZATIONAL, AND ACCOUNTING SKILLS, AS WELL AS ACCESS TO BANK CREDIT, ARE THUS FORCED TO SEEK FUNDS IN THE EXPLOITIVE UNORGANIZED MONEY MARKET THAT INCLUDES `LOAN SHARKS' AND `PAWN SHOPS'. THIS DEVELOPMENT BANK WILL CONCENTRATE ON SERVING SMALL-ENTERPRISE FINANCIAL AND TECHNICAL NEEDS OTHER THAN FOCUSING ON LARGE CORPORATIONS, AND AFFLUENT AND WELL-KNOWN INDIVIDUALS IN THE LOCAL BUSINESS SECTOR. THEREFORE, THE DEVELOPMENT BANK WILL NOT ONLY MOBILIZE SAVINGS FROM SMALL AS WELL AS LARGE LOCAL SAVERS, BUT, MORE IMPORTANTLY, WILL CHANNEL THESE FINANCIAL RESOURCES TO THE SMALL ENTREPRENEURS IN THE MARGINAL SECTOR; THEY HAVE BEEN ALMOST TOTALLY EXCLUDED FROM ACCESS TO NEEDED CREDIT AT REASONABLE RATES OF INTEREST AND FINANCIAL TERMS AND ARRANGEMENTS. THE DEVELOPMENT BANK WILL ALSO HAVE OTHER SUBSIDIARIES THAT WILL ENABLE THE HOLDING ENTITY PAGENO="0111" 107 TO MAXIMIZE RETURNS SO AS TO RE-INVEST. THE DEVELOPMENT BANK AS A DEVELOPMENT MECHANISM IS CHOSEN NOT SOLELY FOR THE BENEFIT OF THE DISADVANTAGED ENTREPRENEURS BUT ALSO BY PRODUCTIVITY ANALYSIS OF CAPITAL/OUTPUT RATIOS AND IN THE CONTEXT OF AN OVERALL DEVELOPMENT PROGRAM THAT TAKES ACCOUNT OF EXTERNAL ECONOMICS, INDIRECT REPERCUSSIONS (i.e. OBSTACLES AS A RESULT OF RACE) AND LONG-TERM ECONOMIC OBJECTIVES AND IMPLICATIONS. INVESTORS AND MANAGERS WILL BE ENCOURAGED TO VISIT AND IN TURN, WITH THEIR NEWLY ACQUIRED KNOWLEDGE ENCOURAGE CLIENTS TO SUCCEED, THEREBY MINIMIZING THE LOSS RISKS AND, HENCE, MAXIMIZING EXPECTED RETURNS. THEREFORE, THE THEORY BEHIND THE DEVELOPMENT BANK IS THE ESTABLISHMENT OF THE BASIC PRINCIPLE IN THE FIELD OF COMMERCE: THAT THE MARKET, ITS PRICES, AND SALES (DETERMINED BY LEVEL OF DEPOSITORS IN THE CASE OF BANKING), SHOULD BE LEFT TO INTERNAL ECONOMIC FORCES AND NATURAL COMPETITION (IN THIS CASE BETWEEN FINANCIAL INSTITUTIONS) WITHOUT MANIPULATION BY THE AFFLUENT FEW. IN THIS CASE, THE CATALYST OF COMPETITION IN THE MEMPHIS AREA WILL BE THE DEVELOPMENT BANK. THE BANK WILL WORK AND OPERATE WITHIN A FREE MARKET AND WILL RESPOND TO THE NATURAL LAWS OF SUPPLY AND DEMAND, HOWEVER, TAKING INTO CONSIDERATION THE HANDICAPS OR OBSTACLES FACED BY THE LEAST ADVANTAGED WHO HAPPEN TO BE AFRICAN-AMERICANS OR BLACKS. WHY FOR MEMPHIS? THE CHOICE OF A DEVELOPMENT BANK FOR MEMPHIS AS THE FINANCIAL MECHANISM TO FOSTER ECONOMICS FOR METROPOLITAN MEMPHIS AND THE SURROUNDING RURAL AREAS IS BASED ON ECONOMIC INDICATORS THAT REFLECT HARSH PROBLEMS OF ECONOMIC DECAY, POVERTY, UNDERDEVELOPMENT, HIGH LEVELS OF UNEMPLOYMENT, AND HIGH NUMBERS OF LOW INCOME FAMILIES AND DISADVANTAGED INDIVIDUALS. A GREATER NUMBER OF FAMILIES AND INDIVIDUALS IN THE LOW INCOME AND DISADVANTAGED CATEGORIES IS MADE UP OF BLACKS OR AFRICAN-AMERICANS. PAGENO="0112" 108 SOME OF THESE INDIVIDUALS POSSESS ENTREPRENEURIAL SKILLS AND SPIRITS BUT ARE UNABLE TO PARTICIPATE IN ECONOMIC DEVELOPMENT--A CENTRAL DIMENSION OF OUR GREAT COUNTRY DUE TO LACK OF CAPITAL, AN ACUTE ELEi~1ENT THAT IS NOT ONLY CRITICAL BUT A PREREQUISITE TO ESTABLISHING A SUCCESSFUL ENTERPRISE. THE TALENTED BUT DISADVANTAGED AND POOR INDIVIDUALS MORE OFTEN THAN NORMAL AS COMPARED TO ADVANTAGED AND WEALTHY INDIVIDUALS TEND TO PUT ANY RESOURCEFUL TALENTS TO WASTE DUE TO THE EXISTING FINANCIAL STRUCTURE. FURTHERMORE, IN OUR COUNTRY WHEREBY THE MONETARY POLICY WORKS ON TWO PRINCIPLE ECONOMIC VARIABLES--THE AGGREGATE SUPPLY OF MONEY IN CIRCULATION AND THE LEVEL OF INTEREST RATES, THE BENEFICIARY IS THE WELL-TO-DO. AS COMPENSMTIUN, THE DEVELOPMENT BANK WILL OFFER CLASSES TO ITS LOW INCOME CLIENTS UN THE SUBJECTS OF BUSINESS, ECONOMICS, WITH BORROWING AND REPAYMENT BASED UPON GOOD FAITH PRINCIPLES. A DETAILED CONFIDENTIAL REPORT WILL BE FURNISHED TO THE MEMBERS OF THE COMMITTEE UPON WRITTEN REQUEST. THE REPORT WILL INCLUDE AN UPDATED LIST OF INTERESTED AND COMMITTED INVESTORS, AN EXPOSITION OF THE OPERATIONAL MECHANISMS FOR THE BANK, AND COMMUNICATE THE LEVEL OF SUCCESS IN THE ORGANIZATIONAL PHASE. PAGENO="0113" 109 PREPARED STATEMENT OFMABRA HOLEYFIELD THE NEED The need for locally based and managed revolving loan funds was established in the early sixties. It was shown that conventional lending institutions were not responsive to the needs of the lower income community. In fact, the practice of "Red Lining" was quite common. As a result, those communities most in need of economic development were barred from consideration. Federal and local governments along with several large foundations responded with the development of a variety of loan funds and programs designed to provide capital to businesses in distressed areas. Because of the current problems in the banking industry, the need for continued support in this area is even more acute. Loan approval requirements at conventional institutions are such that minority businesses in particular have a difficult time qualifying. The most difficult requirement is that the applicant has to have collateral equal in value to the loan. MANAGEMENT AND ADMINISTRATION Managing loan funds targeted to minority businesses or distressed communities is significantly different from managing loan funds for a bank. A bank loan officer essentially examines the credit history and collateral of the applicant. A business plan is required but it is not given as much weight as the collateral offered. A great business plan and weak collateral will not produce a loan approval at most banks. Given the fact that applicants to revolving loan funds will not normally meet collateral requirements, the managers have to be more skilled in evaluating business plans and the skills of those involved in the business. In many instances, the manager will have to provide some level of technical assistance in order to assist the applicant in qualifying for a loan. This means that if a loan fund is going to be successful, funds will have to be available to pay a highly competent staff. Even a competent staff cannot change the fact that a higher percentage of loans will end up in default, than would normally be the case in a conventional institution. Given this fact, realistic goals must be established at the beginning. These goals, which might include failure rates as high as 25-30 percent, must clearly be understood by the funding source. Failure to set realistic goals often results in revolving loam funds establishing loan criteria similar to banks in an effort to reduce the failure rate. Once this is done, the revolving loan fund becomes irrelevant. What must be understood is that one of the major problems facing the minority business community is a lack of historical involvement in business. This "lack of history" makes it even more difficult to succeed. While revolving loam funds will experience a higher failure rate, even failures contribute to the development of entrepreneurs who will eventually succeed. PAGENO="0114" 110 PREPARED STATEMENT OF GARY L. ROWE ~. thairixan and Members of the ~nittee Co behalf of ~ ~ MiXX)rity Business Developnsflt Center (NBDC) operated by Banks, Finley, White and Qmrpany CPA's, funded by the Minority Business t~velo~z1Ent Agency, U.S. Copartsent of Omemerce. I thank you for the invitation to testify before the House Budget Coemittee Task Force on Coimminity Developamnt and National Resources. I wish to sake it clear that I an spea]dng as an individual as to the services of the Mes~his NJ3DC, and not as a spokesperson for the U.S. Minority Business Develorsent Agency. The Memphis NBDC is part of a national network of 100 Centers nationwide. ¶Ibe Msix~iis NBDC serves the Standard Metropolitan Statistical Area to inclix~e; Meir~iis Shelby County, Tipton County, Crittendon County Arkansas and Desoto County Mississippi, and management and technical assistance, the leverage of pablic and private resources and the brokering of business opportunities. ¶Ike Center provides managenant and technical assistance to individuals and firms in the areas of marketing, finance, construction assistance and management to improve the gross receipts, profits and net worth of the firms assisted. All firms and individuals seeidng assistance from the 3)C will be provided with initial general counseling and referral assistance, free of charge. Suheequent services would be on a fee for services basis. Hocever, no qualified entrepreneur should be refused assistance based on inability to pay the fee. ¶Iha Men~is MH)C develope and maintains an inventory of minority vendor firms qualified and capable of selling their goods and services to the piblic and private sector, ~ to broker or match these minority firms with piblic sector procureirent and private sector contract opportunities, both foreign and domestic. This inventory has been named the `P~IE" system. ~[bo Center identifies qualified minority individuals and firms with the potential to start new businesses and expand existing businesses pp~ to broker or match these individuals and firirs with new business ownership opportunities. In a~ition, the Center identifies capital sources for investment in or lending to minority firms or potential entrepreneurs ~ to broker or match these capital sources to minority firms seeking or requiring such funds. ¶Ehe Center is an integral partner in stimulating Economic Development in Meim~is and the Mid South. The annual report of performance during the period of April 1, 1990 through March 31, 1991 reflects a culmination of parterships with the piblic and private sector. `Iks Center assisted a total of 147 minorlty\ business providing 1,992 billable hours of management and technical assistance. The Center packaged a total of twenty-three (23) financial proposals with the potential dollars approved totaling $2,603,949. The Center assisted minority owned fires with procurement of contracts valued at $9,871,100. This information, which is generated on a quarterly basis is submitted to the Minority Business Development Agency, Atlanta Regional Office. PAGENO="0115" 111 The Center itaintains an aggressive advocacy and outreach program constantly linking with public/private Corporations and minority firms. The following organizations provide exair~les of partnershipa established with the ~is M~)C: ~1HE SHELBY ~IY ~~tJNIT~ RE-flWES~4ENT CDAIITION The Memphis NBDC has been a part of the Shelby County Comonnity Reinvestment Act Coalition since 1988. The Shelby County Coninninity RelrlvestnEnt Act Coalition is representative of coninninity and advocacy groupo representing the spectrum fron the NAACP to The National Association of Real E~tate Brookers (NAREB). In the period fron 1988 to the present NBDC has participated with the coalition in negotiating cornrrninity reinvestment agreements with First Thnnesse Bank, Sovran Bank, Union Planters, and First American Bank. The Coalition has also challenged Leader Federal Savings & Loans reguest for branch openings and has sucoessfufly delayed (3) three such reguests because of = Leader's poor record of addressing low-income credit needs.. From these negotiations and agreements new 1st nortgage loans, new home repair loans, and new construction loans for low-income housing, and new Business loans for Businesses in the targeted areas, and new credit instruments for residents of the inner-city.are availble.. NBDC LOAN REVIEW ~~HE The Memphis Minority Business t~velopuent Center has established a ~rking relationship with local lending institutions to serve on a loan review connnittee. The purpose of the Loan Review Commnitte is to review and analyze loan proposals before they are presented to lending institutions to identify the strength and weakness of the proposal. This connnittee has caused loan approval rates to increase CONSORPIUM The mission of the Business Assistance Consortin is to increase the opportunity for economic progress and independence for Minority businesses.The t~lve (12) members of the Business Assistance Consortium will pronote business develoirmant and an economic environment in which Minority businesses can better develope our talents and skills to achieve better lives for our conununity and, in so doing, contribute to a stronger economic base. ¶EHE NSHPHIS APEX NEIGHBORHOOD DEVFILORHENT COR~)RATION (MAN1X~ The Memphis Area Neighborhood t~velopnent Corporation is organized and controlled by local residents to develop the economy of their own conumninity. The Conmnninity t~velopmant Corporation is, in fact, a new conununity tool created by people in low income areas to gain influence over the economic conditions of their lives. TO get their influence to make fundamental changes in their conununities, NANDOD will identify and develop local skills and talents, own and control land and other reso~ces, start new business and industries, increase job opportunities, sponsor new conuminity facilities and services and improve the physical environment. NBDC's programs are designed to assist prospective and existing minority businesses to penetrate markets and industries historically under-represented by minorities. These include general contracting, manufacturing, wholesaling, finance, business and professional services and the markets of the future such as Interaational Thade and Thlecommununications. PAGENO="0116" 112 We are taking steps to continue this reinvigoration and leverage the resources withing all sectors irore effectively to address these needs strategically.. This testirrony highlights anny of the initiatives nev undeiway within the MBDC. Thank you for the opportunity to appear here today and bring into focus ~h of what the Mai~is Minority Business I~velo~mEnt Center is doing on behalf of hinority business. I will be pleased to address your questions. PAGENO="0117" 113 PREPARED STATEMENT OF BILLY HANEY Mr. Chairman, members of the Task Force, I am Billy Haney, Executive Director of South Delta Planning & Development District (Greenville, Mississippi). I also serve as Chairperson of the Mississippi Association of Planning and Development Districts. I would like to thank you, Mr. Chairman, for the opportunity of appearing before this hearing to examine "Mechanisms for Financing Economic Development." I would further like to express my personal appreciation for your strong support of all initiatives which serve to improve the quality of life of the people living in our State. South Delta PDD serves six counties and 35 municipalities located in the heart of the Mississippi Delta, long considered one of the poorest areas in the poorest state in the United States. The area we serve is approximately 210 miles long and 45 miles wide, representing approximately 3,502 squaremiles of primarily rural areas. In addition, this area represent a total population of 163,786 persons, based on the 1990 Census. This population figure represents a decline of 13,775 persons or approximately 7.76 percent since the 1980 Census. The area also has: Inadequate infrastructure ( water, sewer, streets); Substandard housing; Per capita income well below state and national levels; School drop-out rates far above state and national levels; Teen pregnancy rates far above state and national levels; Illiteracy rate comparable to some third world countries; Many other social/economic problems. However, today we are examining economic development tools and public-private partnership for the creation of jobs and improving the rural economy. Our six counties have a total labor force of 66,290 persons, with 6,600 or 9.956 percent of those being unemployed (May 1991). The 12-month moving average of unemployment is 10.7 percent. The counties individually range from a low unemployment rate of 9 percent up to a high of 15.5 percent (Mississippi Employment Security Commission). The economic base of the counties has historically been agriculture, however, the major source of income for five of our counties is transfer payments and the major source for the sixth county is land rental. All of these negative statistics are presented to provide a "thumb nail" picture of the economic development "arena." The "flip side" of the coin is where our interest centers today. What can/has and should be done to improve the economy and life-style of this area. I am not a native of the Mississippi Delta. I grew up in Northeast Mississippi in the Tupelo area. In my lifetime, I have seen that area rise from a similiar "economy of dispair" through an " economy of repair" to today's economic yardstick for Mississippi, as well as the PAGENO="0118" 114 Nation. I took this job in Greenville because I wanted to be a part of this "revival" which I know, with help from people like you, is coming to the Delta area of Mississippi. Most of my staff are in the Greenville/Delta area for that same reason. We are transplanted planners/administrators by profession; we are "change artists" by dedication. What has been done in the past? Mark Manning, South Delta Planning and Development District Economic Development Director, will present highlights of several programs which have provided great assistance to our area. CURRENT PROGRAMS The Planning & Development Districts, serving as regionally based, private, non-profit development agencies, are in a unique position to understand the current problems associated with rural development. As is evident, the Mississippi Delta is a prime example of long term economic stagnation in rural America. At the same time, there are a number of currently operating programs which are functioning efficiently in assisting local units of government to arrest and reverse negative trends in investment, job creation, per capita income and other generally accepted measures of prosperity. Examples of currently available programs are as follows: 1. U. S. Department of Commerce/Economic Development Administration (EDA) The U. S. Department of Commerce, Economic Development Administration has, for many years, been vital to area development by providing infrastructure improvements for industrial development, Planning Grant funds for development of long term economic development strategy, and funds for area based Revolving Loan Funds. EDA funds have provided port facilities, rail improvements, water and sewer capacity, and other infrastructure. Without EDA assistance, it is unlikely that many currently successful industrial parks would be in existence. The Revolving Loan Fund of South Delta Planning & Development District began in 1979 with capitalization of $1,070,000. In 12 short years, the RLF has grown to a portfolio size in excess of 3.5 million dollars. The RLF has been directly associated with concurrent private investment of over 19 million dollars and is responsible for job creation and retention in excess of 1500 jobs. This reflects a Cost Per Job of less than $2,400 to the EDA RLF. The program has been successful primarily because of prudent local lending practices and the general goals and objectives of EDA. 2. U. S. Department of Housing and Urban Development Small Cities Community Development Block Grant Program (CDBG) The Small Cities CDBG program is one of the primary sources of funding for capital improvement and economic development financing in the South Delta area. Just in the last two years, the program has provided funds for 3 Rural Health facilities, various drainage improvement projects, water and sewer capacity improvements, and economic development infrastructure and loan funds responsible for the creation and retention of approximately 1000 jobs in the South Delta area. 3. U. S. Department of Housing and Urban Development Urban Development Action Grants (UDAG) While the UDAG program is no longer funding new projects, this PAGENO="0119" 115 program continues to impact the Delta area since local units of government have been allowed to retain repayment funds for further economic development. Currently, South Delta PDD is working closely with an area municipality to utilize UDAG repayment funds to match State Minority Business Enterprise loan funds. This project will provide gap financing to a locally owned and operated minority business firm to retain over 40 jobs in an area with an unemployment rate of 11.0 percent. The key to the successful utilization of these funds is local control flexibility of the eligible uses of funds. 4. State of Mississippi Minority Business Enterprise Loans In order to enhance business opportunities for members of the minority business community, the State of Mississippi has created the Minority Business Loan Program. Under this program, a minority owned business is eligible to borrow up to 50 percent (or $250,000) of total eligible project costs at favorable rates of interest. Equity requirements are only 5 percent and the primary lending institution receives a first lien on assets financed. This program not only allows long term low down payment financing, but also serves to increase relationships between minority business owners and the financial community. 5. Farmers Home Administration (FmHA) In addition to the community facility grant/loan programs available through FmHA, South Delta PDD has been fortunate to receive 1.25 million in loan funds from FmHA to increase its presence in the economic development loan field. These are not grant funds, but are borrowed at 1 percent over a thirty year period and reloaned for rural business development in the South Delta area. The program is very flexible and allows for a great deal of local control and input into the economic development process. You have seen what has been done with "those tools which were or are available." Please allow me to stress the need for more "TOOLS." As previously demonstrated, a number of Federal and State programs exist which are extremely helpful in fostering rural economic development. Our experiences with the different agencies have been positive and there is generally a very real commitment among agencies to cooperate and assist in local efforts. There are, however, a number of areas that need to be addressed to facilitate local development efforts as follows: A. Programs whose guidelines can be developed at the local level -- give us as much flexibility locally with programs as possible as long as we exhibit fiscal responsibility and a successful track record. B. Timing of economic development projects is critical especially when attempting to tie two or more programs into one project. Whenever possible, it would be extremely beneficial to maximize similarity in program guidelines. For example, it is often required to complete somewhat differing environmental procedures for each program that funds one project. C. While job creation and the commensurate improvements in quality of life are important, there should be less emphasis upon direct job creation and more emphasis on investment attracted and the total long term impact upon the area economy. For example, in the Delta, value added processing may or may not add a large number of direct jobs but is very important in long term development strategy. D. Program design should take all reasonable steps to provide positive PAGENO="0120" 116 reasons for traditional financial institutions to invest in area development. Examples include subordinate financing, near equity or equity financing, management assistance, etc. E. Based upon our long term exposure to area problems and program effectiveness, it is clear that area problems require coordinated area input and control. The programs that have been the most effective in quickly and effectively addressing financing needs have been based in local decision making. For example, the South Delta Revolving Loan Fund decision making process is controlled by a loan review committee made up of area businessmen. By understanding the local community and having an awareness of business concerns, the RLF is in a position to respond quickly. F. Districts such as South Delta PDD have found that immense benefits are derived from "an infusion of ideas" received from national organizations such as the National Association of Development Organizations. This organization represents the basic network for improving economic opportunities and the quality of life in America's small metropolitan and rural areas. In closing, our area has existed on hand-outs long enough and this has not been the answer. We do not need or want "give-away programs" in our area. Instead, we seek opportunities to truly create long term investment in both the people and the economy of the Mississippi Delta. By borrowing 1.25 million dollars to create a loan fund for economic development, we and others are showing our commitment to positive change. We simply ask you to help us by continuing programs so important to our area and to refine and simplify these same programs as the opportunities arise. Please allow me to close by expressing my appreciation for your sincere interest in our work. "A chain is only as strong as its weakest link." We will be happy to answer any questions you might have. PAGENO="0121" 117 PREPARED STATEMENT OF ROBERT D. GRAY To The Honorable Members of the United States Congress who make up this panel and especially to my Congressman, The Honorable Mike Espy of Mississ!ppi. It is indeed an honor, as well as a privilege, to have been invited to make a presenta- tion at this hearing. I believe the topic at hand is "Mechanisms For Financing Economic Develop ment." Let me begin by saying, something must be done. And something must be done In a timely fashion to arrest the deterioration and disIntegration of rural and small town America. I believe rural and small town America is the backbone of the entire economic structure of this country. Therefore, its health and viability should and must be protected at whatever the cost. I truly do believe that the deplorable and deteriorating economic conditions of rural America are contributing to the destruction and decay of big city America. Therefore, if we solve the problems of small town and rural America, we begin to solve many of the problems in our major cities. Someone or some institutions must be willing to invest In rural America. While there may seem to be some degree of attidual change recently, major corporations have been unwilling to invest in rural America for the most part, citing such excuses as low-skill levels oF workforce, population make-up, partlcuiarly where Blacks make up a significant part of the population. They (Corporate America) call It red-lining. Most assuredly, if the population make-up is 30% or more Black, then it's a NO NO as to locating a facility there. Banks and other commercial lending institutions are not willing to invest in rural America. In fact, banks are taking money out of, rather than putting money into these communities (rural). The Community Reinvestment Act Is not working or Is not being enforced. We realize that there is a banking ôrisis in this country at present and the regulatory agencies for financial institutions have tightened down on these institutions, causing havoc to the business community. Rural and small town America is paying far more than its share for these conditions (Banking). PAGENO="0122" 118 Rural America did not cause these conditions, legitimate small business did not cause these conditions. Fraud, cronism, graft, the buddy-buddy system that exist in the financial institution world, and yes, racism that exist in banking caused this banking crisis. Big banks in big cities are still lending money, but rural banks In small communi- ties are not. Rural banks are investing their money with the Big Boys, rather than investing In small business In their own communities, which gave rise, to their very existence. Government guaranty programs do not work. The only time a bank, in our area, will honor a government guaranty is either when the project does not need a guaranty in the first place or when the Institution wants to help a friend. If an investigation was conducted of the various government guaranty programs, some startling findings would appear as to who had received these loans. Therefore, banking in rural America Is far too conservative, far too ~ oriented, far too ~ oriented and far too racist. It would seem to me that If you had the full faith and credit of the United States Government guaranteeing 90% of a loan, then a bank would feel comfortable, but that is not the case in this area. In fact, I've had banks to tell me they would not make a loan that was 250% guaranteed. I just do not understand. On the other hand until recently. I know of banks making loans In the several million dollar range unsecured to their fr~nds and cronies. In fact, just recently, one bank In my area settled for 20~ on the dollar for a several million dollar loan, and when I say several, I'm talking upward of 20 million dollars that was unsecured; whereas, if they had loaned 20 small businesses in their area one million each, at 1~I5~t 16 of those businesses would have prospered and been able to repay those loans. This is Cronism. We are not advocating giving away money or investing unwisely. We are merely saying lets play on a level playing field. Give my project the same consideration that you give Joh Doe. Give us the same opportunity to develop and become a part of the economic mainstream as you do our counterpart. History tells us that this is not going to happen with our traditional institutions of finance. The reinvestment act has not made them do it. The various other laws to eliminate discriminating in lending have not made a significant difference. Then why should we expect anything different to happen now, especially with the present crisis that exist within the banking system. PAGENO="0123" 119 An institution of finance must be developed, be it a "Regional Development Bank', or call it what you may, that is willing to make its resources available to all, using the same set of rules and standards. It's no secret why this area (Lower Mississippi Delta) lags far behind the other parts of this country. It's because a large segment of the population is lcf~ out of the economic mainstream, namely, Black People. No nation or area can survive, let alone prosper, when such a significant portion of its population is shut-off from the area's resources for economic prosperity. It's no difference in us (Blacks) here in the Lower Mississippi Delta and those in California, Connecticut, Maine, Massachusetts, or New York. The difference is we just make up such a large part of the population. Let me caution you that developing such an institution (Regional Development Bank) and putting the same people in place to operate it, will be no different than what you have today. There are programs that could work, such as the guaranty programs, if the people in charge had the right attitudes, mentality and work ethics, to make it happen. What usually happens is that the people who are put in place to run the MESBICS and like programs either soon dcvelop the local banking mentality or they do not understand the real business world. Therefore, in lieu of this testimony, I urge you (the congress of the United States) to forge ahead in developing a Development Bank to serve as a vehicle of resource to address the economic conditions for all people on an equitable basis, rather than for the select few which traditional financial institutions are guilty of. THANK YOU! PAGENO="0124" 120 PREPARED STATEMENT OF HARRY J. BOWIE In 1969, 14 community membership and action groups founded the Delta Foundation to concentrate attention and resources in economic development in the Mississippi Delta region. i-leadquartered in Greenville, Mississippi, these community leaders believed that the national legislative accomplishments of the early 1960s could be realized through the creatiofl of jobs and improved income for their individual constituents. Their work built an organization that has created over 2,000 jobs. It directly generates $20 million annually in new sales revenue to the Delta region through operating companies owned and managed b~ Delta Enterprise. Delta Foundation also manages an investment division and venture capital subsidiaries with a capitalization of $6,500,000. The business loan portfolio includes over 100 low-to moderate- constituent clients. Annual sales revenue from these client businesses in the loan portfolio, and businesses that have already paid off their loans, is estimated to be another $30,000,000 a year. Conservative macro-economic multipliers would say that the 2,000 jobs created have indirectly generated another 2,000 jobs in the Delta area. Similarly, the $50,000,000 in estimated annual sales directly and indirectly influenced by Delta Foundation has generated another $50,000,000 in annual sales revenue in the Delta region. The Delta covers 40 counties in Arkansas and Mississippi that span a region approximately 250 miles long and 150 miles wide. Economic Development in the Delta is a challenging endeavor. The Delta Foundation recently commissioned a needs study of its constituents. Of the 1,737 usable survey responses received, 73~ said money was a major problem. Thirty-one percent of the respondents said jobs were their greatest need. Fifteen percent of the respondents were either unemployed or laid-off, and another 11% were employed only part time. In spite of the' challenges and the needs that are still unfilled the Delta Foundation has made a significant and positive impact on its constituents' lives. Stable jobs exist for individuals who never had a steady job before the Delta Foundation efforts. Several of those individuals have advanced from entry- level jobs to both supervisory positions and top management. Most importantly the Delta Foundation demonstration, that viable businesses can be successfully built within constituent communities, has given minority individuals and community groups the confidence and knowledge to start and build their own businesses. The Delta Foundation's central staff of 11 operates three different corporations and one division under the leadership of its President, Harry J. Bowie. They include Delta Enterprises Inc., Z~ction Communications Inc., Sun Delta Capital Access Corp., and a Rural Development Loan Fund. One of the greatest needs facing our region is the need to generate jobs and opportunities for development. These jobs and the work force that must fill these jobs will increasingly have to be globally competitive. It is unrealistic to expect that major companies from outside of the region will locate enough plants to fulfill even a major portion of the employment needs in the region. The overwhelming majority of new jobs that will be created in our region will come from the expansion of existing business and/or the creation of new businesses, small and median sized, within the region. In order for this to occur, there is the need to genei~ate an expanded pool of seed capital and venture capital. The need for more venture capital isparticularly vexing for minority groups in Mississippi and the larger region. Until and unless minorities can make major advances in the ownership of businesses and enterprise development there will not be a.major improvement to the overall economic climate of our region. Low skilled and minimum wage jobs for the minority population will not significantly change the economic condition of our state or the surrounding states. PAGENO="0125" 121 An idea that has been discussed recently is the concept of a Regional Development Bank. Although there may be some merit to this concept, it should b~ looked at very carefully. The regulatory agencies that govern banks will of necessity be much more conservative given the recent climate with regard to the savings and loan industry a~d potential problems surfacing with regard to banks nationally. It should also be noted that each state in the region has developed differently with regard to sources of venture and seed capital. It may, in fact, be more prudent to increase the capital pools and effectiveness of existing agencies in different states then to attempt to impose one regional entity and/or solution to the different problems in each state. Small Business Investment Corporations (SBICs), Minority Small Business Investment Corporations (MSI3ICs), and unregulated Venture funds can be found in the region; although, at present, they have a very limited capacity. The creation of new funds to significantly expand these programs in a manner that flexibly addresses the need in different states is clearly an issue that your committee should consider. Another need in the area of minority and small business development among new and/or emerging businesses is the need for technical assistance and specific technical expertise. The Department of Defense has developed a Nentor/prote~ program which allows larger private sector business to support minority businesses through joint collaboration. Your committee might give consideration to legislation which establishes a private business incentive program similar to the Defense Departments Mentor/proteae program where there is an incentive for the private business sector to assist in the development of minority businesses. The use of Income Tax Credits or some other incentive should be considered. PAGENO="0126" 122 Community Economic Developarent Program An extremely important program is the Community Economic Development (CED) Program which is authorized in the Community Services Block Grant. This program is funded at about $21 million and is a key resource to non-profit organizations such as Delta Foundation. Delta has used funds from -this program to help create many of the 2,000 jobs which were referred to above. A poignant example of this is the Fine Vines garment plant in Greenville, MS. In the early morning hours of February 16, 1988, the garment plant located on Washington Avenue in downtown Greenville caught on fire and totally destroyed the plant., all of the equipment, piece goods, and the overwhelming majority of it finished inventory. One hundred and sixty workers were immediately put out of work. The limited insurance was enough to pay the outstanding bills with a little capital remaining. It would have been totally impossible to get back into business without access to the CED program funds. When they began calling the employees back to work, over ninety percent were still unemployerl and available to come back to work at Fine Vines, Inc. Another company which has been started with these funds and matching private dollars includes Electro National which produces electronic and mechanical parts such as pressure switches, stepping switches, and other parts that are used in military and commercial equipment. Approximately 70% of the parts are sold for use in military equipment. The CED program is unique. No other federal program exclusively targets investment capital to low income -communities, using community organizations as a vehicle to promote economic opportunity for low income individuals. The CED program