Economic Development
Formal Monitoring Approaches Needed to Help Ensure Compliance with Restrictions on Funding Employer Relocations Gao ID: GAO-07-1005 September 10, 2007Congress imposed restrictions on some federal programs to prevent funding of business relocations. Congress expressed concerns about state and local governments using federal funds to attract jobs to one community at a loss of jobs to another and about compliance with relocation restrictions. This report (1) identifies large federal economic development programs that state and local governments can use as incentives, (2) identifies which programs contain statutory prohibitions on funding relocations, and (3) assesses whether federal agencies had established and implemented procedures to help ensure compliance with prohibitions. To address these objectives, GAO searched federal databases, reviewed relevant statutes and regulations, and conducted limited testing of agency procedures.
GAO identified 17 large federal economic development programs that offer financial assistance and services that state and local governments can use as incentives to attract and retain jobs. While academic studies indicate that it is difficult to quantify the funds used as incentives, particularly given differing definitions of incentives, the use of federal funds for such purposes appears to be more limited than the use of state and local funds. Although academic studies question the overall role and significance of incentives in firms' decisions to (re)locate, researchers with whom GAO spoke noted that incentives could influence firms that already had narrowed their choices. Nine of the 17 large federal economic development programs restrict the use of program funds to support employer relocation. Seven are grant programs, and two are loan guarantee programs. In many grant programs, initial recipients of funds (states and local governments) provide funds to others (e.g., businesses) to facilitate economic development; in loan guarantee programs, third-party lenders approve businesses for eligibility to receive funds. All nine programs prohibit using federal funds to support a business relocation that causes unemployment, but the thresholds for job loss differ. For example, a single lost job would trigger the provision for six programs, but for the other three programs, the job loss threshold is higher. Federal agencies administering the nine programs with a nonrelocation provision used various procedures, including screening applicants and monitoring recipients, to help ensure compliance, but the extent to which these procedures specifically addressed nonrelocation provisions was limited. The two loan guarantee programs emphasized screening procedures to help ensure compliance, and both programs had written guidance and other mechanisms that specifically addressed nonrelocation provisions. Screening may be effective for helping to ensure compliance in loan guarantee programs because federal agencies know at the time of initial application which businesses are requesting funds and how they plan to use them. In contrast, because of the way grant programs are structured, at the time of initial application, grant applicants do not always know which businesses later will apply for or receive assistance. As a result, officials administering grant programs relied more extensively on monitoring than screening to help identify instances of potential noncompliance. Despite this greater reliance on monitoring, only one of the grant programs GAO reviewed had written monitoring guidance that specifically addressed business relocation restrictions. Without formal policies and procedures, federal agencies have limited assurance that grant recipients and subrecipients are complying with statutory requirements that restrict the use of program funds to support employer relocations.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-1005, Economic Development: Formal Monitoring Approaches Needed to Help Ensure Compliance with Restrictions on Funding Employer Relocations
This is the accessible text file for GAO report number GAO-07-1005
entitled 'Economic Development: Formal Monitoring Needed to Help Ensure
Compliance with Restrictions on Funding Employer Relocations' which was
released on September 12, 2007.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to the Chairman, Subcommittee on Interstate Commerce, Trade, and
Tourism, Committee on Commerce, Science, and Transportation, U.S.
Senate:
United States Government Accountability Office:
GAO:
September 2007:
Economic Development:
Formal Monitoring Approaches Needed to Help Ensure Compliance with
Restrictions on Funding Employer Relocations:
Restricting Federal Funds for Employer Relocation:
GAO-07-1005:
GAO Highlights:
Highlights of GAO-07-1005, a report to the Chairman, Subcommittee on
Interstate Commerce, Trade, and Tourism, Committee on Commerce,
Science, and Transportation, U.S. Senate.
Why GAO Did This Study:
Congress imposed restrictions on some federal programs to prevent
funding of business relocations. You expressed concerns about state and
local governments using federal funds to attract jobs to one community
at a loss of jobs to another and about compliance with relocation
restrictions. This report (1) identifies large federal economic
development programs that state and local governments can use as
incentives, (2) identifies which programs contain statutory
prohibitions on funding relocations, and (3) assesses whether federal
agencies had established and implemented procedures to help ensure
compliance with prohibitions. To address these objectives, GAO searched
federal databases, reviewed relevant statutes and regulations, and
conducted limited testing of agency procedures.
What GAO Found:
GAO identified 17 large federal economic development programs that
offer financial assistance and services that state and local
governments can use as incentives to attract and retain jobs. While
academic studies indicate that it is difficult to quantify the funds
used as incentives, particularly given differing definitions of
incentives, the use of federal funds for such purposes appears to be
more limited than the use of state and local funds. Although academic
studies question the overall role and significance of incentives in
firms‘ decisions to (re)locate, researchers with whom GAO spoke noted
that incentives could influence firms that already had narrowed their
choices.
Nine of the 17 large federal economic development programs restrict the
use of program funds to support employer relocation. Seven are grant
programs, and two are loan guarantee programs. In many grant programs,
initial recipients of funds (states and local governments) provide
funds to others (e.g., businesses) to facilitate economic development;
in loan guarantee programs, third-party lenders approve businesses for
eligibility to receive funds. All nine programs prohibit using federal
funds to support a business relocation that causes unemployment, but
the thresholds for job loss differ. For example, a single lost job
would trigger the provision for six programs, but for the other three
programs, the job loss threshold is higher.
Federal agencies administering the nine programs with a nonrelocation
provision used various procedures, including screening applicants and
monitoring recipients, to help ensure compliance, but the extent to
which these procedures specifically addressed nonrelocation provisions
was limited. The two loan guarantee programs emphasized screening
procedures to help ensure compliance, and both programs had written
guidance and other mechanisms that specifically addressed nonrelocation
provisions. Screening may be effective for helping to ensure compliance
in loan guarantee programs because federal agencies know at the time of
initial application which businesses are requesting funds and how they
plan to use them. In contrast, because of the way grant programs are
structured, at the time of initial application, grant applicants do not
always know which businesses later will apply for or receive
assistance. As a result, officials administering grant programs relied
more extensively on monitoring than screening to help identify
instances of potential noncompliance. Despite this greater reliance on
monitoring, only one of the grant programs GAO reviewed had written
monitoring guidance that specifically addressed business relocation
restrictions. Without formal policies and procedures, federal agencies
have limited assurance that grant recipients and subrecipients are
complying with statutory requirements that restrict the use of program
funds to support employer relocations.
What GAO Recommends:
To improve the management of federal economic development grant
programs, GAO recommends that the Departments of Labor, Agriculture,
and Housing and Urban Development develop (or finalize the development
of) and implement formal and structured approaches to monitor
compliance. The Departments of Labor and Agriculture concurred with the
recommendation and reported taking steps to implement it. Each of the
three agencies provided technical comments that were incorporated into
the report as appropriate.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-1005].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact William B. Shear at (202)
512-8678 or shearw@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
State and Local Governments Can Use a Variety of Large Federal Programs
to Attract Businesses:
Nine Large Federal Economic Development Programs Have Nonrelocation
Provisions, but Requirements Vary:
Extent to Which Federal Agencies Had Established and Implemented
Procedures to Help Ensure Compliance with Nonrelocation Provisions Was
Limited:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Description of the Nine Large Federal Economic Development
Programs with Nonrelocation Provisions:
HUD CDBG Entitlement and State Programs:
HUD and USDA EZ/EC Programs:
Labor WIA Adult, Dislocated Workers, and Youth Programs:
SBA 504 Loan Program:
USDA B&I Program:
Appendix III: Comments from the Department of Labor:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Description of 17 Large Federal Economic Development Programs
That Offer Financial Assistance or Services That Can Be Used as
Business Incentives:
Table 2: Job Loss and Other Statutory or Regulatory Requirements for
Nine Large Federal Economic Development Programs with Nonrelocation
Provisions:
Table 3: Timeline Showing Congressional Approval of Nonrelocation
Provisions for Nine Large Federal Programs:
Table 4: Federal Agency Mechanisms to Screen for Compliance with
Nonrelocation Provisions:
Table 5: Status of Federal Agency Mechanisms for Monitoring Compliance
with Nonrelocation Provisions, as of July 2007:
Figures:
Figure 1: Overview of CDBG Funding Streams for Economic Development
Projects Involving Businesses:
Figure 2: Overview of EZ/EC Funding Streams for Economic Development
Projects Involving Businesses:
Figure 3: Overview of WIA Adult, Dislocated Workers, and Youth Funding
Streams:
Abbreviations:
BLS: Bureau of Labor Statistics:
B&I: Business and Industry Guaranteed Loan program:
CBO: Congressional Budget Office:
CDC: certified development company:
CDBG: Community Development Block Grant:
CFDA: Catalogue of Federal Domestic Assistance:
CRS: Congressional Research Service:
EDA: Economic Development Administration:
EC: Enterprise Community:
EZ: Empowerment Zone:
EZ/EC: Empowerment Zone/Enterprise Community:
GSA: General Services Administration:
HHS: Department of Heath and Human Services:
HUD: Department of Housing and Urban Development:
IRS: Internal Revenue Service:
NETS: National Establishment Time Series:
SBA: Small Business Administration:
USDA: U.S. Department of Agriculture:
WIA: Workforce Investment Act:
United States Government Accountability Office:
Washington, DC 20548:
September 10, 2007:
The Honorable Byron L. Dorgan:
Chairman:
Subcommittee on Interstate Commerce, Trade, and Tourism:
Committee on Commerce, Science, and Transportation:
United States Senate:
Dear Mr. Chairman:
State and local governments are estimated to spend billions of dollars
annually in business incentives--financial assistance, tax concessions,
and other benefits--in an effort to attract and retain jobs. State and
local governments can directly or indirectly use funds and program
services from a variety of federal, state, and local programs to induce
individual businesses to relocate, expand, or maintain their operations
in a state or community's jurisdiction. In response to concerns about
state and local governments using federal funds to attract jobs to one
U.S. community at a loss of jobs to another community, Congress began
to impose restrictions in the 1950s on some federal programs to prevent
funds from being used to relocate businesses.
In 1997, we provided an overview of eight major federal programs that
states and localities used at that time for economic development
purposes.[Footnote 1] However, relatively little is known about how
many other federal economic development programs state and local
governments currently use as incentives to attract employers or about
the extent to which restrictions exist against using funds to support
an employer's relocation. You noted that in recent years the
controversy about the costs and benefits of using limited government
funds to recruit businesses has been growing and expressed concerns
about efforts to help ensure compliance with restrictions on the use of
federal funds. The objectives of this report are to (1) identify large
federal economic development programs that state and local governments
can use as incentives to businesses for attracting new jobs into their
jurisdictions, (2) identify which of these programs contain statutory
prohibitions on using program funds to relocate businesses, and (3)
assess whether federal agencies had established and implemented
procedures to help ensure compliance with these provisions.
To identify large federal economic development programs that state and
local governments can use in incentive packages for businesses, we
searched the General Services Administration's (GSA) online Catalog of
Federal Domestic Assistance (CFDA) for economic development programs
that CFDA reported as having budget obligations of at least $500
million.[Footnote 2] We also searched the Congressional Research
Service's (CRS) 2006 Tax Expenditure Compendium for economic
development tax expenditure programs with reported estimated tax
revenue losses of $500 million or more for fiscal year 2006.[Footnote
3] We then narrowed the list according to criteria that enabled us to
identify the largest programs most likely to be candidates as a
business incentive. Further, we reviewed the Web sites for each of the
50 states' economic development agencies to identify federal programs
typically marketed as business incentives. To identify the programs
with nonrelocation provisions, we reviewed relevant statutes and
regulations and focused on those programs that we identified as the
largest based on our review of CFDA and the CRS Tax Expenditure
Compendium. To assess the completeness of our search results, we
interviewed representatives of selected federal agencies, economic
development trade associations, and policy groups. To assess the extent
to which federal agencies had procedures in place to help ensure
compliance with nonrelocation provisions, we obtained documents from
federal agencies that described the procedures for helping to ensure
compliance and then conducted limited testing of these procedures
(typically a nongeneralizable sample of 10 cases for each program) to
determine their implementation. We did not conduct an overall
evaluation of the programs, evaluate how well the programs served their
intended purposes, or evaluate how nonrelocation provisions affect the
relative success of the programs in achieving their intended purposes.
