Issue Paper from the National League of Cities on USC 1926(b) National League of Cites 1997 Hot Issue Federal Barrier to Providing Municipal Service -- "Section 1926" NLC urges the Congress of the United States to amend the Consolidated Farm and Rural Development Act (Title 7 U.S.C 1926) to allow a municipality to provide a full range of municipal services within the portion of any such rural district service area which in incorporated within a municipality. Background The Department of Agriculture through its Rural Utilities Service, formerly the FMHA (Farmers' Home Administration), makes loans and loan guarantees to associations to provide community services to rural areas, including municipalities. Many cities and towns have become concerned that a provision of the federal statute which authorizes this program is a barrier to economic development and logical municipal growth. As a means of reducing repayment risk to the federal treasury, the statute provides that the service provided or made available by an association with an outstanding federal loan or loan guarantee shall not be diminished by actions, such as the granting of a competing franchise or inclusion of its territory in a municipality. Annexation is not prohibited, but a city would not be allowed to provide services that might compete with the association. Because the wording of the statute must be read so carefully, the provision of the law is quoted below in its entirety. (b) Curtailment or limitation of service prohibited The service provided or made available through any such association shall not be curtailed or limited by inclusion of the area served by such association within the boundaries of any municipal corporation or other public body, or by the granting of any private franchise for similar service within such area during the term of such loan; nor shall the happening of any such event be the basis of requiring such association to secure any franchise, license, or permit as a condition to continuing to serve the area served by the association at the time of the occurrence of such event. MUNICIPAL IMPACT: The law has created a number of problems for municipalities. Some of these are listed below. The federal government has intervened in court and other processes on behalf of rural water and other associations when a municipality has attempted to extend "competing" services to new areas either through annexation or extraterritorial extension or services. At times this has occurred when a municipality has attempted to extend or annex territory immediately adjacent to the city. In some cases the association has no utility connections or infrastructure within the area in question. Instead the courts and the Department of Agriculture have broadly interpreted the statute's "made available" language to allow the association to self-define its "area served." There is a real distinction in the mind of cities between a "service area" and an "area served." The language "area served" should mean an area that is actually receiving service from the association. The presence of the statute as currently interpreted can act as a barrier to community economic development, presumably one of the underlying reasons for the loan program to begin with. This can occur in the following way: an industry may wish to locate or expand into an area in close proximity to a municipality. The municipality is willing and able to extend its municipal services to this area,, and the industrial concern is agreeable to the arrangement' The association claims that the area in question is in an area to which it can make services available and therefore objects, effectively blocking the development. In other scenarios the association may proceed to serve the area,, but with infrastructure that is inadequate for future development. Municipalities would like to plan ahead and make logical service extensions that provide water service that is adequately sized and interconnected to provide for adequate fire protection. There are instances in which municipalities believe that financially successful associations have taken out or extended loans, not for real financial necessity, but in order to perpetuate the territorial protection of the statute. The current statute seems to provide no opportunity for an association and a municipality to cooperatively negotiate an agreement regarding service areas and submit it for approval. It would appear to give the Department of Agriculture or an individual the ability to block such an agreement merely by invoking the statute, even in cases in which it can be shown that the federal taxpayer is at no measurable increased risk of association default on a loan or unreasonable levels of service charges to the association's customer base. The statute appears to be drafted so broadly that its aim is long term territorial service veto rights for rural associations rather than protection of the security of the federal loan. It would seem that the federal government has a legitimate interest in securing its loan but that determination of service areas and local planning and services are better left to state and local governments where policies can be better integrated into the governmental structure selected by the public. CONGRESSIONAL OUTLOOK.- No action is currently pending in Congress or proposed by the Clinton Administration. NLC urges the Congress to amend Title 7 U.S.C. 1926 to allow a municipality to provide a full range of municipal services within the portion of any such rural district service area which is incorporated within a municipality. -ACTION.- Contact NLC if is an issue of concern to your community. Names of individuals within cites that can speak knowledgeably about the issues are necessary if any statutory changes are to be made. Raise issue during your visits with your Congressional delegation either while you are in Washington, when your Senators and Representatives are back home in the state or district of through their distrcit offices. For more information contact.- Cameron Whitman Senior Legislative Counsel Center for Policy & Federal Relations 202-626-3020