gives non- profit community based organizations the opportunity to improve the economic condition of their communities. The discretionary fund provides enormous economic benefits to local communities. CED discretionary monies are used by community development corporations as a way to bring private investment and economic growth to poor communities. In 1987, the last year for which complete information is available, CED grants were responsible for creating more than 2,000 jobs, leveraging over $67 million in outside investment and creating 123 new business ventures. The discretionary fund provides a low cost source of employment opportunities for low income individuals. A major criteria for receiving funding is the creation of jobs for low income people; 75% of the jobs created by C~D investments must go to low income people. Since its inception, the CED discretionary fund has been responsible for the creation of close to 20,000 permanent jobs in poor communities. There is great deiuamd for CED discretionary funding. In 1990 more than 200 applications for CED were submitted. Yet, because of limited funding, only 46 grants were made. Despite the highly competitive nature of the program and the complicated and detailed application procedure, community development organizations, often with very limited resources, are willing to invest time and money to apply for funds knowing that, at least statistically, their changes are not very good. Congressman Espy, we understand you have been a key supporter of this program and we appreciate your efforts in this regard. Micro-Lending In many parts of the country, the availability of funds for small business is limited. Downturns in regional economies, particularly in the northeast as well as in the south, and the continuing lack of credit in rural areas, have made it increasingly difficult for small businesses and solely-nwned proprietorships to gain access to credit. PAGENO="0127" 123 The Crisis in the nation's financial institutions has made even healthy banks more risk adverse and less willing to make smaller less profitable loans. Small businesses with lower lending needs, less credit history and less conventional forms of security are often victims of the new financial environment. In addition, there is a growing recognition that micro businesses, generally, those enterprises with up to 15 employees, including the owner, play an important role in job creation and economic growth. Very small and micro enterprises, employing less than 15 people, provide up to 80% of all new job opportunities nationwide. This sector is particularly important in rural areas. The credit needs of these businesses are generally up to $35,000, with most of the need centering below ~15,000. These very small businesses are seldom the focus of public policy resources. For example, in~ 988, SBA made 513 loans for less than $25,000. That total, $7.7 million, constituted 3% of the agencies loans that year and 2.2% of its total obligations. In the same year, one hundredth of one percent of the SBA's total obligations represented loans of less than $10,000 in rural areas.. In addition to capital, these small enterprises usually require technical assistance in planning, cash flow management and business development. Organizations such as the Delta Foundation and other Community Development Corporations (CDCs) have been leaders in small business lending. CDCs have programs which address the credit needs of women and low income persons wishing to start their own businesses. In addition, both provide a range of technical assistance and financing services to established and expanding small businesses. In the Senate, Senator Bumpers and Senator Mitchell, are about to introduce a demonstration program aimed at promoting small business lending. Their approach includes such intermediary organizations as CDC5 to provide lending and technical assistance to very small businesses. The Bumpers-Mitchell bill capitalizes revolving loan funds with 10 year loans from the Small nusiness Administration (SBA) at the government rate. The bill also permits a one time only grant of up to $150,000 to administer these funds. We would prefer a grant program to capitalize the fund, permitting intermediaries to cover their cost through the interest rate charged borrowers. Failing that, the model of the Rural Development Loan Fund, which is administered by Farmer Home Administration (FmHA) is a good one. This RDLF provides 1% loans for 30 years .and again, the cost of technical assistance and loan fund administration is covered by interest rate payments by borrowers. This provides a long term basis for supporting the costs of the intermediary. Described below is the type of demonstration we would endorse. Micro-Lending Demonstration Program Goal: to demonstrate the effectiveness of a range of small business activity in creating job and enterprise opportunity in areas hard hit by the recent downturn in the economy. Also to demonstrate the effectiveness of intermediary organizations in assisting small businesses through a range of financing and technical assistance services. Program: up to $20 million in grants will be made available through the Small Business Administration to implement a five year demonstration. Grants will be made to intermediary organizations private, non-profit corporations, generally referred to as community development corporations (CDCs) -- with a demonstrated record of achievement in business lending and providing assistance to small businesses. PAGENO="0128" 124 with the funds provided, SBA must make at least 30 grants, equally divided between urban and rural. Grants funds are to be used to capitalize revolving loan funds and to provide funding for administrative and technical assistance costs -- not to exceed 10% of the grant. Priority will be given to intermediaries from areas suffering from the impact of the recession. Intermediaries will operate the loan fund and provide technical assistance. Generally, loans to private businesses may not exceed $35,000. In implementing the demonstration, SHA will be expected to fund a range of lendir.g targets including those programs proposing to make loans of upto $5,000, those programs targeting between $5-15,000 and $15-35,000. All intermediaries will be responsible for establishing a loan loss reserve. Rates and terms will be established by the intermediary. In determining lending criteria, intermediaries are to pay particular attention to businesses or entrepreneurs with limited financial resources who are unable to obtain commercial credit yet, possess the potential to be successful women minorities and low income. SBA will audit loan funds on an annual basis and provide necessary project monitoring. The administrator will be authorized to recapture capitalization funds which are used in a manner inconsistent with the purposes of demonstration. At the end of the third year of the demonstration SBA will conduct an evaluation and report to Congress on the program. We are also grateful for your help in promoting rural housing programs in the federal budget process. The administration proposed major reductions in rural housing lending as well as a shift to guaranteed loans. Through your efforts, rural housing programs will continue. Rural Housing Need According to the National Housing Task Force, some 4.3 million low income households in non-metropolitan areas currently experience housing problems. Of this number, close to two million have significant problems with the units themselves, including a lack of plumbing. Low paying jobs and the seasonal nature of work, coupled with the downturn in natural resource based economies important to rural America, have prevented our small, towns from participating in the recent improvement in the nation's economy. Non-metropolitan areas now have a higher rate of poverty and unemployment than our big cities. According to the 1980 census, there are 229 non-metro counties with high rates of substandard housing and poverty. In Mississippi, there are 25 counties in which at least 20% of the people have incomes below th~ poverty line and 10% of the housing units are substandard. In 1970, there were appzoximately 500,000 more low rent units in small towns and rural areas than there were renter households. By 1985, there were 500,000 fewer low rent units in non-metro areas than there were renter households. Beyond this, there were 2.5 million low income renter households, but only 2 million low rent units. And, of the 2 million units available, only 1.3 million were occupied by low income households As of January 1990, FmHA had on-hand eligible pre-applications and applications for rural rental housing totalling over $2 billion or close to four times the FY `90 appropriation. In order for a pre-application to be considered eligible, the market or need for the project must be proven. PAGENO="0129" 125 Funding History Rural housing programs were increased by about 5% in FY `90, this increase was offset by a reduction.of about $60 million in section 502 direct lending FY `91. During the 1980's rural housing programs were reduced by more than 50%. The bulk of FmHA funding is in the form of subsidized loans. Some $1.31 billion is provided for single family loans under Section 502. Close to 90% of 502 loans are in rural areas which populations of less than 10,000. The average annual income of Section 502 is about $13,500 and the law requires that 40% of Section 502 mortgage aid go to very low income households (50% of median). Some $574 million is appropriated for FY `91 for the Section 515 loan program. Section 515 provides reduced interest loans to public and private sponsors to finance the acquisition, construction and repair of multi-family housing for low income and elderly households. The average annual income of Section 515 tenants is about $8,000. About 40% of all Section 515 units are occupied by elderly households. In Fiscal `91 Mississippi received over $77 million in FmHA funds. In all categories that state used more funds than originally allocated. This shows the tremendous need for housing in rural Mississippi and the importance of FmHA rural housing programs. 44-629 0 - 91 - 5 PAGENO="0130" 126 PREPARED STATEMENT OF RALEIGH H. BYARS Part One - TheilississiPPi SBDC PrpRram~ MY name is Raleigh H. Byars, I am the State Director of the Mississippi Small Business Development Center Program (MSBDC), a small business assistance network for the small businesses of Mississippi. The State SBDC Office is located on the Main Campus of the University of Mississippi, Oxford, Mississippi. I have been the State SBDC Director since October of 1988. Prior to that I was the SBDC Business Service Center director in the Oxford office from 1981 to 1988. At that time the Oxford SBDC was responsible for the delivery of small business assistance services to 29 counties in North Mississippi. The SBDC Program is a joint Federal/State Program Partnership between, the U.S. Small Business Administration and the separate states for the purpose of delivering assistance services to the small business community of the Nation. The SBDC Program, as it is commonly called, began with the enactment of Federal legislation in 1980, the Small Business Development Center Act of 1980. Begun as a pilot program in the business school of a single university in 1977, there are now 56 SBDC Programs and over 600 SBDC Business Service centers in 50 states, Puerto Rico and the Virgin Islands. The Mississippi SBDC Program was officially designated and funded by the U.S. Small Business administration (SBA) on September 18, 1981. Mississippi was the 18th State to enter the program through an agreement with SBA. The administration of the program is through a Cooperative Agreement between SBA and the University of Mississippi, the designated "Lead" institution for the Mississippi SBDC Program. The State SBDC Office, which is housed on the University of Mississippi Campus, works in cooperation with the SBA District Office in Jackson to nanage the statewide program. The University of Mississippi contracts with other state universities! colleges to form a statewide SBDC Network for the delivery of assistance to the State's 51,000 plum small business establishments. The Mississippi SBDC Network is currently made up of 11 Business Service Centers, one International Trade Center, one Resource Center and one Contract Procurement Office. A wide variety of institutions, State and non-profit organizations host or act as the parent unit for the 14 SBDCs. The Host Network is made up of five senior universities, six community colleges, one private college, one State Economic Development Department, and one State Contract Procurement Office. The National Network of 56 SBDCs, which includes the Mississippi SBDC, function as a framework for cooperatively linking the resources of the universities/college system, federal and state agencies and programs and the private sector to help solve problems answer questions, and otherwise assist small businesses. On the National level, the accomplishments of all 56 SBDCs in 1990 were as follows: 191,865 - Small Business Clients Counseled 12,234 - Training/Education Workshops 274,928 - Attendees at the Workshops The accomplishments of the Mississippi SBDC Network during the period of 1981-1989 were: 18,495 - Small Business Clients 164,532 - Total Counseling Hours (8.9 hrs per case) 1,121 - Training/Education Workshops 27,698 - Attendees at Workshops Mississippi Small Business Clients (New and Existing) Counseled: 49 % - New Venture or Start-Up Clients 51 % - Existing Businesses PAGENO="0131" 127 Areas~oLf~ounsel ing~p rovids~d tg~58DC~C1i ents~ Percent Area of~Counse2 ~ 49 Z - Start-Up Clients receive full range of counseling (All other Clients) 16 Z - Sources of Financing/loan applications 10 Z - Marketing Assistance 09 % - International Trade 16 X - Other Areas - ~ Now to focus on the problem of equity capital needed by small businesses to qualify for borrowing from financial inčtitutions or under various Federal, State, or private programs. Secondly, to make suggestions regarding other options to current equity capital requirements to qualify for borrowing capital. First, let me briefly discuss the counseling assistance that the SBDC Program provides to small business clients. As pointed out above, approximately one-half of clients that request assistance are interested in starting a business. For start-up clients, the full range of topics are discussed in detail, either in a group setting or in individual counseling sessions. The large portion of that time is spent with clients discussing the amount of capital needed to start the business and secondly, sources available for financing a new venture. Over the eight years that I served as the SBDC Service Center director, the greatest frustration that I experienced in working with clients was the problem of equity, risk, or capital injection that is needed to be considered for start-up funding. These clients could be classified from very small, mom and pop businesses, to small manufacturing operations with 10-20 employees. The major obstacle that eventually blocked a large percentage of new venture clients was the lack of equity funds. Many hours of work were spent going over alternative ways that a client should investigate for a possible nourcO of equity funds. For example, other family members, a relative, friends, find a partner with capital, small time investor, selling personal assets to name a few. Sometimes these were successful and often were not. The question always was "if I had that much capital, I wouldn't need a loan" or if I had that much money, the bank would lend me the money without a guarantee from a government agency. There were situations where clients had perhaps half the necessary equity, but often this was neither sufficient to satisfy the financial institution, nor the government agency. From the time that I joined the SBDC Program in 1981, I can truthfully say that loans through federal and state agencies were almost none existent. It was not until late in the 1980's that both the Federal and State agencies began to got involved in guaranteeing small business loans and really to have an impact in the snmll business financing arena. I can report today that throughout the MSBDC System, that it is a common occurrence these days for loans to be approved that would not have even been consider by many government agencies a few years ago. There has been a significant turn around in the attitudes and sensitivity of these agencies, to the needs of both start-up and existing businesses. PAGENO="0132" 128 The attitude back then was if you don't have the 25 or 30 percent of equity capital, you can forget about obtaining some type of Federal or State sponsored financing program. It was as simple as that, without that equity capital, the loan packages received little evaluation, analysis and review. In other words, the basis of an analysis and review of a loan package was to first look at equity injection and if it was not available, then there was no need to proceed any further with that application. I am not saying this because the SBA is the primary funding source for the Mississippi SBDC Program, it is because I have been astonished and, more importantly, encouraged by these changes that have taken place and the fact that SBDC clients now have a chance to secure the capital needed to start a new venture. How did this happen and what caused it? Well I think that it was a recognition by those manager and supervisors responsible for financing program that something was wrong. Here was Mississippi at the bottom of the economic ladder and at the same time the government programs were not using the funds available to make loans for small businesses and very few loans were being made in Mississippi. Iii addition, changes andshifting of personnel in some of the management and supervisory positions responsible for administering the financing programs had an impact. Let me make one last comment about the equity capital problem. In the past, as mentioned above, the emphasis was one the requirement that applicants have the 20 to 30 percent of equity up front to qualify or to apply for a loan. In addition to the changes that I discussed above, one other change in criteria was changed. That change had to do with the amount of collateral necessary to secure a loan. Earlier, as in the requirement for 20-30 percent equity, there was a requirement for 100 or more percent of collateral, depending on who you were dealing with to secure a loan. A new philosophy has emerged among the federal, state agenöies and other institutions, that has shifted the emphasis from 100 or sore percent collateral to, in my opinion, a more applicable topic. The new emphasis is on the revenue and "cash flow" of the business. In other words, the analysis of a loan package does not stop at the determination of the level of equity injection, but rather to the ability of the business to generate revenue and to sustained a positive cash flow. I think the basis for this shift was a realization that the ability of the business to repay the loan was neither dependent on the level of capital injection, nor on the amount of collateral, but rather on the potential cash flow from the business operation. The repayment schedule can not be kept current from collateral, even with 100 percent collateral, it has to be made from dollars received by the business and if the business is viable, then the loan can be serviced from business revenues. PAGENO="0133" 129 Now to other possible options that may be considered to help small businesses qualify for business loans. As has been discussed, financial institutions, federal and state agencies reqŕire equity capital up front to quality for or to be considered for a loan. (The alternative discussed above is not uniform across all agencies, therefore other options need to be investigated). Since the requirement for equity is still a criteria and will continue to be there, even in the situation discussed above, there needs to be other options available to small businesses to secure the necessary capital. One way that is being considered, by one of the statewide banks in Southwest Mississippi, is for the bank to provide the equity injection. Let me hasten to say also that this is a one year pilot project and we want know for some time whether it has been be successful or not. I will explain that more fully later. This project began an a result of an effort by the bank, SBA and others to come up. with a way to overcome this problem of equity injection. First of all, these loan will be for $ 50,000 dollars or less. Initially, the project will be only for small business clients in Pike county. How will this procedure be incorporated into the loan application process? After the client has gone though all the business planning steps, which includes going through the SBDC for business planning assistance, and after the amount of capital necessary to start the business has been determined, at this point the new procedure will be put in place. For example, if the loan is for $ 40,000 and the bank is asking for a 10 percent capital injection to qualify for the loan, the participating bank will make the capital injection by pyoviding the $4,000 to the client. The key to this procedure is that the $ 4,000 of capital injection will be put on "standby", which means that the small business person makes no payments on the $ 4,000 capital injection loan until such time as the business can afford to repay that loan and continue with payments on the $40,000 loan. Modifications to this step would also be available, such as providing half the equity injection if the small business person needed that amount etc. The is not necessarily a new procedure, regulations outline and authorize such a procedure, which can be implemented in these situations. If this procedure is successful in the local banking system in Pike county, it could be initiated in that particular statewide banking system in other counties around the state. FederaJ.~Conmunitr ~Dsvelopment Prograj~s. Comments and Recommendat lonm~. One problem that is prevalent across all economic development, small business, community development programs and to other service providers is the problem of fragmentation of services. By that I mean, one organization provides planning, one financing, another something else along the way to starting a business. For example, the SBDCs may be the first contact made by the local small business person and will become extensively involved with the client in his or her efforts to start a business. PAGENO="0134" 130 However, the SBDC has no in house financing programs and must refer clients to some other agency for financing assistance. The SBDC may go so far as to help the client with the other agency's application for assistance. At this point, the SBDC counselor has become very familiar with all aspects of the client's business and has worked extei~sively with the client, especially in the case of a start-up venture. On the other hand the financial institution receiving the referral has never heard of this person and knows little or nothing about the business and, if it is a new venture, could possible not be interested in working on the financing plan. So, as a result of the fragmentation, the small business client gets shuttled from one agency to another, from one government agency to another, and so on. In most instances the financing institution, whether it is a bank, federal/state agency, or some other institution, may not be interested in the fact that the SBDC has spent 10-12 hours with this particular client. The financing institution has to start all over again, from scratch to build a rapport with the small business person. P~ar~t Three - ~oinaunitr Developrrtent Organizations. Proarans. and Interaction with the SBDC Pro~raa~ Economic Development Administration. Progran and operations with University Centers and others. Loans to create jobs, one job for each $. 35,000 in loan proceeds. Experience has been that most involvement is with city, county and local government. Comment/RecominendmtLon~ In Mississippi, SBDCS have had little involvement with EDA Programs. To reduce the fragmentation of economic, community development and small business assistance efforts, this program could be combined with other similar programs into a single entity in regional locations to both improve the delivery of business assistance programs and to offer a "one stop" service to users. Farmers Home Administration. Funds available to establish revolving loan programs for small businesses. Activities that involve small businesses, which could involve local SBDCs. Two Planning and Development Districts (PDDs) in Mississippi operate revolving loan programs (RLPs) that were established with funds from FHA. Comment/RecomsendatiOn. In Mississippi, SBDC5 have had little involvement with FHA Programo however, SBDC clients have been referred to PDDs regz~rding participation in the revolving loan programs. To reduce the fragmentation of economic, community development and small business assistance efforts, this program could be combined with other similar programs into a single entity in regional locations to both improve the delivery of business assistance and offer a "one stop" service to users. Certified Development Corporation (CDC)(SBA 504 Program). Programs that are active may involve banks, SBA debentures, small businesses and others at the local level, eg. chambers of commerce, industrial development organizations, banks etc. Participation packages with multiple involvement by the parties mentioned. Loans to purchase fixed assets, by existing businesses or new business ventures. Apparently there is little interest in the program, although, the structure of financing deals offer an excellent opportunity to banks with low risk. PAGENO="0135" 131 ~c,mment/Recommendation. In h'ississippi, SBDC5 have had little or no involvement with CDC Programs. To reduce the fragmentation of economic, community development and small business assistance efforts, this program could be combined with other similar programs into a single entity in regional locations to improve the delivery of business assistance programs and to offer a "one stop" service to users. U.S. Small Business Administration Financing Programs. The SBDCs are only involved in financing programs to the extent of helping clients understand the loan application and providing assistance with the completion of a loan package. The SBDC counselor will explain the guaranty and the direct loan programs to small business clients and offer suggestions regarding which to select based on the needs of the client and the loan criteria. The decision is up to the small business client regarding which program to pursue and which bank to deliver the application for consideration. In the course of assisting a client, SBDCs may provide help with estimating investment for building, land, equipment, inventory, working capital and start-up capital. Also, assistance with estimating revenue, costs and expenses and preparing a cash flow budget for three years are the standard items that are available through the local SBDC service center. However, once the small business client has a completed SBA loan package, it is up to hin or her to deliver the package to the bank of choice. From that point forward, the communications and exchange of administrative paper work, changes and modifications to the loan package are between the bank, SBA and the small business client. At this point, SBA is only interest in the relationship with the bank because the legal paper work is between SBA, the bank and the small business person. For all intents and purposes, the SBDC drops completely out of the process and here is where the close working relationship is lost. SB4 steps in without any knowledge of the client, perhaps a relationship with the bank, but not always. Here the new participants involved have to become acquainted with one another, establish a rapport and working relationship and begin to put a financing package together. The long working relationship that the SBDC began months earlier is lost and the small business client moves along the road of multiple service providers and financial institutions. This is not to say that the local SBDC counselor can not have a working relationship with the local banker, but the point that I want to make is that a new relationship has to be established when a new service provider or financial institution enters into the process. That is what happens when the loan package is taken to the bank and the process takes on a new player, because as pointed out above, the procedure shifts to legally binding agreements between the three parties involved namely the bank, SBA and the small business person. ComaentLRecornmen~dation. Because of the legal relationship that evolves between the small business client, the bank and with the government agency, there is little that can be done to change that situation. However, there could be an organizational structure that would permit the government agency loan officer to have a closer working relationship with the local SBDCs. GovernDent agency loan officers or any financial institution loan officer needs to be on the ground in order to work closely with both the amall business client and the SBDC counselor in order to take advantage of what has already been accomplished in the business planning process. PAGENO="0136" 132 This means that government agency loan officers need to be assigned or to work on a area or regional basis with the local players in this process in order to capitalize on the established working relationships at the local level. The loan officer that never meets the loan applicant, has only a casual relationship with the banker and, if the SBDC counselor is taken out of the picture, has only the information on the loan application to go on in making a decision regarding a loan. To reduce the fragmentation of economic, community development and small business assistance programs, these programs could be combined with other similar programs into a single entity in regional locations to improve the delivery of business assistance programs and to offer a "one stop" service to users. Summary~ All through this process there is duplication of effort, loss of working relationships etc. that occur because of the way that programs are currently structured. If required services were defined and organized on a regional basis, so that services were not centralized and fragmented, I believe that not only would the quality of services be improved, but the impact on economic and community development and small business growth would also have greater significance. Such a regional organization would have all the economic and community development and small business assistance and financing programs combined in one entity in order to offer "one stop" services to users. The SBDC Network is an established structure in all 50 states and normally serves an area of from six to ten counties. One specialist in each of the service areas could handle the load in most SBDC service areas. For example, one economic development, one community development, one small business assistance, one financial (loan) specialist in such a combined entity could handle the load for a six to ten county service area. The advantage of the SBDC Network is that it has an established organizational structure in all 50 states and most state programs are organized along similar structural lines. The other development programs are generally centralized in many cases in the stat.e capital or in larger cities, but could easily be de- centralized and placed in the regional delivery centers. I hope that my comments and recommendations have been helpful to the committee in reaching decisions about economic development policy. Thank you for the opportunity to appear before you and on behalf of the i'fississippi Small Business Development Center Program, I hope that you will continue to put your trust in the National and State SBDC Programs for the delivery of assistance service to the small business community of our Nation. PAGENO="0137" 133 PREPARED STATEMENT OF GEORGE SURGEON Good afternoon. My name is George Surgeon. I am President and Chief Executive Officer of Southern Development Bancorporation and its wholly-owned subsidiary, Elk Horn Bank and Trust Company of Arkadelphia, Arkansas. Thank you for inviting me to testify this afternoon. Whenever I have had the opportunity to discuss development banking with bankers, I have often been told that what Southern does in rural Arkansas really doesn't count because Southern is so radically different from other banking companies. Indeed, there is some truth to this assertion. First, Southern's shareholder group is unique for small bank holding companies. Southern's shareholders include major Arkansas corporations and investors led by the Winthrop Rockefeller Foundation, Stephens Group, Inc., Sam and Helen Walton Foundation, Arkla, and the Arkansas Electric Cooperative among others. Investors outside Arkansas include major foundations and socially responsible investors such as the Ford Foundation, the John D. and Catherine T. MacArthur Foundation, Aetna Insurance Company and Metropolitan Life Foundation. As you can imagine, these companies and foundations do not usually invest in the illiquid securities of small country banks. The reason they invested in Southern is because Southern's corporate mission is unique. Southern was created to catalyze economic development in rural Arkansas for the benefit of low and moderate income Arkansans, not to maximize earnings. This is certainly not to imply that we take our financial responsibilities to our depositors or shareholders lightly. Indeed Elk Horn Bank achieved record profits in 1989 and 1990 - its first two years of ownership by Southern - as well as in the first half of 1991. Elk Horn Bank has received the highest ratings for safety and soundness by several independent bank rating agencies. To facilitate the achievement of Southern's economic development goal and to help underWrite the extraordinary costs of creating and implementing a successful economic development program, Southern's shareholders have agreed to limit their financial return to the rate of inflation for an indeterminate period of time. Before I outline Southern's community development strategies, it might be helpful to discuss exactly what we mean by community development. In some ways it's easier to define community development by providing examples of what it is not. For example, building penthouse apartments or luxury townhomes in inner-city neighborhoods that residents of those neighborhoods cannot afford is not development. It's displacement. Similarly, building assembly plants in small rural towns, like Arkadelphia, where no real value is added to a manufactured product, plants that are attracted to rural areas because of low wage rates and the ability to avoid providing workers with health, life, and disability insurance benefits, is not development either. That's exploitation. In short, increased economic activity p~ se, whether in rural or inner-city communities, is not necessarily synonymous with community development. Community development at its best unleashes the talents and the capacities of local ŕommunity residents. Community development activities should not only PAGENO="0138" 134 increase the standard of living of community residents; they should also create new wealth in the community, and result in increased local ownership of capital. To quote David Osborne, a frequent contributor to ~ magazine, Harvard Business Review, The New Republic, and other publications, "Growth is simply an increase in output. Development is a process through which people, communities and firms increase their capacity to produce, creating an upward spiral that has its own momentum." All of us here this afternoon are only too familiar with the economic history cf the Delta and the problems the Delta has encountered as its economy transformed from one based exclusively on agriculture to a more diversified one. That transformation has not been easy and is still not complete. The Final Report of the Delta Commission clearly illustrates the challenges that continue to confront the Delta. Soliciting industry from the North and overseas to build branch plants in rural towns has been a cornerstone of the state- sponsored economic development strategy of Arkansas and other Delta states since the nineteen-fifties. In many cases it has proven to be very successful. However, exclusive reliance on an industrial recruitment strategy can lead to an undiversified local economy that puts small rural communities on a never ending boom and bust treadmill. For example, a large number of manufacturing plants that moved to Arkansas in the late 1950's because of low wage rates have now moved to the Pacific Rim. Arkadelphia, Arkansas', experience is typical of many other small rural towns across the country. In the mid-l980's over a period of four years Arkadelphia lost three major employers: a Reynolds Metals plant, a Fafnir ball bearing manufacturing plant, and a Levi Strauss cut and sew operation. This resulted in a cumulative loss of approximately 1500 jobs in a town with a population of 10,000 in a county of 20,000. Unemployment had reached over 13% in Clark County when Southern was negotiating to purchase Elk Horn Bank in 1987. Southern truly appreciates the work of Arkansas Industrial Development Corporation ("AIDC") and state agencies like AIDC that operate throughout the Delta. We applaud their tireless efforts to bring established industries to rural communities. Southern's own approach to rural economic development, however, centers on building Arkansas from the inside out. The specific strategy Southern has adopted focuses on assisting in the creation and expansion of small locally owned businesses that either produce goods or services for export outside Arkansas or produce goods or services that substitute for goods and services consumed in Arkansas but which are produced elsewhere. The premise is that these small, locally based firms will, over time, create more jobs than larger companies, and that they will be better employers. The job creation capacity of small firms has been documented in several studies of the economic expansion during the 1980's. Small local companies 3hould also be more likely to stay in Arkansas and not move to the Pacific Rim or Eastern Europe to chase marginally lower wage rates and marginally more attractive government subsidies. We believe that this