We also did not address the impact these programs had on development
efforts by state and local governments. We interviewed representatives
of six federal agencies--Department of Labor (Labor), Department of
Housing and Urban Development (HUD), Department of Agriculture (USDA),
Small Business Administration (SBA), the Department of Commerce's
Economic Development Administration (EDA), and the Department of the
Treasury's Internal Revenue Service (IRS). In addition, we interviewed
academics, researchers, representatives of economic development trade
groups, and consultants that businesses hire to identify and select new
business locations (site-selection consultants). We conducted our work
in Washington, D.C., and San Francisco and Fresno, California, from
October 2006 through August 2007 in accordance with generally accepted
government auditing standards. Appendix I provides a more detailed
description of our scope and methodology.
Results in Brief:
We identified 17 large federal economic development programs that state
and local governments can use to attract and retain jobs. The 17
programs--which include grants, direct loans and loan guarantees, and
tax incentives for job training, infrastructure development, and
business financing--are administered by five agencies--HUD, Labor,
USDA, SBA, and IRS. State and local governments could combine federal
economic development funds from various programs with their own
resources to attract businesses. Based on our review of state economic
development Web sites, the programs that appear to be marketed more
than others were HUD's Community Development Block Grant (CDBG), SBA's
7(a) and 504 loan guarantee programs, and IRS's tax-exempt private
activity bond programs (at least 19 states advertised each of these as
incentives). The results of our state Web site reviews were largely
consistent with the comments of the site-selection consultants with
whom we spoke. While academic studies indicate that differing
definitions of incentives and the ability to interchange funds at the
state and local level make it difficult to quantify the amount of
federal, state, and local funds spent on business incentives, the use
of federal funds as incentives appears to be more limited than the use
of state and local funds. However, state and local governments could
use federal economic development funds to attract additional investment
or to free up their own funds for other purposes. Academic researchers
with whom we spoke estimated that state and local governments spend
from $20 billion to $50 billion annually on business incentives, mostly
in the form of tax incentives, such as property and sales tax
abatements. But the discretion that state and local governments have
over the use of federal economic development funds varies. For some
programs, such as SBA's 7(a) and 504 programs, third-party lenders and
nonprofit development corporations make funding decisions. Others, such
as Labor's Workforce Investment Act (WIA) and industrial development
bond programs, provide state and local governments with more control
over how to allocate resources to businesses. Finally, academic studies
we reviewed questioned the importance of business incentives in firms'
decisions to relocate, but according to the studies we reviewed and
consultants with whom we spoke, state and local incentives could
influence relocation decisions after businesses already had narrowed
their choices.
Nine of the 17 programs that we identified prohibit using program funds
to relocate a business if the move would cause unemployment in the
original location. They are the two HUD CDBG programs, three Labor WIA
programs, a HUD Empowerment Zone (EZ) program, a USDA Empowerment Zone/
Enterprise Community (EZ/EC) program, a USDA Business and Industry
(B&I) Guaranteed Loan program, and SBA's 504 program (see app. II for a
more detailed description of the nine programs). The first seven are
grant programs in which a federal agency provides funds to recipients,
such as state or local governments, that, in turn, may provide funds to
other entities, which we refer to as subrecipients, to facilitate
economic development.[Footnote 4] The remaining two programs guarantee
loans that third-party lenders and nonprofit development corporations
make. All prohibit the funding of relocations that result in
unemployment, but the amount of job loss that triggers the
nonrelocation provision differs by program. For example, in six
programs, a single loss would trigger the provision, but in the other
three programs, higher thresholds trigger the provision. The three
programs with higher thresholds also require applicants to exceed other
thresholds before triggering the provision, such as requiring that
relocations occur across defined geographic areas. For example, HUD's
CDBG program, consistent with its statutory requirement, prohibits
funding for a business that relocates to a different labor market.
Recently, USDA, for its B&I program, has requested but not obtained
congressional removal of the nonrelocation provision, saying
enforcement of the provision was not cost-effective given the few
complaints received over the course of many years.
Federal agencies administering the nine programs with nonrelocation
provisions used various procedures, including screening applicants and
monitoring recipients, to help ensure compliance, but the extent to
which these procedures specifically addressed nonrelocation provisions
was limited. The two loan guarantee programs--USDA's B&I and SBA's 504
programs--emphasized screening procedures to help ensure compliance.
For example, both programs had written guidance and other mechanisms
that specifically addressed nonrelocation provisions. The emphasis on
screening for loan guarantee programs seemed appropriate given the
structure of these programs. While agencies administering the seven
grant programs with nonrelocation provisions also screened applicants,
agency officials noted inherent limitations in using screening
mechanisms for grant programs. For example, under grant programs,
applicants (such as state and local governments) do not always know at
the time they apply for funds which specific businesses later will seek
and obtain assistance through the program. Because of the inherent
limitations of screening procedures for grant programs, agencies
administering grant programs primarily relied on monitoring to help
identify instances of potential noncompliance. However, only one of the
seven grant programs we reviewed--HUD's EZ program--had developed
written monitoring guidance specific to the nonrelocation provision.
Officials at all agencies stated that they have received few or no
complaints of noncompliance with nonrelocation provisions, and some
officials said that they do not consider noncompliance to pose a
significant risk to the programs. However, without structured guidance
and procedures in place to monitor compliance, agencies have limited
assurance that grant recipients and subrecipients are complying with
statutory and regulatory requirements and spending funds on allowable
activities.
We are making recommendations in this report intended to provide Labor,
USDA, and HUD with greater assurance that fund recipients and, where
applicable, subrecipients are complying with nonrelocation provisions
and spending federal economic development funds on allowable
activities. We provided a draft of this report to Labor, USDA, HUD,
SBA, Commerce, and IRS for review and comment. Labor provided written
comments that are reprinted in appendix III. USDA's Acting Assistant
Deputy Administrator for Cooperative Programs provided oral comments on
August 8, 2007. In its written comments, Labor stated that the
department concurred with our recommendation and described actions to
implement it. Specifically, Labor said that the department is
implementing two complementary strategies. First, Labor said that it is
developing a formal policy guidance letter that will clarify allowable
and unallowable uses of WIA funds for economic-development-related
activities. This guidance will specifically address prohibitions
related to the nonrelocation provision. Second, Labor said that its
draft Formula Grant Supplement to its Core Monitoring Guide includes
indicators of compliance along with each governor's responsibility to
determine which costs are allowable or unallowable under WIA, including
prohibitions against using WIA funds to encourage business relocation
and related restrictions. Labor stated that regional office reviewers
have extensively tested the draft Formula Grant Supplement and that it
expects the supplement to enter the final clearance process shortly and
be completed by December 31, 2007. In oral comments on our report,
USDA's Acting Assistant Deputy Administrator for Cooperative Programs
stated that USDA concurred with our recommendation and provided us with
documentation showing that the department is taking initial steps to
implement the recommendation. Labor, USDA, HUD, SBA, and IRS provided
technical comments that we have incorporated in the report where
appropriate. Commerce did not provide comments on the draft report.
Background:
In 2000, the Council of State Governments reported that more than 40
states offered tax and financial incentives to businesses for
activities such as relocating, expanding, buying equipment, or creating
and maintaining jobs. The use of incentives to attract and retain
businesses has been an issue of debate for many years. Proponents
maintain that economic development incentives are an effective means by
which states and communities can compete for jobs. Opponents contend
that the dollars spent to provide incentives would be better used to
support activities believed to have more impact on a community's
economic development, such as improvements to infrastructure and
investments in education to develop a competitive labor pool.
While states and localities compete with one another to attract
businesses, some states and localities have attempted to curtail the
use of economic development funds to relocate jobs. According to two
policy groups promoting accountability in economic development, three
cities--Austin, Texas; Gary, Indiana; and Vacaville, California--and
nine states--Alabama, Connecticut, Florida, Iowa, Maryland, New Mexico,
New York, Ohio, and Wisconsin--prohibit using city and state resources,
respectively, to relocate jobs within their boundaries. For example,
both policy groups state that the Gary, Indiana, city ordinance
prohibits tax abatements for the relocation of existing jobs from
outside the corporate limits of the city. One of the groups also said
that in Puerto Rico, the governor may refuse any business application
for tax incentives if doing so would adversely affect the business'
employees in any state in the United States. Regional entities also
have established formal and informal agreements to curtail the
competition for businesses and jobs within their boundaries. These
entities include the Metro Denver Economic Development Corporation; the
tri-county region comprising Broward, Miami-Dade and Palm Beach
counties in Florida; and Contra Costa and Alameda counties in
California.
In 2006, the total number of unemployed workers was 6.8 million in the
fourth quarter, compared to 145.6 million employed. According to the
Bureau of Labor Statistics (BLS), employers reported that a total of
894,739 workers lost their jobs because of extended layoffs in 2006
that resulted from a variety of economic factors, such as bankruptcy
and reorganizations.[Footnote 5] A BLS survey of employers found that
20,199 of these losses (about 2 percent) occurred because of business
relocations within the United States, the majority across state lines.
Another source--the National Establishment Time Series (NETS)--uses
proprietary Dun & Bradstreet data on U.S. companies to track business
relocations. According to a representative of the company that
maintains the NETS data, more than 2.8 million businesses have
relocated since 1990 and about 100,000 of these (or almost 4 percent)
occurred across state lines.
A number of federal programs fund or support economic development
activities. In prior work, we identified activities that are directly
related to economic development--planning economic development
activities; constructing or renovating nonresidential buildings;
establishing business incubators; constructing industrial parks;
constructing and repairing roads and streets; and constructing water
and sewer systems.[Footnote 6] These programs typically are available
to applicants that include individuals; local, state, territorial, and
tribal governments; and nonprofit organizations through loans, loan
guarantees, and project and formula grants. Appendix II provides a
description of the nine federal economic development programs that we
identified as having nonrelocation provisions, including information
about program funding and how the programs operate.
State and Local Governments Can Use a Variety of Large Federal Programs
to Attract Businesses:
We identified 17 large federal programs that state and local
governments can use to attract businesses. These programs offer
assistance to businesses in the form of loans and loan guarantees,
grants, job-training services, and tax benefits as incentives to
businesses. Of the 17 economic development programs, states appear to
have marketed 14 as incentives for businesses. However, according to
academic experts who study economic development incentives and site-
selection consultants, the amount of federal funds used as incentives
is likely more limited than the amount of state and local funds used as
incentives. State and local governments have varying discretion over
the use of the federal funds, but can leverage federal funds to free
their own resources for incentives or for other purposes that support
businesses. Finally, academic studies on incentives and site-selection
consultants have questioned whether incentives offered by state and
local governments influence a business' decision to relocate or expand
operations.
State and Local Governments Can Use Various Types of Federal Programs
as Business Incentives:
We identified 17 large federal economic development programs that state
and local governments can use as incentives to attract and retain
businesses, based on a search of the CFDA database, Tax Expenditure
Compendium, and state economic development Web sites. As shown in table
1, five agencies administer the 17 programs, which offer a range of
assistance or services (such as loans, grants, tax benefits, and
training programs) to businesses.
Table 1: Description of 17 Large Federal Economic Development Programs
That Offer Financial Assistance or Services That Can Be Used as
Business Incentives:
Agency: HUD;
Program: CDBG Entitlement;
Program Description: Grants to large cities and urban counties to
benefit the community development needs of low-and moderate-income
people.
Agency: HUD;
Program: CDBG State;
Program Description: Grants to states to benefit the community
development needs of low-and moderate-income people living in non-
entitlement areas.
Agency: HUD;
Program: EZ (urban);
Program Description: Grants, loans, and tax relief to federally
designated urban areas to help them overcome economic and social
problems.
Agency: HUD;
Program: Renewal Communities;
Program Description: Tax incentives and regulatory relief for federally
designated urban and rural areas to help them overcome economic and
social problems.