strategy will diversify the local economy and thereby provide some insulation from economic dislocation during the bad times that inevitably come. We also believe that this strategy will not only improve the standard of living in rural Arkansas but also expand the ownership of wealth and thereby create more stakeholders in rural Arkansas. PAGENO="0139" 135 The organizing group that created Southern thought that the vehicle to best implement this economic development strategy was a regulated bank holding company. From 1986 through 1988 Southern's organizers raised $6.5 million in equity capital, plus $4 million in long term low interest loans, and over $1.5 million in foundation grants to capitalize the Company. Southern became operational in May of 1988 with the acquisition of Elk Horn Bank. As a bank holding company, Southern is regulated by the Federal Reserve Bank of St. Louis. When the Fed examines Southern, or when the State Bank Department or the FDIC examines the Bank, they do not use a special set of regulatory guidelines to evaluate our safety and soundness. They apply the same standards to us as they do to First Commercial, Worthen, First Tennessee, Deposit Guaranty, or any other bank for that matter. A comprehensive description of Southern's organizational structure and development activities is found in the inaugural issue of Community Affairs Newsletter published this spring by the Federal Reserve Bank of St. Louis and in Southern's Annual Review. These documents are attached as exhibits to my written testimony. My colleague Julia Vindasius, who follows me on the program, will speak in detail about our most non-traditional program, the Good Faith Fund, which makes very small loans - the maximum loan size being $5,000 - to individual entrepreneurs for self employment purposes. The story of AEB Consultants is illustrative of what we do and what we hope to replicate throughout Arkansas. In 1989 AEB Consultants was a small, one-man company located in Little Rock. It tests workers in nuclear plants for exposure to radiation for the Department of Energy and the Department of Defense. Prior to involvement by Southern's venture capital affiliate, Southern Ventures, Inc., all of AEB's business was undertaken on a sub- contractor basis. AEB had neither the equipment, the technical staff, nor the working capital to be a primary contractor - which is where the money is. Over the past nine months, Southern Ventures has invested $277,000 in this minority owned, high tech Company. Since then AEB has won a primary contract with the Navy for its Puget Sound facility in Washington state. The Company leveraged Southern Venture's equity investment with a $200,000 long-term loan from Arkansas Capital Corporation, guaranteed by the U.S. Small Business Administration. Employment has increased from three to nineteen. This is a prototypical transaction, not just for Southern Ventures, but for the other Southern companies as well. AEB provides a service for export outside Arkansas in an industry with strong growth potential. AEB's laboratory is located in Pine Bluff in close proximity to the National Center for Toxological Research, a valuable, though underutilized, Delta resource. Its location close to NCTR should facilitate joint ventures in the future or possible commercialization by AEB of basic research developed at NCTR. Southern's investment in AEB has allowed us to participate with other key players in development - ACC and SBA - and thereby leverage our small capital base. In his invitation, Congressman Espy suggested that I share my experiences in community development as they relate to the proposed Delta Development Bank. Over the past. several years I have learned many lessons about community development in the rural South, most of them the hard way. The five that stand out are as follows: First, development banking is a business. To be successful at development, a bank must approach and manage its development activities as it would any other bank product. The development PAGENO="0140" 136 programs implemented by the Delta Development Bank must be strategically integrated within a sound business plan to create synergy, reach scale, and achieve operating efficiencies. Otherwise the scope of the Delta's problems and the immense physical size of the region will easily dwarf the bank's capital resources. All businesses strive to generate profits, not to break even. The Delta Development Bank should be no exception. Profit will be necessary to fund the expansion of the bank's activities and to insure that it will be self funding in the future. Targeting breakeven operation is a sure fire tactic for failure. Second, you can't do it by yourself. To have a measurable impact on the lives of the 8.3 million residents of the Delta would require a development bank with capitalization in the billions of dollars. Barring that level of federal support, the Delta Development Bank will have to forge public/private partnerships with all the entities involved indevelopnent in the region. Third, you can't do it all. Again, barring several billions of dollars in capitalization, the Delta Development Bank will have to target its activities both programmatically and geographically. Where the bank should target its resources and what programs it should offer will depend on the size of its actual capitalization. These questions will also benefit from further research. Fourth, bankers make bad developers. Developers make bad bankers. Bankers generally have introverted personalities and utilize deductive reasoning to solve problems, whereas developers are just the opposite. Thus, the stellar Commercial Bank Loan Officer with strong community credentials might be exactly the wrong person to head up a division of the Delta Development Bank. Finally, development doesn't travel well. There have been numerous tomes written on community development including several on community development banking. However, what works in Chicago, Minneapolis, or New York might not work well in Pine Bluff, Greenville, or Memphis and might be totally inappropriate or irrelevant in Tunica, Helena, and other smaller Delta communities. The organizers of Southern Development Bancorporation raised a lot of money to launch a development bank for the rural and distressed communities of Arkansas, some $12 million. In the three years that Southern has been operational, it has originated almost 200 development investments for more than $7.5 million. We take pride in these accomplishments. However, Southern's investment performance pales in comparison with the need in the communities, we serve and with our goal of catalyzing economic development in distressed communities throughout Arkansas. We know that the only way.that we will achieve our goals will be in partnership with other development organizations such as Arkansas Capital Corporation, Arkansas Industrial Developnent Corporation, the U.S. Small Business Administration, the Farmers Home Administration, and hopefully, before too long, the Delta Development Bank. PAGENO="0141" 137 ~hibit I AretllV9 * ** ** * ~ T - .5 * ~--~`- .* -. S. - BS!h ~thrd ~sseava Distriti Southern Development Provides Exam~le of Innovative Commumty Developrnentlen ding outhem Develo~- loans These arecommercial th~bank olglnatedover$2 to thaiprovedes affordable anentBoncorp- loansthatcontriba[etothe, nsilllonlna~lcuInsialcred1ts. ffic~nd~omesupport ~ oration (Southern) . deodopmentofthdlooil -The Bank'tide~lQprnint~.. cesia~rnall businesses; a pnvately economybut thaio$ic'flagn I nd1n~ activities tncr~as~d En rprise Centeriwascreated owned and capi- clal institutionswould not steadilyslnce 1988, iisfir~t.ye~ji * b~ rbovaiingavacast, . talizedbankhold- ..grantonsimilartirms~pthe ofpper~alonu&1erSou1heha-~: .l0~0O($~quare-footfurniture * ingcompanyorganized in - normal coaneofbüslness- owaershjp-Thti buea~e~as-'-- stote in~lowntosesArkaeleiphia, * 1988 to aceelerateeconomic. - .MoslofEHB'sdrmlopment -. sisted'rtsngefromwoodjk~ - Arkansas. TheCenterhasbčen development among low and lendrng h~ involved th eaten u~ts manufacturtrsio lsree&r so cceasful that atth. end moderate-income residentoof sion of SEA-guaranteed term eggp~sultiyfarnes'to ničdlcal.~ of 1990, OLCbegandesvloping. rural Arkansas. . loins with ticed interestrales. preeticen In ruraFcoinmun~ties EnterpriswCentefll, across the * - The bankended 1990w1th -- startedbyphyslclans just outof street from the original Center, ERa Rorn tlesisfu and more than $2 millionin devel- methcal school. * -* and Ente~prise Ceater UI in Trust Cocsçcsny (ERD) oprnent loans In process. - - . *- * ~in ~i~ff, Arkansas. * Soathem'ssabsidiaries include Also, sinceeugust 1989, EHB Opportunity Ldcdc -* OLC alsod~elo~olow- and - the Elk 11am Bank and Trust haseagaged In aggressive Cor~tor~ttion (OLC) rno~ierate-iacome residential Company, a commercial bank outreach efforts to local family OLC is Soathem's for-profit - housing. At the end of 1990, whose primary cpntribution to farm operatiovo and has real estate development OLC had three residential Soathem's economic develop- become ttooervice area's only * subsIdiary. To date OLC's most projects underway. The most bent mission has been the * alternaaiveto federal govem- successful project Jaas been * ambitious Involvesthe acquisi- oraginallon of desw1opmnt mentfinancing During 1990 EnL~prL Centerl an Incubs tin'a and rehabilitation of 20 - - - - S * S -. * * *` ` Iov:-incc~me rental uisitsin - Plte Bluff. OLC acquired this seriouslydetertoraied,isut still occupied, projeci from the RTC InJanuaiyl99iandplansto rehabilitate Itwiulaniral rental * rehabfundefromthedftyof1 Pine Eluff and flnancingfrom alo~,al commercial bank * `honsas Entorpriso Group (AEG) AEG, Southem's nm-profit affiliate, pmvjdesfiaancuai * and ~1etworklngservlcOf, mar- * t,&t~,, tralalag,and technical, cetosm~llbusln~ses - I: rdn~°-ente~ri~t~ *;Increase t}ieprobabllltylf sac- ccs~. Amhab three components.- 1. soLrnmRR I~7V7eEc, 1Nr~ (SW),ayenturecapltal ~ * company Ilcensedbythe Small ___________ Business Mmlnistration as an ____________ SBIC, ha3concentrated its In- Yestment activiuieson providing PAGENO="0142" 138 ~iv, ~ equity ratherthan secured debt number andshipe the preluct Third t.~orld locations toth toils portfolio companies. from theiocafmanufacturer.- - rural South. Th~ough the end The focus l~as been on innova- Managerneni-AEG pro- of 1990, GFF had made 45 - - the, fast-growth compaptes video traditional management.. loans totaling $123,860:GFF thatpaywages above the norm consulting and innovatlrp cost has been Southern's mcinsuc- in the local maiicetplace. These acc5iintingservices not gener- cefsful program In meeting tjse - * firrnshave thepotential for allyavailabletosnrallmanu- qeedsof*omenandml~ority **~ * rapid growth and offer skill facrurers. entrepreneurs; currently, 58 development and advancement Financia!-AEG's most in- percent of GFF's members are C2'~) ~ opportunities fi*employees, novative financial service is women and 81 percent are ~.-" ~ - - notoimply the minimum wage Working Capital Investments minorities. . j ~.`. with no benefits or chances for (WCI) which makes short-term -.. . - . - I - * improvement. SVI has invested investments in specifIc con- --- . . -; almoet $L7 million ir~ 10 tracts, purchssk orderti or * compaptes~siinse products and receivables WCI enters into* services range from bio-asoay joint venturm' with fit-ms to radiochemistry tenting to provideworking capital. When ceramic coating, to waste water the firm completenproductioń treatment, to new techniques and receives payment. WCI forpetroleum refining, receives its investment back, plus a predetermined share of 2. AEGMANUFAC77JRING the profit on the specific job. SFJMCES-As the diagram shows, AEG Manufacturing 3. GOOD FAITH FUND (Gif), Services provides marketing, a micro-enterprise rerolving management and financial loan fund, makes very small, services to new and fledgling short-term loans forself-em- manufacturingenrrepreneurs. ploynientto very low income Markellng-AEG provides residents using peer-group sup- market research, develops port techniques. With a pri- ~ advertising campaigns, places mary goal of poverty allevia- wllbaloafmm OFF. ads in publications, takes lion, GFF adapted lendingpro _________- orders ona 24-hour toll-free grams proven effective in PAGENO="0143" 139 Exhibit II SOUTHERN DEVELOPMENT BANCORPORATION 1989 ANNUAL REVIEW SOUTHERN DEVELOPMENT BANCORPORATION is a privately owned bank holding company created to accelerate economic growth among tow and moder- ate income residents of rural Arkansas. Southern's progi-anss emphasize the delivery of credit, capitat, and marketing/management assistance to encour- age the creation and expansion of small business en- terprises. ELK HORN BANK & TRUST COMPANYoriginates devel- opment credit through commercial and residential loans. Elk Horn is one of the few banking institutions in the state that actively participates in Small Busi- ness Administration loan programs. OPPORTUNITY LANDS CORPORATION is a for-profit real estate development subsidiary of Southern. OLC works to meet the residential and commercial space needs of targeted towns in southern Arkansas. ARKANSAS ENTERPRISE GROUP is a 5011c)(3) tax-ex- empt affiliate of Southern that provides financial services, marketing training, and technical assistance to small business owners. AEG manages four non- bank funds that promote economic development in southern Arkansas: Southern Ventures, Good Faith Fund, Seed Capital Fund, and Working Capital In- vestments. SOUTHERN VENTURES, INC. isa licensed Small Business Investment Company that makes loans and equity investments in small, growing companies. SVI is one of the few venture capital companies in the country actively pursuing investments in rural areas. In addi. tion to investments, SVI also provides management assistance to portfolio companies. GOOD FAITH FUND makes small, short-term loans exclu- sively for starting or expanding self-employment en- terprises. To assure a high rate of repayment, the program employs peer-group support techniques that were first proven effective in Third World loca- tions. SEED CAPITAL FUND provides loans and investments to fund new and expanding businesses. The AEG staff identifies businesses that are particularly promising in terms of bath financial feasibility and job creation potential. WORKING CAPITAL INVESTMENTS funds short terns joint ventures to finance operating costs in the pro- duction process for smatl, under-capitalized, manu- facturing firma. PAGENO="0144" 140 I \\! yin Larry Cawtey received a toan from the Good Faith Fund to purchase equipment for his automobile dclvii shop. Larry was 4 member of one of the eight GFF borrowing groups. PAGENO="0145" ~vt1opnient Financing :xkr~ ftT2te,~t7.~.. ~ ~1i~i'so _______ $157975 ~ ~~~itS2 ~j __ 2t"~ - 141 residents of rural Arkansas. Southern brings diverse tools to that process - bank loans and forms of higher nsk business credit, manage-. ment and marketing exper- tise and entrepreneurial training. In addition to (man- ciat services and manage- ment training, SDB operates a real estate subsidiary that develops affordable housing and Inexpensive commercial office space. "Money is nec- essary for economic develop- mint, but it's not sufficient," said Etk Horn Bank Presi- dent George Surgeon. "Bud- ding entrepreneurs need ac- cess to market data, technical support, and business plan. ning counsel. Above all, they need people who have ma' knows?" said Grzywinski. "I believe a large part of the de. velopment business is that you get in and start doing it. You keep your eye on the ball and keep adapting and changing and modifying. You do a lot of handcraft. ing." SDB finished its first full year of operation in 1989. During the year, Southern invested just over $2 million in 68 development projects, up from $745,867 in 34 trans- actions in 1988. SDB's invest~ ment performance is sum~ marized at the left (see chart). These are loans and investments that probably would not have been made without Southern's involve. ment. Individual financings ranged from a $250,000 debt and equity investment in a waste water treatment com- pany by Southern Ventures to a $2,500 loan for a start-up automobile and appliance repair shop by the Good Faith Fund. SDB accomplished these devctopnsent objec- tives within the framework of a regulated bank balding company and while making a profit. Southern's profits largely reflect the earnings of its banking subsidiary, Elk Horn Bank & Trust Com- pany of Arkadelphia, With more than $60 million in as' sets at year end, Elk Horn Bank maintained its preem' inent position as the largest bank in Clark County. Elk Horn also generated record earnings of $572,000 in 1989, up from $383,000 a year ear- lier, for a return on average assets of 0.99%. Deposits in. creased by five percent to $53,559,000 while the bank's capital accounts increased by almost $600,000. This pro. Southern Development Bancorporation Inc. Magazine her' lure business judgment with aids Southern Development whom they can talk." Bancorporation as one of the SDB was created at "most radical experiments in the initiative of the Winthrop the history of rural economic Rockefeller Foundation to development." function as a privately capi. SDB in a privately talized development bank. capitalized, regulated, bank Southern focuses on holding company created for nurturing new and home- the purpose of accelerating grown businesses. By pro- economic activity among viding a variety of services low and moderate income and financial assistance, SDB is initiating a chain re- __________________________________ action in which entre- preneurs invest in new preducts and services, make a profit, and con- tinue expanding their businesses. "I think that the ____________________ *management services we provide small busi- _____________ ness owners are just as important as the finan. _____________ cial assistance," said Brian Ketley, vice __________ president of Arkansas Enterprise Group, the SDB, "Southern is here to create employment and promote economic de- velopment in south Arkan- sas. We want to create a self- sustaining vehicle for enter- prise formation that will be an important part of the Arkansas economy for the tong term." Southern is pat- terned in part on Shorebank Corporation which operates a program with similar goals in the inner city of Chicago. Ronald Grzywinski serves as chairman of both SDB and Shorebank. Can the structure that has achieved demon- stratable success in a north- ern urban setting be adapted to rural Arkansas? "For Arkansas, I think training and support for small businesses is going to be critical. But who PAGENO="0146" 142 ../ (.2 0 ~ Shorty Washington works attho sewing machine that she pur* chased with a toss from the Good Foith Fund. LucilleSmith stands In one of the classrooms in herUttle Folk Daycaro. Snrith isa participanttn the Good Faith Fund. 4; L mary capital ratio of 10.48% ousty retaining a solid loan group as determined by the Elk Horn Bank Vice President compared to 9.77% on Dc- portfolio. Thebanks netloan FDIC. Similarly, seriously Carolyn McAnaity assists Mitch cember 31, 1988. The banks tosses as a percent ofaverage delinquent loansatyear.end Bettla in securing a toasts bay record profits and develop- loans outstanding were were only 0.73% of loans equipment for the buatnoas ho ment Initiatives were 0.25% for the year as op- outstanding compared to coownstnArtadeiphta. achieved white nimultane- posed to 0.43% for Its peer 1.44% for Its peergroup. PAGENO="0147" 143 Elk Horn Bank & Trust Company The 105-year-old Elk Horn Bank was purchased by Southern in May, 1988 to be the springboard for its development activities. The bank, in conjunction with the other SDB companies offers a variety of non-traditional programs to assist small businesses. In October, 1909, the Yearly Pol1nrm3nro development loan customers were also clients of the bank's venture capital affili- ate, Southern Ventures, Inc. In 1989, Elk Horn Bank eupanded its lending activities to the agricultural sector. Many Arkansas banks exiled this arena when overinflaled farmland prices crashed in the early t980s. r~-~--'1 j~I~~~1187ip3o f~ .l98L....,.. ... 1515,10 03,5 $51100 `jttt~'~ - 11372!I0 row mop farmers, but also closed out a finances (amity farmers who $1 mittion are diversifying their farms. construction The concept is that if a toantobuild farmer'sroweropsdonotdo a 41 unit, welt one year, then his tive' federally stock, poultry or vegetables subsidized, might. In the last half of tow-income, 1989, the bank nude 10 toans e t d c r I y to (amity farm operations to- h o u s i n g lating $211,075. Seven of project in these loans total' Arkadetphia _________________________________________________________ ing $157,975 were and opened fordiversification a $1.1 mit. or expansion of tion con- famityfarmsand struclion are considered loantobuild _____________________ ______________ development a 33-unit, ~ 5106 ~js.s3,7ti,oso credits. federally - ~` - 1)17 ... . ... - 152,105030 A n o I h e r cubsidized, - 1t80_._...... .. __. . ..lltBSO,030 `rca that meets ow-income, -- 1180,132,030 credit ncedsand clderty $1,771,030 generates profits h o u s i n g .1,917,003 for the bank is project in - 9088 mortgage bank- Hughes, ing. The bank Arkansas. ~~~`"1s.ta,3v,o88 originated 71 Al the - ....~... - ...._~1~Bl,ooo single-family close of - . - .. .__~~l,035,000 mortgageloamin 1988, the $53,512,000 1989. These loans bank laid - aggregated to the ground- $3,097,353, up work for a from 58 loans for Develop- $2,321,750 in ment Dc- _______________ 1988. For the most part, posit" pro. these mortgage loans were gram. These deposits are sold to the secondary mar- raised from individuals, cor- kel. Five of the bank's 1989 poralions, religious organi- morlgagors qualify at "low zations and others who want income" families according to see their money do more to the U.S. Department of than just earn interest. Dc' Housing and Urban Devel- velopment Deposits""" will be opment's 1990 Section 8 used to fund development rental assistance guidelines loam, and the earnings on for Clark County. Sixteen these deposits will be used had tow enough incomes to to offset the extraordinary qualify for below market costs of doing economic dc- rate financing through the velopmcnt in a regulated Arkansas Development Fi' banking environment, Dc- nance Authority. Twenty' velopment Deposits"" earn four morigagors had family the same rate of interest as incomes below the 1990 Ar' other deposits and can be kansas median of $25,900 made in any amount, An ac- (which is almost one'lhird live campaign to raise Devel- less than the national me- opment Deposits"" from dian family income of across the country will be $35,700). The bank also launched soon. bank was awarded Certilicd Lender Status by the Small Business Administration in r~rcognilion of Elk Horn's participation in SBA's 7(A) loan guarantee program and the bank's commitment to small business tending. Only 11 banks in Arkansas have achieved this elite status. "We believe that by investing the lime to care- fully tailor a financing pack' age that weds the cus- tomer's needs and secures a government guarantee, we can qualify a larger number of small businesses for bank credit," said bank Prc-sidc',,t George Surgeon. The bank originated 13 commercial de- velopment loans in 1989 to- taling $640,932. Two bank Only a few banks are stilt active farm tenders in alt of southern Arkansas with only a small handful is southwest Arkansas. Elk Horn Bank began to actively market ag- ricUltural production credit to family farmers in Ihe Ark' adetphia area when it hired veteran agricultural loan of' ficer Bill Fowler in the sum- mer, 1989. "Agricultural pro. duclion loans are very risky and you shouldn't gel in- volved unless you lake the lime to learn the business and plan to make a long. term cvmmitm('nt to the in- dustry, as Elk Horn has done," said Fowler. The bank nut only supports the credit needs of traditional PAGENO="0148" 144 Southern Vnnturen,tnc. Prod- dent Jell Boone ulnitu K-Tech, Inc. Thin cerumlc coaling bunt- nvnuwoa euvntaiucoopvruliona SVl Invested tn. Bill Fnwler,vtce prnutdonttordlk Horn Bank, dlncunnea un agri- cultural loan application with TrIcia Cole. Elk Horn In nun ut a tew banka tn nouth Arkaunaa ectlne In tending money ter tarmiug operutlona. Quick Response! clkHorn uuiurded Certified Lender Status Tot meet the growing needu of small businesses in southern Arkansas, Elk Horn Bank bus qualified (or Certified LenderStutus by the Small Business Administration. Thiu new status will signifi- cantly reduce the time it takes to approve SBA guaranteed loans to new and misting businesses. At the time Elk Horn was purchased by Southern Develop- ment Bancorporation, there was nnly one SBA tnun en the bank's books. Since the bank was acquired by SOB, Development Lending Officer Ted t(erstcn and his coticagues have worked with many businesses originating nsore than $500,000 in SBA guaranteed leans. Oot~ it ofthc275banks in the slate have qualified as SBA Certified Lc 1i~j~: 7 Ted Knrntnn und wunda Bunyan lath at the grund opening of Wanda'a Hutt- k murk, Wanda received an ( SBA loon to purchuse the nlumshn hod managed tar 13 yearn. PAGENO="0149" `-A a C;' PAGENO="0150" Opportunity Lands Corporation Opportunity Lands sale at $36100. Current plam Corporation, the for-profit call for the home loans to be real estate development originaledbyElkHornBank subsidiary of Southern, re- and insured through as Fl-IA cently completed construe- program that allows all the lion and sold its first afford- closing costs lobe included able single-family home in in the borrower's mortgage, Arkadelphia. The purchaser leaving only a 3% down of the $52,000 residence is a payment to be paid by the single parent who obtained purchaser at closing. With a financing through a low- in- sales price of $36,100, ADFA terest rate loan program financing, and FHA mort- provided by the Arkansas gage insurance, the homes Development Finance Au. wilt be available for low-in- thorily (ADFA) for tow- and come families. moderate-income Arkansas Linda Chandler, vice families. This project is typi- president and manager of cal of OLC's residential de- OLC, said that in addition to velopment programs. The its residential projects in goals of OLC's residential Arkadelphia, the company activities are lo provide de- has begun planning a "rural cent affordable housing for rental rehab" program in the residents of Southern's Pine Bluff. This program targeted areas and, at the would make use of low- in- same time, generate a profit terest rate funds available that will allow the company from the city to substantially to expand its programs to rehabilitate single-family serve a larger number of properties within certain people. OLC's development targeted areas in Pine Bluff. activities often require the Chandler is investigating company to blend together a several absentee-owned variety of federal, slate and properties that are "pretty private sector assistance to dilapidated." The program's make projects happen that inlenl is to sell or lease the conventional real estate de- renovated homes to the cx- velopersavoid. isling tenants for monthly During 1989, OLC re- payments closeto what they ceived a second $186,000 at- are currently paying in rent, location of ADFA bond Another residential money to construct four ad- project in the planning stages dilional affordable homes for is the construction of a 33- 146 The bulldingo across the utroet from The EnterprIse Center are beIng acquIred to construct 01Cc second commercial proj. eel-The Enlorprtse Centorlt, square foot building that would house SDB's Good Faith Fund as its first tenant. "We may team up in the future with Arkansas Enterprise Group to make a business incubator program that not only provides office space to entrepreneurs," said Chandler, "but also delivers services they need to grow their businesses such as: marketing, business plan unit, elderly congregate care facility in Hamburg, Arkan- sas. OLC has made a preapplication to the Farmer's Home Administra- tion for financing of this de- velopment. OLC is also working to meet the commercial space needs of small busi- nesses. The first project un- dertaken by OLC was the purchase of the 12,000 "We want to do.something that is going to meet a need..." square foot vacant Adams- development, or help with Nowlin Building in down- selecting atlorneys and ac- town Arkadelphia renamed counlanls. This type of pro- The Enterprise Center. The gram might be more impor. small, low-rent office spaces tant in developing the rural were completely fitted by the Arkansas economy than end of May, 1990. Thebuild- building out ineupensive ing was purchased for commercial space alone." $42,000, and $343,000 of OLC's objective here renovations have been made. is to enhance the rate of en- A second commercial terprise creation and sur- project entails acquiring and vival. "The key to our sac- renovating two small build' cess so far has been our se- ings across the steet from lectivettess. We've worked The Enterprise Center to hard to make one project a createThe Enterprise Center success before moving on to II. OLC isalso trying lobring something else," said Chan- the Enterprise Center model dler. -l feel the momenlum, to Pine Bluff and has made and I expect itlo continue." an offer on a vacant 9,500 PAGENO="0151" 147 Arkansas Enterprise Group injune, 1989 and has partici- pated in 47 ventures with four manufacturers, invest- ing $99,800. Tobian says that WCI is still in the develop- ment stage but hopes to fi- nance at teast five new manufacturers during 1990. SOUTHERN VENTURES, INC. SVI is a for-profit venture capital company owned by AEG that makes equity investments between $50,000 and $250,000 in lo- cally-owned companies. Ac- cording to SVI `resident leff Doose, white they try to make funds available to a full range of businesses "AEG is here to help create employment and ~ economic development in southern Arkansas. h~t~t ~ can take additional risk trepreneunat success, completes production and and hopefully receive a corn- "AEG ts here to help receives payment for its mensurale retum on our in- create employment and ceo- product, WCI is reimbursed vestment," said Doose. "The nomtc development in for its inveslmenls plus a high return investments, in southern Arkansas," said small share of the profit. turn, help cover the invest' Brtan Kelley, vtce president "What this means is ments that don't work out." of AEG. "We want to create that WCI assumes a lot of SVI invests in compa- a self-suslatning vehicle that risk," said Lou Tobian, man- nies through loans, equity will stilt be here 10 or 20 ager of WCI. "We bear a investorients, or a combina- years from now. There are a large share of the financial tion of beth. In return, SVI vanely of tools we can use. risk so, in exchange for that slaff participate on the board We intend to try out a num- risk, we expect to share in of directors of the company, ber of those tools, see what the earnings." and SVI serves as a source of works, make changes or dis- The program is dv- managerial assistance. SVI card the ones that dont." signed to be a long-term, requires that the company progressive relationship, have monthly beard meet- SEED CAPITAL FUND We feel more comfortable ings and submit financial Many financial serv- assuming more risk as the statements for analysis be- ices are already available for relationship matures," said fore the meetings so any po- small bxsinesses. However, Tobian. "We begin to trust tenlial problems can be ad- the ioslttulions offering these each other, and the next time dressed early. SVI also as- programs do not enjoy the manufacturer needs sists in marketing, financial AEG's financial flexibility. working capital, we are in a management and produc- Ketley manages the Seed better position to provide lion management. Capital Fund that is realty a more money." Venture capital in- fund within a fund. 1 he Seed WCI began operating vesting is an inherently risky Working capital is a problem for undercapital- ized, small manufacturing businesses. Where does a small manufacturer turn to acquire the raw materials it needs to fulfill a large con- tract? In south Arkansas, one answer is the Arkansas En- terprise Group. AEG is the non-profit division of Southern Devel- opment Bancorporation that manages several programs designed to help small busi- nesses. AEG provides finan- cial and networking set-vices, marketing training, and technical assistance to in- crease the probability of en- Capital Fund was created to euperimenl with new ap- proaches for accelerating en- terprise formation. The newest lest pro- gram within the Seed Capi- tal Fund is Working Capital Investments. This fund makes small, short-term in- vestments in specific con- tracts, purchase orders or re- ceivables. If a manufacturer receives a large purchase or- der bul doesn't bane the capital to pay for supplies to complete production, WCI enters into a joint venture with the rnanuf,,eturer to provide the necessary capi- tal. When the manufacturer business, "On the average, out of five investmepts, two will fail and produce a total loss, two will limp along and return only principal, and only one will become a real star, The return on that one investment needs to be enough to sustain the inves- tor," said Doose. * Doose doesn't thittk that SVI wilt perform better than the industry norm. in fact, I think that if we achieve average perform- ance, it will be really extraor- dinary." SVI is one of a small handful of venture capital companies in the country actively pursuing invest- ments exclusively in rural PAGENO="0152" 00 S 1J;IfI "li * * * * * : : * * * a~~c~g * PAGENO="0153" 149 Arkansas Enterprise Group (Continued) used waste products from atuminum refining plants in Bauxite to produce a su- per-absorbent cat titter product. SVI made a se- cured toan to the company so tosses on this venture are expected to be tow. The kitchen equip- ment business was at- tempting to reorganize out of Chapter 11 bankruptcy and, according to Doose, seemed to represent a good opportunity to maintain a business that had signifi- cant employment. A For- tune 500 company had owned the business but had `taken att the profits out of it and left it for dead.' The business at- tempted to recapture the market share they once had but was unable to do so. "This is the one out-and- out failure we have had out of our first five invest- ments,' said Doose. The sixth and most recent isvestmenl is SVI's first minority-owned com- pany. A laboralory opera- tion to perform biochemi- cal testing of nuclear plant workers will apes soon in Pine Bluff. The owner has experience in this field and the company has a strong potential for growth. Through financial and managerial assistance, Doose and SVI employees Lou Tobian and Stephanie McHenry.Dosning de- velop strong relationships with their clients. This indi- vidualized attention can be a big boost for early slage companies. "You essen- tially live and breathe the company like the cntrepre- $100,000 since May 1988. ncur does," said Doose. "You think about them con- AEG MARKETiNG stantly and you worry about SERVICES the things they could have or "The marketing pro' should have done. There are gram is based on the prem- a lot of sleepless nights." se that one way to assist small businesses is to help GOOD FAITH FUND them increase their sales," CIT focuses on self- said AEG Vice President employed business people Brian Kelley. who need loans to start or Motlie Munro works expand their businesses. The for AEG Marketing Services unique aspect of GFF is that and, in the six months since it utilizes peer-group sup- the program started, has port techniques that have completed a study of manu- proven effective in several facluring in south Arkansas, Third World locations lx as- conducted training sessions sure a high rate of repay- on sates management and ment on small loans let mi- created Iwo training and in- cm-entrepreneurs. formation packages for dis- Borrowers organize tribution to smatt businesses. themselves into groups of `Ourgoal is to develop a cot- five people, alt of whom are lection of services for manu- self-employed or interested facturing and industrial in becoming self-employed, companies that wilt help After the group completes them succeed," said Keltey. two weeks of orientation, it `Locally-based ceo- is certified and recommends nomic development in gm- its first two members for eral, and ABC's programs in loans. When the first two particular, are long-term members have made regular propositions,' said Brian payments at the bi-weekly Kelley. `It will be difficult to meetings over a two month assess ABC's impact for sev- period, the next two mem- eral years, because it is so bers are recommended for difficult to measure the local loans. After another two economy." The primary months, if all four bereowers measure of success wilt be are current on payments, the monitoring changes in the remaining member becomes indieiduat businesses as- et~gibte for a loan. sisted by AEG's services. This program is The personal atten- Southern Development Ban- lion provided by ABC corporation's most radical should help Arkansas busi- departure from traditional nesscs grow and prosper. banking, bc-cause it doesn't require collateral or detailed financial statements from its borrowers. With 36 members in eight borrowing groups, CIT has loaned more than Independent at last Good Faith Fund helps entrepreneur rnsch gcnst For yearn William Olive approached banks about borrowing money to begin his automobile and ap- pliance repair shop. Bach time he was turn- ed down for a loan. `For several yearn I tried to borrow the money, but banks told me they didn't gel into businesses as small as mine,' said Olive. Olive wasone of the firsl clients to participate in the peer- grouplending process initiated by the Good Faith Fund. He has already paid back his first loan and has taken out his second from the fund. `I try to encour- age others to try the Coed Faith Fund," said Olive, `I talk to people all the time who could be doing something for themselves, but are afraid It) venture t'xt on their own.' PAGENO="0154" 0 U z z >. .0 U) C 0. E 0 C-) I- C U) = w 0 U) U) C C-) 1F~~ ~ir~ ~ ~ ~ ~ ~ ~ ~ ~ -~ 0 ~ z *~ E ~ ~ ~ ~~_u ~D. .0 U) C 0. E 0 C-) I- LU U) C LU E 0 E U) C-) 0 z ~ 0 ~ H ~ 0 U i j~ jj h~ -~ O ~O ..Uc~S ~ e~ 6 6 PAGENO="0155" 151 DIRECFORS Elk Horn Bank Attorneys ~ ~ ~ ~ ~ ~ ~ James W. Harrington Mayer Brown and Platt Southern Development Chairman Rose Law Firm Bancorporation George P. Surgeon Wright Chancy & Berry Board