Agency: IRS/Treasury[A];
Program: New Markets Tax Credit;
Program Description: Tax credits for investments in qualified community
development entities that make investments in designated low-income
communities.
Agency: IRS;
Program: Private activity bonds;
Program Description: Tax incentives for construction of public
airports, docks, and mass- commuting facilities.
Agency: IRS;
Program: Private activity bonds;
Program Description: Tax incentives for the construction of sewage,
water, and hazardous waste facilities.
Agency: Labor;
Program: WIA Adult;
Program Description: Employment and training services to adults ages 18
years and over.
Agency: Labor;
Program: WIA Dislocated Workers;
Program Description: Employment and training services to dislocated
workers.
Agency: Labor;
Program: WIA Youth;
Program Description: Employment and training services to economically
disadvantaged youth ages 14 to 21 possessing specific barriers to
employment.
Agency: SBA;
Program: Certified Development Company 504 Loans;
Program Description: Loans that development companies make and SBA
guarantees, providing small businesses with proceeds to acquire or
renovate fixed assets, including land, buildings, machinery, and
equipment. This program does not cover working capital or refinancing.
Agency: SBA;
Program: 7(a) Loans;
Program Description: Loan guarantees providing small businesses with
proceeds to acquire land, buildings, machinery, equipment, furniture or
fixtures, and funds to cover building renovation, leasehold expenses,
working capital, and refinancing.
Agency: USDA;
Program: EZ/EC (rural);
Program Description: Grants, loans, tax, and regulatory relief to
federally designated rural areas to help them overcome economic and
social problems.
Agency: USDA;
Program: B&I Guaranteed Loans;
Program Description: Guaranteed loans to businesses for purchasing or
improving land, facilities, equipment, and certain agricultural
production projects.
Agency: USDA;
Program: Community Facilities Loans and Grants;
Program Description: Direct loans, loan guarantees and grants to rural
communities to develop public facilities, including industrial park
sites.
Agency: USDA;
Program: Farm Ownership Loans;
Program Description: Direct and guaranteed loans for purchase of family-
size farms.
Agency: USDA;
Program: Farm Operating Loans;
Program Description: Direct and guaranteed loans for operation of
family-size farms.
Sources: GAO, GSA, and CRS.
[A] IRS enforces compliance with relevant portions of the federal tax
code for the New Markets Tax Credit program. The Department of the
Treasury's Community Development Institutions Fund awards New Markets
Tax Credit allocations to qualified community development entities.
[End of table]
Out of the 17 programs we identified,
* five were direct loan or loan guarantee programs: the SBA 7(a) and
504, USDA B&I, Farm Ownership Loans, and Farm Operating Loans;
* four were tax incentive programs: IRS's New Markets Tax Credit, its
two private activity bond programs, and HUD's Renewal Communities;
* three were programs that support job training services: WIA Adult,
Dislocated Workers, and Youth programs; and:
* five were programs that offer more than one type of financial
assistance (grants, direct or guaranteed loans, or tax incentives): the
two HUD CDBG programs, HUD EZ, USDA EZ/EC, and USDA Community
Facilities.
State and local governments also can use federal economic development
resources to supplement their existing resources to attract additional
investment and potentially use federal economic development funds to
free up money for incentives they otherwise would have spent on
economic development.[Footnote 7] For example, according to USDA
officials, EZs and ECs often leverage federal program resources to
obtain other funds, thereby attracting businesses. Similarly,
businesses located in EZs and ECs can claim various state and federal
tax credits, including IRS's Work Opportunity Tax Credit, which
provides tax credits to employers hiring individuals residing in an EZ
or EC. According to our January 2007 report on the New Markets Tax
Credit program, these credits can be packaged with other types of
incentives, such as EZ/EC incentives or state and local tax abatements,
to make the investments in economically distressed communities more
attractive to investors such as banks. We previously have reported that
more than one-fourth of New Markets Tax Credit projects were located in
federally designated EZs.[Footnote 8] State and local governments also
can use federal economic development funds to support economic
development activities, thereby freeing up state and local funds for
business incentives or other uses.[Footnote 9]
Based on our review of state economic development Web sites, states
appear to market all but 3 of the 17 programs (Community Facilities
Loans and Grants, Farm Ownership Loans, and Farm Operating Loans being
the exceptions). The programs that appear to be marketed more than
others are the CDBG programs, SBA's 7(a) and 504 loan guarantees, and
private activity bonds (at least 19 states appear to advertise each of
these as incentives). Benefits from EZs, ECs, or Renewal Communities,
and job-training programs funded with WIA funds were the next most
marketed incentives, with at least nine states offering them. This
appears to be somewhat consistent with what site-selection consultants
told us about the specific federal incentives they see in business
incentive packages. The consultants told us that they see CDBG loans
funded with Entitlement and State block grants, private activity bonds,
EZ/EC benefits and, increasingly, customized job-training funds in
incentive packages. In contrast to the results of our Web site reviews,
the consultants did not cite SBA loans as being among federal resources
included in business incentive packages.[Footnote 10]
Use of Federal Funds as Business Incentives Appears to Be More Limited
Than Use of State and Local Funds:
Although federal programs are marketed as business incentives, the
amount of federal funds used as incentives appears to be more limited
than the amount of state and local funds used. While the precise amount
of federal funds used as incentives is not available, the Congressional
Budget Office (CBO) estimated that the federal government spent $27.9
billion to support commerce and business in addition to $2.2 billion on
credit programs in 1995.[Footnote 11] CBO also indicated that the
federal government provides the bulk of its support to businesses
through tax provisions. CBO estimated tax revenue losses of at least
$32.2 billion for the provision of the tax code that yielded the
largest amount of direct support for businesses--depreciation of
capital assets in excess of the alternative deprecation system--but did
not provide total estimates of foregone revenue associated with all tax
provisions.[Footnote 12] It is not clear from the CBO report whether
and to what extent state and local governments also used these programs
and tax provisions as incentives. We reviewed academic studies on
economic development business incentives offered from 1995 to 2005 and
interviewed the authors of these studies. The academic literature on
economic business incentives generally focuses on state and local
government incentives rather than federal incentives. Academic studies
estimate that state and local governments spent from $20 to $50 billion
annually on business incentives.[Footnote 13] While the amount of
federal funds used as business incentives has not been measured to any
great extent, some researchers with whom we spoke said that the amount
of federal funds used as business incentives is likely limited compared
to the amount of state and local funds used as incentives.[Footnote 14]
One limitation in developing estimates of federal, state, and local
funds spent on incentives is defining what constitutes a business
incentive. For example, a state or local government might offer
indirect benefits, such as infrastructure improvements, to attract or
retain businesses, but these might not be counted in estimates as
business incentives.[Footnote 15] Moreover, although the amount of
federal economic development funds available as incentives appears to
be limited, money can be fungible, or freely interchangeable, at the
state and local level. Thus, even though the amount of federal funds
used as incentives might be limited, state and local governments could
leverage those funds to free up their own resources for incentives or
for other purposes that support businesses.
Furthermore, state and local governments have less discretion over the
use of federal resources than they do over their own, but the degree of
discretion varies with the program. For at least four of the programs
(SBA's 7(a) and 504 loan programs, USDA's B&I loan program, and IRS's
New Markets Tax Credit), state and local governments have no direct
role in funding decisions. For these programs, third-party lenders,
development corporations, or the federal government decide which
businesses receive funds. In contrast, other programs provide states
with more discretion over how they can use funds. For example, under
WIA, states and local areas can use the discretionary and statutory
funding from Labor to develop job training and employer service
programs, including customized job training, which we previously have
reported can be an important factor in a company's decision to locate
in a particular area.[Footnote 16]
Finally, the academic literature we reviewed questioned the importance
of incentives in location or relocation decisions. These studies, as
well as published articles in site selection industry magazines,
indicate that other considerations might outweigh economic development
incentives when companies decide where to locate. The studies explained
that the critical factors in deciding were more likely to be the size
and education of the labor force; local infrastructure such as
telecommunication lines; transportation options, such as access to
ports, roads, and rail; and access to consumer markets. However, the
studies and consultants acknowledged that the incentives state and
local governments offered could influence a business' decision when the
business already had narrowed its choice to three or four locations.
Nine Large Federal Economic Development Programs Have Nonrelocation
Provisions, but Requirements Vary:
We determined that 9 of the 17 large federal economic development
programs that state and local governments can use as business
incentives contain statutory prohibitions against using funds to
relocate businesses if the relocation would cause
unemployment.[Footnote 17] Seven of the federal economic development
programs with nonrelocation provisions were grant programs, and the
remaining two were loan guarantee programs. The number of job losses
and other requirements needed to trigger the nonrelocation provision
varied by program. Nonrelocation provisions for the nine programs were
enacted over a 40-year period. Recently, one program has sought but not
obtained congressional removal of its nonrelocation provision.
Nine Large Federal Economic Development Programs Contain Statutory
Nonrelocation Provisions:
Based on our review of laws and regulations for the 17 large federal
economic development programs that state and local governments can use
as business incentives, we determined that nine contain statutory
prohibitions against using program funds to relocate
businesses.[Footnote 18] (See app. II for a more detailed description
of each of these nine programs.) They are the two HUD CDBG programs
(Entitlement and State programs); the WIA Adult, Dislocated Workers,
and Youth programs; USDA and HUD's respective EZ/EC programs (for
designated rural and urban communities, respectively); USDA's B&I
program; and SBA's 504 program. SBA voluntarily applies a nonrelocation
provision to its 7(a) program.[Footnote 19]
All nine programs that we identified with statutory restrictions on
employer relocations use job loss in a relocating company's original
location as the primary criterion for applying a nonrelocation
provision, but the job loss threshold varies by program. As shown in
table 2, the statutory language for three programs--HUD and USDA's EZ/
EC program and USDA's B&I program--do not specify a job loss threshold,
but these agencies interpret the job loss threshold as one job lost.
The three WIA programs specify a job loss threshold of one job lost.
The remaining three--HUD's CDBG Entitlement and State programs and
SBA's 504 program--have higher job loss thresholds. In addition to job
loss, these three programs specify other conditions for applying a
nonrelocation provision, such as requiring that the relocations occur
across geographically defined areas.
Table 2: Job Loss and Other Statutory or Regulatory Requirements for
Nine Large Federal Economic Development Programs with Nonrelocation
Provisions:
Agency: HUD;
Program: CDBG Entitlement and State;
Job loss threshold: More than 25 jobs;
Other requirements:
* Relationship between job loss and size of labor market in originating
employer's area;
* Relocation occurs across different labor market areas (as defined by
BLS);
Exemptions from application of nonrelocation provision:
* New operations of a business that are unrelated to existing
operations, even if business decides to reduce or eliminate existing
operations;
* Nonprofit entities;
* Indirect assistance that benefits multiple businesses;
* Loss of 25 or fewer jobs;
* Microenterprises;
* Purchase of business equipment, etc. if purchase does not result in
relocation of sellers' operations.
Agency: HUD;
Program: EZ (urban);
Job loss threshold: 1 job[A];
Other requirements: None;
Exemptions from application of nonrelocation provision: None.
Agency: Labor;
Program: WIA Adult, Dislocated Workers, and Youth programs;
Job loss threshold: 1 job;
Other requirements: None;
Exemptions from application of nonrelocation provision: None.
Agency: SBA;
Program: Certified Development Company 504 Loans;
Job loss threshold:
* One third workforce reduction within a company, or;
* substantial increase in unemployment in any area of the country;
Other requirements: None;
Exemptions from application of nonrelocation provision:
* Relocation is key to the economic well-being of the applicant;
* Benefits to applicant and receiving community outweigh negative
impact to original community.
Agency: USDA;
Program: EZ/EC (rural);
Job loss threshold: 1 job[A];
Other requirements: None;
Exemptions from application of nonrelocation provision: None.
Agency: USDA;
Program: B&I Guaranteed Loans;
Job loss threshold: 1 job[A];
Other requirements: None;
Exemptions from application of nonrelocation provision:
* Business applying for $1 million or less of assistance, or;
* Business applying would increase direct employment by less than 50
employees[B].
Source: GAO analysis.
Note: For CDBG programs, see 42 USC 5305(h); for EZ/EC programs, see 26
USC 1391; for WIA programs, see 29 USC 2931(d); for SBA program, see 15
USC 661; and for B&I program, see 7 USC 1932.
[A] Neither the statutes nor the regulations for these programs specify
a job loss threshold. However, agency officials stated that the job
loss threshold is one lost job for these programs.
[B] Based on language contained in statute, 7 U.S.C. 1932(d)(2). The
regulations for the B&I program differ from the statute in that
businesses are exempt from the nonrelocation provision if they are
applying for less than $1 million in assistance "and" ( as opposed to
"or") the business would increase direct employment by less than 50
jobs. 7 C.F.R. 1980.412(c); 7 C.F.R. 4279.114(b). Loans that are not
exempt from the nonrelocation provision require U.S. Department of
Labor involvement in reviewing certain information about these loans.
USDA officials said that they are currently implementing the B&I
program based on the program's regulations. Thus, USDA sends to Labor
only those loans that are for at least $1 million and would increase
direct employment by more than 50 jobs. According to USDA officials,
USDA is seeking to have the statutory language changed to make it more
consistent with regulatory language. The officials stated that when the
B&I statute was originally enacted in 1972, loans of $1 million and
above were rare. Currently, according to USDA, if the agency were to
send to Labor for review loans based solely on the amount ($1 million
and above), Labor would have to review most B&I loans.
[End of table]
HUD regulations for the CDBG Entitlement and State programs make
business relocations ineligible for funding if they involve certain job
losses. Any relocation involving the loss of 500 or more jobs is
prohibited. In contrast, relocations involving the loss of 25 or fewer
jobs are exempt from the nonrelocation provision. For relocations
involving between 25 and 500 jobs, the nonrelocation provision applies
if the number of jobs lost equals or exceeds one-tenth of one percent
of the number of employed persons in the labor market experiencing the
loss.[Footnote 20] The CDBG program's statute does not specify a job
loss threshold; it only requires that the agency prohibit funding for
business relocations that are likely to result in a significant loss of
employment. According to a HUD official, HUD chose to exempt any
relocation involving 25 or fewer jobs because losses of this magnitude
likely would not significantly affect a labor market of any size. By
exempting these smaller businesses from the nonrelocation provision,
this official said that the CDBG program retains some flexibility for
entitlement and nonentitlement communities to provide funds to
businesses to promote job growth. This official further noted that HUD
also determined that relocations involving 500 or more jobs would be
significant for labor markets of any size.
SBA's 504 program, which guarantees the portion of a business loan that
nonprofit certified development companies make to businesses, features
potentially higher job loss thresholds.[Footnote 21] For example, SBA
regulations would require that applications for loans be denied if the
relocation would result in the business's reducing its workforce by at
least one-third, or serious unemployment would result in the original
business location or any area of the country. SBA regulations allow for
the waiver of these job loss limits if the relocations would be key to
the economic well-being of the business or if the benefits to the
applicant and the receiving community would outweigh the negative
impact to the community from which the applicant would move.
As noted previously, three of the programs specify conditions in
addition to job loss for applying the nonrelocation provision, such as
relocations occurring across defined geographic areas and funding
thresholds. For example, HUD's CDBG regulations for both the
Entitlement and State programs prohibit funding for a business that
relocates to a different labor market area.[Footnote 22] USDA's B&I
program, through which USDA guarantees up to 80 percent of a loan that
an approved third-party lender makes to businesses, statutorily
prohibits program funds from supporting business relocations in cases
in which USDA assistance exceeds $1 million. Our review of
congressional reports indicates that this minimum funding threshold is
intended to expedite the processing of small business applications,
based on the reasoning that the relocation of small businesses would
pose no threat to the labor force or other businesses in the original
location.
Congressional approval of the nonrelocation provisions for the nine
large programs was spread over a 40-year period (1958 to 1998). Table 3
shows the date on which the nine programs became subject to
nonrelocation provisions.
Table 3: Timeline Showing Congressional Approval of Nonrelocation
Provisions for Nine Large Federal Programs:
Year[A]: 1958[B];
Agency: SBA;
Program: Certified Development Company 504 Loan program.
Year[A]: 1972;
Agency: USDA;
Program: B&I Guaranteed Loan program.
Year[A]: 1993;
Agency: USDA / HUD;
Program: EZ/EC (2 programs).
Year[A]: 1998[C];
Agency: Labor;
Program: WIA Adult, Dislocated Workers, and Youth (3 programs).
Year[A]: 1998;
Agency: HUD;
Program: CDBG Entitlement and State (2 programs).
Source: GAO analysis.
[A] Years listed are those in which the legislation was enacted, not
necessarily the years in which the provisions took effect.
[B] The 504 loan program was enacted in 1986 as part of the Small
Business Investment Act of 1958, as amended. The nonrelocation
provision was established under the original 1958 act. It applied to
the predecessors of the current 504 loan program and to the 504 program
itself.
[C] Labor's WIA was enacted in 1998, but the act's nonrelocation
provisions are based on the Job Training Partnership Act, which was
enacted in 1982.
[End of table]
One of the federal agencies has sought but not obtained removal of a
nonrelocation provision from its program. USDA officials said that
since 2001 the agency has sought congressional support for the removal
of the nonrelocation provision for the B&I program, citing
administrative burden and other problems involved with ensuring
compliance. A USDA official explained that while Labor has the
statutory responsibility to analyze labor market information related to
B&I applications--to help ensure that funding will not result in the
transfer of any employment or business activity--Labor does not receive
separate funding to support analysis of this information. According to
USDA, the agency has sent between 6 and 18 B&I applications to Labor
for review in the past few years. Labor confirmed that it does not
receive separate funding to support its analysis, but said the agency
reviews all of the applications Labor provides.[Footnote 23]
Extent to Which Federal Agencies Had Established and Implemented
Procedures to Help Ensure Compliance with Nonrelocation Provisions Was
Limited:
Federal agencies administering the nine programs with nonrelocation
provisions used various procedures to help ensure that program
recipients complied with overall program goals and requirements, but
the extent to which these procedures specifically addressed
nonrelocation provisions was limited. The Guide to Opportunities for
Improving Grant Accountability states that organizations awarding
grants need effective internal control systems to provide adequate
assurance that funds are properly used and achieve intended
results.[Footnote 24] The two loan guarantee programs--USDA's B&I and
SBA's 504 programs--relied on screening mechanisms (written review
guidance and eligibility checklists or third-party verification of
data) to help ensure compliance with nonrelocation provisions. In
contrast, officials who administer grant programs we reviewed noted
inherent limitations in using screening mechanisms for grant programs,
given that program recipients (states and local governments) do not
always know at the time of application which businesses later will
apply for and obtain assistance through the program. Because of the
inherent limitations of screening, the agencies administering grant
programs primarily relied on monitoring recipients and subrecipients to
help identify instances of potential noncompliance. However, only one
of the grant programs we reviewed had developed monitoring guidance
specifically tailored to the nonrelocation provision. Without
structured guidance and procedures in place, agencies have limited
assurance that recipients and subrecipients are complying with
statutory and regulatory requirements and spending funds on allowable
activities.
Agencies Had Eligibility Screening Procedures, but Focus on
Nonrelocation Provision Was Limited:
As stated in the Guide to Opportunities for Improving Grant
Accountability, organizations that award and receive grants need
effective internal control systems to help ensure that grants are
awarded to eligible entities for intended purposes and in accordance
with applicable laws and regulations. As shown in table 4, each of the
four federal agencies we reviewed had screening procedures covering
applicants' eligibility to receive funds. The agencies used at least
one of the following mechanisms: written application or plan review
guidance, eligibility checklists, self-certification forms, third-
party verification of data, or business statements of compliance.
However, only four of the nine programs--including both loan guarantee
programs--used screening mechanisms that specifically addressed a
relevant nonrelocation provision.
Table 4: Federal Agency Mechanisms to Screen for Compliance with
Nonrelocation Provisions:
Agency: HUD;
Program: EZ (urban);
Written application or plan review guidance: Specific to nonrelocation
provision: [Empty];
Written application or plan review guidance: Not specific to
nonrelocation provision: [Check];
Eligibility checklist that specifically addressed nonrelocation:
[Empty];
Self-certification form: Specific to nonrelocation provision: [Empty];
Self-certification form: Not specific to nonrelocation provision:
[Check];
Third-party verification of applicant data specific to nonrelocation:
[Empty];
Business statements of compliance: [Empty].
Agency: HUD;
Program: CDBG (Enlightenment);
Written application or plan review guidance: Specific to nonrelocation
provision: [Empty];
Written application or plan review guidance: Not specific to
nonrelocation provision: [Check];
Eligibility checklist that specifically addressed nonrelocation:
[Empty];
Self-certification form: Specific to nonrelocation provision: [Empty];
Self-certification form: Not specific to nonrelocation provision:
[Check];
Third-party verification of applicant data specific to nonrelocation:
[Empty];
Business statements of compliance: [Check].
Agency: HUD;
Program: CDBG (State);
Written application or plan review guidance: Specific to nonrelocation
provision: [Empty];
Written application or plan review guidance: Not specific to
nonrelocation provision: [Check];
Eligibility checklist that specifically addressed nonrelocation:
[Empty];
Self-certification form: Specific to nonrelocation provision: [Empty];
Self-certification form: Not specific to nonrelocation provision:
[Check];
Third-party verification of applicant data specific to nonrelocation:
[Empty];
Business statements of compliance: [Check].
Agency: Labor;
Program: WIA Adult;
Written application or plan review guidance: Specific to nonrelocation
provision: [Empty];
Written application or plan review guidance: Not specific to
nonrelocation provision: [Check];
Eligibility checklist that specifically addressed nonrelocation:
[Empty];
Self-certification form: Specific to nonrelocation provision: [Empty];
Self-certification form: Not specific to nonrelocation provision:
[Check];
Third-party verification of applicant data specific to nonrelocation:
[Empty];
Business statements of compliance: [Check].
Agency: Labor;
Program: WIA Dislocated Workers;
Written application or plan review guidance: Specific to nonrelocation
provision: [Empty];
Written application or plan review guidance: Not specific to
nonrelocation provision: [Check];
Eligibility checklist that specifically addressed nonrelocation:
[Empty];
Self-certification form: Specific to nonrelocation provision: [Empty];
Self-certification form: Not specific to nonrelocation provision:
[Check];
Third-party verification of applicant data specific to nonrelocation:
[Empty];
Business statements of compliance: [Check].
Agency: Labor;
Program: WIA Youth;
Written application or plan review guidance: Specific to nonrelocation
provision: [Empty];
Written application or plan review guidance: Not specific to
nonrelocation provision: [Check];
Eligibility checklist that specifically addressed nonrelocation:
[Empty];
Self-certification form: Specific to nonrelocation provision: [Empty];
Self-certification form: Not specific to nonrelocation provision:
[Check];
Third-party verification of applicant data specific to nonrelocation:
[Empty];
Business statements of compliance: [Check].
Agency: USDA;
Program: EZ/EC (rural);
Written application or plan review guidance: Specific to nonrelocation
provision: [Check];
Written application or plan review guidance: Not specific to
nonrelocation provision: [Empty];
Eligibility checklist that specifically addressed nonrelocation:
[Empty];
Self-certification form: Specific to nonrelocation provision: [Check];
Self-certification form: Not specific to nonrelocation provision:
[Empty];
Third-party verification of applicant data specific to nonrelocation:
[Empty];
Business statements of compliance: [Empty].
Agency: USDA;
Program: B&I Loans;
Written application or plan review guidance: Specific to nonrelocation
provision: [Check];
Written application or plan review guidance: Not specific to
nonrelocation provision: [Empty];
Eligibility checklist that specifically addressed nonrelocation:
[Empty];
Self-certification form: Specific to nonrelocation provision: [Check];
Self-certification form: Not specific to nonrelocation provision:
[Empty];
Third-party verification of applicant data specific to nonrelocation:
[Check];
Business statements of compliance: [Empty].