of Directors President Hillary clinton Roy N. Shope Certified Public Herman Davenport Executive Vice President/Cashier Accountants Ronald Grzywinski Herman Brewer Ernst & Young James W. Harrington ~ President Mary Houghton Linda Chandler Dr. Jacquelyn McCray Vice President Thomas McRae Bill Fowler Gene Meyer Vice President Dr. Robert Miller Carolyn McAnally Henry Morgan Vice President Walter V. Smiley Johnny McAnally Dorothy Stuck Vice President George P. Surgeon Beth Marshall S. Robson Walton Assistant Vice President Morris Turner Elk Horn Bank Assistant Vice President Board of Directors Betty Carter Thomas Barksdale AsmstantCastver James Blanton Tod Kersten Harold Echols Development Loan Officer Ronald Grzywinski Sue Stinrtett James W. Harrington Resi Estate Loan Officer Mary Houghton J. Hugh Lookadoo Arkansas Enterprise Group Mary Jo Mann Mary Houghton Wayne D. Pollard Chairman Roy N. Shcpe Ronald Grzywlnski George P. Surgeon President S. Robson Walton Brian Kelley J. B. Wingfield Vice President Susan Raynolds OFFICERS Director, Resource Development Julia Vindaslus 00000000 Manager, Good Faith Fund Southern Development Bancorporatlon Southern Ventures, Inc. Ronald Grzywlnski Jeffrey A. Doose Chairman President George P. Surgeon Stephanie McHenry-Downing Presiderd Linda Chandler Investment Manager Lou Tobian Vice President Investment Manager Jeffrey A. Doose Vice President Brian Kelley Opportunity Lands Vice President ~ Linda Chandler Jo Ann McMasters Vice President Vice President & Controller Lou Tobian frtvestment Officer PAGENO="0156" 152 PREPARED STATEMENT OF JULIA VINDASIUS My name is Julia Vindasius and! am the Executive Director of the Good Faith Fund, a self- employment loan fund which is a a non-profit program of Southern Development Bancorporation. Thank you very much for the opportunity to share with you my experience with micro-enterprise financing. Backg~ The Good Faith Fund (GFF) began operations in May of 1988 concurrently with the start- up of Southern Development Bancorporation, a federally regulated bank holding company. Southern and its non-profit affiliate, Arkansas Enterprise Group, is headquartered in Arkadelphia, Arkansas. The Good Faith Fund is headquartered in Pine Bluff, Arkansas, about 50 miles southeast of Little Rock on Highway 65. GFF currently serves a seven- county target area in southeastern Arkansas which includes Jefferson, Desha, Drew, Bradley, Lincoln, Chicot, and Ashley counties. GFF has staff in four field offices in McGehee, Lake Village, Hamburg, and Monticello. The OFF targets low income residents making very small, short-term loans for self-employment projects and activities using peer group support and outreach techniques pioneered by the Grameen Bank of Bangladesh. Through the delivery of self-employment credit and credit services, the GFFs mission is to both raise the income levels and entrepreneurial skills of low-income residents in the rural communities in our region and widen the profile of would-be entrepreneurs to include women, minorities, and other dislocated workers. Key to our mission is to focus on low- income enterprising people. Good Faith Fund operates by bringing credit and services into local communities. Our outreach to prospective customers is in the form of training workshops for people interested in self-employment, the organization and facilitation of borrowing groups in our target area, and subsequent lending and administration of small loans and technical assistance to "micro-entrepreneurs." At the Good Faith Fund, borrowing groups of four to six people self-select to provide mutual support and assistance and to serve as an preliminary loan committee for loans to their members. The OFF staff facilitates the formation of borrowing groups, but individuals are responsible for meeting with, screening, and choosing their own members. After an initial orientation and training (six 3- hour sessions), the borrowing groups are certified, reviewing and approving loan proposals from their members. Each group chooses a chairperson and secretary and opens a group savings fund to which they all contribute at biweekly meetings. Groups of borrowing groups or "centers' meet in each town on a biweekly basis. Consensus, mutual support, membership responsibility, and feedback over a long time horizon are central to the borrowing group process. As of this date, the Good Faith Fund is working in 5 towns in the region, works with 8 certified borrowing groups, and has 40 members. Approximately 58% of our members are female and 89% are African-American. Since we started the program, we have disbursed 55 loans totalling over $133,000. Our average loan size is about $1,200 and our maximum loan limit is $5,000. Good Faith Fund has lent money to upholsterers, caterers, home-based seamstresses, day care operations, cleaning and janitorial services, video production shops, several kinds of repair services, a small farmer, gift and accessory traders, crafters, Mary Kay Representatives, and auto detailers among others. Several of our customers have been on public assistance and several are working themselves off welfare (particularly Food Stamps) as a result of their self-employment activity. We have many members who have chosen to belong to the Good Faith Fund in order to take advantage of the network, training, and technical assistance that is available through membership. Profiles of some of our recent members are in our quarterly newsletter, Sidelines, attached. Good Faith Fund is part of a rapidly growing field called microenterprise development which focuses on these tiniest entrepreneurial activities. Peer group lending, the type of PAGENO="0157" 153 lending that Good Faith Fund employs, is a subset of the field and I will be talldng about both interchangeably. Microenterprise development programs include training and technical assistance programs and credit programs. Microenterprise programs broaden economic development and small business development programs by reaching out to poor constituencies or communities. Peer-group lending programs generally operate under the "peer-pressure" rule which is basically that after a peer-group self-selects, loans are extended on a rotating basis to members of the group as long as everyone in the group is current on their loan payments. The peer-pressure rule assumes that the poor do not have assets that can serve as collateral for loans and that another guarantee mechanism--accountability to one's peers--is required to substitute for collateral. In most programs and the Good Faith Fund, the accountability is not legally binding, although some programs do require their groups members to co-sign each other's notes. In practice, peer groups serve less as "pressure" groups as they do support groups for assistance and networking. Also, peer-groups are viewed as an efficient administrative mechanism since administrative and credit review costs are generally higher for individual, collateralized loans. Moreover, peer-groups allow program staff to work with several clients at once. Despite the group concept and the community organizing aspects of Good Faith Fund's outreach activities, the emphasis is on serving low-income individuals, not communities. Peer-group lending targets the self-employed and family-based businesses, not cooperative ventures or community-owned enterprises. Loans are made to individuals within a group, not to the group to re-lend as in some cooperative lending models. Peer-group lending programs have in common that through credit and peer-support, an individual's skills or talents can be tapped to earn income through self-employment. The vision and expectation of our programs is that credit is a tool which allows one to invest in one's own future and skills and increases one's choices and opportunities. Therefore, credit should not be a tool limited only to the wealthy, but also to the poor and disadvantaged. As a result, women, minorities, and dislocated workers are often targeted client groups for microenterprise development programs. Almost all customers of micro- loan funds are not able to access business credit from local banks. Allow me a minute to tell you about the membership in this field. Two microenterprise development programs started in the mid-eighties--WEDCO (Women's Economic Development Corporation) in Minneapolis and MICRO in Arizona. Subsequently, there was a surge of interest in the field among development professionals in the United States largely because of the successes of the international programs such as Grameen Bank in Bangladesh and the Latin American microenterprise credit programs sponsored by Accion, International, both of which had made small self-employment loans to thousands of the rural poor, significantly raising incomes and quality of life for their clients. By the late eighties, many professionals and donor organizations that had both international and domestic involvement became interested in trying to replicate the peer-group lending model in the West. Within two years, seven peer-group lending programs started in Canada and the United States, strongly influenced by international models, either Accion's group lending programs or Grameen Bank's. The Calmeadow Foundation in Toronto, Canada kicked off their circle lending program in three Native North American communities in October 1987. While Grameen's program has influenced Calmeadow's work, Calmeadow's also received technical assistance and advice from Jeff Ashe who had formerly run Accion International; Calmeadow continues to sponsor micro-credit programs in South America. Good Faith Fund began seven months later in southeastern Arkansas as a replication of the Grameen Bank model. In August of 1988, the Women's Self-Employment Project (WSEP) which had been running a self-employment training and credit program for women in Chicago for about two years, started a separate group lending program modeled after Grameen called the Full Circle Fund. That same year, the Lakota Fund started a group lending credit program modeled after Grameen Bank after an unsuccessful attempt to operate an individual business loan fund on the Pine Ridge reservation in South Dakota. Finally, three peer-group demonstration programs were started in North Carolina by the North Carolina Rural Economic Development Center with funding from the state legislature and program assistance from the Center for Community Self-Help. These programs were influenced by Grameen Bank to the extent that they followed and researched the emerging practice of Good Faith Fund, Women's Self-Employment Project, and the other "Grameen- style" peer-group lending programs. Today, it seems, there are legions of peer-group lending programs emerging every month around the continent. Local and state government, foundations, policy and advocacy groups, and social service/job training programs have expanded their definition of economic development and have started microenterprise credit programs and many are using peer-group lending principles. Some notable examples are Jeff Ashe's Working PAGENO="0158" 154 Capital program in the northeast, Coalition for Women's Economic Development (CWED) in Los Angeles, and rural enterprises program in Nebraska led by Gene Severens at the Center for Rural Affairs in Walt Hill. I would like to reiterate the lessons that George Surgeon suggested. First, although Good Faith Fund targets a different constituency than the other Southern companies and is a non- profit program, it is no less committed to operating in the most business-like fashion. Our success requires it and our customers demand it. Many of our customers feel that the Fund is one of the only places where their business activities are treated with the respect and professionalism necessary for success. Secondly, targeting resources is critical to any development effort. Good Faith Fund has maintained a circumscribed target area for three years and will only expand its geographic scope when it has the staff and resources to do so. In addition, OFF's program will perform best when there are other credit, capital and institutional resources targeted in the same area. Partnerships with banks and other institutions are important to achieve overall development objectives. At the Good Faith Fund,we are able torun our field office operationsby having baiks and county and local officials contribute rent and utilities or donating in-kind services. Third, because development and banking seem often at odds, investment in specialized staff training and professional development is critical. In 1990, because we understood the scope of our mission and the special nature of the field, Good Faith Fund made a significant investment in recruiting, hiring, and training seven new Loan Representatives by creating a 6-month training Fellowship program focused on microenterprise and rural economic development. Finally, as George mentioned, `development doesn't travel well." Investment in testing strategies and adapting as necessary is as critical as implementing strategies. In addition to these lessons, I'd like to share some other thoughts about micro-enterprise development and Good Faith Fund's experience. Very few of our customers operate growth businesses--that is, those whose success will be measured by profits, investment, and jobs created. Rather the Good Faith Fund's target has been survival enterprises or supplemental income activities. If I leave only one message in this testimony, it is to urge you to remember the fine gradations of "small" when you think about "small business" and to shed some of the conventional wisdom about "growth." The common wisdom is that growth means increases in sales and numbers of employees. However, at the "micro" end of the continuum, income is generated in many and diverse ways for survival and security. "Growth," for these businesses means expanding into any number of income-generating activities. These businesses are often home-based so that individuals, particularly women, can be close to their children and family responsibilities. For example, one of our customers borrowed $150 to purchase fabric and notions for her home sewing business. She has an early morning paper route and is the primary income earner for her family as her spouse is often out of work. As she nears the end of her loan, she is thinking about borrowing again to operate her snow-cone machine during the summer. Another of our customers, a single mother, works occasional jobs to supplement her business income as a indoor landscaping and plant maintenance service, although she aims to focus solely on her business as her income stabilizes and her family circumstances become more supportive. What is important to remember is that these businesses are a critical part of local economies. They emphasize existing talent and skill-building, and are a viable and rational alternative to low-wage jobs or, in many of our Delta communities, no jobs. Like many other micro-enterprise development programs, Good Faith Fund targets women because by doing so, we meet both of our development objectives--to support self- employment and small business development as well as to alleviate poverty in our region. Statistics suggest that women are increasingly likely to start a business, yet, women have less access to resources-including credit, capital, and-most critically-information. The Good Faith Fund focuses additionally on the fact that women are also most likely to live in poverty and, therefore, raise children in poverty. While banks are not likely to provide access to credit to women entrepreneurs generally, for low-income women Mary Kay Representatives,who are likely to be interested in loans of less than $5,000, (and in our experience, often under $1,000) banks are definitively inaccessible. Internationally and domestically, development loan funds and business assistance programs often target women both for administrative reasons and for development reasons. Administratively, women have proven to be less risky and more reliable borrowers. Developmentally, women are more likely than men to spend increases in income from self-employment on their households and children. Savings are also a critical component to peer-group lending programs. While different programs emphasize savings in different ways, the premise is that the poor can save and can collectively (as a group) accumulate wealth more rapidly than is possible individually. Savings programs are gaining increasing popularity. At the Good Faith Fund, among our greatest accomplishments has been when borrowing groups have saved enough money to PAGENO="0159" 155 lend to their group members for business purposes. While the group savings loans are small--$250 or $700, they are landmark events which demonstrate the economic power that is possible when individuals unite and are given a supportive opportunity to accumulate wealth and re-invest. Along these lines, measuring impact by measuring asset increases is gaining increasing popularity among micro-enterprise development programs as well as welfare reform advocates. (See Michael Sherraden's book, Assets and the Poor, Finally, I'll answer the most common question we hear: Good Faith Fund charges market rates of interest. In Arkansas, because of the usary law restrictions, the current interest rate is 10.5%, but most micro-enterprise development programs charge approximately 15-16%, plus loan fees. It is an important principle in the field of micro-enterprise development that the barrier to self-employment is not the cost of credit, but the access to credit. For small loans, subsidizing the interest rate is not a useful strategy since the differential between 12% and 18% is minimal in absolute dollars. Micro-lending practice focuses not on rate but on loan term and structure as well as management assistance in order to enable individuals to have accesss to affordable credit and strengthen their capacity to compete in the market. Challenges to the field. Even at market interest rates, none of the micro-credit programs operating today were started without quite significant grant subsidies, both for loan capital and for operating support. A few programs have received program related investments (very low interest loans) from major foundations to build their capital base. And several programs are now being supported with public monies--state legislature allocations, local government funds, JTPA monies, or in-kind contributions from public or publicly supported agencies. The Good Faith Fund is entirely supported--both loan capital and operating budget--with grants from private foundations. The Winthrop Rockefeller Foundation provided $500,000 in loan capital and our operating budget has been supported by the Ford Foundation and the Charles Stewart Mott Foundation among others. We are currently in the process of applying for a grant from the Office of Community Services/Health and Human Services Demonstration Partnership which, if granted, will be the first public support to the Fund. A prevalent expectation in the field is that peer-group lending programs (and all micro- credit programs) can run their operations cost-effectively. Because we operate loan funds, there is a high expectation for programs to reach "self-sufficiency" by working to eliminate the need for grant subsidy and to be able to cover all their operating expenses with interest earnings. The obstacles to achieving scale and self-sufficiency seem obvious. Since earnings on small loans, given the administrative costs, are minimal, the key to achieving self-sufficiency is to have a high volume of lending activity. Yet, microenterprise lending programs are often started where economic development is needed, and therefore, where market economies are depressed, jobs are scarce, and often welfare dependency is high. In rural areas, this also means that population density is low--so the numbers are against you. Even in highly entrepreneurial regions, like the Mexican immigrant areas on the border towns in Arizona and California, achieving scale is a challenge. Practitioners and evaluators of the field are wrestling with this common expectation of self- sufficiency since the practice to date is demonstrating that Western communities--rural or urban, industrial or agricultural, homogeneous or diverse, welfare dependent or not--will not be able to generate the volume of loans necessary to cover their operating expenses. Most critically, every micro-credit program struggles with how to afford the necessary provision of training and technical assistance. Initially, peer-group lending programs based on international models were focused on being "minimalist credit" programs which meant that training and technical assistance.-costly components.-were reduced to a minimum, if offered at all. Thus, how much training and T/A can be provided was a controversial topic in the field. Today, however, most programs do and must offer some type of training and assistance to their customers along with credit. The intensity and level of the training or T/A depends on their clients' needs and the extent to which the loan fund serves existing or start-up enterprises. While it has been argued that bigger businesses require more business assistance, there is no doubt that programs which target the smallest enterprises of welfare. poor residents will spend more training resources on self-esteem building and assistance with basic needs. Many of the newest micro-credit programs have emerged out of established business development programs that have always provided planning and management training for their clients and would like to add a financing option for their graduates. As the experiments persist, variations on the model emerge rapidly as practitioners become more familiar with the needs in the local communities and the peculiar. social/economic/cultural constraints that different communities face. Many of the variations occur around the different technical assistance and business training needs as mentioned above. For example, some programs require business training while others provide PAGENO="0160" 156 informal "orientation" programs in-house. Some new programs are requiring a fair amount of community investment and resources before the program will operate. Finally, variations occur based on who is funding the program and the mission of the program. Good Faith Fund is also adapting its program to the local environment. We continue to test new products, services, and regulations. The Delta communities in which we work have a good deal going against them for furthering this economic development approach-- depressed market economies, little history of self-employment activity, few community- based organizations, high welfare dependency, and low population density. The challenge is for us to make our program easier to access for the small percentage residents who are interested in self-employment which generally means increasing and intensifying our outreach activities. More significantly, we are increasing our technical assistance and training components, testing new sectoral interventions such as family home day care and crafts to build expertise in a promising sector and build a network of customers around it. Policy recommendations. Currently, there is pending before the Congress new nticroenterprise legislation titled "Small Business Economic Opportunity Act." The draft bill, introduced by Senator Dale Bumpers in the Senate, proposes to lend funds to micro-enterprise intermediary programs (such as Southern's non-profit affiliate, Arkansas Enterprise Group and CDCs involved in micro-credit) to be used for re-lending to micro-enterprises in amounts of $l0-25,000. While the intent of the bill is to make a significant contribution to a much needed area of small business growth, there are problems with the bill given an understanding of the practice, the context in which we work, and the nature of the businesses with which we work. While there is provision for some brief period of grant subsidy to offset the high technical assistance costs that microlending funds incur, the "spread" between the program's cost of funds and use of funds--approximately 4%--will not make it feasible or affordable for an intermediary to participate, thus making much needed loan capital unavailable to entrepreneurs. As the grant funds and the loan terms have presently been structured, the legislation expects that each intermediary will raise a very substantial amount of money every year for 10 years to support the necessary costs of micro-lending--TA, loan processing, loan losses, as well as principle and interest repayment. Fundraising is difficult business for all non-profits and as the field grows, funds will become more competitive, particularly for rural areas. I would urge the committee to review the legislation and suggest the changes that will lead to a more feasible process. The biggest policy challenge for most micro-enterprise credit programs is influencing welfare and human services policy. Several microenterprises programs have tested training and credit strategies and set up special benefit waiver programs to help welfare recipients transition off aid through self-employment. The Family Support Act of 1988 opened up some opportunities for states and non-profit programs to encourage welfare recipients to pursue self-employment as an option for breaking welfare dependence, but a great deal of work still remains. Good Faith Fund spent the last 18 months researching a strategy to reach more welfare recipients and is about to start a three year welfare demonstration program in SE Arkansas. Particularly in rural areas where wage employment opportunities are scarce, it is critical that self-employment and business development be encouraged and supported with transitional benefit programs as viable and rational alternatives for welfare recipients. This welfare transition project is another example of a partnership between community-based and public agencies--Vo-Tech schools, Adult Education programs, a community action agency, and the Arkansas Department of Human Services at the state and county levels. As with this welfare demonstration project, partnerships with local banks, educational institutions, and other community based organizations and agencies is critical to our success. I would encourage the committee to support investment in community-based institutions of all kinds that will further development in the Delta and I commit the Good Faith Fund as a working partner to support such investments and subsequent projects. PAGENO="0161" The Good Faith Fund proudly announces the addition of two new borrowing groups to the Pine Bluff Center: JEMM+ and Willing Working Females. JEMM+ was certified on February 13, 1991. Its members are Joe Okeke of the Joe MadokCo.,Eddie WilliamsofWilliams Bros. Upholstery, MelvinTurner, who has ajanito- rial service, Maxine Williams of Williams Day Care, Annette Everett of Annette's Gifts andSpecialty Items,andJeff Reams of Reams Mobile Vending. The members of JEMM+ didn't know eachotherbeforeformingtheirgroup. Maxine Williams was the main force in getting them together, according to Eddie Williams. "Maxinejustkeptcalling and calling `tilitgot on my nerves!" Herhard work paid off when the first4 members--Joe, Eddie, Melvin, and Maxine--theJEMMinJEMM+--formedtheir group. Annette andJeffjoined the group later as the 5th and 6th members. According to Melvin, JEMM+'s orienta- tjon was "smooth, with no drawbackL" He added, "I learned that many businesses fail because of poor management. I enjoyt~d the managementaspects of orientation."A.hnette added, "I enjoyed th~ contacts you get to make--and all the free advice." According to Eddie, "It was imj~ortant that we got to know everybody. Because of the intensive orientatibn period, we had to make sure we weren't jlaying. Now we send customers to each other to keep th~ cash flowing to our group rhembers." Willing Working Females (WW1~') was certified on Match 18th, 1991. Vivian Alexander, Sharon S.tepps, and Christine Sloan, all Mary Kay ftpresentatives, .joined with Debbie Strawn ol' Do-Rights Clt~aning Service to form WWE WWF also had a key person who helped them get together. sharon recalls, "My name wason theGFFlistforone and ahalfyears.Thenthisenthusiasticwoman, Vivian Alexander, got us together. There are problems getting money to start a small busi- ness out of your home. But we found The Good Faith Fund." About orientation, Vivian said, "We learned from each other, gaining new ideas." Sharon added, "We learned things about our- selves. And we learned to be supportive, as friends helping one another." At their first center meeting, Mr. Clodis "Mac" McCuien, the Pine Bluff center chair- person, offered some words ofadvice: "Com- munication is going to be the key. Don't tryto solve your problems by yourself. Give your group members a phone call. You'd be sur- prised at how it can help."* 157 Fathibit I -a bulletIn for members and frIends of The Good Faith Fund________ Vol.1, No.1 Published by The Good FaIth Fund Spring 1991 a pro~rom of Southern Development Bancorporotlon Welcome to Sidelines ...Abulletin for you, the members and new friends of The Good Faith Fund (GFF). We'll send Sidelines every three months and share business tips and news about GFF and self- employment in our communities. You'll read about new borrowing groups forming an~l new businesses getting started. You'll read about other GFF members--and maybe even yodrself! We want Sidelines to meet your needs. Tell your Loan Representative what you'd like to see in Sidelines. We'll do our best to put it in. And, Sidelines can be like having a (enter meeting. When you learn something interesting, you can share it with others in Sidelihes. New Pine Bluff Groups Certified Chairperson"Mac McCuien and members of JEMM+ (back row) and WWF (front row). 44-629 0 - 91 - 6 PAGENO="0162" 158 ~~NEY~f~ ~ Make Your Business Better ~r t~nthis page of Sidelines, you'llgetvaluable tips onhowto "MakeYourBusinessBetter." ~There will be step-by-step information on how to manage yourbusiness and your money, how ~ to sell more, and where and how you can get help for your business. There will also be ideas ~and advice about how to work with your borrowing group so that everyone wins! ~l'he TABs at the top of each "Make Your Business Better" page tell you whether the article will be about Market, Management, Money, or Support. Keep all the articles in each cat- egory together to look at in the future. We hope that the more you learn, the more you'll earn! A Look at Loan Decisions When someone in your OFF borrowing group makes a loan proposal, you must de- cide ifheorshehasplanned carefullyenough to pay back the loan and help the business. Say "Do-It Donna" is making her loan pro- posal to your group. Here are some things to keep in mind as your group makes its loan decision: 1. Ask Questions! Have you ever planned a picnic, only to find when you arrived at your favorite spot, you forgot something important, like salt or a can opener? The same thing could happen when a member plans a loan proposal. This is how "two heads--or more--are better than one." If Do-It Donna forgot to include transporta- tion costs in her cash flow, you can be the one to ask, "What about gas for making deliveries?" Think long and hard about what might be missing from the plan and ASK lots of questions. 2. Remember the 3 M's-Market, Man- agement, and Money! Every business needs the "3 M's" to be successful: a market (people who will buy the product or service), management (a way to run your business well), and money (enough cash flow to keep you going). Be sure to ask Do-It Donna about the 3 M's during your loan proposal meeting: Market * Does she know who her target customers are? How does she plan to reach them? * How will she advertise her product or service? * Is the product or service priced right for her target customer? Will people buy it? Management * Does Donna have a schedule or routine? Does she plan her time carefully? * Does she have all the equipment and supplies she needs? * Does she have space for her business? * Is she organized? Money o Does the cash flow work out? Will she make enough money to meet her ex- penses? Are all expenses listed? `What is the loan amount and does it make sense? Can she borrow less and achieve her goals? Can she afford the payments? * Does she have good back up plans? 3. Judge Commitment! Be sure that your group and Do-It Donna are serious about making the business work and getting the loan paid back. Ask yourself: * How does she feel about her bUsiness? Is she enthusiastic and confident? * How do you feel about her business? * Does Donna seek help and listen to advice? * How can your group support her? Pep talks? Send her customers? By asking good questions about Donna and her business, you will make a better loan decision and help her increase her earnings and succeed in her business. Try to get as close to a "sure thing' as possible. Remember, you're in this together~O Announcements ~ Chicot County-A Good Faith Fund Intro- ductory Reception will be held on May 16, 1991, at 7:00 p.m. in the Lake Village Mu- nicipal Courtroom. Come and learn about self- employment and The Good Faith Fund! C SE AR-Selling Your Crafts!, a workshop for crafts producers, will be held onjune 8,1991, from 9:30-3:00 in Monticello. Call OFF at 535-6233 for more Information. t' New GFF Branch Offices- Find us in Monticello at 102 S. Main St., tel: 367-2311, and in McGehec at the comer of Pine and 1st Streets. Is your business related to recycling? If so, check out the 1991 Recycling Conference, to be held May 3 & 4, 1991, at the Camelot Hotel in Little Rock. Call the OFF office for more information. Great acts are performed not by strength but by persistence. PAGENO="0163" 159 PREPARED STATEMENT OF M. SCOTT LAWYER Mr. Chairman, Congressmen, Members of the Panel, Ladies and Gentlemen: I appreciate the opportunity to speak with you concerning problems facing the stimulation of economic growth in rural and urban communities, and more particularly in minority communities. Minority communities, for the purpose of this presentation, are defined as those in which over fifty per cent (50%) of the populations are from minority groups. As the Congress and members of the banking community have known long before the passage of the Community Reinvestment Action ("CRA"), members of minority communities have been financially disenfranchised. Although some progress has been made and some worthwhile programs have been developed since the passage of the CRA; these growing minority communities continue to be further disenfranchised at an alarmingly increased rate. We are all well aware of the current savings and loan debacle which is underway in this country. Some are less familiar with the commercial bank crisis which has been ongoing since the early 1980's and promises to continue for at least the next two years. The net result of both of these crises is the loss of financial PAGENO="0164" 160 institutions and branches of those institutions in minority and otherwise undesirable communities from the perspective of prospective purchasers. While the FDIC and RTC have diligently pursued the sale of previously minority owned institutions to like minority groups, their record in maintaining the character of those institutions has been less than stellar. Their charge from the Congress and their own internal policies is to attei~nt to maintain the status quo. If an African American institution is placed into a conservatorship, it is attempted to be marketed to African Americans. While this is notable and, in the case of the RTC some limited interim capital assistance is available; it is not affirmative action. To be realistic, who else other than African Americans would likely purchase such an institution? I would submit to you that the current legislative and regulatory environment regarding the purchase of failed minority institutions amounts to little more than subdividing the reservation and reselling it to the original owners. Why, in the face of the thousands of failed institutions which must be resolved, are there no programs designed to encourage minority groups to purchase non- minority failed institutions which could open branches in minority communities and restore the financial services which are almost non-existent in those communities? When minority communities lose a minority owned financial institution or when branches of majority owned institutions located PAGENO="0165" 161 in minority communities are not purchased by other majority owned institutions or investors; the minority community is further disenfranchised economically. The real result is that redlining is further exacerbated and the community sinks further and further into economic chaos requiring more and more federal assistance. This situation can be remedied by expanding assistance to minority investor groups and institutions in such a manner that would require the seed capital to come from within the minority community but with realistic assistance from the FDIC and RTC. I would propose the following seven point plan to be added to the Administration's proposed banking reform bill which is now being considered by the Congress. 1. Expand the RTC's Interim Capital Assistance Program, originally adopted as a provision of FIRREA to include all majority and minority commercial banks, savings and loan associations as well as branches of both if so offered by the FDIC and RTC. This would also include a mandate to the Office of the Comptroller of the Currency to expedite the chartering process, which now takes up to four months, for minority investor groups. 2. Extend the repayment period for the Interim Capital Assistance Program, now a period of PAGENO="0166" 162 nine months to thirty-six months with long tern permanent financing available to minority investor groups but only if the performance of the new minority institution is satisfactory. 3. Amend the Community Reinvestment Act to give credit to majority owned institutions and their holding companies for the purchase of preferred stock from minority owned institutions or their holding companies and allow such purchases of preferred stock to be accomplished with pretax dollars. The preferred stock purchased should be required to meet the bank regulatory standards of Tier 1 capital. 4. Require by statute the allocation of twenty- five percent (25%) of all asset sales by the FDIC and RTC to be offered first to minority institutions on a negotiated basis rather than through the current bid process which favors large majority owned financial institutions. 