Agency: SBA;
Program: 504;
Written application or plan review guidance: Specific to nonrelocation
provision: [Check];
Written application or plan review guidance: Not specific to
nonrelocation provision: [Empty];
Eligibility checklist that specifically addressed nonrelocation:
[Check];
Self-certification form: Specific to nonrelocation provision: [Empty];
Self-certification form: Not specific to nonrelocation provision:
[Empty];
Third-party verification of applicant data specific to nonrelocation:
[Empty];
Business statements of compliance: [Empty].
Source: GAO analysis.
[End of table]
Review of Applications or Plans:
All four agencies had procedures for reviewing applications or plans to
help ensure that applicants were eligible to receive funds under the
program.
* The two loan guarantee programs--USDA for its B&I program and SBA for
its 504 program--had formal written guidance that specifically
addressed the screening of applicants for compliance with the
nonrelocation provision. USDA's formal written guidance listed the
nonrelocation provision as one of the ineligible purposes of a B&I loan
guarantee.[Footnote 25] SBA also incorporated specific references to
its nonrelocation provision into its standard operating procedures,
which are addressed to SBA personnel and lending partners who review
and approve 504 loans. SBA also required its 504 lending partners to
complete an eligibility checklist for each loan guarantee applicant.
One of the items on the eligibility checklist seeks to determine
whether 504 loan proceeds will be used to "relocate any operations of a
small business, which will cause a net reduction of one-third or more
in the workforce of the relocating small business or a substantial
increase in unemployment in any area of the country." In reviewing the
supporting documentation for 10 approved loans, we found that certified
development companies were using the eligibility checklist SBA had
developed to screen 504 loan applicants for these loans.[Footnote 26]
* Each of the seven grant programs had formal written guidance covering
the review of required plans but with the exception of USDA's EZ/EC
program, the guidance did not specifically address the nonrelocation
provisions for each program. Under the CDBG programs, recipients
(entitlement communities and states) must submit an action plan to HUD
each year that broadly identifies the activities that they will
undertake to meet the objectives of previously submitted consolidated
plans.[Footnote 27] Labor requires states to submit strategic plans for
WIA describing how a state intends to use WIA funds. Both agencies use
written checklists as guidance to determine whether the submitted plans
are complete and both agencies' guidance includes an item to determine
whether applicants have assured their compliance with applicable laws
and regulations. HUD officials noted that its written guidance on
review of action plans does not require analysis of the nonrelocation
provision, in part because CDBG recipients generally do not know which
businesses will apply for CDBG funding at the time the plans are
developed and submitted to HUD. HUD officials explained that most CDBG
recipients engaged in economic development activities have an "open
window" approach, in that assistance is available to businesses on an
"as needed" basis during the program year.
* For the EZ/EC programs, USDA had formal written guidance for
reviewing required application plans that referred to the program's
nonrelocation provision, while HUD's written guidance did not
specifically address the provision. Under the EZ/EC program,
communities seeking EZ or EC designation submit (1) a strategic plan
outlining the community's vision for revitalizing its distressed area;
(2) a tax incentive utilization plan specifying how the community plans
to use the tax benefits available under the program; and (3) an
implementation plan providing detailed information on the activities
and projects the community is undertaking to implement its strategic
plan. HUD officials said that while the agency does not currently have
review guidance specific to the nonrelocation provision, the agency has
been revising a review manual to incorporate language specific to the
provision and has been taking other steps, such as communicating
directly with EZs regarding compliance and providing training to staff,
to raise awareness of the provision and the need to comply with it.
USDA officials said that EZ/EC review staff were told to reject any
application for EZ/EC designation in which an applicant's strategic
plan included evidence that the community intended to lure businesses
from other communities. The officials said that review staff eliminated
several applications for potential program designation because intent
to relocate jobs was evident in the submitted plans. However, we were
not able to verify this statement because USDA officials said that the
strategic plans eliminated from contention were discarded and are no
longer available for review.
Some officials, particularly those who administer grant programs, noted
the limitations of reviewing applications and plans to identify
instances of potential noncompliance with a nonrelocation provision. As
noted above, HUD CDBG officials said that action plans for its
Entitlement program were unlikely to identify specific businesses
receiving funds because the communities do not always know which
businesses would apply for assistance when they submitted the action
plans. Similarly, the officials noted that action plans for the State
CDBG program do not contain a list of proposed activities, but rather a
description of the methods used to distribute funds to local
governments. HUD officials noted that under the CDBG State program,
individual states implement a method of distributing funds that may or
may not include economic development activities and that in most cases
the states evaluate applications from local governments to determine
which activities to fund.
Requirements for Self-Certification of Compliance:
As part of the application review process, USDA's EZ/EC and B&I
programs require applicants to sign self-certification forms that
included a specific reference to the nonrelocation provision for each
program. For example, USDA's application for the EZ/EC program
contained a form in which an applicant self-certifies that "no action
will be taken to relocate any business establishment to the nominated
area." According to USDA EZ/EC officials, this required certification
sends a clear message to the EZ/EC community that relocation is not
permitted under the program. Similarly, USDA's B&I program requires
loan applicants applying for loans of more than $1 million that will
increase employment by more than 50 employees to self-certify that "it
is not the intention of the applicant or any related company to
relocate any present operation as a result of the proposed
project."[Footnote 28]
Other agencies, such as HUD for both its CDBG and EZ programs and Labor
for its WIA programs, require more general statements of compliance.
For example, HUD's application for Round II of the EZ program contained
a form in which an applicant self-certified that "the nominating
entities shall comply with state, local, and federal requirements, and
have agreed in writing to carry out the Strategic Plan if designated."
Similarly, HUD's CDBG program requires applicants to self-certify their
compliance with "applicable laws," which HUD officials said includes
the Housing and Community Development Act of 1974, as amended, which
contains the nonrelocation provision. According to the officials, HUD
saw no need or statutory basis to add a special certification for the
nonrelocation provision, particularly since not all states or
entitlement communities use CDBG funding for economic development
purposes. Labor's statement of compliance, included in WIA state
strategic plans, requires the governor of each state to assure that WIA
funds "will be spent in accordance with the Workforce Investment Act
and the Wagner-Peyser Act and their regulations, written Department of
Labor guidance implementing these laws, and all other applicable
federal and state laws and regulations." Labor officials noted that
this general statement of compliance covers compliance with the
nonrelocation provision. During our review of 30 USDA EZ/EC, HUD EZ,
and Labor WIA approved grant applications (10 applications for each
program), we found that recipients had completed the required self-
certifications for each of the applications we reviewed.
Pre-Approval Third-Party Verification:
As part of the pre-approval process for the B&I program, USDA turns
over information that certain loan applicants provide to Labor for
independent, third-party verification. For guaranteed loans in excess
of $1 million that will increase employment by more than 50 jobs, USDA
will send an applicant's certification of nonrelocation and the market
and capacity information form to Labor for clearance. In-turn, Labor
sends the form to state-level workforce agencies, where the business'
competitors are located, for analysis and direct solicitation of the
competitor's comments. According to USDA officials, Labor must complete
this third-party verification before USDA can approve a B&I loan
guarantee request. Our review of loan documentation for 10 approved B&I
loan applications indicated that both USDA and Labor carried out these
procedures for the applications we reviewed. As discussed earlier in
this report, USDA officials have been asking Congress to remove the
nonrelocation provision from the B&I program, citing an administrative
burden and costs incurred in helping to ensure compliance.
Requirements for Written Statements of Compliance from Businesses:
Regulations for HUD's Entitlement and State CDBG programs and Labor's
three WIA programs require grant recipients (such as a state or local
government) to obtain a signed written statement of compliance with the
nonrelocation provision from businesses before providing direct
assistance to them. For example, under the CDBG programs, there is a
two-step process. First, businesses receiving CDBG assistance must
submit a written statement to the recipient (entitlement community or
state), subrecipient, community-based development organization, or
nonprofit providing the assistance whether the activity will result in
the relocation of jobs from one labor market area to another. Second,
if the assistance will not result in the relocation of jobs covered by
the statutory prohibition, the business must provide a certification
that it has no plans to relocate jobs (in a manner that would violate
the nonrelocation provision). However, these statements are not
included in a recipient's application for funding (action plan), and
thus HUD does not review them during the action plan review process.
HUD officials noted that it would not be possible for an entitlement
community to provide these statements to HUD with an action plan
because, as previously noted, most entitlement communities do not know
at that time which businesses will apply for CDBG assistance. Similar
to HUD, Labor's regulations for WIA require that local workforce
investment boards conduct a pre-award review of businesses seeking job
training funds, which includes obtaining a written certification from
the business indicating whether WIA assistance is being sought in
connection with past or impending job losses at other facilities.
Our review of 10 approved WIA grants indicated that businesses had
completed the required statements of compliance for each of those
grants. With respect to HUD's CDBG program, we did find one case in
which a HUD CDBG entitlement community recipient we contacted told us
that its subrecipient (a nonprofit development corporation) was not
obtaining the required written statements of compliance. An official
from the entitlement community said that neither the entitlement
community nor the subrecipient had developed formal procedures to help
ensure compliance with the regulatory requirement. In addition, neither
HUD nor Labor require that recipients provide copies of completed
written statements to HUD or Labor, although a HUD official noted that
the written statements would be available to on-site reviewers during
monitoring visits. HUD officials also said that HUD is revising a
monitoring handbook to include a question addressing the business'
written statements of compliance. We discuss agency monitoring
procedures and guidance in greater detail in the next section.
While Monitoring Is a Key Control for Helping to Ensure Compliance with
Nonrelocation Provisions, Only One Grant Program Had Written Guidance
Specific to the Provision:
The Guide to Opportunities for Improving Grant Accountability states
that once grants are awarded, agencies need to ensure that grant funds
are used for intended purposes and in accordance with applicable laws
and regulations. The guide also states that it is critical to identify,
prioritize, and manage potential at-risk subrecipients to ensure that
grant goals are reached and resources are properly used. Due to
inherent limitations in using the screening process to help ensure
compliance with nonrelocation provisions, other procedures, such as
monitoring activities, become key controls. Having established, written
procedures in place helps to ensure that agencies achieve their
monitoring objectives and that staff are consistently implementing
monitoring procedures.
Officials at some of the agencies we reviewed told us that they rely on
complaints as a mechanism to monitor compliance with the employer
nonrelocation provision. A HUD official said that an employer
relocation that resulted in significant job loss and involved the use
of federal funds likely would result in the affected community or state
raising a complaint to the federal agency or to their congressional
representatives. HUD, Labor, SBA, and USDA officials all reported
receiving few if any of these complaints, in some cases over the course
of many years. For this reason, some officials did not consider the
risk of noncompliance to pose a significant risk to the programs.
However, this complaint-based approach is reactive and does not
necessarily provide reasonable assurance of compliance. Standards for
Internal Control in the Federal Government states that an agency's
monitoring activities should be performed continually and be ingrained
in agency operations.[Footnote 29] As shown in table 5, the four
agencies administering programs with nonrelocation provisions used
various other mechanisms, including on-site review, to monitor fund
recipients. All of the agencies had formal written guidance covering
the monitoring of program participants. However, only one program--HUD
for its EZ program--had a monitoring procedure that specifically
addressed the nonrelocation provision.
Table 5: Status of Federal Agency Mechanisms for Monitoring Compliance
with Nonrelocation Provisions, as of July 2007:
Agency: HUD;
Program: EZ (urban);
On-site monitoring of recipients: [Check];
Written monitoring guidance: [Check];
Written monitoring guidance specific to nonrelocation provision:
[Check];
Specific monitoring guidance has been used in a monitoring review:
[Check].
Agency: HUD;
Program: CDBG (Entitlement);
On-site monitoring of recipients: [Check];
Written monitoring guidance: [Check];
Written monitoring specific to nonrelocation provision: Draft;
Specific monitoring guidance has been used in a monitoring review:
Agency: [Empty].
Agency: HUD;
Program: CDBG (State);
On-site monitoring of recipients: [Check];
Written monitoring guidance: [Check];
Written monitoring guidance specific to nonrelocation provision: Draft;
Specific monitoring guidance has been used in a monitoring review:
[Empty].
Agency: Labor;
Program: WIA Adult;
On-site monitoring of recipients: [Check];
Written monitoring guidance: [Check];
Written monitoring guiduance specific to nonrelocation provision:
Draft;
Specific monitoring guidance has been used in a monitoring review:
[Empty].
Agency: Labor;
Program: WIA Dislocated Workers;
On-site monitoring of recipients: [Check];
Written monitoring guidance: Check];
Written monitoring guiduance specific to nonrelocation provision:
Draft;
Specific monitoring guidance has been used in a monitoring review:
[Empty].
Agency: Labor;
Program: Agency: WIA Youth;
On-site monitoring of recipients: [Check];
Written monitoring guidance: [Check];
Written monitoring guidance specific to nonrelocation provision: Draft;
Specific monitoring guidance has been used in a monitoring review:
[Empty].
Agency: USDA;
Program: EZ/EC (rural);
On-site monitoring of recipients: [Check];
Written monitoring guidance: [Empty];
Written monitoring guiduance specific to nonrelocation provision:
[Empty];
Specific monitoring guidance has been used in a monitoring review:
[Empty].
Agency: USDA;
Program: B&I Loan Guarantee;
On-site monitoring of recipients: N/A[A];
Written monitoring guidance: [Check];
Written monitoring guiduance specific to nonrelocation provision:
[Empty];
Specific monitoring guidance has been used in a monitoring review:
[Empty].
Agency: SBA;
Program: 504 Loan Guarantee;
On-site monitoring of recipients: N/A[A];
Written monitoring guidance: [Check];
Written monitoring guiduance specific to nonrelocation provision:
[Empty];
Specific monitoring guidance has been used in a monitoring review:
[Empty].
Source: GAO analysis.
[A] Given program structure and legal requirements, USDA and SBA
procedures are implemented up-front, on a pre-approval rather than a
post-approval basis.
[End of table]
To effectively leverage limited staff resources, HUD and Labor told us
that their respective agencies conduct on-site monitoring reviews in
accordance with risk-based procedures intended to focus monitoring
resources on areas requiring the most attention.[Footnote 30] For
example, HUD's procedures for the EZ program specify factors for
reviewers to consider when determining the scope of a review. These
factors include funding amount, outstanding complaints related to
noncompliance with a legal requirement, and unresolved monitoring or
assessment issues. Similarly, for the CDBG program, reviewers consider
factors such as the complexity of a state or entitlement community's
activities and use of subrecipients to carry out funded activities.
According to HUD CDBG officials, on-site monitoring is the most
effective way to identify potential violations of the nonrelocation
provision for the CDBG program. Labor also conducts on-site monitoring
of states and a sample of local workforce investment agencies. As part
of Labor's risk-based procedures, reviewers may consider factors such
as the number of federal grants a state administers, a history of
disallowed costs or administrative findings in previous reviews, and
percentage of grant funds subcontracted.
USDA's monitoring for the EZ/EC program involves two staff members--one
in a state office and the other in the national office--reviewing
requests for drawdown that EZ/ECs make several times during the year.
Drawdown requests include a specification of how an EZ or EC will use
its funds. Prior to disbursing requested funds, USDA staff members
review the request to ensure that the funds will be used to carry out
the community's strategic plan (which includes a certification form
that specifically refers to the nonrelocation provision and which USDA
reviews at the time of initial application). In addition to reviewing
drawdown requests, USDA staff in both the state and national offices
review mandatory annual reports describing a community's progress in
implementing its strategic plan. According to USDA officials, the
review of annual reports also includes a review of any updates to the
strategic plan to ensure that no relocation support has crept into the
plan since the initial review. A USDA official added that USDA staff
have made on-site monitoring visits to all of the rural EZ/ECs.
Officials of SBA's 504 and USDA's B&I program told us that they do not
monitor for compliance with the nonrelocation provision because, unlike
federal grant programs, in loan guarantee programs, a federal agency
can determine which specific businesses will receive assistance and for
what purpose (relocation, equipment purchase, etc.) before an agency
guarantees a loan. SBA officials explained that SBA and certified
development companies (CDC) approve a project for 504 financing before
construction begins, but SBA does not disburse loan funds or issue a
debenture guarantee until after the project is completed.[Footnote 31]
According to SBA officials, CDC staff review the completed project
before closing on a loan, at which time loan funds are disbursed and a
debenture guarantee issued. Similarly, USDA officials told us that
their field staff verify uses for loan proceeds when they review a loan
closing package, specifically the settlement statement, before
guaranteeing a loan. USDA officials explained that once a loan is fully
disbursed, subsequent monitoring of the use of loan proceeds for
compliance focuses on other issues, such as the number of jobs created,
rather than compliance with the nonrelocation provision, because the
loan proceeds already have been used for their intended purposes. The
emphasis on screening rather monitoring seemed appropriate for the two
loan guarantee programs since the federal agencies know which specific
businesses are requesting funds and the purposes for which the funds
will be used.
HUD's EZ program was the only program we reviewed that had written
monitoring guidance specific to the nonrelocation provision at the time
of our review. As of July 2007, HUD had used this monitoring guidance
in four on-site reviews. HUD's guide for the review of Round II EZ
strategic plan compliance calls for review staff to determine whether
there is "any evidence to indicate that the EZ is complying with the
prohibition against assisting a business to relocate." The guide did
not provide specific procedures or steps that staff should follow to
make the assessment of compliance, but rather referred to the program's
implementing regulation for the nonrelocation provision. HUD officials
said that under current procedures, on-site reviewers rely on receiving
complaints of noncompliance or on information obtained by asking open-
ended questions about compliance to determine whether communities are
complying. For the four reviews in which HUD had used the guidance at
the time of our review, the narrative supporting the reviewer's
assessment of compliance indicated that approved implementation plans,
discussions with EZ staff regarding standard operating procedures, and
a review of loan file documents were among the bases on which HUD
reviewers determined that EZs were complying with the program's
nonrelocation provision. HUD officials said that for additional on-site
reviews planned for fiscal year 2007, the agency is considering
reviewing implementation plans to specifically check for compliance
with the nonrelocation provision. HUD officials said that they would
focus on plans involving sites with potential for commercial
development to determine whether HUD-approved activities or projects
involving marketing or promotional efforts encouraged relocations to an
EZ.
HUD and Labor officials told us that their agencies were developing
monitoring guidance specific to the nonrelocation provision for the
CDBG and WIA programs, respectively, but that such guidance is in draft
form.[Footnote 32] As of July 2007, HUD and Labor had not finalized
this guidance or used it in a monitoring review. HUD officials said
that HUD expects to finalize the monitoring guidance tailored to the
nonrelocation provision by December 31, 2007. The officials explained
that HUD was developing monitoring guidance for inclusion in a
forthcoming revision to a monitoring handbook that HUD uses for all of
its major Office of Community Planning and Development grant programs,
including the CDBG and EZ programs. HUD undertook the revisions because
the current version of the handbook was issued prior to the
promulgation of the CDBG program's nonrelocation provision in December
2005. HUD CDBG officials stated that including a question on compliance
with the nonrelocation provision is intended to ensure that compliance
reviews by HUD staff in this area would be consistent. Labor officials
explained that their monitoring handbook for employment and training
grant programs, including WIA programs, is generic and limited to
examining core activities found in all of Labor's employment and
training programs. In contrast, Labor's formula grant supplement to the
monitoring handbook, currently under development and in draft form,
will provide a more detailed examination of statutes, rules, and
regulations specific to the formula-based programs once finalized.
Labor officials said that the formula grant supplement has been tested
in field offices and will address the nonrelocation provision. The
officials said that they expect to publish the formula grant supplement
in the latter half of calendar year 2007.
Conclusions:
State and local governments use incentives, including funds from
federal economic development programs, to attract business investment
and create jobs in their communities. Although it is difficult to
determine the extent to which state and local governments use federal
funds as business incentives, 9 of 17 large federal economic
development programs contain statutory restrictions against using
program funds to relocate jobs if the use of such funds creates
unemployment. Thus, for these nine federal programs, the agencies
charged with their administration are responsible for helping to ensure
that program funds are used for intended purposes and in accordance
with applicable laws and regulations, including compliance with
nonrelocation provisions.
Each of the four agencies that administer the programs with
nonrelocation provisions used screening and monitoring mechanisms to
help ensure that fund recipients were eligible to participate in the
programs, meeting program goals, and complying with legal requirements.
The two agencies administering the loan guarantee programs we reviewed-
-SBA for the 504 program and USDA for the B&I program--relied primarily
upon screening mechanisms to help ensure that applicants would not use
loan proceeds to relocate businesses and jobs. For these two programs,
screening mechanisms may be sufficient since the agencies can determine
which specific businesses will receive assistance and how the loan
proceeds will be used. In such cases, a screening process can determine
if loan funds will be used to support a business relocation. In
contrast, officials from the other programs we reviewed, particularly
those that administer grant programs, noted limitations in using
screening mechanisms for such programs. For example, with grant
programs, fund recipients (e.g., states and local communities) do not
always know which businesses will apply for or receive funding at the
time the recipient submits an initial plan or application for funding.
Acknowledging the limitations of screening for helping to ensure
compliance with nonrelocation provisions, agency officials regarded on-
site monitoring as the most effective way to detect an instance of
potential noncompliance in their grant programs. However, officials
also noted that they targeted their limited monitoring resources on
recipients that posed the greatest risk. Furthermore, they maintained
that noncompliance with nonrelocation provisions did not present a
significant risk to the programs they administered because they
received few or no complaints over the years and regarded complaints as
a barometer for undertaking monitoring activities.
We recognize that there are costs associated with monitoring program
recipients for compliance with nonrelocation provisions. Nevertheless,
a reactive approach in which agencies assume there are no problems
because outside parties do not report them, by itself, is an
insufficient means to help ensure that problems do not exist and
federal internal control standards state that monitoring should be
performed continually and be ingrained in agency operations. Further,
USDA EZ/EC program officials said that they have rejected applications
for zone designation because intent to relocate jobs was evident in the
applications, providing evidence that applicants do sometimes seek to
use program funds to lure businesses away from one community to
another.
Given the relatively large size of some federal grant programs and
their complicated funding structure (including the number of recipients
and subrecipients involved in the process), it is important that
agencies develop and use cost-effective approaches to identify,
prioritize, and manage potential at-risk recipients. Specific
monitoring guidance and procedures would provide staff impetus and
direction in their monitoring roles and help ensure consistent
monitoring efforts across locations. Moreover, written guidance would
provide recipients and subrecipients with specific information on the
types of business support activities allowed under each program. For
example, we learned that there are HUD CDBG subrecipients who may be
unaware of the requirement that businesses receiving assistance under
the program must provide written statements of compliance with the
nonrelocation provision. Absent such guidance and related controls,
agencies have limited assurance that recipients and subrecipients--
which include state and local governments as well as individual
business--are meeting statutory and regulatory responsibilities that
restrict the use of program funds to support employer relocations.
Recommendations for Executive Action:
To provide greater assurance that grant recipients and subrecipients of
federal economic development programs are complying with statutory
restrictions against the use of program funds to support employer
relocations, we recommend that the Secretaries of Labor (for the WIA
Adult, Dislocated Workers, and Youth programs); Agriculture (for the
EZ/EC program); and Housing and Urban Development (for the CDBG
Entitlement and State programs) direct their respective offices to
develop (or finalize the development of) and implement formal and
structured approaches for federal reviewers to follow when monitoring
for compliance with nonrelocation provisions.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Secretaries of the
Departments of Labor, Agriculture, Housing and Urban Development, and
Commerce; the Acting Commissioner of the Internal Revenue Service; and
the Administrator of the Small Business Administration. We received
written comments from Labor that are summarized below and are reprinted
in appendix III. USDA's Acting Assistant Deputy Administrator for
Cooperative Programs provided oral comments on August 8, 2007, which
are summarized below.