5. Allocate twenty-five percent (25%) of all FDIC and RTC asset management contracts to minority owned financial institutions and companies on a negotiated basis as opposed to the current PAGENO="0167" 163 bid process. If the contracts cannot be successfully awarded on such a basis, then have them bid through the normal bid process. With regard to this point of the program, amend the Community Reinvestment Act to give credit to majority owned institutions that either subcontract with minority owned institutions or companies when the majority owned institution is awarded such asset management contracts or who assist the minority institutions or companies when the contract is awarded to the minority owned business. 6. Amend existing tax laws to permit minority owned institutions that purchase failed institutions or branches to assume the tax loss carryforward of the failed institution or a prorata portion of same in the case of branch purchases. This provision should be retroactive to the effective date of FIRREA. In addition, any tax loss carryforward acquired by a minority institution pursuant to this amendment could be passed through to one acquirer. This portion of the program would PAGENO="0168" 164. greatly stimulate minority investors to purchase what are now unwanted institutions and branches and further enhance the build-up of capital in minority communities. 7. Amend existing tax laws to permit the use of accelerated depreciation on all fixed assets and leasehold improvements purchased from the FDIC and RTC by minority owned institutions. All seven points of this program are critical to revitalizing minority ownership of financial institutions which will realistically serve the needs of minority communities as opposed to paying lip service. The facts are that the number of financial institutions in this country is rapidly declining. Minority communities created by the change in demographics over the past twenty years are losing entire institutions and branches at a disproportionate rate since majority institutions and investors choose not to purchase them in favor of purchasing institutions in majority or otherwise more financially desirable communities. The loss of these institutions and branches create disproportionate economic effects in minority communities which currently requires and will continue to require increasing federal assistance to those communities on a much larger scale. The program proposed would be much more sound economically than the current and future forms of federal assistance which are PAGENO="0169" 165 and will be required by these minority communities. I would anticipate resistance to the program outlined from the FDIC and RTC since their handling of resolutions of failed institutions which affect and concern minority communities and investors will be closely scrutinized. In the aftermath of the television coverage of the handling of Freedom National Bank of New York or the recent case of Adams National bank of Washington we understand that such transactions need to be scrutinized. More importantly, minority ownership of financial institutions is a proven and effective way to provide economic stimulation to minority communities. Such ownership, on a broad scale basis, will only occur if federal assistance is expanded to at least include the points in the program outlined. The tax incentives outlined would have a de minimus effect on the budget deficit. The expansion of the Interim Capital Assistance Program should have been incorporated in that program from its inception. The allocation of asset sales and asset management programs are only fair in light of minority populations percentages. The suggested amendments to the Community Reinvestment Act will stimulate the investment of dollars, expertise and commitment by majority owned institutions in the minority community. This problem must be addressed now and by this body. I would also like to briefly touch on one other proposed program which could also have a profound effect on minority as well PAGENO="0170" 166 as majority communities. Earlier this year, my colleagues Hiram Eastland and Wilbur Hawkins worked with Congressman Espy to draft legislation for the ŕreation of a regional development bank for the seven state Mississippi Delta Region. Such an institution would be chartered under this legislation to specifically address the needs of communities in this region that require financial services not normally provided by traditional commercial banks. This funding entity could work with banks in the region to increase the amount of capital available for regional investment. The regional institution could, for example, guarantee loans or participate in loans with banks in the region on various projects. The regional development bank would be initially capitalized by preferred stock of the bank being issued to the United States Government in a manner similar to banks which were recapitalized after' the Depression by the Reconstruction Finance Corporation. That is to say that once the bank is capitalized and operational investors would be sought to invest in the common stock of the bank. The proceeds of the common stock sales and bank earnings would be devoted to retiring the preferred stock initially issued. The institution envisioned would generate funds for lending and investment through the sale of notes and debentures. As previously noted, its lending function would target areas and promising enterprises not currently being adequately serviced by conventional lenders. As this legislation is further developed, we will be seeking your assistance and support on this project. I appreciate the opportunity to address the members of this Task Force on what I believe is at least a partial answer to the problem of stimulating economic growth in both rural and urban communities. PAGENO="0171" 167 PREPARED STATEMENT OF RANDLE RICHARDSON Thank you Mr. Chairman and Members of the Task Force. I am here today at your invitation to discuss the programs of the Farmers Home Administration relating to community development. Although I can speak in detail only about those programs for which I am responsible in Tennessee, I have been provided information on national program levels by our headquarters in Washington. With me today are Mr. James Huff, State Director of Farmers Home in Mississippi, and Mr. Frank Shoemake, Chief of the FmHA Community and Business Program in Mississippi. As the designated witness, I have a prepared statement. Mr. Huff and Mr. Shoemake will be available to answer any questions you might have about their operations. FmHA's community and business programs fall into three primary categories: water and waste, community facilities, and business and industry. Direct and guaranteed loans are made in all three categories, with the business and industry~ program being nearly all guarantees. The rural housing and farmer programs also contribute to viable community development. Funding allocations for the current fiscal year are: $500 million for water and waste direct loans to provide facilities in communities up to 10,000 population. $35 million for water and waste guaranteed loans. $301 million for water and waste grants to enable the most needy communities to have water and sewer systems. $100 million for Community facility direct loans for such projects as health clinics and fire stations in communities under 20,000 population. $25 million for community facility guaranteed loans. $100 million for Business and industry loans made by commercial lenders and guaranteed by FmHA in communities under 50,000 population. $31.5 million for Intermediary relending loans made to private nonprofit and public entities to support revolving funds for local business development -- community size cannot exceed 25,000. PAGENO="0172" 168 $20.8 million for Rural development grants to stimulate local economic development. Funding for rural housing this fiscal year totals more than $2.6 billion. The major share, $1.4 billion, is devoted to low and very-low-income single-family housing. New to the program this year is guaranteed loans for which $100 million is available. That is divided $70 million in unsubsidized loans and $30 million for interest-assisted loans. Rural rental housing is funded at $574 million. Other assistance such as housing repair loans and grants, farm labor housing and rental assistance account for the balance of the $2.6 billion. Over the years, FmHA has invested more than $23 billion in community and business loans and grants and almost $59 billion, in the rural housing program. FmHA has long been an active participant in the efforts of local communities to improve basic services for their residents and strengthen their economic position through job creation and preservation. In our immediate four-State area, Tennessee, Mississippi, Arkansas and Louisiana currently have a combined portfolio of 2,177 such projects totaling $820 million financed by FmHA loans. In the last five fiscal years, 355 water and waste grants have been made for $106 million. In loans alone the total represents almost six projects for each of the 316 counties and parishes in the four-State area. On a dollar basis, that averages out to $2.6 million per county or parish. By States, the figures are 338 loans totaling $165 million and 79 grants totaling $22 million in Tennessee; 622 loans totaling $249 million and 109 grants totaling $22 million in Mississippi; 482 loans totaling $197 million and 100 grants totaling $40 million in Arkansas; and 426 loans totaling $209 million and 67 grants totaling $23 million in Louisiana. Here in Tennessee, we have an overall portfolio of $1.7 billion. About $1 billion is in housing loans, $500 million is in farm loans, $140 million is in community loan and $40 million is in business and industry loan guarantees. We currently have a B&I caseload of 33 loans with about $25 million outstanding. The fiscal year 1991 allocation is $2,789,000. Our peak year in this program was ten years ago when we had 137 loans totaling $150 million. In Tennessee, we have a B&I program chief and one technician. Between them, they participate in presentations by the Tennessee Bankers Association and in Business Development Week programs sponsored jointly by the Tennessee Valley Authority, Small Business Administration and local chambers of commerce, rural revitalization conferences and seminars for business people sponsored by the private lending sector. Business development week usually involves a week's stay in a community making public film presentations, distributing program literature and engaging in widespread discussions with community leaders, lenders, potential borrowers, and business people. PAGENO="0173" 169 We make it a point to let lenders know when there is a change in the program. We try to stay in touch with them as a matter of our regular activity. As with most human endeavors, there are successes and some failures. For example: In Crockett County, a father and son borrowed $112,000 to set up a supermarket in their community. People were driving 20 miles to buy groceries, and responded enthusiastically when given a change to shop locally. That loan has been paid in full, and the father and son now have stores in several other towns in Crockett County. - In Bean Station, an unincorporated community of about 400 population in East Tennessee, three men took over a defunct upholstered furniture plant in 1973. Within a few months their initial investment had been about eaten up, but they persisted and managed the company to good profits. With a million-dollar B&I loan from a local bank, guaranteed by us, they modernized and tripled the size of their plant. Eight years later, the last year before they paid off the loan and the last year we were privy to their books, they paid almost $2 million in corporate federal income tax. Bean Station Furniture Factory continues today as a stable employer of 175 people. If you do much driving in the Southeast today, you probably have seen a Cracker Barrel Old Country Store. The company was organized in 1969 and had grown to 16 stores by 1978 -- and needed a better financial structure. With a $3.3 million B&I loan, Cracker Barrel restructured and expanded, from 445 employees in 1978 to more than 10,000 in 100 stores in eight states now. They recently concluded a stock sale that netted over $50 million. They don't need us anymore, but we are happy to be able to say we were able to lend a hand when they needed it. mall three of these examples, the FmHA guarantee resulted in benefits to the borrowers and to the lenders. Stable jobs were created and the economic environment of the community enhanced. The borrowers were provided an opportunity to start and grow in a rural community while using the private lending sector as a source of credit. The lenders were, and still are, able to make larger and longer term loans than they are willing to make normally; they can sell the guaranteed portion of the loan to bring in outside capital; they can tailor loan terms more in line with the business cash flow repayment ability and the life of the asset being acquired; and they now can count the entire amount of the loan toward their Community Reinvestment Act goals. In a broader sense, the B&I program encourages stable employment in rural areas. This helps prevent flight to other, unknown areas, provides employees with steady income that supports other businesses serving the area, and helps them reach the American dream of owning their own home while also enjoying the utilities and services taken for granted by urban residents. Mr. Chairman, you also asked about the intermediary relending program under which we lend an intermediary -- a nonprofit corporation -- up to $2 million at 1 percent interest with a 30-year payback. PAGENO="0174" 170 The intermediary -- through a revolving fund -- relends to local businesses in rural areas at a rate less than that charged by commercial lenders. This gives the business a better chance of survival due to less pressure on cash flow to meet debt service. This program, too, involves local lenders because the loan to the ultimate recipient is limited to the lesser of $150,000 or 75 percent of the project cost. Involving local lenders also puts credit decisions in the hands of people with finance and business experience and uses their knowledge and experience to help plan and control the growth of their community. In Tennessee, we have closed one intermediary relending loan for $2 million and have issued a letter of conditions on another one for almost $1.9 million. We advance the funds to the intermediary on a 30-day need basis. We have made two advances totaling $1,030,000 involving eight (8) ultimate recipients which will create 290 jobs for our cost per job of $3,551. Funds from other sources total about $1.5 million for the eight projects, meaning our loan funds account for about 40% of the total involved in the projects. That is a good mix of private and public funds aimed toward economic development. This completes my statement Mr. Chairman. We will be glad to answer any questions you might have. PAGENO="0175" 171 PREPARED STATEMENT OF OLIVIA DOBBINS The Black Business AssOciation was formally chartered in 1976 as a non- profit 501 (c)(6) organization The BBA is an umbrella advocacy and service organization. We serve as a representative on many fronts for the causes and problems of our members, and other "socially & economically" disadvantaged businesses in the region. Our mission is to positively advance the Black community through upgrading its economic opportunities and position. In December, 1989 we began a series of meetings with local lending officers, the local FDIC, other organizations, and individuals in the financial field . From these meetings the BBA and others realized it was time to bring the community together to create an innovative plan truly capable of addressing the sizable problem. We are working with the Shelby County Community Reinvestment Coalition on a joint CRA-responsive proposal for: 1. The creation of a Comprehensive Business Development Plan to be produced by representatives of the banking community, local government, the BBA, Black CPA's, LeMoyne Owen College, Shelby State Community College, Memphis State University, and other concerned organizations. 2. Funding of an economic study of the African American community to assess for business and housing requirements. 3. Local lending institutions with CRA requirements to join with the Tennessee Valley Authority in creating a capital pool that will provide debt and equity capital for businesses, especially those locating in targeted census tracts and capable of providing entry level jobs and training opportunities for disadvantaged residents. This fund would coordinate the diverse loan funds, and technical and management support programs currently available, yet underutilized, in the 29 counties TVA subregion. The plan would also link the products and land resources of north Mississippi to the distribution capabilities of Memphis. 4. Local lending institutions to establish financial & technical assistance partnerships with community based group and organizations that seek to revitalize target neighborhoods, and provide housing. Minority businesses need assistance from the Federal Government in the form of: 1. Business Development grants to help buy equipment. 2. Programs to provide low interest loans, and assist with bonding. 3. Timely information on govermnent sponsored business seminars. 4. Removal of the barriers that make it more difficult for black businesses to compete. 5. Increased minority participation in hearing, panel discussions, and committees that pertain to business and economic development. 6. Requirements of a "Community Reinvestment Plan" by majority cor- porations participating in government contracts. This should include joint business ventures between majority and minority companies on public sector projects and private sector projects. 7. Incentives to a. contractors and contractor associations to train and assist minority firms. and to train socially and economically disadvantaged individuals. b. majority corporations for joint ventures in both public and private sector contracts. c. majority corporations that "Adopt-a Neighborhood". Memphis/Shelby County has demographics not found in any other region of the U.S. The minority population has increased to 55-60% Memphis and 42.7% Shelby, yet there remains a vaste disparity in economics. According to 1984 ED & A figures, we have 39.8% of the TVA subregion's minority population. We are therefore the ideal position to share ideas on improving the economic climate. PAGENO="0176" 172 PREPARED STATEMENT OF WINTHROP P. ROCKEFELLER Mr. Chairman and members of the Committee, I want to say that it is an honor to appear here in my role as Chairman of President Bush's Council on Rural America. On behalf of the Council's Vice Chairman, Governor Kay Orr, and my fellow Council members, it is a pleasure to share with you the objectives of the President's Council on Rural America. I would like to express our enthusiasm for our work in support of rural America. Rural communities and their economic outlooks are changing. Traditional employment in the natural resource industries and basic manufacturing has declined. The shift in the global economy requires that rural Americans be internationally competitive. For rural America to remain a strong and integral part of our country, we need to understand its diversity and complexity. The President's goal is "to improve the employment opportunities, incomes, and well-being of rural America by strengthening its capacity to compete in the global economy.' To achieve this goal, the President's Initiative calls for a more effective approach to rural development. This approach includes a central role for the private sector, a broad sharing of rural development benefits, new partnerships between units of government and a long- term strategic plan. The President's Initiative on Rural America outlined six recommendations for "rural economic development for the 90's." The Council on Rural America is one of the six. As a national effort, the President's Initiative provides a coordinated and comprehensive approach to rural development. The federal government begins the effort but with the acth~e participation of state and local governments working with the private sector. PAGENO="0177" 173 The six recommendations are: 1. The establishment of a permanent working group on rural development as partof the President's Economic Policy Council; 2. The appointment of the President's Council on Rural America; 3. The creation of state rural development councils; 4. The targeting of federal rural development programs; 5. The demonstration of the effectiveness of these programs; 6. Better access to rural information- by rural decision-makers. I am here today to give you a brief status report on each of these areas and then share some specifics on the President's Council. Economic Policy Council Working~Group on Rural Development--The Chairman of the President's Economic Policy Council is Treasury Secretary Nicholas F. Brady. Secretary Brady asked the Secretary of Agriculture to chair the Economic Policy Council Working Group on Rural Development. Eleven executive departments, two independent agencies and two White House bodies are members of the Council Working Group (list attached). It sets the policy for the President's Initiative. It meets quarterly. Agriculture Secretary Edward Madigan has called the next meeting in September. In addition, a group of senior government program officials meets twice a month to provide the staff support to the Council Working Group and to manage the implementation efforts. State Rural Development Councils--The key to the President's Initiative is the State Rural Development Councils now active in Kansas, Maine, Mississippi; South Carolina, South Dakota, Texas, Oregon and Washington. These councils are the pilot projects which include federal officials from agencies with rural development programs, state officials, local government representatives and members of the private sector. The full membership participated in an intensive Rural Development Economic Institute. They produced inventories of rural development issues and resources in their states. Now they are developing long-range strategic plans to implement rural development programs. All levels of government in cooperation with the private sector are working to implement these programs. The State Rural Development Councils will be expanded to additional states during fiscal year 1992. Demonstration and Targeii~g of Federal Programs--These recommendations will be implemented by the State Rural Development Councils in fiscal year 1992. Projects will demonstrate comprehensive and innovative approaches and methods of rural development. They will encourage federal inter-agency and inter-governmental cooperation. PAGENO="0178" 174 Rpral Ii~formption CeiUeir-The Rural Information Center is the single most important source of ready information about rural development within the federal government. It is a joint project of the USDA National Agricultural Library and the Extension Service. During FY 91 federal departments and agencies have made active commitments to the Rural Information Center. The Department of Health and Human Services has funded a Rural Health Information Clearing House. The Small Business Administration is participating in a pilot study of small business information. Farmers Home Administration is providing a staff position. Other federal agencies are exploring participation in support of the center. The President!~Council on Rural America--President Bush formed the Council on July 16, 1990. Its role is to advise the President and his Economic Policy Council on what the federal government can do to improve rural economic development. The seventeen members of the council (list attached) have met twice. The group will meet next in late July 1991. Subgroups are studying four areas: 1) economic issues, 2) institutional and infrastructure development, 3) individual development and lifestyle essentials and 4) implementation factors and funding. We will hold a series of public meetings in the fall and have scheduled a January 1992 meeting with representatives from each of the Executive Departments. The Council adopted the following mission statement: "To advise the President on how rural Americans can improve their quality of life, enhance their economy and improve delivery of federal services and resources." The objectives of the Council are: 1. To articulate a creative vision for rural America; 2. To outline an innovative, inter-departmental structure for developing rural policy; 3. To manage the array of rural programs in support of the President's and his Council's vision for rural America; 4. To involve local leaders as well as state and federal government and the private sector in order to implement rural development programs. Mr. Chairman, I would be pleased to respond to questions. PAGENO="0179" 175 President's Council on Rural America WINThROP P. ROCKEFELLER, of Arkansas. Chairman. Currently, Mr. Rockefeller serves as Chairman of the Board and CEO of Winrock Farms, Incorporated, Little Rock, Arkansas. KAYA. ORR, of Nebraska. ~Iice Chairman. Former Governor of Nebraska and a former member of USDA's National Agricultural Research and Extension Users Advisory Board. Ms. Orr also served as Treasurer of Nebraska. HELDALBARTON, of Kentucky. Mrs. Barton serves as President and Chairman of the Board of Health Systems Incorporated in Corbin, Kentucky. JOIIILE. BOURNE~Jr,. of South Carolina. Currently, Mr. Boume serves as Mayor of North Charleston, South Carolina. Member of the Board of Directors of Cooper River Federal Savings and LoanAssociation. NORMAN BROWN, of Michigan. Currently, Dr. Brown serves as President and Chief Programming Officer of the W. K Kellogg Foundation in Battlecreek, Michigan. Serves on President Bush's Thousand Points of Light Foundation. HUGH M. FIELD, of Iowa. Mr. Field is a Partner in the law firm of Beecher, Rathert, Field, Fister, Walker and Morris in Waterloo, Iowa. He also serves as City Attorney, City of Waterloo. - - OTIS 1... FLOYD~Jt, of Tennessee. Dr. Floyd serves as Chancellor of the Tennessee Board of Regents, in Nashville. RALPH HOFSTAD. of Minnesota. Mr. Hofstad is the Founder of Hofstad Consultants and recently served as President and Chief Executive Officer of Land O'Lakes, Incorporated. He is a Director of CARE, N.Y. CHARLiE E. XRUSE, of Missouri. Mr. Kruse is Director of the Missouri Department of Agriculture in Jefferson City, Missouri. CHARLES I. MOYER, of Kansas. Currently, Mr. Moyer serves as Chairman of the Board and Executive Vice President of the First National Bank of Phillipsburg in Phillipsburg, Kansas. -more PAGENO="0180" 176 -2- ~ATHV S. NOVINGER, of South Carolina. Currently, Mrs. Novinger serves as Senior Vice President of Administration and Government Affairs for SCANA Corporation in Columbia, South Carolina. REYNALDO U. ORTIZ of Washington. Currently, Mr. Ortiz serves as President and Chief Operating Officer for US West NewVector Group in Bellevue, Washington. UNWOOD E. PALMER. Jr.. of Maine. Currently, Mr. Palmer Is President of Capitol Consultants, Inc. and a lobbyist for Eaton, Peabody, Bradford and Veague in Augusta, Maine~ He is the owner and operator of Tree Farm and Land Development Companies. ALBERT HAROLD QUIE of Minnesota. Currently, Mr. Quie serves as President of the Prison Fellowship Ministries in Minnetonka. He is a former Governor of Minnesota and served a U. S. Senator from Minnesota. STEVEN KRIS SYDNESS, of North Dakota. Currently, Mr. Sydness is Director of International Markets, Great Plains Software, Inc., in Fargo. He also serves on the Board of City Commissioners in Fargo, North Dakota. BILL WALKER, of Mississippi. Mr. Walker was formerly Chairman of the Board of W. E. Walker Stores, Incorporated, and has served on the Boards of the Deposit Guaranty Bank and the Mississippi Economlo Council. DONALD KESNER WEILMUNSTER, of Idaho. Currently, Mr. Weilmunster isthe owner of Fort Boise Cattle Company which consists of raising cattle, farming, timber, and mining. PAGENO="0181" 177 PRESIDENTIAL INITIATIVE ON RURAL DEVELOPMENT EPC WORKING GROUP ON RURAL DEVELOPMENT May 31, 1991 Douglas J. Aller Deputy Assistant Secretary for Economic Development Economic Development Administration U. S. Department of Commerce Room 7804 Herbert C. Hoover Building Washington, DC 20230 Phone: 202-377-4067 FAX: 202-377-0995 Mr. Schuyler Baab Deputy Under Secretary U.S. Department of Health and Human Services Hubert H. Humphrey Building, Room 600E 200 Independence Avenue, S.W. Washington, DC 20201 Phone: 202-475-6060 FAX: 202-245-6699 Nicole Ballenger Senior Staff Economist Council of Economic Advisers Room 323 Old Executive Office Building Washington, DC 20500 Phone: 202-395-5040 FAX: 202-395-6947 Paul R. Bardack Deputy Assistant Secretary U.S. Dept. of Housing and Urban Devel. Room 7214 451 Seventh Street, S.W. Washington, DC 20410 Phone: 202-708-0566 FAX: 202-708-3363 Bruce Bartlett Deputy Assistant Secretary U.S. Department of the Treasury Main Treasury, Room 3445 1500 Pennsylvania Avenue, N.W. Washington, DC 20220 Phone: 202-566-2768 FAX: 202-786-8452 PAGENO="0182" 178 * Xs. Debra Bowland Acting Assistant Secretary. for Policy U.S. Department of Labor Frances Perkins Building, Room 52006 200 Constitution Avenue, N.W. Washington, DC 20210 Phone: 202-523-6181 FAX: 202-523-9216 The Honorable Betsy Brand Assistant Secretary U.S. Department of Education Room 4090 330 C Street, S.W. Washington, DC 20202 Phone: 202-732-2251 FAX: 202-732-3897 Robert Grady Associate Director Office of Management and Budget Rm. 260, Old Executive Office Bldg. 17th & Pennsylvania Avenue, N.W. Washington, DC 20503 Phone: 202-395-4844 FAX: 202-395-5730 The Honorable L. Joyce Hampers Assistant Secretary Economic Development Administration U.S. Dept. of Commerce Room 7804 - Herbert C. Hoover Building 14th & Constitution Avenue, N.W. Washington, DC 20530 Phone: 202-377-5081 FAX: 202-377-0995 Walter E. Hill Assistant Under Secretary Office of Small Comm. and Rural Devel. U.S. Department of Agriculture Room 2l9A Administration Building 14th and Independence Avenue, S.W. Washington, DC 20250-0100 Phone: 202-447-8653 FAX: 202-447-2080 PTS: 447-8653 FTS FAX: The Honorable Anna Eondratas Assistant Secretary Community Planning and Development U. S. Department of Housing and Urban Development Room 7100 Washington, DC 20410 Phone: 202-708-2690 FAX: 202-708-3363 PAGENO="0183" 179 The Honorable Edward R. Madigan Secretary U.S. Department of Agriculture 14th & Independence Avenue, S. W. Washington, DC 20250-0100 Phone: 202-447-3631 FAX: 202-447-2166 447-3631 FTS FAX: The Honorable James 0. Mason Assistant Secretary U. S. Department of Health and Human Services Room 716G Hubert H. Humphrey Building 200 Independence Avenue, S. W. Washington, DC 20201 Phone: 202-245-7694 FAX: 202-245-6963 The Honorable S. Anthony McCann Assistant Secretary U.S. Department of Veterans Affairs Room 500 810 Vermont Avenue, N.W. Washington, DC 20420 Phone: 202-233-8041 FAX: 202-535-8525 Patrick Murphy Deputy Assistant Secretary U.S. Dept. of Transportation Nassif Building, Room 10228 400 Seventh Street, S.W. Washington, DC 20590 Phone: 202-366-4551 FAX: 202-366-7127 Gary Nodler Kansas City Regional Administrator U.S. Small Business Administration 911 Walnut Street 13th Floor Kansas City, MO 64106 Phone: FAX: 8-867-5559 FTS: 867-3316 FTS FAX: 867-5559 Robert M. Rauner Director of Economic Adjustment Office of Economic Adjustment U.S. Dept. of Defense The Pentagon Room 4C767 Washington, DC 20301-4000 Phone: 202-697-~.55 FAX: 202-695-1334 PAGENO="0184" 180 The Honorable Patricia Saiki Administrator U.S. Small Business Administration 409 Third Street, S.W. Washington, DC 20416 Phone: 202-205-6605 FAX: 202-205-6429 The Honorable Rockwell A. Schnabel Deputy Secretary U.S. Department of Commerce Rm. 5838 Herbert C. Hoover Bldg. 14th & Constitution Avenue, N.W. Washington, DC 20230 Phone: 202-377-4625 FAX: 202-377-8610 John Schrote Acting Assistant Secretary U.S. Department of the Interior 18th & C Streets, N.W. Rm. 6116, Interior Building Washington, DC 20240 Phone: 202-208-6182 FAX: 202-208-5048 The Honorable Roland R. Vautour Under Secretary Small Community and Rural Development U.S. Department of Agriculture Room 219-A Administration Bldg. 14th and Independence Avenue, S.W. Washington, DC 20250-0100 Phone: 202-447-4581 FAX: 202-447-2080 Robert H. Wayland, III Deputy Assistant Administrator Office of Water U.S. Environmental Protection Agency Room 1035, East Tower 401 1! Street, S.W. Washington, DC 20460 Phone: 202-382-5711 FAX: 202-382-5711 Wylie Whisonant Deputy Under Secretary U. S. Travel & Tourism Administration U.S. Department of Commerce Rm. 1865 Herbert C. Hoover Building 14th and Constitution Avenue, N.W. Washington, DC 20230 Phone: 202-377-0136 FAX: 202~377-4279 PAGENO="0185" 181 Rural Economic Development for the. 90's A Presidential Initiative. PAGENO="0186" 182 THE WHITE HOUSE Office of the Press Secretary For In~ediate Release January 22, 1990 STAT~4ENT BY THE PRESS SECRETARY Today the President ordered the implementation of a report f rem the White House Economic Policy Council's Working Group on Rural Development, formed in April 1989 to analyze and evaluate existing Federal rural development programs and devolop policy options for improving their coordination and execution. The President has instructed Secretary of Agriculture Clayton Yeutter to implement six proposals designed to improve the coordination of rural development programs and servo as a catalyst for future initiatives. They are: Preside _C~ncil on Rural America. A Presidential Council will be formed with membership drawn from farmers, state and local governments, rural businesses and high technology industries to advise the Federal government on improving Federal rural development policy. State Rural Devel~pment Councile. Each state will establish a Rural Development Council to coordinate Federal rural development programs in its region. Council members will include representation from the office of the governor and the state representatives of all Federal departments administering rural development programs locally. The council will identify and assess local rural development needs and coordinate the delivery of Federal and state rural development programs to meet those needs. Bural Development Demonstration P_r~arazi. Under existing budgetary resources and programs, a series of Rural Development Demonstration Programs will be organized to: identify regional rural development needs; develop plans of action to meet those needs; bring together the necessary resources; and evaluate the process and its results for possible application on a broader basis. Rural Development Technical Assistance Center and Hot ~ The U.S. Department of Agriculture will establish a center to provide technical assistance and detailed information on Federal programs that serve rural communities. The center will also link callers with Federal, state and regional program officials who can provide additional assistance. -MORE- PAGENO="0187" 183 tra3ur~veJ~p~~ Given limited Federal budget resources, the Federal government will attempt to target rural development programs on those activities that generate the maximum net oconomic benefits. t~hile most Federal rural development programs allocate funds by formula, programs with discretionary accounts will allocate funds to those activities where the payoff. is greatest. I~cQz1omic PoUcv Council's Working Gr~u~~ on Ru~ ~yeiopment~. This working group will become a standing ~ommfttee of the President's Economic Policy Council and will implement any rural development initiatives developed by the President's Council on Rural America and approved by the Administration, Secretary Teutter.will hold a press availability at the U.S. Department of Agriculture today at 10:30 a.m. to discuss these initiatives. FOR FURTHER INFORMATION CONTACT: At the U.S. Department of Agriculture, Kelly Shipp (202) 447'4623. PAGENO="0188" 184 WORKING GROUP on RURAL DEVELOPMENT PRESiDENTiAL RURAL DEVELOPMENT INITIATIVE Room 5405 South BuUdlng I (~~1II U.S. DEPARTMENT OF AGRICULTURE W iA~' WASHINGTON, D.C. 20250 (202) 245-7583 FAX 202/382-1077 PRESIDENTIAL INJTL4TIVE ON RURAL DEVELOPMENT SUMMARY OF PROGRESS July 9, 1991 SUMMARY Two of the major action items of the President's Rural Development Initiative are the President's Council on Rural America, and the pilot State Rural Development Councils (SRDC). President Bush has appointed seventeen members of his Council and they are actively pursuing a plan of work with recommendations to be to the President in the latter part of 1992. In cooperation with State and local gnvernments, eight pilot SRDCs have been organized. An Executive Director is assigned to each SRDC, methods for flna.ncing the Councils worked out, and working relationships developed with State and local governments, as well as the private sector. A National Rural Economic Development Institute was organized which provided rural development training for the Washington-based inter-departmental Initiative staff; a one-week intensive course for the SRDC members (Federal, State, local and private interests), and a three day follow-up session. A twenty one member Economic Policy Council Working Group on Rural Development (EPC/WGRD), chaired by the USDA Secretaiy, Edward R. Madigan, represents fifteen departments two independent agencies, and two White House bodies. The EPC/ WORD is the policy making body for the initiative. A Management Group of inter-departmental, senior program managers advises the EPC-WGRD on the implementation of the Initiative. During the next 6 months the President's Council will hold three working sessions and conduct a series of public hearings. Based on rural development needs and resource assessments, the SRDCs will be writing a SRDC strategic plan, and implementing demonstration programs. The pilot phase will conclude with an assessment of the SRDC implementation models by the end September, 1991. At that time, other States will be invited to participate the Rural Development Initiative. PAGENO="0189" 185 2 THE INITIATIVES The Presidential Initiative on Rural Development, announced in January 1990, called for the following major steps: * Establish the Economic Policy Council Working Group on Rural Development a permanent Cabinet-level policy body with responsibility for implementing the President's Rural Initiative; * Create a President's Council on Rural America to advise the President on how the Federal government can