In its written comments, Labor stated that the department concurred
with our recommendation that it develop and implement formal and
structured approaches for federal reviewers to follow when monitoring
compliance with nonrelocation provisions. In addition, Labor stated
that it agreed that such guidance and approaches will assist states in
monitoring local subrecipient compliance with these provisions. Labor
stated that to support efforts to monitor and ensure compliance with
nonrelocation provisions, it is implementing two complementary
strategies. First, Labor is developing a formal policy guidance letter
that clarifies allowable and unallowable uses of WIA funds for economic-
development-related activities and that will specifically address
prohibitions related to the nonrelocation provision. Second, Labor said
that its Core Monitoring Guide and draft Formula Grant Supplement to
the guide provide federal reviewers with tools for monitoring
compliance with the nonrelocation provision. Labor said the draft
Formula Grant Supplement includes indicators of compliance along with
each governor's responsibility to determine which costs are allowable
or unallowable under WIA, including prohibitions against using WIA
Title I funds to encourage business relocation and related
restrictions. Labor stated that its regional office reviewers have
extensively tested the draft Formula Grant Supplement since the fall of
2006, and the supplement will enter the formal clearance process
shortly. Labor said that when completed in final form, which the
department expects to occur by December 31, 2007, the supplement will
provide federal reviewers, as well as state review staff, with a
valuable resource for assessing recipients' compliance with the
nonrelocation provision under the WIA Adult, Dislocated Worker, and
Youth programs.
In oral comments, USDA's Acting Assistant Deputy Administrator for
Cooperative Programs stated that USDA concurred with the report's
recommendation. The Acting Assistant Deputy Administrator also provided
us with documentation showing that USDA is taking initial steps to
implement the recommendation.
We also received technical comments from Labor, USDA, HUD, IRS, and SBA
that were incorporated into the report as appropriate. Commerce did not
provide comments on the draft report.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the date of the report. At that time, we will provide copies of
this report to the Ranking Member, Subcommittee on Interstate Commerce,
Trade, and Tourism, Senate Committee on Commerce, Science, and
Transportation, and interested congressional committees. We will also
provide copies of this report to Secretaries of Labor, Agriculture,
Housing and Urban Development, and Commerce; the Acting Commissioner of
the Internal Revenue Service; and the Administrator of the Small
Business Administration. We will provide copies to others upon request.
In addition, this report will be available at no charge on our home
page at [hyperlink, http://www.gao.gov].
If you or your staff have any questions concerning this report, please
contact me at (202) 512-8678 or shearw@gao.gov. Contact points for our
Office of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made key contributions to
this report are listed in appendix IV.
Sincerely yours,
Signed by:
William B. Shear Director:
Financial Markets and Community Investment:
[End of section]
Appendix I: Scope and Methodology:
To identify large federal economic development programs, we conducted a
search of the Catalog of Federal Domestic Assistance (CFDA) database
(using key word searches of "jobs" and "economic development") and
focused on those programs that can be used to provide assistance to
businesses and that CFDA reported as having obligations of at least
$500 million for fiscal year 2006. In a prior report, we found
inconsistencies in how agencies reported budget data for CFDA,
resulting in potential over-reporting of data.[Footnote 33] However,
for purposes of this report, because we are using CFDA to identify
large federal economic development programs, the risk is acceptably low
of CFDA not covering large programs we would have otherwise selected.
We, therefore, consider CFDA to be a sufficiently reliable source of
data for use in this report. Because CFDA does not include tax
expenditure programs, we searched the Congressional Research Service's
(CRS) Tax Expenditure Compendium (using key word searches of "community
development" and "private activity bonds") for economic development tax
expenditure programs that support businesses for which CRS reported as
having estimated tax revenue losses of at least $500 million in fiscal
year 2006. We also confirmed these budget figures with agency
officials. We excluded programs that are only available under specific
circumstances or are not available nationwide, such as regional
economic development programs or those that are only available under
disaster assistance designations.
In addition to these database searches, we reviewed each of the 50
states' economic development Web sites to identify the federal programs
that states marketed as incentives or financial assistance for
businesses. While this search did not provide us with a comprehensive
list of federal programs used as business incentives, it provided us
with additional information on how the programs we identified through
CFDA and the CRS compendium might be used as incentives.
To identify large federal programs currently or formerly subject to
restrictions against use for relocating jobs among U.S. communities, we
reviewed laws and regulations. Our review included the use of
electronic databases. We identified relevant nonrelocation provisions
for four federal agencies--the Departments of Housing and Urban
Development (HUD), Agriculture (USDA), Labor, and the Small Business
Administration (SBA)--and a former provision for one federal agency--
the Department of Commerce's Economic Development Administration (EDA).
To assess the completeness of our search results, we interviewed
representatives of select federal agencies as well as representatives
of economic development trade associations and policy groups. To
identify congressional purpose in adopting or rescinding restrictions,
we reviewed implementing laws and their legislative histories,
including congressional reports and the Congressional Record.
To assess federal agency procedures to help ensure compliance with
nonrelocation provisions, we requested, obtained, and analyzed the
following information from HUD, Labor, USDA, and SBA:
* policies and procedures designed to ensure compliance with
nonrelocation provisions;
* data on the number of complaints received regarding the provisions;
* data on the number of violations identified; and:
* information about any enforcement actions taken, as well as the
status of those actions.
We also conducted a limited test of agency procedures by reviewing a
small and random, but not generalizable sample of case file
documentation for each of the programs (generally 10 files for each
program). These documents included the mechanisms agencies have
developed to screen for compliance with nonrelocation provisions,
including:
* an eligibility checklist (SBA's 504 program);
* self-certification forms (USDA and HUD's Empowerment Zone/Enterprise
Community program);
* business statements of compliance as a condition of receiving
assistance (Labor's Adult, Dislocated Workers, and Youth programs under
the Workforce Investment Act); and:
* third-party verification of data that applicants self report (USDA's
Business and Industry Guaranteed Loan program).
Further, we reviewed monitoring guidance and exhibits for each program
having such guidance; completed monitoring reports; publications on
effective internal control and grant management practices; and recently
issued reports we completed on the programs.[Footnote 34] To supplement
our document reviews and testing procedures, we conducted interviews
with officials at each agency.
The scope of our work in this area was focused mainly on whether the
agencies had screening and monitoring procedures. We did not test the
effectiveness of the implementation of these procedures. Furthermore,
we did not conduct an overall evaluation of the programs, evaluate how
well the programs served their intended purposes, or evaluate how
nonrelocation provisions affect the relative success of the programs in
achieving their intended purposes. We also did not address the impact
these programs had on development efforts by state and local
governments.
We conducted our work from October 2006 through August 2007 in
Washington, D.C., and San Francisco and Fresno, California, in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Description of the Nine Large Federal Economic Development
Programs with Nonrelocation Provisions:
The following is a description of the nine large federal economic
development programs that we identified as having statutory
restrictions against using program funds to relocate businesses and
jobs. Seven are grant programs in which a federal agency provides funds
to recipients (generally a state or local government) that, in turn,
may provide funds to a subrecipient (such as a nonprofit entity or for-
profit business) to facilitate economic development activities. They
are:
* the Department of Housing and Urban Development's (HUD) Community
Development Block Grant (CDBG) Entitlement and State programs;
* HUD and U.S. Department of Agriculture's (USDA) Empowerment Zone/
Enterprise Community (EZ/EC) programs (urban and rural respectively);
and:
* the Department of Labor's (Labor) three Workforce Investment Act
(WIA) programs--Adult, Dislocated Workers, and Youth.
The two remaining programs--USDA's Business and Industry (B&I) program
and SBA's 504 program--are loan guarantee programs in which federal
agencies guarantee loans that third-party lenders and nonprofit
development corporations make.
HUD CDBG Entitlement and State Programs:
HUD's CDBG program provides communities with grants for activities that
will benefit low-and moderate-income people, prevent or eliminate slums
or blight, or meet urgent community development needs. The Entitlement
program provides grants to qualifying local governments. The State
program provides states with grants for distribution to the smaller,
nonentitlement communities. Both programs fund a wide range of
activities--including those that support housing, public improvements,
public services, and economic development--which involve the use of
funds to assist, recruit, and retain individual businesses. According
to the Catalog of Federal Domestic Assistance (CFDA), fiscal year 2006
estimated budget authority for the CDBG Entitlement program was $2.6
billion and $1.1 billion for the State program.
HUD's Office of Community Planning and Development (CPD) administers
the CDBG program. A headquarters office sets program policy while 43
HUD field offices monitor recipients. HUD distributes funds to
entitlement communities and states based on the higher yield of two
formulas.[Footnote 35] See figure 1 for an overview of the funding
process for economic development projects involving businesses.
Entitlement communities may carry out activities under CDBG directly,
or they may award funds to subrecipients, which include, as HUD defines
them for the purposes of the CDBG program, governmental agencies such
as housing authorities as well as private nonprofit and a limited
number of private for-profit entities. Under HUD regulations,
subrecipients must enter into a signed, written agreement with
entitlement communities regarding compliance with laws and regulations.
States distribute their funds to nonentitlement communities for
activities such as business financing. The distribution mechanisms vary
by state; some states set aside a certain percentage of funds for
economic development while others do not take into account the category
of activity. Neither HUD nor the states distribute funds directly to
citizens or private organizations. Moreover, HUD does not select the
business entities that receive CDBG assistance; recipients and
subrecipients make these decisions.
Figure 1: Overview of CDBG Funding Streams for Economic Development
Projects Involving Businesses:
[See PDF for image]
Source: GAO analysis of prior reports and HUD information.
[End of figure]
Businesses receive assistance through the CDBG program either from a
recipient (such as an entitlement community) or from subrecipients
(such as designated public agencies or nonprofit development
corporations). For example, once an entitlement community or a state
receives its allocation, businesses may apply for economic development
funding, assuming that the recipient has elected to operate an economic
development program. This assistance may take the form of loans,
grants, technical assistance, or infrastructure improvements. This
approach assumes that the recipient's consolidated and action plans
include and authorize these types of economic development activities.
For a related GAO product on the CDBG program, see Community
Development Block Grants: Program Offers Recipients Flexibility but
Oversight Can Be Improved. GAO-06-732. Washington, D.C.: July 28, 2006.
HUD and USDA EZ/EC Programs:
HUD and USDA's EZ/EC program targets federal grants and provides tax
relief to distressed communities in urban and rural areas,
respectively, to help those communities overcome economic and social
problems. EZs and ECs can use grant funds for a range of activities
identified in strategic plans, which are developed in conjunction with
community stakeholders. Strategic plans outline the urban or rural
community's vision for revitalizing its distressed areas and the
activities and projects planned to accomplish this task. These
activities can include education, infrastructure development, workforce
development, and assistance to for-profit businesses. According to
CRS's Tax Compendium, estimated revenue losses for USDA's and HUD's
EZ/EC program were $1 billion combined for fiscal year 2006.[Footnote
36]
Congress authorized three rounds of EZ designations and two rounds of
EC designations. HUD and USDA have primary oversight over the program,
which involves reviewing strategic plans, designating communities as
EZs or ECs, and evaluating the progress EZs and ECs make in
implementing their strategic plans. However, two other agencies, the
U.S. Department of Health and Human Services (HHS) and the Internal
Revenue Service (IRS), also have had responsibility for administering
the program. For the first round of the program which began in 1993,
HHS had fiscal oversight over the program, in which HHS issued grants
to states, which served as pass-through entities that in turn
distributed funds to individual EZs and ECs. For the second round of
the program, which began in 1998, Congress appropriated grant funds
through USDA and HUD, but not through HHS. For the third round, which
began in 2001, Congress appropriated grant funds for rural EZs but not
for urban EZs. In addition to grants, businesses that locate in an EZ
or EC can claim tax benefits, such as the Work Opportunity Tax Credit,
which IRS administers. Tax benefits have been available in all three
rounds of the EZ/EC program, but not the EC program.