improve rural development policy and programs; * Create State Rural Development Councils of rural development officials to conduct comprehensive federal/state rural development. programs; * Demonstrate promising rural development practices, and improve the targeting of Federal rural development resources; and * Expand the provision of rural development information through the Rural Information Center. PROGRESS This report updates the progress achieved to date in implementing the President's Rural Development Initiative. EPC Working Group on Rural Development The President's Initiative called for the Economic Policy Council Working Group on Rural Development (EPC-WGRD), as a Cabinet-level, inter-departmental decision-making body, to exercise continuing responsibility for managing implementation of the Presidential Rural Development Initiative. The EPC-WGRD meets three to four times a year. The next meeting is being scheduled for mid~September, 1991. A staff-level Monday Management Group (MMG) of senior program managers, operating under the authority of the EPC-WGRD, meets regularly to provide detailed definition to the Presidential Initiative. This group meets on the second and fourth Monday of the month, is chaired by the USDA Deputy Under Secretary for Small Community and Rural Development, and rotates meetings among the EPC-WGRD departments. The MMG is responsible for the design of an implementation strate~', and for giving definition to the action items contained in the Presidential Initiative. The MMG operates through project PAGENO="0190" 186 3 Task Forces: * State Council Coordinating Task Force (no longer operational) helped to define the role for the SRDCs, determined methods for staffing, and developed the structure under which SRDCs were organized; * Rural Economic Development Institute Task Force (no longer operational) defined the curriculum for the National Rural Economic Development Institute training for SRDC members; * Demonstration Task Force is drafting the guidelines for implementing SRDC demonstration projects,the Demonstration and Targeting action item in the Presidential Initiative; * Federal Employee Trainuzg Task Force is responsible for defining rural development training needs for Federal employees and assessing the capacity of the existing training system to meet those needs; * Outcome Monitoring Task Force is responsible for evaluating the success of SRDCs and the methods used to support them during the pilot phase; * Public Affairs Management Task Force is responsible for preparing public * information materials in support of the Presidential Initiative; * &pansion Task Force is responsible for designing the procedures for moving the SRDCs from the pilot phase of the eight States to full national implementation in all 50 states and territories; and, * Rural &onomic Development Resource Centers is reviewing a proposal to utilize the Small Business Administration 503/504 Certified Development Companies for accessing inter-departmental rural economic development financing, As the Initiative is implemented, the EPC-WGRD will continue its oversight role in rural development policymaking, including the following: * The EPC-WGRD will ensure the continued availability of inter-departmental resources to support the initiative and promote collaboration on the Initiative among Federal departments and agencies; * The EPC-WORD will serve as a policy-making body to resolve inter- departmental issues identified by State Councils and elevated to the EPC- WORD for national policy action PAGENO="0191" 187 4 The EPC-WGRD will serve as the point of contact between the Federal executive branch, at the national level, and state governments to discuss and recommend appropriate policy responses to Federal-State issues that are identified through Federal-State activities in the SRDCs. President's Council on Rural America The President's Council on Rural America was formed by Executive Order c~12720 to advise the President on rural development policy needs and to provide guidance in setting a national policy agenda for rural economic development. A seventeen member Council has received Presidential Commissions, and a chair (Winthrop P, Rockefeller) and vice-chair (Governor Kay Orr) has been appointed. The orientation meeting of the Council was held in Washington, D.C., on January 23-24, 1991. At this meeting the Council was briefed on current conditions in the rural economy, rural development procedures, and steps being taken to implement the Presidential Initiative. A working session was held in Morrilton, Arkansas, on May 28-19, 1991. At this meeting the Council adopted the following mission statement: `To advise the President on how rural Americans can improve their quality of life, enhance their economy and improve delivery of Federal services and resources." The Council organized four work groups: (1) Economic Issues, (2) Institutional and Infrastructure Development, (3) Individual Development and Lifestyle Essentials, and (4) Implementation Factors and Funding. Future meetings are scheduled for July 30-31 (Kennebunkport, Maine), September 23-25, November 25-27; and, during 1992, January 27-30 (Williamsburg, Virginia), March 24-26, and May 25-27. State Rural Development Councils The SRDCs are the key element of the Presidential Initiative. The Councils are composed of the heads of State offices of Federal agencies with rural development responsibilities; Federal regional representatives in the case of agencies without State-level offices; representatives of State government agencies; representatives of local governments; and representatives from the private for-profit and non-profit sectors. The State Councils have the following responsibilities: Mission : To improve the employment opportunities, incomes, and well-being of the Nation's rural people by strengthening the capacity of rural America to compete in the global economy. PAGENO="0192" 188 5 * Goal: To develop and implement a strate~' for the efficient and effective employment of public and private, rural development resources within the State. * Objectives: (1) To develop, at the state-level, inter-departmental and inter- governmental collaborative rural development programs; (2) To involve the private sector in the collaborative efforts; (3) To ensure that the benefits of rural development are widely shared among rural citizens; and, (4) To undertake a comprehensive, long-term and strategic approach to rural development efforts. * InitialAction Steps: (1) Inventory of State rural economic development needs- -to be completed during FY `91; (2) Inventory of the State rural economic development resources-to be completed during FY `91; (3) Develop a long- term, State Council Strategic Plan for the involvement of all rural development resources-a "living document", constantly reviewed, to be available early FY `92; and, (4) Implementation of a Council rural development action agenda, including one or more SRDC demonstration project(s)-to be implemented during FY `92. SRDC progress to date includes the following: Councils have been formed in 8 pilot States (Kansas, Maine, Mississippi, Oregon, South Carolina, South Dakota, Texas, and Washington); * Initial organization meetings were held during October and November 1991, with strong participation by Federal, State, and local organizations; * Executive Directors have been identified and funded for one year (by the Departments of Transportation, Commerce-Economic Development Administration, USDA-Extension Service, Farmers Home Administration, Forest Service, and Soil Conservation Service) for all pilot States; * The Rural Economic Development Institute has been formed at the University of Wisconsin-Madison, and has conducted a three-day training session for Washington-based MMG'staff. Also, conducted two six day, multi- state National Institutes for 250 SRDC members. Those in attendance included senior administrators from both Federal and State agencies, Governors' staff~ State government commissioners and private sector representatives. A second, in-state, three day Summer Institute is being conducted in each SRDC state. * Funding for the National Institute was provided by the Departments of Commerce (Economic Development Administration), Health and Human PAGENO="0193" 189 6 Services, Interior, Transportation, Small Business Administration, and the USDA (Cooperative State Research Service, Economic Research Service, Extension Service, Forest Service, Office of Transportation, and Rural Electrification Administration). All eight SRDCs have held numerous follow-up meetings to complete the organizational effort, including the drafting of SRDC by-laws, and selected SRDC chairs. In three States the SRDC is led by State and Federal co-chairs. All SRDCs have completed rural development needs assessments and resource inventories and are in the process of drafting their strategic plans. To provide guidance for the expansion of the SRDCs to additional States, the Outcome Monitoring Task Force is conducting evaluations on: (1) The National Rural Economic Development Institute (completed); (2) The organization and work of the SRDCs; (3) The MMG operational and support. structure for the SRDC; and, (5) The SRDC demonstration and targeting projects. In addition, The Aspen Institute and the Ford Foundation are collaborating to support the University of Southern California's Washington Public Policy Institute in writing case studies on the eight pilot SRDCs. Rural Information Center The Rural Information Center (RIC) has emerged as the single most important source of ready information about rural development within the Federal Government. The RIC is a joint project of the USDA National Agricultural Libraiy and the Extension Service. The range of activities, as well as resource levels, have been expanded. During FY'91 a number of Federal departments and agencies have made active commitments to RIG * The Department of Health and Human Services has funded a Rural Health Information Clearinghouse at the RIC; * The Small Business Administration is participated in a small business information pilot study; * The Farmers Home Administration provided a staff position. In addition, other Federal agencies, including both the Department of Transportation and the USDA Forest Service, are exploring participation in support of the RIG 44-629 0 - 91 - 7 PAGENO="0194" 190 THE WHITE HOUSE Office of the Proec Scactery For Immedleto Releeco Juty 10, 1000 EXECUTIVE ORDER PRESIDENTS COUNCIL ON RURAL AMERICA By the outhority vootod in me cc Procidont by the Conetliution end lowe of the Untied Stotoc of Americri, end In order to octebllzh, In occordonco with the provicione of the Federal Advlcory Committee Act, cc emended (5 U.S.C. App.), en cdvIeory council on the rural economic development policy of the United Statoc, it Ic hereby ordered cc followe: Soctioni. tnbflahrncol. (e) There Ia cetebilcihed the Preeldont'c Council on Rural Ametice (`Council'). The Council aheil be compoiicd of not more then twenty (20) rncmbere to be cppointcd by the Procidont (b) The Procldont thrill appoint a Chelrrnen end Vice Choirmon from cmon~ the mombera of the Council. ~ Eunotione. (a) The Council thrill advice the Preoldont and the Economic Pŕilcy Council on how the Federal Government can improve Ito rural economic development policy. (b) In the performance of lie cdvlcorV dutioc, the Council chali conduct cuoh contInuing roviowe rind cecocemento of the Federal Govcrnmont'c rural economic development policy cc deemed nececcery or cpproprlate by the Council. ~ AdcnInIctrnIi~ii. (a) The heade of executive cgoneiee thrill, to the extent permitted by low, provide the Council ouch Information with reopeot to rural economic development policy mattere cc the Council doomo rc~uIrcd for the purpoco of carrying out ho functionc. (b) Mombero of the Council who are not otherwlco offlccrc or empioyc-oe of the Federal Government thrill corvo without any componcotion for their worh on the CounciL However, they ehall be entitled to travel oxponcoc, including per diem In lieu of cubcictonco, cc authorized by tow for pereonc caving Intermittently In tho Government cervtce (5 U.S.C. 0701.5707). (c) To the extent permitted by law and cubloct to the availability of eppropriatlono, the Frirmere Home Admlnietratlon thrill provide the Council with cdmlnlctratlve ccrvtcec, lecllltloe, otaft, and other aupport cavlcec noceecery for the performance of Ito functlonc. Funde for the operation of the Council thrill he provided by the Department of Agriculture. (d) Notwithetrindlng cny other Executive order, the lunctionc of the Precident under the Federal Mvtccry Committee Act, cc emonded, except that of reporting to the Congreco, which crc eppllcablo to the Council, thrill be performed by the Secretary of Agriculture in eccordance with guldellnoc baud by the Adminletretor of General Sorvlccc, (o) The Council thrill terminrito 2 ycrira from the date of thic order unloco cooner extended. GEORGE BUSH ThE WHITE HOUSE, July 16, 1990. PAGENO="0195" 191 President's Council on~Rural America WINTHROP P. ROCXEFE?LL~R, of Arkansas. Chairman. Currently, Mr. Rockefeller serves as Chairman of the Board and CEO of Winrock Farms, Incorporated, Little Rock, Arkansas. KAY~ORR. of Nebraska. Vice Chairman. Former Governor of Nebraska and a former member of USDA's National Agricultural Research and Extension Users Advisory Board. Ms. Orr also served as Treasurer of Nebraska. N~LDAL~ARmN. of Kentucky. Mrs. Barton seives as President and Chairman of the Board of Health Systems Incorporated In Corbin, Kentucky. J~NNE.BQURNE,~J~L, of South Carolina. Currently, Mr. Boume serves as Mayor of North Charleston, South Carolina. Member of the Board of Directors of Cooper River Federal Savings and Loan Association. IiQRMAN BROWN. of Michigan. Currently, Dr. Brown servos as President end Chief Programming Officer of the W. K Kelbgg Foundation in Battlecreek, Michigan. Serves on President Bush's Thousand Points ofUght Foundation. HJVLMffiJ), of Iowa. Mr. Field is a Partner in the law firm of Beecher, Rathert, Field, Fister, Walker and Morris in Waterloo, Iowa He also serves as City Attorney, City of Waterloo. ~SJ~EkCD~4r,. of Tennessee. Dr. Floyd serves as Chancellor of the Tennessee Board of Regents, in Nashville. RALPH HCWSTAP~. of Minnesota. Mr. Hofstad Is the Founder of Hofatad Consultants and recently served as President and Chief Executive Officer of Land O'Lakes, Incorporated. He is a Director of CARE, N.Y. ~HARUE EJ~U~, of Missouri. Mr. Kruse is Director of the Missouri Department of Agriculture in Jefferson City, Missouri. CHARLESLMQYEB, of Kansas. Currently, Mr. Moyer servos as Chairman of the Board and Executive Vice President of the First National Bank of Philiipsburg in Phillipsburg, Kansas. -more- PAGENO="0196" 192 CATHY B. NOVINGEFI. of South Carolina Currently, Mrs. Novinger serves as Senior Vice President of Administration and Government Affairs for SCANA Corporation in Columbia, South Carolina REYNAL.DO U.ORTIZ of Washington. Currently, Mr. Ortiz serves as President and Chief Operating Officer for US West NewVector Group in Bellevue, Washington. UNWO±ODE. PALMEFILAtI. of Maine. Currently, Mr. Palmer is President of Capitol Consultants, Inc. and a lobbyist for Eaton, Peabody, Bradford and Veague fri Augusta, Maine. He is the owner and operator of Tree Farm end Land Development Companies. ALBERT HAROLDQIJIEI of Minnesota Currently, Mr. Oulo setves as President of the Prison Fellowship Ministries in Minnetonka He is a former Governor of Minnesota and served a U. S. Senator from Minnesota. STEVEN KRISSYDNESS. of North Dakota. Currently, Mr. Sydness is Dfrcctor of International MarketS, Great Plains Software, Inc., in Fargo. He also serves on the Board of City Commissioners k~s Fargo, North Dakota. BEJ~WALKER. of MississippI Mr. Walker was formciiy Chairman of the Board of W. E. Walker Stores, Incorporated, and has served on the Boards of the Deposit Guaranty Bank and the Mississippi Economic Council. DONALD KESNER WEILMUNSTER, of Idaho. Currently, Mr. Weilmunster is the owner of Fort Boise Cattle Company which consists of raising cattle, farming, timber, and mining. PAGENO="0197" 193 U.S. OEPA~MENT 0, Ao~,cUL'ruflg DRAFT P DEPARTMENTAL cueJCCT~ I EsrABLL~r OF S~ ~3RAL DEv~op!~7r ca.iNc~s REGULATfiON OATS: 0~~ On January 22, 1990, President Bush ordered implementation of the White House Economic Policy Council's Working Group on Rural Development report, 1Rural Economic Development for the 90's: A Presidential Initiative.' The actions: (1) form a Presidential Council on Rural America, (2) establish State Rural Development Councils, (3) conduct rural development demonstrations, (4) expand the Rural Information Center, (5) target Federal rural development programs, and (6) make thE Working Group a standing committee of the President's Economic Polic) Council. The Secretary of Agriculture chairs the Working Group. The Federal rural development mission is to improve the employment opportunities, incomes and well-being of the Nation's rural people by strengthening the capacity of rural America to compete In the global economy. Implementation of the mission is guided by four main principles: - The private sector must be involved; - Benefits of development must be shared; - New governmental partnerships are required; and - A strategic approach is needed. Piüpose -- The State Rural Development Councils (States and territories) are the functional committees responsible for implementing the Presidential Initiative at the State level. They have four functional responsibilities. - To develop better State level inter-departmental and inter- governmental RD relations; - To inventory rural economic development needs in the State and identify alternative solutions for dealing with RD needs; - To design a State strategy for applying availatle resources to achieve long-term rural economic development; and, - To implement (in cooperation iith the States, local governments, and the private sector) the State rural economic development strategy, and make progress reports. Nembership -- Each State Council is to be composed of (1) Federal RD program representatives, and (2) members which represent State RD programs, local government organizations, tribal governments and private enterprise. Dl$TSISUT1OP4: PAGENO="0198" 194 Qrgiatzatl-on -- Each Council is to organize Its own executive structure and select leadership positions. Each Council will have a senior level, Federal employee as a full-time Executive Director. EstiMated Omerating Costs -- Council members (Federal, State and local government, and private interests) will not be entitled to reimbursement, except from their own agency funds, for any Council activity. This does not apply to the Executive Director, who as a full- time employee assigned to the Council is compensated for work in support of the State Council. PAGENO="0199" 195 WORKING GROUP on RURAL DEVELOPMENT PRESIDENTIAL RURAL DEVELOPMENT INITIATIVE Room 5405 South Building 0 ~ ~ U.S. DEPARTMENT OF AGRICULTURE WASHINGTON, D.C. 20250 (202) 245-7583 FAX 202/382-1077 RURAL DEVELOPMENT MISSION -- To improve the employment opportunities, incomes, and well-being of the Nation's rural people by strengthening the capacity of rural America to compete in the global economy. -- STATE COUNCIL GOAL -- To develop and implement a strategy for the efficient and effective employment of public and private, rural development resources within the State. -- OBJECTIVES -- To develop, at the state-level, inter-departmental and inter- governmental collaborative rural development programs. To involve the private sector in the collaborative efforts. To ensure that the benefits of rural development are widely shared among rural citizens. To undertake a comprehensive, long-term and strategic approach to rural development efforts. -- INITIAL STATE COUNCIL ACTIONS -- Inventory of State rural economic development needs. (Completed during Fl `91) Inventory of the State rural economic development resources. (Completed during Fl `91) Develop a long-term, State Council Strategic Plan for the involvement of all rural development resources. (Draft CSP for Summer Institute) Implementation of a Council rural development action agenda. (Fl `92 implementation) PAGENO="0200" STATE RURAL DEVELOPMENT COUNCIL LEADERSHIP 5/21/91 Working Group on Ibiral Develognent Roan 5405-South Building U. S. Departh~ent of lcrictilture 14th & Independence Avenue, S .W. Washington, D.C. 20250-0100 tate Kenue M~ne~ ~i~&pp~ Jack Su~9vsn 6~i~ ~th~&o~na s~bikŕta oxas W~gton ~a1rs John Price Leroy Perry Don Thornpaon Pat Dixon MeMe Hogon John Klrchhoft Fred Poston Agency FmHA SBA FHwA FmHA EDA FmHA FmHA ES Phono 913-295-2870 207-622-8382 601-965-4215 503-326-2731 803-765-5676 605-353-1430 817-774-1301 509-335-2933 Fax 913-295-2669 207-~-8277 601-965-4231 503-326-6898 803-765-5677 605-353-1220 817-774-1477 509-335-2959 Che~r Laura Nlcho~1 Bernard Shc,~i Doug McKay Agency KDOC St/ME . Oft/Qov. Phone 913-283-3481 207-289-3071 803-734-9818 Fax 913-286-6066 . ixocu~vo Director Richard Cox Robert Ho Poto Pony Rick Rooo Frank Garcia Bob Hartford Stephen Buxboum Sponoor SCS ES EDA FS DOT FmHA ES Phone 913-288-2688 207-681-3192 801-857-2284 503-373-7258 803-737-0449 605-773-6001 206-686-8979 Fax 913-283-0183 207-681-1387 601-057-2358 503-601-6115 803-737-0410 605-773-8041 208-686-0873 Ad~rooo KDOC 400S.W. 6th 102 LIbby Hal Univ/ME 1320 Seven Sp~Inga Rd. do OR Econ. Dovcicp. Dept P.O. 8o2c 827 Cc~umb!o, SC 800 Gov~'o Drive MS/GH-61 9th 9* Co'umbIa * Su~to 600 Topeka, KS 69603 Orono, ME 04499 Raymond, MS 39154 775 Surrtrner St Sc3em, OR. 07310 29202 Pleffo, SD 57601-2217 * Cyrnpla, WA 83504 Monitor Den GIbb Coil Bouchcsd Pat O'Brien Stephen Frcrtcko John Sebetue Joanne Kt~ng Richard Tcrbl Dave Seem Agency SBA SCS DoD .. 0MB FS FrnHA DOT ERS Phone 202-205-7520 202-392-0767 703-397-3822 202-395-4752 202-453-8233 202-447-4439 202-383-0233 202-219-0544 Fax 202-205-7034 202-472-1452 703-697-3021 202-395-4341 282-453-3271 202-475-5033 202-396-3713 202-219-0202 - Walter E. Hill (202) 447-8653 FAX: (202) 447-2080 W. Robert lovan (202) 245-7583 FAX: (202) 382-1077 3. Norman Reid (202) 245-7582 FAX: (202) 382-1077 Linda Deniijson (202) 382-0394 FAX: (202) 382-1077 Address: PAGENO="0201" 197 PRESIDENTIAL INITIATIVE ON RURAL DEVELOPMENT EPC WORXING GROUP ON RURAL DEVELOPMEW~ June 12, 1991 Douglas J. Allor Deputy Assistant. Secretary for Economic Development Economic Development Administration U. S. Department of Commerce Herbert C. Hoover Building, Room 7804 Washington, DC 20230 Phone: 202-377-4067 FAX: 202-377-0995 Mr. Sqhuylor Saab Deputy Under Secretary U.S. Department of Health and Human Services Hubert H. Humphrey Building, Room 600E 200 Independence Avenue, S.W. Washington, DC 20201 Phone: 202-475-6060 FAX: 202-245-6699 Nicole Ballenger Senior Staff Economist Council of Economic Advisers Room 323 Old Executive Office Building Washington, DC 20500 Phone: 202-395-5040 FAX: 202-395-6947 Paul R. Bardack Deputy Assistant Secretary U.S. Dept. of Housing and Urban Devel. Room 7214 451 Seventh Street, S.W. Washington, DC 20410 Phone: 202-708-0566 FAX: 202-708-3363 Bruce Bartlett Deputy Assistant Secretary U.S. Department of the Treasury Main Treasury, Room 3445 1500 Pennsylvania Avenue, N.W. Washington, DC 20220 Phone: 202-566-2768 FAX: 202-786-8452 PAGENO="0202" 198 Ms. Debra Bowlarid Acting Assistant Secretary for Policy U.S. Dapart17~ont of Labor Frances Perkins Building, Room 52006 200 Constitution Avenue, LW. Washington, DC 20210 Phone: 202-523-6181 FAX: 202-523-9216 The Honorable Betsy Brand Assistant Secretary U.S. Department of Education Room 4090 330 C Street, S.W. Washington, DC 20202 Phone: 202-732-2251 FAX: 202-732-3897 Robert Grady Associate Director Office of Iianagcuont and Budget ~a. 260, Old Executive Office Bldg. 17th & Pennsylvania Avenue, N.W. Washington, DC 20503 Phone: 202~395-4844 FAX: 202-395-5730 The Honorable L. Joyce Hampero Assistant Secretary Economic Development Administration U.S. Dept. of Commerce Room 7804 - Herbert C. Hoover Building 14th & Constitution Avenue, N.W. Washington, DC 20530 Phone: 202-377-5081 FAX: 202-377-0995 Walter E. Hill Assistant Under Secretary Office of Small Comm. and Rural Devel. U.S. Department of Agriculture Room 219A Administration Building 14th and Independence Avenue, S.W. Washington, DC 20250-0100 Phone: 202-447-8653 FAX: 202-447-2080 FTS: 447-8653 FTS FAX: The Honorable Anna Kondratas Assistant Secretary Community Planning and Development U. S. Department of Housing and Urban Development Room 7100 Washington, DC 20410 Phone: 202-708-2690 FAX: 202-708-3363 PAGENO="0203" 199 The Honorable Edward R. Madigan Secretary U.S. Department of Agriculture 14th & Independence Avenue, S. W. Washington, DC 20250-0100 Phone: 202-447-3631 FAX: 202-447-2166 FTS: 447-3631 FTS FAX: The Honorable ~7ames 0. Mason Assistant Secretary U. S. Department of Health and Human Services Room 716G Hubert H. Humphrey Building 200 Independence Avenue, S. W. Washington, DC 20201 Phone: 202-245-7694 FAX: 202-245-6963 The Honorable S. Anthony McCann Assistant Secretary U.S. Department of Veterans Affairs Roon 500 810 Vermont Avenue, N.W. Washington, DC 20420 Phone: 202-233-8041 FAX: 202-535-8525 Patrick !4urphy Deputy Assistant Secretary U.S. Dept. of Transportation Nassif Building, Roon 10220 400 Seventh Street, S.W. Washington, DC 20590 Phone: 202-366-4551 FAX: 202-366-7127 Gary Nodlor Kansas city Regional Administrator U.S. Small Business Administration 911 Walnut Street 13th Floor Kansas city, MO 64106 Phone: (816) 867-3316 FAX: 8-067-5559 FTS: 867-3316 FTS FAX: 867-5559 Robert M. Rauner Director of Economic Adjustment Of f ice of Economic Adjustment U.S. Dept. of Defense The Pentagon Room 4C767 Washington, DC 20301-4000 Phone: 202-697-9155 FAX: 202-695-1334 PAGENO="0204" 200 The Honorable Patricia Saiki Administrator U.S. Small Business Administration 409 Third Street, S.W. Washington, DC 20416 Phone: 202-205-6605 FAX: 202-205-6429 The Honorable Rockwell A. Schnabel Deputy Secretary U.S. Department of Commerce Rm. 5838 Herbert C. Hoover Bldg. 14th & Constitution Avenue, N.W. Washington, DC 20230 Phone: 202-377-4625 FAX: 202-377-8610 John ~Schroto Assistant Secretary U.S. Department of the Interior 18th & C Streets, N.W. Rm. 6116, Interior Building Washington, DC 20240 Phone: 202-208-6182 FAX: 202-208-5048 The Honorable Roland R. Vautour Under Secretary Small Community and Rural Development U.S. Department of Agriculture Room 219-A Administration Bldg. 14th and Independence Avenue, S.W. Washington, DC 20250-0100 Phone: 202-447-4581 FAX: 202-447-2080 Robert H. Wayland, III Deputy Assistant Administrator Office of Water U.S. Environmental Protection Agency Room 1035, East Tower 401 K Street, S.W. Washington, DC 20460 Phone: 202-382-5711 FAX: 202-382-5711 Wylie Whisonant Deputy Under Secretary U. S. Travel & Tourism Administration U.S. Department of Commerce ~. 1865 Herbert C. Hoover Building 14th and Constitution Avenue, N.W. Washington, DC 20230 Phone:* 202-377-0136 FAX: 202-377-4279 PAGENO="0205" 201 SCHILLINGER & ASSOCIATES MARKETING CONSULTANTS 8128 DOGWOOD RD. * GERMANTOWN, TN 381384129 o .9O1/7E4~5422 July 11, 1991 To Honorable, Mike Espy. Chairman Richard Durdin Harold Ford James Oberstar House Of Representatives Washington, DC 20515 Re: Delta Regional Investment Fund Dear Honorable Representatives, Attached is a development report on the progress of an "established community development laboratory" for enriching the auality of community life, stimulating economic renewal, and motivating Iccal initiative. The program began in 1987 under the efforts and ingenuity of, Richard 7. Fasten, Ph.D Professor Of Community Development Southern Illinois University 35 Hillcrest Drive Carbondale, IL 82901 618/549-2461 My first meeting with "Doc" Poston was on May 18th, 1990 at my home in Germantown. That meeting revealed accomplishments in Cairo. IL that the entire Delta Area communities can use as a model. At that time I offered my services to assist him in any way possible in accomplishing his community development goals. The accomplishments, under the guidance of "Dec' Fasten through the CONFLUENCE CO)9!UNITY DEVELO?MENr INC. . . A Not For Profit Organization Dedicated to Human Progress. . . are in the enclosed report. Smell amounts of financial assistance have been received from two private foundations. PLEASE take one minute to read the Foreword and the Executive Summary. This could become the "model program" that could change the lives of many people in the Delta Area. Resre~tfully Submitted, R~~' ~chjl~['iLn~ev ~ SCHILLINGER & ASSOCIATES RPS/kv PAGENO="0206" 202 L~ QP I~L~I~ DF~ A MA~T'ER I~ I~ A~ P' DR `I' I-I R 1-1 I ~ cJ R I ~ It 8 `I' C) It A r I C) N QP' ~ A I RQ, I L, L, I N~J I ~ A Model ?artnership Between a Town And Its State University PAGENO="0207" 203 CONTENTS FOREWORD Background on Cairo A Laboratory for Community Development II. EXECUTIVE SUMMARY Three Page Condensation of Report 2 III. THE LABORATORY Genesis, Organization and Action 4 Workshop and Formulation of Master Plan 8 IV IMPLEMENTATION OF THE MASTER PLAN 10 V. MANAGEMENT 13 VI. MARKETANALYSIS 14 ExhibitA-Population by Market Segment 15 Exhibit B - Projected Attendance Penetration 16 Exhibit C - Demographics 17 Exhibit D - Estimated Park Attendance by Month and Day 18 Exhibit E - Design Day, Arrival and Departure by Hour 19 VII. FINANCIAL ANALYSIS 19 Exhibit F- Toll House Restaurant and Gift Shop, Projected Revenue and Operating Expense 20 Exhibit G - Boatman's Memorial Concession Stand, Projected Revenue and. Operating Expense 21 ExhibitH-Projected Income and Other Expense 21 PROJECIED COSTS FOR PARK DEVELOPMENT STAGE NUMBER ONE, PHILOSOPHY AND RATIONALE 22 Exhibit I- Toll House Restaurant and Gift Shop, Projected Remodeling and Equipment Costs 22 Exhibit J - Boatman's Memorial With Concession Stand, Projected Renovation and Equipment Costs 23 Exhibit K- Expansion of Picnic Grounds, Projected Building and Equipment Costs 23 Exhibit L - Children's Playground and Sports Area. Projected Building and Equipment Costs 23 CONSOUDATED BUDGET 24 CONCLUSION 24 DRAWINGS 25 REFERENCES 32 PAGENO="0208" 204 FOREWORD The National Register of Historic Places refers to Cairo as a community that despite decades of decline and depression, remains one of the most fascinating in the state of Illinois. "Its past glory," says The Register, "stands recorded in the streets and buildings that remain. . .works of architectural brilliance.. . its history among the most colorful and complex of any municipality. .. rife with schemes, skirmishes, phenomenal growth and equally phenomenal decline. . . a history of promise unfulfilled." Located at the confluence of our nation's two mightiest waterways--the Mississippi and the Ohio--where twenty thousand miles of tributaries from the Rocky Mountains to the Appalachians converge, and Illinois, Missouri and Kentucky are linked geographically and culturally in a instate region, Cairo is one of the most publicized cities in the Midwest, which for more than a century and a half has claimed a near mythic hold on the visionary dreams of Americans. No other American river town possesses a more abundant supply of resources yet to be capitalized upon. In a setting reminiscent of the Old South, prominent in the writings of Charles Dickens and Mark Twain, the western headquarters of Union Army forces during the Civil War, a steamboat terminal for settlers from the East who forged the opening of the West, more than a fourth of the entire community is listed on The National Register of Historic Places. Here at the meeting point of those two mighty rivers the tonnage of commercial navigation exceeds that which passes through the Panama Canal. Mainline rail service and a network of interstates reaching out to teeming consumer and industrial markets less than a day's travel away, make Cairo a natural hub for river, rail and highway transportation. By virtue of its strategic geographical location and its historic fame, Cairo should be a thriving center of prosperity. Instead, it is mired in poverty, afflicted by double-digit unemployment, substandard housing, the ugliness of physical deterioration and boarded-up storefronts. Decade after decade Cairo consistently lacked the capacity to deal with its adversities and constraints. It suffered a history of civic resignation, bitter internecine factions, bigotry and racial violence, wasteful local government, power elites in positions of domination that engaged in intimidation, vindictiveness, and unethical tactics to discourage competition. Bribery, favoritism, insensitivity, bossism, vice, political corruption, sheer indifference to the general welfare run through its history as recurring parts of the theme--classic examples of practices and policies that have suppressed the workings of democracy and killed community life in countless numbers of American towns and cities. It is in this locality that Southern Illinois University in partnership with concerned citizens has established a community development laboratory in which to formulate policies and methodologies for enriching the quality of community life, stimulating economic renewal, and motivating local initiative to resolve internal problems in all areas of need--an experiment in which actions that will strengthen and advance the workings of democracy at the local base of American society, taking into account the complexities our nation faces as we move toward the year 2000, are being tested and demonstrated. PAGENO="0209" 205 2 II EXECUTIVE SUMMARY This report concerns ajoint effort by a town and a state university to create a living example of how we can regenerate our disintegrating sense of community--the socioeconomic cancer now growing in the fabric of American society of which the more visible issues confronting our towns and cities today are merely symptomatic. The array of internal ills now plaguing towns and cities across our nation do not define their underlying problem. They cant pull themselves together to make democracy the working way of life that enables them to tackle their ills. They can't think and act as communities. Vision and leadership are impossible in the absence of shared values, and vibrant local communities are the soil in which shared values are generated. This, in essence, is the premise on which the laboratory established by Southern illinois University and the people of Cairo is based. With guidance from the university, the people of Cairo, long beset by decay and deterioration, are in the process of coming together as neighbors and creating that sense of community towns throughout America so desperately need. Cairo still has a long uphill journey ahead, but through community self-study and analysis, citizen fact-finding, discussion at a series of thirty-two public forums or "town meetings," and volunteer labor invested in scores of action projects that have become instruments for the development of community, the moment may now be at hand for Cairo to finally seize hold of its deferred destiny--and, in so doing, cast a beacon of hope outward to all of our nation's struggling towns and cities. The Cairo laboratory began in 1987 with a handful of people who quickly multiplied their number into the hundreds--black and white, young and old, and all in between. After intensive training, volunteer workers took a complete census of population and housing which became a means of eroding the color line, assessing needs and generating a spirit of togetherness and determination that had not existed before. Upon learning that Fort Defiance State Park where the Ohio River joins the Mississippi was scheduled to be closed, Cairo's growing sense of community had given its people the will to form a nonprofit development corporation with which they leased the park from the state, then turned out en masse to clear away its jungle overgrowth and begin maintaining it themselves. Now that point of geographic wonder is a place where tourists can view the confluence of our nation's two mightiest waterways. In the context of their comprehensive program of civic awakening, the people of Cairo, examining every component part of their community as a social organism, have identified their unique combination of historic resources coupled with their strategic geographical location as their major asset for economic renewal. And they have seen that by pulling together to make use of those resources they will continue rekindling their sense of community, thus further strengthening the workings of democracy. In June 1990 they held a three-day "think tank" workshop to review their many achievements and begin consolidating their ideas for future economic development into a master plan. Ronald P. Schillinger, President of Schillinger & Associates of Germantown, Tennessee, a management and marketing consulting firm, was brought in for the three-day workshop to lend its business expertise in drawing up the master plan. To provide jobs for the unemployed the ultimate objective of the master plan which has grown out of the past three years of community self-study and discussion is to restore Cairo as an early American river town in the manner that Williamsburg, Virginia has been restored as an early PAGENO="0210" 206 3 American colonial town. This will enable Cairo to capitalize on its lucrative economic potential in the rapidly growing U.S. tourist industry. Every trade and service related to restoration, construction, cultural development, education, entertainment, recreation, tourism, eating establishments, and overnight accommodations will be invigorated. It will be a transformation of nationwide historic and cultural significance. Development projects leading to this ultimate objective will be carried out in a series of steps designed to make the restoration insofar as possible a self-supporting enterprise, and produce investment capital for each succeeding project to help carry the complete restoration through to full realization. With this ultimate objective in mind, the three-day workshop focused on a listing of projects according to location and image to be included in the master plan, each of which will contribute to the production of income and be of specific historic value. The development of Fort Defiance State Park into an income-producing enterprise is the central beginning point, the "hub." This will provide capital with which to initiate subsequent projects eventually reaching out through the city and beyond into the instate region of southern illinois, western Kentucky, and southeast Missouri. As the restoration goes forward tours will be conducted for entertainment and educational purposes, giving travelers a memorable experience of the life-styles and conditions that faced our country's builders as America began her westward expansion into Lthiisiana Territory. Tickets for the tours will be sold at the historic Toll House Restaurant Gift Shop located at the entrance to Fort Defiance State Park. Persons within a 100-mile radius of Cairo provide the best'~otential market, but the vast recreational and historic resources of Cairo as a tourist destination for travelers from outside this radius are of major significance. The Southern Illinois Tourism Council receives numerous inquiries about the site from sources national and worldwide. With 1.7 million residents within a radius of 100 miles--close enough to make several trips a year.-plus 2.6 million tourists now visiting 16 illinois state parks within 100 miles of Cairo, the potential market is approximately 4.3 million people. This does not include visitors at Missouri and Kentucky state parks which are also within 100 miles. To assist in planning, market analysis has been divided into four segments: Core, the City of Cairo; Primary, persons within a 50-mile radius; Secondary, those within a 100-mile radius; the Tourists, persons from a wider area. Each of these four segments will require a different marketing program to maximize income from return visits. Demographics and economic impact factors are measured in these market segments and compared with similar markets and projects to help calculate comparable control factors for analysis. As shown in Exhibit B, Section VI, Market Analysis, it is anticipated that the first development stage of Fort Defiance State Park outlined in Section IV, Implementation of the Master Plan, will attract 7.2% of the potential market, or 308,700 persons. This includes groups from churches, social clubs, schools, motorcoach tours, international and domestic tourists, and residents within 100 miles attending specially-planned events, activities, and attractions. Some of the characteristics of the general population obtained from research are: 65% are warm-month travelers, April through October. 46% enjoy sight-seeing, historic sites and scenic viewing. 55% desire to take something home, a souvenir. PAGENO="0211" 207 4 60% will spend money on food. 85% base their return visit on enjoyment, not price. These statistics along with other information help in estimating potential attendance, revenue, costs, and marketing planning. Specific characteristics of the warm-month traveler, April through October, are: 78% travel during the months of June, July, and August 64% have incomes over $20,000 73% are married. 74% are over 30 years of age. 71% will arrive at the park before noon. This information helps with administrative budgeting, inventory and staffing of facilities; marketing to create specific programs within the marketing plan for special events and communication distribution; and operations to prepare service requirements to meet the expectations of tourists and residents. As indicated in Section IV, Implementation of the Master Plan, facilities needed to build Fort Defiance State park into an income and job-producing enterprise will proceed in four development stages, each generating revenue to help finance the next, ultimately providing capital for the rebuilding of historic Cairo. The initial phase of the overall park development will focus on two income and job-producing properties: 1. Remodeling of the building vacated by the State Police near the park entrance into the Toll House Restaurant with turn-of-the-century ambience, a Gift Shop and Tourist Information. Estimated income $825,797 gross, $331,143 net. 2. Equipping and putting into operation the Concession Stand on the second floor of Boatman's Memorial, and installation of coin-operated viewing scopes. Estimated income $342,900 gross, $194,471 net. Ordinarily the start-up costs needed to put these two facilities into operation would be based on average conditions that exist within the industry. However, through the use of frugality and in-kind service the costs here will be considerably below average. III THE LABORATORY On February 11, 1987, Richard W. Poston, Professor of Community Development, Southern Illinois University at Carbondale, met with fifteen Cairo citizens in a private home where he outlined a self-help development program that would structure and set in motion a people's movement involving insofar as possible the entire communituy--men and women, black and white, young and old--all working as one. Using a policy of participatory democracy as old as America herself, now applied to modern times, citizens of this historic river town would analyze themselves as human beings, as a PAGENO="0212" 208 5 community, examine their strengths and weaknesses, face up to their needs, and take whatever actions they found necessary--depending primarily on their creativity and initiative. After adopting the proposal unanimously and with high enthusiasm, the fifteen appointed themselves as a temporary steering committee to promote the program through the community, elected two talented women--one white, one black--as co-chairpersons, and all fifteen raised their right hands making a solemn pledge.to see it through no matter how many years it might take. Then age-old habits emerged. As could be expected in any of the numerous communities across America suffering the ills of Cairo, nine of those fifteen soon dropped out--a moment of great drum beating quickly forgotten by most of the drummers. But the remaining six formed a solid core, and within the two months that followed mobilized a civic force unlike anything in the memory of the oldest citizen. Two hundred and twenty-five black and white volunteers went through a week of intensive training learning how to take a complete, up-to-date census of population and housing, climaxed by an all-community outdoor religious service where 500 people joined hands singing "Amazing Grace." Normally, the purpose of taking a census is to gather demographic data. Here it was for a much larger purpose. In keeping with the principle of carrying out every project, not as an end in itself, but as an instrument for the development of community, the census became an exercise in cross-cultural relations, a tool for eroding the color line--blacks and whites enumerating each other, assessing community needs and inequities, creating a new sense of neighborliness--and, as a by-product, gathering demographic data. For eight weeks, often until three in the morning, their census headquarters bristled with activity, detailed questionnaires on population characteristics, oocupational skills, and housing being checked, for accuracy, coded and made ready for computer tabulation. Never had so many people from the two races and from differing walks of life come together for so complex and difficult a project. In each household the enumerators also left opinion questionnaries for the probing of human attitudes--attitudes that form deep-seated barriers every community in today's America must overcome if it is to rise to its full potential for quality living-these questionnaires to be filled out in private with no names signed, then picked up in secret ballot boxes, thus providing a means by which the people could express without fear exactly what they thought of themselves and each other, of their community, its problems, its internal obstructions to progress and prosperity. This, then, became the basis for a report presented for discussion at public meetings. The new movement, called Operation Enterprise, had become everyday conversation. Neighbors who had rarely spoken were becoming friends. A nonprofit community development corporation was in the talking stage. In the process of taking the census and providing an outlet for the expression of hidden attitudes, citizen participation on a community-wide scale had been activated and a community that for decades had been civically dormant was showing signs of awakening from its slumber. As these early signs of social change were emerging, word came from the state capital in Springfield that Cairo was about to lose one of its paramount cultural and economic assets--Fort Defiance State Park, situated on that picturesque peninsula at the very point where the Ohio joins the Mississippi, and "Old Man River" surges relentlessly on to the Gulf. / Named for General Grant's Civil War Fort Defiance, dedicated by the state in 1960, then neglected and ravaged by filth and jungle overgrowth, state officials had decided that unless the people of Cairo wanted to lease the park and be responsible for its maintenance, it would be closed, shut down permanently as of the end of that year. PAGENO="0213" 209 6 Had this news come during the days of indifference that prevailed before the laboratory for community development was established, it would have been greeted as just another defeat to which the people had become accustomed. Now it came as a shock the truly concemed refused to accept. As the people's representative, Professor Poston began negotiations with state officials in Springfield and gained acceptance of the nonprofit community development corporation then being contemplated as the legal vehicle for leasing the park, thus making it an economic development project the people as a whole could have a direct and personal part in planning and accomplishing. Fort Defiance State Park could be theirs, an instrument for community problem solving, a means of adding fuel to the momentum then under way for the development of community, for strengthening and advancing the workings of democracy. Articles of incorporation for Confluence Community Development, Inc. were filed, and on July 11, 1987 hundreds of citizen volunteers, along with members of their Army National Guard, launched their first attack on the filth, driftwood, and entangled growth that had despoiled that historic site. Through the rest of that summer of 1987, on into the fall, increasing numbers of citizens with new hope for a brighter future--black and white, who over a period of decades had been separated by suspicion and predudice--expended thousands of hours of voluntary labor with donated materials and equipment working together at Fort Defiance State Park, infusing themselves with the sparkling essence of community. Boatman's Memorial, a three-level observation platform, was sandblasted and painted, bronze historic plaques cleaned and polished. Rest rooms and a concession stand that had been sealed off by iron doors and cement blocks were opened. Barbecue grills were installed, trash hauled away, riprap sprayed. Trees were trimmed, grounds kept mowed. On November 30, 1987, after nearly a year of intensive preparation, citizens jammed their high school cafeteria for the first in a series of public forums known as "town meetings" to help the people make themselves aware of every community problem conceivable, along with the will, the spirit, the unity needed to mount necessary action. Subject matter for the town meetings came from citizen fact-finding committees on every component part of community life: economic development, education, local government, the physical environment and aesthetic features, housing, public health and health care, social services, recreation, cultural development, historic preservation, etc. Nothing was left untargeted for investigation and improvement, and the intricate relationships among all of the community's varied parts were carefully pointed out. At each town meeting after the committee scheduled for that evening made its presentation, the crowd broke into study groups, each going into a room in the high school with a trained discussion leader and notekeeper, then reconvened in general assembly to hear the notekeepers' reports and proceed with decision making. On Christmas Eve of 1987 they received their 501(c)(3) tax exempt status from the Internal Revenue Service for Confluence Community Development, their legal arm for economic renewal, and the town's church choirs joined in Christmas caroling. Early Saturday morning, April 30, 1988, a seemingly endless caravan of cars, trucks, and heavy equipment rolled into Fort Defiance State Park to push on with the work citizen volunteers had started the summer before. People from teenagers to some in their eighties literally swarmed over that fifty acres, the cool morning air rent by the ear-splitting roar of mowing machines. PAGENO="0214" 210 7 Concrete slabs were laid for new picnic tables. At the park entrance craftsmen using a crane fined into place a rustic overhead arch for a stockade gateway carved with the words "Fort Defiance, Confluence of America," accented by a landscaped wooden rail fence along the park boundary. And on through another summer, another fall, into 1989, 1990, and 1991 the work has continued, the park becoming a scene of memorial services, celebrations and musicfests performed by local talent. From the spirit of determination gained in taking their census, their surveying of human attitudes, their reclamation of Fort Defiance State Park, and the research coming from their battery of citizen fact-finding committees, coupled with thirty-two town meetings since that night of November 30, 1987, the people have exhibited a degree of civic consciousness that has provided the basis for a genuine philanthropic partnership, a solid effort to assist, a priceless lesson for communities in trouble throughout America. Rarely has there been a greater opportunity for philanthropic assistance to reap a multiplier effect of nationwide significance. Following, is a partial listing of other actions this growing spirit of civic initiative with university assistance has made possible. *Staged weeks of workdays along the Ohio River front in the community's business district cutting weeds, removing truckloads of debris, painting and cleaning up. *Cleared acres of jungle at the northern and southern approaches to the city that seemingly forever had grown unabated. *Formed work crews that have circulated through run-down residential areas helping the elderly, the indigent, the infirm with grass mowing and other yard chores. ~ an imposing red granite welcome structure at the northern entrance to the community coming in from Interstate 57, which when completed will be landscaped, floodlighted, and fly the American flag. *Established an independent ambulance service which is in operation twenty-four hours a day, seven days a week. Thirty-five volunteers have completed 116 hours of training and been certified as emergency medical technicians. *Made it possible for and out-of-town entrepreneur to purchase a historic Victorian mansion and restore it to its original condition for a bed and breakfast. *Enabled Confluence Community Development to acquire a three-story residence known as the Maud Rittenhouse House, and a two-story commercial building, both listed on The National Register of Historic Places, for restoration. *Established the Alexander County Historic Preservation Commission to survey, protect, and help bring about the restoration of all the extensive historic sites and buildings in Cairo and its surroundings, thus expanding the laboratory for community development to include the entire county. *Increased citizen attendance at meetings of the city council, thereby opening the way for greater citizen participation in local governmental affairs. *persuaded the U.S. Army Corps of Engineers to conduct engineering studies to determine the feasibility of constructing a major slackwater harbor at Cairo. These studies, now well along, indicate a highly favorable cost-benefit ratio; and 31 companies, each of which employs 500 or more workers, have expressed interest in using the harbor when it is constructed. *Persuaded the Illinois state government to build a modem two-lane paved road into Fort Defiance State Park. As these and numerous other actions emerged from the committee research, town-meeting discussions, and university assistance it became increasingly clear that Cairo's prime economic resource for solving its chronic unemployment problem and building a new prosperity is its richness in history, together with its strategic geographical location at the confluence of the Mississippi and Ohio Rivers. Having recognized this fundamental asset, a wide-ranging series of projects were envisioned that would culminate in the historic restoration of Cairo as an early Amercan river town, thus providing PAGENO="0215" 211 8 the American public with a living image of a significant era of our nation's history. Beginning with the development of Fort Defiance State Park into a major income-producing enterprise, these projects were conceived as actions that would create a new self-contained economy. In the manner that Williamsburg, Virginia provides a study of American history during the 17th and 18th centuries, the historic restoration of Cairo and its surroundings will provide a study of American history as it was during the 19th and early 20th centuries. As these opportunities came increasingly into focus it became clear that if the projects necessary to translate those opportunities into reality were to be initiated on a sound business basis, professional feasibility studies, market analysis, cost and revenue estimates, plus engineering design work will be essential, and the scores of actions then being contemplated had to be consolidated into a master plan. For assistance in this essential step, Professor Poston made contact with a highly reputable management and marketing consulting firm, Schillinger & Associates, of Germantown, Tennessee, and arrangements were made to bring Ronald P. Schillinger, the firm's president, to Cairo for a three-day "think tank" workshop. Similar to the town meetings, though extended and intensified, this workshop was held in the Cairo High School Cafeteria June 21, 22, and 23, 1990. Beginning at nine o'clock each morning and continuing into the late night hours with appropriate breaks, past accomplishments were reviewed and the future projects were listed focusing on specific site locations, historical significance, land, buildings, image, services, activities, recreation, and landscaping and environmental considerations. Participants divided into dicussion groups, each with a notekeeper to report on its daily planning, and ideas growing out of these three days of discussion were summarized into the project outline set forth below for conversion into the master plan. A. FORT DEFIANCE STATE PARK 1. As the focal point for the master plan, develop Fort Defiance State Park into an income-producing tourist and recreation attraction. From this central hub make tours of historic sites available with costumed guides by horse-drawn carriages, trolley cars, steam engine trains, and buses. Make message recorders available for self-guided tours. 2. Reconstruct General Ulysses S. Grant's Civil War Fort Defiance and related military installations, which served as the western headquarters of union Army forces. B. HISTORIC RESTORATION OF 19TH AND EARLY 20TH CENTURY CAIRO 1. Continue restoration of the Maud Rittenhouse House, currently in progress. 2. Continue restoration of the Custom House, currently in progress. 3. Renovate the Firehouse, and convert into a museum for the display of historic fire fighting equipment. 4. Reconstruct the Train Station with historic displays. 5. Remodel an existing building into a historic brothel with mannequins, authentic furnishings, decorations, and appointments. 6. Remodel an existing building into a historic dance hail fully equipped and open for use by local residents and tourists. PAGENO="0216" 212 9 7. Renovate the Gem Theater and make operational for dramatic performances, concerts, movies, and special meetings. 8. Restore the frontispiece of General Grant's bank, columns of which will be excavated from where they are buried in Fort Defiance State Park. 9. Identify and renovate and/or restore all other historic buildings, including storefronts throughout the commercial downtown area. 10. Conduct research for opening underground rooms and passageways. 11. Restore brick streets and sidewalks. 12. Install historic street lights, including gaslights. 13. Install informational plaques on all historic buildings. 14. Create graphic displays and erect appropriate signs. 15. Install landscape gardens, water features, and other aesthetic attractions to support the general image. 16. Designate pedestrian and public-service-only traffic routes for horse-drawn carriages, trolley cars, steam engine trains, and buses. 17. Renovate the pavilion at St. Mary's Park and erect illustrative graphic displays depicting historic events in the park. 18. Redevelop the riverfront with docking facilities for tour boats, a park area with benches on the levee, and graphic displays of river transportation. 19. Make maximum use of historic structures now operational, such as Magnolia Manor and the Cairo Public Library housed in the Safford Memorial Building. C. MUSEUMS I. Construct a Riverboat Museum on Ohio Street next to the Ohio River interpreting Cairo's riverboat history. 2. Construct a Civil War Museum and Research Center near reconstructed Fort Defiance. 3. Adjacent to the Civil War Museum, construct a Geological Museum showing how the rivers have changed the terrain over the past centwy, along with graphic interpretations and explanations of the New Madrid Fault. 4. Immediately south of the Geological Museum, construct an Indian Museum featuring the history of American Indian Tribes in the taistate region. D. SPECIAL EVENTS A wide range of activities including celebrations, musical concerts, comedy presentations. dramatic performances, period dances for both spectators and participants, arts and crafts, Civil War living history encampments and reenactments, and other special events will offer opportunities for the Amercan public to visit and experience the life-styles and conditions that faced the builders of our country following President Jefferson's Louisiana Purchase. PAGENO="0217" 213 10 E.TOURS Along the designated public-service-only routes conduct tours with costumed guides and receptionists for educational and entertainment purposes in horsedrawn carriages, trolley cars, steam engine trains, and tour buses. And make tape-recorded message machines available for self-guided tours. F. EXPANSION OF CURRENT TOURIST ACTIVITIES 1. Riverboat Days and related activities held the last week of June and the first week of July. Give special attention to planning the week of closing ceremonies scheduled by "Always A River" for September 1991, sponsored by the six state humanities councils and the National Endowment for The Humanities. 2. Tour of historic homes. 3. Holiday House at Magnolia Manor beginning at Thanksgiving and running through the Christmas Season. 4. Highlight mini-parks such as the Halliday and Lansden. 0. SERVICES Provide all necessary services to accommodate tourists, local residents, and associated business enterprises--infrastructure, parking lots, utilities, plazas, signage, lighting, sanitary facilities, and other accommodations. H. ADMINISTRATION Confluence Community Development will negotiate development opportunities and coordinate expenditures. Revenue generated by ticket sales for tours, and for special events and income-producing facilities at Fort Defiance State Park in excess of operational expenses will be invested in park development, and in the historic restoration indicated above. IV IMPLEMENTATION OF THE MASTER PLAN Fort Defiance State Park, leased by Confluence Community Development from the Illinois Department of Conservation, creates the central point, the "hub," providing the common point of orientation here at the confluence of our nation's two mightiest waterways, the Mississippi and the Ohio. From this hub development "spokes" will reach out through Cairo and beyond into the tristate region of southern Illinois, southeast Missouri, and western Kentucky. Driving south into the southernmost tip of illinois the highway forks, one fork turning left across the bridge over the Ohio River into Kentucky, the other reaching straight ahead across the bridge over the Mississippi River into Missouri. There at that fork adjacent to the entrance to Fort Defiance State Park where Routes 51, 60, and 62 converge sits a picturesque yellow brick building, the last building in Illinois going south, the tint coming north. fU U U PAGENO="0218" 214 11 Originally the Toll House Office for the Ohio River Bridge built in 1938, relieved of tolls only ten years afterward in 1948, later enlarged and equipped with a towering radio antenna for a State Police Station, this building was vacated by the State Police in September 1990 after construction of new quarters was completed. Following that it was transferred to the Illinois Department of Central Management Services, then to the Department of Conservation. Confluence Community Development has now signed a new lease agreement for Fort Defiance State Park, including the vacated State Police Station, extending over a forty-year term commencing January 1, 1991, and ending December 31,2031 for a consideration of ten dollars, which by mutual consent may be renewed for subsequent forty-year terms. This building, in excellent structural condi~on, will be remodeled into the historic restaurant with mm-of-the-century ambience, gift shop, and a center for tourist information referred to earlier in this report, which will be known as the Toll House Restaurant. The Toll House Restaurant will serve breakfast, luncheons, dinners, sandwiches, beverages, salads, appetizers, breads and pastries, and desserts at prices affordable to residents of the tristate region and the general traveling public. It will also provide catering services, and will be appointed in attractive and inviting decor with a late 19th and early 20th century theme. The Gift Shop will include merchandise found in other tourist shops, along with booklets on the history of Cairo, the history of Fort Defiance, and Civil War souvenirs. As the restoration of historic Cairo goes forward it will also serve as the office for the sale of tour tickets. Only a few hundred yards from the Toll House Restaurant tourists and residents enter Fort Defiance State Park driving under the rustic overhead arch carved with the words "Fort Defiance, Confluence Of America-" Proceeding down the recently paved road for almost a mile toward the parking area, you are surrounded by trimmed trees, mowed grass, picnic tables, and a view of busy tug boats and barges on the two rivers. Boatman's Memorial, the three-level cement observation platform shaped like the bow of a tug boat is about twenty yards from where you have parked your car. Ascending to the first level of Boatman's Memorial you have a view of much of the park. On the second level you have a larger view of the park, the activity on the rivers and an opportunity to use the Concession Stand and rest rooms. Moving on to the third level you feel the total beauty of the park, the mighty strength of the landscape. It is a breathtaking view, a feeling of land, water, and commercial activity, creating a memorable impression. The vastness and richness of the view is itself a treasure. This is the park that three years ago was ravaged by filth and jungle overgrowth, the park the people of Cairo saved by their own sweat equity and converted into a place for citizens to hold festive events. It is a place where tourists from across the land and around the world can experience the results of democracy at work. But at the present time there is nothing in the park for either local citizens or tourists to spend money on. That, the people of Cairo are determined to change, thereby creating jobs for the unemployed and generating revenue to help bring about the historic restoration of one of America's most famous old river towns that for decades has been locked in poverty. Outside funding sought by Confluence Community Development with continuing volunteer labor will provide the initial capital to make this planned change possible. The facilities needed to build Fort Defiance State Park into an income and job-producing enterprise will proceed in four development stages, each generating revenue to help finance the next, ultimately providing capital for the rebuilding of historic Cairo. These four park development stages are as follows: PAGENO="0219" 215 12 PARK DEVELOPMENT STAGE NUMBER ONE 1. Remodel the vacated State Police Building into the Toll House Restaurant with its Gift Shop, and Tourist Information. This is will include a 12 X 14 foot addition to the front and a 11 X 12 foot addition at the south end of the building. 2. Put the Concession Stand on the second floor of Boatman's Memorial into operation equipped for serving drinks, food, snacks, gifts, and install coin-operated viewing scopes. Provide appropriate lighting. Equip the rest rooms with new fixtures. Paint and secure the doors. 3. Expand the picnic grounds with additional tables and benches, shelters, cooking grills, water taps, trash containers, and parking spaces that will extend the tourists' stays. 4. Install a children's playground, an area for outdoor sports, and a hiking or jogging trail winding along the rivet-fronts. 5. Build models of General Grant's Fort Defiance and the first French Trading Post for display in the Toll House Restaurant. PARK DEVELOPMENT STAGE NUMBER TWO 1. Construct a Civil War themed miniature golf course with a mobile concession stand for the rental of clubs and balls, and the sale of snacks and soft drinks. 2. Install a large bricked-in flower garden known as Heritage Circle with the American flag at the center, and benches and smaller flagpoles around the perimeter flying the flags of the twenty-five states of the Union whose water comes together here at the confluence of the Mississippi and the Ohio. 3. Construct a stairway down to the rivers' confluence point where a 30-inch stone wall will form a V-shaped fortress extending 150 feet along each riverbank with cannons and informative historic plaques in the fortress arms. PARK DEVELOPMENT STAGE NUMBER ThREE 1. Construct a fishing shop for the sale of bait and sporting goods. 2. Install monuments to Indian culture and the Lewis and Clark Expedition. 3. Create an arboretum featuring trees and plants that grow in the tristate region. 4. Erect fifty camp sites at the end of the park away from the picnic grounds with necessary faciltites, an entry station for guest registration and the collection of camping fees, and a general store. PARK DEVELOPMENT STAGE NUMBER FOUR 1. Erect an outdoor amphitheater with a seating capacity of 2,000 for dramatic and historical productions, musical performances, conferences, lectures, political debates, and other public gatherings for which there may be admission charges or user fees. PAGENO="0220" 216 13 2. Reconstruct General Ulysses S. Grant's Civil War Fort Defiance which served as the western headquarters of the Union Army. Some of the most important campaigns of the war were launched from Cairo, including the siege on Vicksburg which made it possible to save the Union. 3. Acquire, equip, and place in operation an authentic 19th century river showboat dinner and entertainment house anchored near the confluence of the two rivers, which may also be used for conferences and other special events. The showboat will offer vintage entertainment and will be leased by Confluence Community Development to a private management firm. COMMENT CONCERNING THE FOUR-STAGE PARK DEVELOPMENT As noted above, all revenue from income-producing facilities will be used by Confluence Community Development for park operating and development expenses, and the historic restoration of Cairo as an early American river town. Attendance analysis for the development of the park as an income-producing enterprise is set forth in Section VI, Market Analysis, of this report. Estimated costs and revenues are given in Section VII, Financial Analysis. Architectural, engineering, and landscaping expertise will be needed to assist in the final three stages of total park development, and help direct the restoration of historic Cairo. V MANAGEMENT Confluence Community Development interprets management as the process of acquiring and combining human, financial, and physical resources to produce a service desired by society; and has sectioned it into the three departments indicated below, administration, operations, and marketing. ADMINISTRATION Initial funds will be needed for a full-time manager to hire, train and supervise employees in the Toll House Restaurant with its Gift Shop, and in the Concession Stand at Boatman's Memorial. General park management will be supplied by Confluence Community Development volunteers with technical assistance and direction from Southern illinois University at Carbondale. As sufficient revenue is generated other full-time management personnel will be hired as needed, including a general manager, a group sales/public relations manager, a park operations manager, and a secretary. OPERATIONS Operational policies and procedures will be detailed for facility research, planning, maintenance, scheduling and forecasting, special activities, safety, security and parking. Operational research will help identify any problem that may increase expenses. MARKETING Marketing will estimate the magnitude of the demand and the conditions that determine the supply. Planning and strategy include pricing, forecasting, auditing, department coordination, consumer motivation, and communication--television, radio, newspaper public relations, and special promotion tie-ins with local area businesses and suppliers. PAGENO="0221" 217 14 Administrative, operational, and marketing planning have a direct correlation with revenue, expenses, and return on investment. Planning must be a systematic process that formulates objective criteria into a plan that will identify problems and increase efficiency and operational profit. VI MARKET ANALYSIS The Southern illinois Tourism Council which has been promoting tourism in southernmost Illinois since 1963 is well aware of the vast recreational and historic resources of the Cairo area, and is prepared to pursue an aggressive marketing program to capitalize on the area's economic potential as a tourist destination as the developments in this report unfold. "The value of historical development relative to the tourist market," says the Council, "is evident from the increasing interest in historic sites. This trend has been confirmed by recent surveys of both U.S. and foreign tourists. . .Calro's marketability is of special significance because of the national and international recognition of the confluence of the Mississippi and Ohio Rivers as a site of wonder. The Council receives numerous telephone and mall requests from across the nation and overseas for information on this site. Promotional efforts combined with regional marketing plans are in place and ready to assist Cairo's marketing needs." This means Cairo attractions will be included in millions of printed materials distributed by the state tourist council each year. A similar agreement will be negotiated with the states of Missouri and Kentucky. The flow of traffic on Interstate 57 at the Cairo exit as of 1989 totaled 2,993,000 vehicles. At the point where Routes 51, 60 and 62 converge in front of the building where the Toll House Restaurant will be located the flow of traffic during 1989 was 2,044,000 vehicles. Travelers' expenditures in Illinois were in excess of $9 billion. The developments set forth in this plan will open the door to the rapidly growing $150 million motorcoach market in the state of illinois. In addition to the national and international tourist market, area demographics within a 100-mile radius of Cairo are of great significance. These are the people and businesses that will benefit most frequently from the use of the facilities, and become sales persons for Fort Defiance State Park and Cairo's historic restoration. Today Cairo has approximately 4,800 residents. The population within 50 miles is 465,800, within a 100-mile radius 1,661,600. Exhibit A shows the population by market segment and the estimated population growth over the next five years. Each market segment will need a different marketing program to maximize the potential visits of attendees and their return visits. PAGENO="0222" 218 15 EXHIBIT A POPULATION BY MARKET SEGMENT ESTIMATED POPULATION MARKET SEGMENT 1990 1992 1995 (000) (000) (000) CORE --City of Cairo 4.8 4.8 5.0 PRIMARY-- 50-Mile Radius 465.8 467.0 468.7 SECONDARY -- 100-Mile Radius 1,661.0 1,667.5 1,677.3 TOURISTS -- State Park Visitors 4,333.0 4,333.0 4,333.0 (within 100 miles) Within a 100-mile radius of Cairo, the total estimated population including tourists is approximately 4.3 million--secondary segment 1.7 million, plus 60% of the tourist count 2.6 million. It is estimated that 40% of visitors to the state parks are local residents covered in the other market segments. The population of Cairo has been decreasing for the past 50 years. The restoration program will create jobs, revitalize the economy and increase the population Within five years. Increases in the primary and secondary market population are based on growth patterns from previous years. The tourist estimate includes the count from sixteen Illinois state parks within a 100-mile radius of Cairo. It does not include tourist counts from any state parks in Missouri or Kentucky within 100 miles of Cairo. The population figures are used to calculate market penetration of potential attendees for Fort Defiance State Park, historic sites, tours and activities as the Cairo restoration and revitalization plan is implemented. ATTENDANCE PROJECTION Demographics, along with social and economic impact factors, are measured in the market segments indicated above and compared with similar markets and projects to calculate comparable control factors for analysis. Market surveys on park attendees reveal participation by age, income, frequency of use, return visits, drive time, attendance by day of week, time of day they entered the facility, acitvities, money spent, plus other statistics that can be used to estimate similar attendance at Fort Defiance State Park and other planned Cairo developments. Exhibit B is a three-year attendance projection by market segment: Core, Primary, Secondary, and Tourist markets. The penetration percentage is obtained from a formula consisting of weighted factors that include demographic, psychographic, and typology survey research. The projection formula includes statistics and calculations for age groups, return visits, drive time, decision time and reason, other attractions in the area, and economic and social conditions. The three-year projection is based on the development of Fort Defiance State Park with the attractions and activities outlined in Section IV, Implementation of the Master Plan. These PAGENO="0223" 219 16 developments will make Fort Defiance State Park equal to or greater than similar historic state parks in Illinois. EXHIBIT B PROJECTED ATTENDANCE PENETRATION CORE -- PRIMARY -- SECONDARY -- TOURIST MARKET SEGMENTS PROJECTED ATTENDANCE lstyr. 2ndyr. 3rd yr. (000) (000) (000) CORE --City of Cairo 3.3 3.5 3.7 PRIMARY-- 50-Mile Radius 65.7 75.3 83.1 SECONDARY -- 50 to 100-Mile Radius 83.7 98.3 105.9 TOURIST -- State Parks TOTAL PROJECTED ATTENDANCE 308.7 345.6 378.1 PERCENT OF PENETRATION 1st yr. 2nd. yr. 3rd yr. (%) (%) (%) CORE -- City of Cairo 68.8 72.9 75.5 - PRIMARY -- 50-Mile Radius 14.1 16.1 17.8 SECONDARY -- SOto 100-Mile Radius 7.0 8.0 8.8 TOURIST -- State Parks ith.Q TOTAL PERCENT OF PENETRATION 7.2 8.0 8.8 The above figures include group business--churches, social clubs, schools, motorcoach tours--which will comprise approximately 20% of the total attendance. Group business requires a special marketing program and is an important section of the total marketing plan. The projected attendance is calculated on the population base of 4.3 million in the Cairo market segments. The projections divide the visitors into two groups. The warm months of April through October account for 98.7%, and the cold-month travelers of November to March represent 1.3% of the projected attendance. RESIDENTIAL AND TOURIST TRAVEL DEMOGRAPHICS The following figures and statements are characteristic of the sight-seeing traveler in general. The various components of the summer traveler are averages from surveys taken at state welcome centers, hotel and motel guest surveys, park surveys, and state university research reports. Common components were selected that revealed similar characteristics among all the upper Midwest area summer travelers. PAGENO="0224" 220 17 TOTAL POPULATION *65% -- Warm-month travelers. *46% -- Enjoy sight-seeing, historic sites and scenic viewing. *85% -- Return visit is based on enjoyment, not price. *60% -- Food is the one thing they will spend money on. *55% -- Desire to take something home, souvenirs EXHIBIT C DEMOGRAPHICS Warm-Month Travelers By Category Residential Tourist % % Income Less than $10,000 9.4 7.9 $10,000 to $19,999 26.6 22.2 $20,000 to $29,999 34.7 31.5 $30,000 to $39,999 20.6 19.4 More than $40,000 8.7 19.0 Marital Status Single, no children 20.0 22.5 Single, with children 6.2 7.0 Married, no children 32.9 32.4 Married, with children 40.9 38.1 Age Under 30 25.8 26.3 30 to 39 29.7 28.1 40 to 54 - 20.8 24.4 55 and over - 23.7 21.2 Not Retired 90.5 94.1 The above percentages represent the distribution for income, marital status, and age for the 65% of the population that are warm-month travelers, April through October. This distribution is a guide tool for marketing planning, but is not intended as an absolute. It is an assessment of comparables for attendance projections. PAGENO="0225" 221 18 EXHIB1TD ESTIMATED PARK AUENDANCE BY MONTH AND DAY Operational % Attendance Approximate Attendance Days Per Month Per Month Per Month Per Day January 30 .2 620 21 February 28 .3 930 33 Maich 30 .4 1,230 41 April 30 .9 2,790 93 May 31 4.5 13,890 448 June 30 21.0 64,830 2,161 July 31 27.0 83,350 2,689 August 31 29.5 91,060 2,937 September 30 12.9 39,820 1,327 October 31 2.1 6,480 209 November 29 .4 1,230 42 December 28 .8 2,470 87 Total 359 100.0% 308,700 860 On Easter, Thanksgiving, Christmas Eve/Day, and New Year's Eve/Day the park is open, but operations and services are closed. Exhibit D is a measuring tool for estimating peak months and days which assists in food ordering, personnel assignments, traffic control, and planning cash flow. It is important to plan for peak attendance days that occur during the month of August, and for special promotions and events. The weekly attendance ratio is 60% Monday through Friday, and 40% for Saturday and Sunday. Warm-month attendance figures can vary in total attendance from month to month depending on special events, weather conditions, and the state of the economy. A large attendance day, known as a "peak design day," is estimated to occur in the month of August--2,937 average attendees per day. If this average daily attendance of 2,937 is increased to a weekend day, based on the 60-40% ratio, the peak design day for a weekend day could be 4,112 attendees. This does not mean there would be 4,112 people in the park at one time. They arrive and depart at different times throughout the day. 44-629 0 - 91 - 8 PAGENO="0226" 222 19 Exhibit E estimates the arrival and departure of attendees by the hour. EXHIBITE DESIGN DAY ARRIVAL AND DEPARTURE BY HOUR Arrival % Departure Design Time Period Hour Cumulative Hour Cumulative Level 8:OOto9:59AM 16% 16% 16% 10:00 to 10:59 AM 20% 36% -- -- 36% ll:OOto 11:59AM 21% 57% 5% 5% 52% Noon to 12:59 PM 14% 71% 8% 13% 58% l:OOto 1:59PM 10% 81% 10% 23% 58% 2:00 to 2:59 PM 8% 89% 14% 37% 52% 3:00 to 3:59 PM 5% 94% 15% 52% 42% 4:00 to 4:59 PM 3% 97% 15% 67% 30% 5:OOto5:59PM 2% 99% 14% 81% 19% After6:OOPM 1% 100% 10% 91% 9% The design level shows peak park service demand to be between 11:00 a.m. and 3:00 p.m. The design level chart is used for assigning additional park personnel at key positions to service park attendees: Concession stand, parking, trash pick-up, tours, cash control, first aid, safety, and the Toll House Restaurant. The projected design day estimate is 4,112 attendees, the largest number of people entering the park in one day. Exhibit E shows the highest service level will occur between Noon and 2:00 p.m., 58% or 2,385 attendees requiring services. Special service charts and planning are needed for celebrations, large corporate picnics, and special activities in addition to general public services. VII FINANCIAL ANALYSIS Remodeling of the building vacated by the State Police will take place in stages. First, the ground floor will be readied for the Toll House Restaurant with its Gift Shop and Tourist Information. Basement areas can be arranged for storage, employee rest moms, and office space at the present time with minimum alteration. As the business becomes well established and produces sufficient income in excess of operating costs, further alterations will be made in the basement area. Attic remodeling will come later. As income permits, an outdoor patio overlooking the Ohio River will be added to the Toll House Restaurant. PAGENO="0227" 20 Current plans are for the Toll House Restaurant to be open 359 days a year from January through December, closed for Easter, Thanksgiving, Christmas Eve, Christmas Day, New Year's Eve, and New Year's Day. Based on projected visitors at Fort Defiance State Paik, data from other such recreational parks, motorist surveys, average daily traffic counts, and extensive interviewing of knowledgeable persons in the tristate region, it is estimated that approximately 237,287 customers will patronize the Toll House Restaurant and Gift Shop during the first year of operation. Calculations based on similar existing facilities indicate the cost of food and beverages will be approximately 35% of gross revenue. Gift merchandise will have a 50% cost factor. Projected revenue and operating expense for the Toll House Restaurant and Gift Shop is shown in Exhibit F. EXHIBIT F TOLL HOUSE RESTAURANT AND GIFT SHOP PROJECTED REVENUE AND OPERATING EXPENSE $825,797 759,357 uup 66,440 ~`ROSS IN'~~ Restar"~ GiftS'~-- OPERATING COSTS Food & Beverage Costs.. Gift Merchandise Payroll UtiP~' Tele~ urance 801 1,000 Miscellaneous 1,000 NET INCOME $331,143 BOATMANS MEMORIAL CONCESSION STAND The Boatman's Memorial Concession Stand will be open from April through October. It will sell soft drinks and various snacks and fast foods including hamburgers and hot dogs. It will offer selected gift items similar to those in the Gift Shop in the Toll House Restaurant. Four coin operated viewing scopes will be mounted on the top deck of Boatman's Memorial to be used from April through October. Revenue and operating expense for the Concession Stand are calculated by selecting, comparing and grouping the financial results of existing facilities in other areas in which historical and recreational facilities have been developed similiar to those being planned here, and on the estimated attendance at Fort Defiance State Park. Food, snacks and beverages will be approximately 33% of gross revenue. Gift merchandise will have a 50% cost factor. 223 U .265,775 .33,220 .179,690 ...lO,768 PAGENO="0228" 224 21 Projected revenue and operating expense for the Boatman's Memorial Concession Stand are shown in Exhibit G. EXHIBITG BOATMAN'S MEMORIAL CONCESSION STAND PROJECTED REVENUE AND OPERATiNG EXPENSE GROSS INCOME Food, Snacks & Beverages 287,500 Gift Sales 41,400 Viewing Scopes 14,000 A `T'TXT/~ (`c~C1'C 1 ~f 2 iI')O Food, Snacks & Beverages 94,875 Gift Merchandise 20,700 Payroll 30,000 Utilities 2,354 500 NET INCOME PARK MAINTENANCE AND OTHER EXPENSE Beginning with the first assault on the jungle overgrowth that had despoiled Fort Defiance State Park hundreds of volunteer workers have kept the park in immaculate condition. However, with the planned development now under way, it would not be realistic to assume that necessary maintenance can be done on a permanent basis without paid maintenance employees. Arrangements have been made with the Shawnee Development Council for six workers each summer through the Job Training Partnership Act (JTPA) for cleanup work at no cost to Confluence Community Development, except for supervision. Other maintenance workers will be paid out of the proceeds of park income-producing facilities and an annual stipend of $5,000 received from the Illinois Department of Conservation (IDOC). Projected maintenance cost and other operating expense are shown in Exhibit H. EXHIBIT H PROJECTED INCOME i~ND OTHER EXPENSE GROSS INCOME Toll House Restaurant & Gift Shop 331,143 Boatman's Memorial Concession Stand 194,471 MAINTENANCE AND OTHER OPERATING COSTS 28,977 Maintenance Payroll 10,477 ($15,477 less $5,000 from IDOC) Equipment Repair -- ~ Replacement 1,000 Marketing 10,000 Office Supplies & Postage 2,000 Telephone 1,500 NET INCOME. c/la?; (.27 PAGENO="0229" 225 22 PROJECTED COSTS FOR PARK DEVELOPMENT STAGE NUMBER ONE Normaily, as pointed out earlier in this report, the required financing for facilities being planned in this first stage of converting Fort Defiance State Park into an income-producing enterprise would be calculated in accordance with the usual expenditures for the development of similar recreational parks and attractions. However, it must be constantly borne in mind that the ultimate purpose of the Cairo laboratory is to demonstrate ways and means of strengthening the workings of democracy at the local base of American society, creating a deeper sense of community, lifting the level of civic performance and energizing self-help initiative for the solution of problems in all areas of human need. Policies and procedures for this purpose have a direct relationship to cost estimating. A considerable amount of construction and renovation work will be done as projects of the Cairo High School Manual Arts Class, and the General Maintenance Class of the Regional Adult Education Program. This will provide practical training in the various trades, help upgrade the labor force, and of even greater importance instill a sense of pride among the youth, a feeling that they are participating as responsible citizens, playing a significant role in the building of their community. Thus, in keeping with the fundamental community devleopment principle that no project is looked upon as an end in itself, but as an instrument for enriching the quality of community life, citizen participation with assistance from the university is being utilized to the fullest possible extent, thereby holding development costs to a minimum. Here, in effect, a town and its state university are forming a business partnership, capitalizing on existing natural and human resources to rebuild the town's economy, provide jobs for its unemployed, and break the age-old habit of dependency. With this policy in mind, projected costs of Park Development Stage Number One are shown in Exhibits I, J, K, and L set forth below. EXHiBiT I TOLL HOUSE RESTAURANT AND GIFT SHOP PROJECTED REMODELING AND EQUIPMENT COSTS General Remodeling including 12 X 14 Foot addition Of Entrance Waiting Room With 5/12 Hiproof, Cedar Singles, Double Doorway; And 11 X 12 Foot Cooler Addition With Shelving, Hiproof and Cedar Singles. Carpentry, Bricklaying, Electrical, Plumbing $41,280 Kitchen Layout, Equipment and Installation 15,810 Restaurant Furnishings, Dinnerware, Serving Equipment, Cookware, Cutlery, Cash Register And Other Supplies 4,280 Restaurant Interior Decoration, Carpeting, Lighting, Windows, Wall Covering 6,160 Gift Shop And Tourist Information Counter, Shelves, Display Cases, Racks, Other Supplies And Equipment 1.570 $69,100 In addition to these costs listed in Exhibit!, start-up capital of $40,000 will be needed for initial operating costs including inventory and wages. PAGENO="0230" 226 23 EXHIBITJ BOATMANS MEMORIAL WITH CONCESSION STAND PROJECTED RENOVATION AND EQUIPMENT COSTS Electric Wiring and Lighting Renovation, Parts And Fixtures $ 4,800 Public Rest Rooms Renovation, Parts And Fixtures 3,360 Concession Stand Alterations And Equipment 3,620 Coin Operated Viewing Scopes --4 @ $250 _~L~Q $12,780 EXHIBIT K EXPANSION OF PICNIC GROUNDS PROJECTED BUILDING AND EQUIPMENT COSTS Picnic Tables--SO @ $70 Each $3,500 Benches-~ 10 @ $32 Each 320 Shelters -- 8-15 X 20 Feet, 3005F@ $1,231.25 Each 9,850 Grills-- 25 @ $60 Each 1,500 Water Taps --4 @ $75 Each 300 Trash Containers --25 @ $1 Each $ 15,495 EXHIBITL CHILDREN'S PLAYGROUND AND SPORTS AREA PROJECTED BUILDING AND EQUIPMENT COSTS Children's Playground Swing Sets, Slides, Climbing Wall, Chinning Bar, Modular Equipment $ 5,500 Sports Area Baseball Field, Basketball And Volleyball Courts 6,375 Hiking/Jogging Trail 2~Q $12,625 PAGENO="0231" 227 24 CONSOLIDATED BUDGET Toll House Restaurant And Gift Shop Remodeling And Equipment Costs $ 69,100 Start-Up Capital for Wages, Inventoiy, And Other Initial Operating Costs 40,000 Boatman's Memorial With Concession Stand 12,780 Expansion Of Picnic Grounds 15,495 Children's Playground and Sports Area ~J2.625 $150,000 CONCLUSION This programmatic funding will make it possible to implement Park Development Stage Number One with its Toll House Restaurant and Gift Shop, and Boatman's Memorial Concession Stand, which will generate capital for implementation of the final three stages of park development and the restoration of historic Cairo. It will be a philanthropic investmentresulting intangible income-producing facilities that will alleviate double-digit unemployment and further motivate local initiative for social and economic problem solving in all areas of human need. It will create a partnership model of a town and its state university working together in ways that. can enable communities throughout the Lower Mississippi Delta to rise out of the quagmire of human deprivation which for decades has made this t~e most poverty-stricken region of the United States. It will demonstrate the aw~some power of democracy at work, the most potent force yet invented for human well-being. It will further strengthen the sense of community now taking root in Cairo and its surroundings. And it will restore for the American public a significant era of our nation's history. The Toll House Restaurant with Boatman's Memorial Concession Stand as a seasonal extension will be an integral part of the laboratory for community development, another innovative policy in this national demonstration. Unlike any other business in the tristate region, its entire profit will go into the development of the community. Not one dollar of profit will go into anyone's private bank account. It will be a practicum for the education of currently unemployed persons in the professional food service and hospitality industry, ranging from management to nutrition, emphasizing excellence and knowledge in all aspects of the business. Robert T. Poston is a 1949 graduate of the Michigan State University School of Hotel and Restaurant Administration with 35 years experience as manager of some of the finest dinner houses in the United States. He has a track record of turning establishments that were operating at a loss into profit-making enterprises. He has been recruited from retirement to establish the Toll House Restaurant on a sound financial basis and train its entire work force Thus, the restaurant with its seasonal extension at Boatman's Memorial, will be used not only to earn income for park development and the restoration of historic Cairo it will become a practical educational institution for persons in the construction trades and in the food service industry. Additional research concerning cost and revenue projections will be neces4' to bring the overall master plan to completion, requiring consultation with essential areas of expertise such as surveying and engineering, site analysis, architectural design, landscaping, marketing and management. But with this first stage of the master plan set in motion these follow-up actions will come within reach. PAGENO="0232" 00 Ohio River Bridge Toll House Office Building Vacated By Illinois State Police .:. PAGENO="0233" TOLL GiFT SHOP HOUSE RESTAURANT TOURIST f'~F0IRMATK)N 0) Fl (~rlr? P1 i~N SCALE: 3/ 3~a ~-O PAGENO="0234" Boatman's Memorial t:;~:' .:~ -~ -~-~ \ \~~c:~ ~L-)_*~ PAGENO="0235" 47 Picnic Shelter Volleyball Court PAGENO="0236" \`S ~ ~ /:,/~\~ / r~4I~~( hull/I - PAGENO="0237" PAGENO="0238" a Th PAGENO="0239" 235 32 REFERENCES The following sources were used for information in preparing this report. Southern illinois University at Carbondale illinois Department of Conservation Illinois Department of Transportation illinois Department of State Police illinois Department of Central Management Services Illinois Historic Preservation Agency illinois Department of Commerce and Community Affairs United States Bureau of the Census United States National Park Service United States Army Corps of Engineers University of Wisconsin Schillinger & Associates Scarborough Research Corporation Donnelly Marketing Information Service Purchase Construction Company Harrell's Electric Company Klein's Plumbing & Heating Cairo Public Utilities Commission illinois-American Water Company Central fllinois Public Service Company Southern illinois Regional Tourism Council Confluence Community Development, Inc. National Restaurant Association McDonald's Fixtures & Equipment Company Modern Floor Coverings Company Niemann Flooring The House of Color Webb-DeCota Electrical Suply, Inc. Greco Sales, Inc. Missouri Butcher & Cafe Supply, Inc. Berfield Recreation, Inc. PAGENO="0240" 236 PREPARED STATEMENT OF MALCOLM T. SHEPHERD, MANAGER MADISON MADISON INTERNATIONAL, JACKSON, MS I take thin opportunity to thank Congroceman X~2i1to Ecpy, Chairman of thin Tank Force, for inviting me to addroco thin gathering of concerned and committed people to rural deVelopment. I ctioo take thin opportunity to thank Tack Force bore for being a part of thin proceec and for your interoct in invootigating the activitico needed in thona aroac that arc comotinoc overlooked by the development proco~3c. Regrettably, I cannot attend the Hearing but my hopo~ are that this writton etatement to you will provide you with come icouec to addrcne in opeci~ic ctreac for email, minority-owned bucinece development in both urban and enpecimily rural areac. Hy address to you in geared to financing of emerging email, minority-owned bucinoseec. Thin in a oboe topic to no omen my background and experienoco cc an entrepreneur, financing official, and a privuto-coctor email, ninority bueincccporoon placoc no in the name cituation thin Tack Force in invectigating. ?doct jobc in thin county are generated by email firmo thoce firms employing 100 or ieee; yet, rocearek ohowo that thoce firmo are limited when actual data on accecoing theec progrctmc are reviewed. Snail and ninority~'owned hucineocco cannot accecc federal, regional, ctmto, and local prograuc cc readily an major 2 irme. Thin is true given that the reoource bane in omaller, lena employoen to decipher rogulationc and roguirementc, and given the fact that financial inetitutiono are cooking °oafe" leone. Among small bucinescoc, minority-owned firmo have oven grantor problonc acceneing aid progranc. Small and minority-owned bucinencoc face opacial development probiemc. Programe docignod to neat their macdo must be otrategicaily denigned and ~iccccsiblc in both urban and rural areac. I firmly believe by addreccing the accoooibiiity iccue, email and minority-owned bucineccoc would have an increased chance of becoming oucccncful bucinecoec. Any bucinoeaec regniroc a market opportunity, capital, oound management, salon, and technical aocictance. Those reguiramontc are no different, than reguiremonto majority buolneococ have either at start-up or advanced etagee. For minority groupo enpecially, theco problems are compounded by lack of connoctionc or accocc into the capital and other narkotc. Among thone iooues, capital appearo to be the most critical iccue to address in programc decigned to accist in creating emall and minority-owned bucineonoo. The level of businoco development activities io a direct result of the amount and accoocibility to capital narketo. The banking industry accounts for the majority of funde in the US capital market for buoinooaes devobopment. However, banko are not the only source of financing, but in many inctancoc, nay be the only local source for rural areas sepocially. Other participante in the capital market include crodit uniona, federal, ctate, regional and local loan programs, venture capital and inveotment groupc, PAGENO="0241" 237 foreign investors, pension funds, and foundation and grant sources, among others. Banks arid loan programs mostly provide financing in the debt market; while, foundations end grant programs, investment groups mostly provide financing in the oguity market, Pedoral, regional, end local programs have a mix of financing they can provide. Debt financing usually requires come type of collateral having to do with the business and/or the personal assets of the borrower. collateral, if any, for equity financing is.ueually in the form of stock or future earning power of the business or a certain percentage of ownership in the business. Collateral requirements of banks and other lending institutions are often times more stringent on small and minority- owned bucinec~ groups than non-minority groups. These groups are usually labeled `thigh risk" by lending institutions end banks usually over-collateralized loans to these groups. Since federal and state financing programs arc geared to further secure banks to encourage loans, one would think that banks will relax their collateral requirements when these type of loans are made. This is not the case! ~vcn when those programs are used by minority groups, banks still require the came or an increased love? of security/collateral to increase their comfort level with such loans. Small and minority-owned business in both urban and rural areas are viable means of improving the quality of life for all citizens. In order to improve the ac~esc to financing programs, non-traditional methods of developing these businesses should be employed on the part of federal, regional, state and local lending programs and institutions. Those typo of programs are tied into existing financial institutions, the community, and encouraged by governmental programs. Severe? programs of this type have developed in the last few years under the Community Reinvestment Act (CPA). The CPA focus on activities that foster development within the bank's delineated community, including low- and moderate-income neighborhoods. It particularly encourages housing-related extensions, participation in community development corporations, and smell business financing, including loans to small farms through Community Development Corporations (CDC). Another technique for small and minority-owned business develop is the use of Development Banks (DD). DB' c have the same basic intent and purpose as CDC'c but are usually sponsored by governments. This has a unique meaning end opportunity for rural development since often times local banks have a limited capital base anyway. DB's are structured to foster and promote a reasonable moans to access capital markets. DB'c are useful in borrowing money to finance infrastructure improvements to governments and to provide PAGENO="0242" 238 low cost capital and usually offer no technical assistance progranc to individual, or businesses, but servo ~s a source of financing. CDC's and DB'a were recommended by the recent Delta Comniesion'c ~port tothe NatJ~n. DB'9 can also be structured to provide low interest funds to local governments to be reloaned for small and minority business development. By recommending these two techniques for business development, especially for rural areas, they could have major impact upon encouraging local financial institutions to become more responsive to small and minority-owned business. I will be more than happy to provide additional information on these and other financing opportunities should you request. There is no greater opportunity to assist small and minority- owned business than to provide an opportunity to finance the next succeesful business. Thank you for this opportunity to address you. PAGENO="0243" 239 Ce RICHARD C. HACKETE. Mayor 1 O[ * JAMESE. BROUGHTON . CbiefofStaff I MEMPHIS ECONOMIC DEVELOPMENTCENTER C E. BOBBY WELCH. Director M~mpbis__~ TENNESSEE PREPARED STATEMENT OF E. BOBBY WELCH USING A BUSINESS INCUBATOR IS A WAY FOR NEW COMPANIES TO GET COST EFFECTIVE RENTAL SPACE, SHARE OFFICE SERVICES AND ACCESS EXPERTISE IN MANAGEMENT AND TECHNICAL ASSISTANCE. THE NUMBER OF BUSINESSES USING INCUBATORS OVER THE PAST 2 YEARS HAS INCREASED OVER 250% MAINLY BECAUSE NEW FIRMS STARTING IN INCUBATORS HAVE AN 80% CHANCE OF SUCCESS. THIS RATE IS A STUNNING CONTRAST TO THE FIGURES COMPILED BY THE SMALL BUSINESS ADMINISTRATION WHICH SHOW THAT 80% OF ALL NEW BUSINESS FAIL WITHIN THE FIRST FIVE YEARS. PAGENO="0244" 240 City of Staff 1'Aernphis TENNESSEE The Memphis Economic Development Center continues to maintain its posture of leadership in minority economic development. The lack of access to capital for business expansion has not affected the quality and scope of our service. The MEDC has continued to provide opportunities for low and moderate income persons through technical assistance and training, public service; and office space for new business start-ups. I. The Incubator ConCept Small business have substantially contributed to the economy in job creation, innovation and productivity. As the small, homegrown businesses are becoming an important focus of local economic development efforts, the small business incubator has become an increasingly popular economic development tool which helps improve the success rate of new finns. Incubators are buildings characterized by low rent structure, availability of centralized services and administrative support services, receiving and shipping facilities, conference rooms, computers and word processors, other business services (e.g. technical, management, financial assistance). The arrangement reduces business failure by making them able to survive the critical stages of early business development. This is achieved by providing the business a means of reducing overhead costs. It also seeks to "graduate" their tenants to conventional quarters when they have become economically and financially viable. PAGENO="0245" 241 II. ~.. ~ development of incubator facilities: 1. Establish as working group. Determine a. lead sponsor agency - the initiator b. local working group - responsible for plans through implementation c. other community organizations - provide support and publicity. 2. Define goals and overall objectives. - Determine overall economic development objectives and how the incubator facility can help achieve the goals and objectives. This will help to determine the types of tenants, location of facility, financing sources and technical expertise needed. 3. Collect information on other incubator projects. - Use the overall goals and objectives of the incubator project in researching information on existing facilities in comparable cities. 4~ Analyze local economic base. - Analyze the characteristics of different businesses in the area, level of entrepreneurial activity in the community, and the supply and demand of incubator-type space and support services by industry type. 5. Assess small business support network. - Examine the degree to which a community has formalized its support for small businesses. 6. Perform preliminary, financial feasibility study. - Estimate total project cost and list available financial resources for the project. 7. Review data. - Examine major strengths and weaknesses, gaps in information collect and/or resources identified. Develop strategies for gathering additional information and gaining other resources and involving other organizations. PAGENO="0246" 242 8. Develop a management plan for the facility. - Decide on the type of organizational structure, need for and make-up of Board of Directors, daily management facility, tenant selection policies, tenant services and tenant "graduation" policy. 9. Financing the incubator. - Evaluate available financing resources with the following financing issues in mind: funding for pre-developinent cost, the facility 2and tenants. The MEDC is a joint venture between the City of Memphis, the Chamber of Commerce, and the Black Business Association. We are funded by a BUD Grant for operational cost via the graces of Mayor Richard C. Hackett. In finality, only new businesses and the expansion of existing businesses' which create jobs will eliminate the social ills of any community. Specifics for funding actualization should. include but not be limited to the following: A. Establishment of a venture pool of money for financing new and existing businesses capital requirements. B. Develop a joint venture with local lending institutions in which traditional lending constraints to new/disadvantaged businesses be waived. C. Finance the development of a school for entrepreneurs. D. Structures and finance a curriculum for the public schools at the junior and senior high levels which speak to the American way of life free enterprise and capitalism. Thank you, PAGENO="0247" 243 PREPARED STATEMENT OF ED JONES, CHAIRMAN, BOARD OF DIRECTORS, LOWER MISSISSIPPI DELTA DEVELOPMENT CENTER Mr. CHAIRMAN AND MEMBERS OF THIS TASK FORCE: IT IS MY DISTINCT PLEASURE TO BE ABLE TO SUBMIT THIS BRIEF TESTIMONY ON THE FINANCING ECONOMIC DEVELOPMENT. I APOLOGIZE FOR NOT BEING ABLE TO BE WITH YOU IN PERSON TO DELIVER MY VIEWS. ONE OF THE PROBLEMS IDENTIFIED BY THE LOWER MISSISSIPPI DELTA COMMISSION IS THE SHORTAGE OF CREDIT FOR ECONOMIC EXPANSION IN THE DELTA. SOME OF THIS SHORTAGE DERIVES FROM THE FACT THAT MILLIONS OF DELTA DOLLARS ARE DEPOSITED OR INVESTED OUTSIDE THE AREA. OUR CITIZENS ROUTINELY SEND THEIR SAVINGS TO MUTUAL FUNDS, MONEY MARKET ACCOUNTS, INDIVIDUAL RETIREMENT ACCOUNTS AND VARIOUS INSURANCE-TYPE INVESTMENTS THAT ARE MANAGED BY INSTITUTIONS LOCATED IN NEW YORK, BOSTON OR CHICAGO. MANY OF OUR CORPORATIONS, BUSINESSES AND EVEN GOVERNMENTAL INSTITUTIONS (SUCH AS SCHOOLS) WHICH MAINTAIN MILLIONS OF DOLLARS IN RETIREMENT OR PENSION FUNDS, INVEST THAT MONEY WITH PROFESSIONAL FUND MANAGERS OUTSIDE THE AREA. THERE IS NOTHING ILLEGAL OR EVEN WRONG WITH OUR PEOPLE SEEKING THE BEST FINANCIAL RETURN ON THEIR SAVINGS, BUT THE OUTFLOW OF CAPITAL CURTAILS THE AMOUNT OF CREDIT WHICH SHOULD BE AVAILABLE TO US IF THESE FUNDS WERE DEPOSITED LOCALLY. IT SEEMS TO ME THAT WE NEED TO FOCUS SOME ATTENTION ON HOW TO KEEP THAT MONEY AT HOME DEPOSITED IN LOCAL INSTITUTIONS AND ALSO HOW TO ATTRACT MORE CREDIT AND INVESTMENTS IN THE DELTA FROM OUTSIDE FINANCIAL INSTITUTIONS. MR. CHAIRMAN,. I DO NOT HAVE AN OVERALL PLAN TO ACCOMPLISH THESE GOALS, BUT I WILL OFFER .A FEW IDEAS. I SUPPORT YOUR SUGGESTION OF A DELTA INDUSTRIAL DEVELOPMENT BANK. WHILE I REALIZE THAT CAPITALIZING SUCH A BANK WOULD BE DIFFICULT IN THIS TIME OF BUDGET CRISIS AT BOTH THE FEDERAL AND STATE LEVELS, I ENCOURAGE YOU TO CONTINUE TO PURSUE THE IDEA AND LOOK - FOR CREATIVE WAYS TO CAPITALIZE IT. PERHAPS IT WOULD BE WISE, IN THE MEANTIME, TO TAKE SOME SMALLER STEPS WHICH WOULD BE USEFUL AS WELL. FOR INSTANCE, CONGRESS IS WORKING VERY HARD ON BANKING REFORM LEGISLATION. A MAJOR THRUST OF THE LEGISLATION, I UNDERSTAND, WOULD BE TO EXPAND THE POWERS AND ACTIVITIES OF BANKS. WOULD IT BE POSSIBLE TO DEVELOP INCENTIVES FOR COMMERCIAL BANKS IN DESIGNATED UNDERDEVELOPED AREAS TO SET UP DEVELOPMENT LOAN FUNDS FROM WHICH LOANS WOULD BE MADE FOR. JOB CREATION PURPOSES. PERHAPS THE FUNDS WOULD BE RELIEVED OF SOME REGULATORY REQUIREMENTS OR PROVIDED TAX BREAKS TO COMPENSATE FOR ADDITIONAL RISKS. PAGENO="0248" 244 COMMERCIAL BANKS IN THE DELTA REGION CONTROL THE HEARTBEAT OF OUR ECONOMY. SOMEHOW, NATIONAL POLICY MUST FIND WAYS TO UNLEASH THE FINANCIAL TALENT, CREATIVITY AND RESOURCES OF THESE INSTITUTIONS. I FIRMLY BELIEVE THAT THE PENDING BANKING REFORM LEGISLATION IS A GOLDEN TARGET OF OPPORTUNITY FOR THE DELTA AND I ENCOURAGE THE HOUSE AND SENATE DELTA CAUCUSES TO EXPLORE ITS POTENTIAL. TWO OTHER SOURCES OF CREDIT COME TO MIND AS HAVING THE CAPABILITY OF ENHANCING ECONOMIC ACTIVITY IN THE DELTA. THEY ARE THE COOPERATIVE FARM CREDIT SYSTEMS AND THE FEDERAL AGRICULTURAL MORTGAGE CORPORATION (COMMONLY REFERRED TO AS FARMER MAC). BOTH OF THESE INSTITUTIONS ARE IN THE POSITION TO FACILITATE THE FLOW OF CAPITAL FROM AREAS WITH MONEY TO INVEST INTO AREAS WHERE CREDIT IS NEEDED. BOTH ARE DESIGNED TO PRIMARILY SERVE AGRICULTURE, BUT HAVE LIMITED AUTHORITIES AND GREAT POTENTIAL IN RURAL HOUSING AND OTHER RURAL INFRASTRUCTURE LENDING. FOR INSTANCE, DUE TO THE FEDERAL REGULATOR'S MISMANAGEMENT OF FARM CREDIT SYSTEM LENDING IN MISSISSIPPI, LOUISIANA AND ALABAMA, FARMERS MUST GO TO A PRODUCTION CREDIT ASSOCIATION FOR SHORT-TERM LOANS AND TO A COMPLETELY SEPARATE FEDERAL LAND BANK ASSOCIATION FOR LONG-TERM LOANS. I AM HAPPY TO REPORT THAT THE FEDERAL INTERMEDIATE CREDIT BANK IN JACKSON, MISSISSIPPI AND THE FIRST SOUTH PRODUCTION CREDIT ASSOCIATION HAVE APPLIED TO THE REGULATOR TO BE CHARTERED AS FULL-SERVICE LENDING INSTITUTIONS. WHEN THIS IS FINALLY ACCOMPLISHED, FARMERS AND RURAL HOME BUYERS IN THOSE THREE STATES WILL BENEFIT GREATLY. UNTIL IT HAPPENS, THEY WILL CONTINUE TO SUFFER FROM A VERY INEFFECTIVE AND INEFFICIENT FARM CREDIT SYSTEM SERVICES. THIS IS A REAL SHAME AND A HARDSHIP ON DELTA FARMERS. I. HAVE TRIED TO ASSIST IN THIS EFFORT. HOWEVER, THERE ARE SEVERAL LEGISLATIVE INITIATIVES WHICH ARE NEEDED TO ALLOW THE FARM CREDIT SYSTEM TO PROVIDE BETTER SERVICE TO RURAL AMERICA INCLUDING THE DELTA. FIRST, IN ORDER TO FINALLY ACCOMPLISH ONE-STOP CREDIT SHOPPING NATIONWIDE, PRODUCTION CREDIT ASSOCIATIONS SHOULD BE GRANTED AUTHORITY TO MAKE THIRTY-YEAR REAL ESTATE MORTGAGES. OVER A DECADE AGO, I SPONSORED THE LEGISLATION WHICH GRANTED THEM AUTHORITY TO LENGTHEN THE TERM OF THEIR LOANS TO TEN YEARS. THIS CHANGE ALLOWED THEM TO PROVIDE MUCH BETTER CREDIT SERVICES FOR THE CATFISH AND POULTRY PRODUCERS AND OTHERS IN OUR AREA. HOWEVER, TIMES HAVE CHANGED GREATLY. IN THE LAST DECADE, AND A THIRTY~YEAR PCA LOAN WOULD BE A VERY SIMPLE, BUT POSITIVE CHANGE. IT COULD HELP END A LOT OF BICKERING INSIDE THE FARM CREDIT FAMILY WITH BORROWERS BEING THE SYSTEM'S WINNERS. SECONDLY, FARM CREDIT SYSTEM LENDERS ARE LIMITED TO MAKING RURAL HOUSING LOANS IN COMMUNITIES OF LESS THAN 5,000 IN POPULATION. THIS SHOULD BE INCREASED TO AT LEAST 20,000 IN POPULATION AND THE PRICE LIMITATION NEEDS AN ADJUSTMENT TO TAKE INTO ACCOUNT INFLATIONARY PRESSURES. PAGENO="0249" 245 THIRD, THE NATIONAL HANK FOR COOPERATIVES CURRENTLY MAKES LOANS FOR WATER AND SEWER LOANS IN COMMUNITIES OF LESS THAN 20,000 POPULATION. I DO NOT BELIEVE THAT THEY ARE AS ACTIVE IN THE DELTA AREA AS THEY SHOULD BE. PERHAPS SOME COORDINATION IS CALLED FOR. PERHAPS ADDITIONAL LEGISLATION IS NEEDED TO HELP PROVIDE WATER AND SEWER SERVICES TO ALL DELTA CITIZENS. FOURTH, SOME PEOPLE ARGUE THAT THE FARM CREDIT SYSTEM SHOULD BECOME A PRIMARY LENDER TO RURAL BUSINESSES WELL BEYOND ITS TRADITIONAL AGRICULTURAL CLIENTELE. I AM NOT READY TO GO THAT FAR BECAUSE, AS A GOVERNMENT SPONSORED ENTERPRISE, THE SYSTEM WOULD HAVE A COMPETITIVE ADVANTAGE OVER COMMERCIAL BANKS. HOWEVER, THE CREDIT NEEDS OF RURAL AMERICA, ESPECIALLY IN ECONOMICALLY DEPRESSED AREAS SUCH AS THE DELTA, ARE NOT BEING MET. AS A MATTER OF POLICY, I BELIEVE THAT THE U.S. CONGRESS AND STATE GOVERNMENTS NEED TO EXAMINE WHETHER RURAL AREAS ARE GETTING A FAIR DEAL. ONE NEW ORGANIZATION WHICH IS JUST NOW GETTING OFF OF THE GROUND AND SEEMS TO HAVE GREAT POTENTIAL IN THE FEDERAL AGRICULTURAL MORTGAGE CORPORATION, OR FARMER MAC. THE LEGISLATION CREATING FARMER MAC WAS ONE OF THE LAST MAJOR PIECES THAT I WORKED ON BEFORE RETIRING. ITS PURPOSE IS TO ASSIST LOCAL BANKS AND OTHER AGRICULTURAL LENDERS AS WELL AS THE FARM CREDIT SYSTEM TO MAKE LONG-TERN FARM REAL ESTATE LOANS AND THEN SELL THAT LOAN INTO A SECONDARY MARKET CREATED BY FARMER MAC. IT WAS PATTERNED AFTER SECONDARY MARKETS FOR HOUSING LOANS, STUDENT LOANS AND OTHERS WHICH HAVE PROVEN TO BE VERY SUCCESSFUL. RECENTLY, FARMER MAC HAS BEGUN MAKING A SECONDARY MARKET FOR THE FARMERS HOME ADMINISTRATION GUARANTEED LOANS WHICH ARE VERY IMPORTANT TO OUR AREA. ADDITIONALLY, FARMER MAC CAN BE A BOOST TO RURAL HOUSING LENDING BY MAKING A SECONDARY MARKET FOR HOUSING LOANS IN COMMUNITIES OF 20,000 POPULATION. THIS SHOULD ASSIST RURAL BANKS, CREDIT UNIONS, SAVINGS BANKS AND OTHERS CAUSING RURAL HOUSING LOANS TO BE MORE ACTIVE. THE BASIC BENEFITS OF FARMER MAC ARE: - -TO PROVIDE LIQUIDITY TO RURAL LENDERS -T~ ALLOW RURAL LENDERS TO OFFER LONG-TERM FARM AND RURAL HOUSING LOANS AT THE MOST COMPETITIVE INTEREST RATES. I AN VERY OPTIMISTIC ABOUT FARMER MAC'S FUTURE AND ITS POTENTIAL TO HELP US HERE IN THE DELTA. IT IS NOT AN ANSWER TO ALL OF OUR PROBLEMS, BUT IT IS A HELP AND AT NO TAXPAYER EXPENSE. MR. CHAIRMAN, AS FARMER MAC COMES ON-LINE AND PROVES ITSELF, YOU MAY VERY WELL WANT TO EXPAND ITS MANDATE IN RURAL AREAS. THIS WOULD BE ONE WAY TO KEEP COMMERCIAL LENDERS MORE ACTIVE IN THE DELTA. [Whereupon, at 2:45 p.m., the Task Force adjourned.] 0 PAGENO="0250" PAGENO="0251" PAGENO="0252" ISBN 0-16-035535-4 90000 U U~ ~ 9 780160 355356