As shown in figure 2, businesses can receive funds directly from the
designated EZ/EC cities or from nonprofit corporations the city
establishes to administer the program. For example, EZs/ECs issue
requests for proposals and review applications for EZ/EC funding,
including those that businesses submit. The EZs/ECs that a corporation
oversees generally have a board of directors consisting of community
members who review and have final approval for funded activities (with
input from advisory committees). Businesses then receive funding in the
form of grants, loans, and other assistance. Businesses eligible for
federal, state, and local tax benefits claim these benefits directly on
tax filing forms.
Figure 2: Overview of EZ/EC Funding Streams for Economic Development
Projects Involving Businesses:
[See PDF for image]
Source: GAO analysis of prior reports; and HUD and USDA information.
[End of figure]
For related GAO products on the EZ/EC program, see:
* Empowerment Zone and Enterprise Community Program: Improvements
Occurred in Communities, but the Effect of the Program Is Unclear. GAO-
06-727. (Washington, D.C.: Sept. 22, 2006), and:
* Community Development: Federal Revitalization Programs Being
Implemented, but Data on the Use of Tax Benefits Are Limited. GAO-04-
306. (Washington, D.C.: March 5, 2004).
Labor WIA Adult, Dislocated Workers, and Youth Programs:
The WIA Adult and Dislocated Workers programs provide a variety of
services to individuals, including help with job searches, skills
assessment, and occupational training. The Adult and Dislocated Workers
programs provide similar services, but differ in their eligibility
requirements.[Footnote 37] The Youth program is designed to prepare
high school students for employment or postsecondary education. All
three programs require that states and local areas use a one-stop
center approach, which consolidates 16 categories of programs under
four agencies (Labor, Education, HHS, and HUD) to provide services for
several employment and training programs. In addition to employee
services, state and local workforce investment boards may use WIA funds
from the three programs to provide services to employers, including
helping employers identify and recruit job candidates.[Footnote 38]
States and local boards can also offer various job training programs,
such as classroom-based, on-the-job, or customized training to meet
employer needs.[Footnote 39] According to CFDA, fiscal year 2006
estimated obligations for the WIA Adult, Dislocated Workers, and Youth
programs were $857 million, $1.181 billion, and $926 million,
respectively.
Labor oversees all three WIA programs, but states and local boards have
flexibility over how they use WIA funds. WIA specifies a different
funding source for each of the Act's main clients--youth, adults, and
dislocated workers. Labor distributes WIA funds to states and states
distribute funds to local areas based on specific formulas that account
for unemployment (see fig. 3 below for an overview of the three WIA
program funding streams). Labor allots 100 percent of the adult and
youth funds and 80 percent of the dislocated worker funds to states
(the Secretary of Labor sets aside 20 percent of the dislocated worker
funds primarily for national emergency grants, but these funds can be
used for other job training purposes).[Footnote 40] The states can then
set aside up to 15 percent of the funds as discretionary funds to
support state employment activities. (For the dislocated worker
program, the state can set aside no more than 25 percent of the funds
for rapid response activities, such as notifying workers on how to
access unemployment and one-stop center benefits in the event of mass
layoffs.)
Figure 3: Overview of WIA Adult, Dislocated Workers, and Youth Funding
Streams:
[See PDF for image]
Source: GAO analysis.
[End of figure]
The remainder of the funds are distributed to local areas based on a
formula. Local workforce investment boards, in turn, may provide
services to businesses. Businesses are generally connected to these
services through one-stop career centers.
For related GAO products on the Workforce Investment Act, see:
* Workforce Investment Act: Labor and States Have Taken Actions to
Improve Data Quality, but Additional Steps Are Needed. GAO-06-82.
Washington, D.C.: November 14, 2005;
* Workforce Investment Act: Substantial Funds Are Used for Training,
but Little is Known Nationally About Training Outcomes. GAO-05-650.
Washington, D.C.: June 29, 2005; and:
* Workforce Investment Act: Exemplary One-Stops Devised Strategies to
Strengthen Services, but Challenges Remain for Reauthorization. GAO-03-
884T. Washington, D.C.: June 18, 2003.
SBA 504 Loan Program:
SBA's 504 loan program provides businesses with long-term, fixed-rate
financing for major fixed assets, such as land, buildings, and
machinery and equipment. To qualify for an SBA loan guarantee, a
project must meet job creation or other community development goals,
such as increasing the number of minority-owned businesses in an area.
For the job creation requirement, a business must generally create or
maintain one job for every $50,000 in SBA assistance.
While SBA administers the 504 loan guarantee program, it relies on
development companies to originate 504 loans. SBA participates in the
504 loan program by guaranteeing loans that certified development
companies (CDC) make. CDCs generally are private nonprofit corporations
established to contribute to the economic development of their
communities. For a typical 504 loan project, the borrower (a business)
must cover at least 10 percent of a project's costs, a private third-
party lender provides at least 50 percent of project costs, and a CDC
provides up to 40 percent of project costs. SBA guarantees 100 percent
of the CDC's portion of the loan. According to SBA, in fiscal year
2006, the agency provided 504 program guarantees totaling $5.7 billion.
USDA B&I Program:
USDA's B&I program seeks to improve the economic and environmental
climate in rural communities by providing guarantees on loans private
lenders make to borrowers that meet certain economic development
criteria, such as creating employment or encouraging the development
and construction of renewable energy systems. The program finances
business and industry acquisition, construction, conversion, expansion,
and repair in rural areas. Loan proceeds can be used to finance the
purchase and development of land, supplies and materials, and start-up
costs for rural businesses.
USDA administers the B&I program through field offices located in each
of the states. A borrower first secures a loan from a USDA-approved
private third-party lender. The borrower then applies to USDA for a B&I
loan guarantee. USDA will evaluate the application and make a
determination on whether the borrower is eligible and the proposed loan
is for an eligible purpose, there is reasonable assurance of repayment
ability, there is sufficient collateral and equity, and the proposed
loan complies with all applicable statutes and regulations. USDA will
notify the lender in writing if it is unable to guarantee a loan. USDA
also works with the lender to negotiate the percentage of guarantees,
but USDA can guarantee up to 80 percent of loans for $5 million or
less, 70 percent of loans between $5 and $10 million, and 60 percent of
loans exceeding $10 million. According to USDA, in fiscal year 2006,
the B&I program guaranteed 350 loans with a face-value of $766.3
million.
[End of section]
Appendix III: Comments from the Department of Labor:
U.S. Department of Labor:
Assistant Secretary for Employment and Training:
Washington, D.C. 20210:
August 22, 2007:
Mr. William B. Shear:
Director, Financial Markets and Community Investment:
Government Accountability Office:
441 G Street, NW:
Washington, D.C. 20548:
Dear Mr. Shear:
The Department of Labor's Employment and Training Administration (ETA)
is in receipt of the Government Accountability Office (GAO) draft
report, "Economic Development: Formal Monitoring Approaches Needed to
Help Ensure Compliance with Restrictions on Funding Employer
Relocations," GAO-07-1005.
To ensure that grant recipients and subrecipients are complying with
statutory restrictions against the use of economic development program
funds to support employer relocations, GAO recommends that ETA develop
and implement formal and structured approaches for Federal reviewers to
follow when monitoring Workforce Investment Act (WIA) Adult, Dislocated
Worker, and Youth programs for grantee compliance with nonrelocation
provisions.
The Department concurs with the recommendation that formal guidance and
structured approaches will assist ETA Federal reviewers in monitoring
state grantee compliance with the nonrelocation provisions outlined in
statute at WIA Section 181(d)(1) and in regulation at 20 CFR
667.200(c). In addition, the Department agrees that such guidance and
approaches will assist states in monitoring local subrecipient
compliance with these provisions. Please note that the Department has
the responsibility for monitoring its direct state grantees, and state
grantees have primary responsibility for monitoring their direct local
sub-grantees.
To support efforts to monitor and ensure compliance with the
nonrelocation provisions, ETA is implementing two complementary
strategies. First, we are developing a Training and Employment Guidance
Letter (TEGL), ETA's formal policy guidance vehicle, which clarifies
allowable and unallowable uses of WIA funds for economic development-
related activities. This policy guidance will specifically address
prohibitions related to the nonrelocation provision. When published,
the TEGL will provide both Federal and state monitors with explicit
guidance on how the nonrelocation provision applies to grants funded
under the WIA Adult, Dislocated Worker, and Youth programs. Second,
ETA's Core Monitoring Guide and the draft Formula Grant Supplement to
the Core Monitoring Guide provide Federal reviewers with tools for
monitoring for compliance with the WIA Title I nonrelocation provision.
The Core Monitoring Guide covers the essential functions that must be
in place in order for any grantee to operate an ETA grant within the
boundaries of acceptable practices that are established by law,
regulation, and government-wide rule. The draft Formula Grant
Supplement to the Core Monitoring Guide was developed to assist Federal
reviewers in monitoring for compliance based upon funds allocated by
formula to states. The Supplement provides a more detailed examination
of program specific statutes, rules, and regulations related to program
operations.
The Core Monitoring Guide's Objective 3.5, "Allowable Costs," is
designed to assist Federal reviewers to determine if a grantee has a
system in place to ensure that the costs incurred are necessary,
reasonable, allowable, and allocable. The key indicator for Objective
3.5 is obtaining a copy of the organization's applicable Office of
Management and Budget cost principles circular and ensuring that the
grantee is aware of which costs are allowable, allowable under certain
conditions, or unallowable.
The draft Formula Grant Supplement to the Core Monitoring Guide
includes indicators of grantee compliance along with the Governor's
responsibility to determine which costs are allowable or unallowable
under WIA (20 CFR 667.200(e)), including the prohibitions against the
use of WIA title I funds to encourage business relocation and related
restrictions. The draft Supplement includes a worksheet for the Federal
reviewer to determine whether a grantee's written allowable cost policy
addresses the prohibitions in the WIA regulations.
The draft Formula Grant Supplement to the Core Monitoring Guide has
been field- tested extensively by ETA Regional Office Federal reviewers
since the fall of 2006, and will enter ETA's formal clearance process
shortly. We expect that the Supplement will be completed in the first
half of Program Year 2007 (by December 31, 2007). When completed in
final form, the Supplement will provide Federal reviewers, as well as
state review staff, with a valuable resource for assessing recipients'
compliance with the nonrelocation provision under WIA Adult, Dislocated
Worker, and Youth programs.
If you would like additional information, please do not hesitate to
contact me at (202) 693-2700.
Signed by:
Emily Stover DeRocco:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
William B. Shear at (202) 512-8678 or shearw@gao.gov:
Staff Acknowledgments:
In addition to the above contact, Harry Medina, Assistant Director;
Meghana Acharya; Dianne Blank; Bonnie Derby; Ronald Ito; Terence Lam;
John McGrail; Carl Ramirez; Barbara Roesmann; Paul Schmidt; Michael
Springer; and Kathryn Supinski made key contributions to this report.
[End of section]
Footnotes:
[1] GAO, Economic Development Activities: Overview of Eight Federal
Programs, GAO/RCED-97-193 (Washington, D.C.: Aug. 28, 1997). In the
absence of a standard federal definition to describe economic
development, for this 2007 report we used a list of activities from
another GAO report, Rural Economic Development: More Assurance is
Needed That Grant Funding Information Is Accurately Reported, GAO-06-
294 (Washington, D.C.: Feb. 24, 2006). Thus, economic development as we
define it includes the construction and repair of infrastructure, such
as buildings and roads; direct financial support and technical
assistance to businesses, including job-training assistance; and tax
expenditure programs that support these activities.
[2] The General Services Administration and Office of Management and
Budget maintain the CFDA database, which lists federal programs
available to state and local governments (including the District of
Columbia); federally recognized Indian tribal governments; territories
(and possessions) of the United States; domestic public, quasi public,
and private for-profit and nonprofit organizations and institutions;
specialized groups; and individuals. See appendix I for more
information on CFDA and how we used it in this report.
[3] The Tax Expenditure Compendium is a biennial publication that
provides CRS estimates of revenue costs of individual tax provisions
for the U.S. Senate's Committee on the Budget. We used the 2006 Report
(CRS, 109th Congr., 2nd sess; S. Prt. 109-072).
[4] For purposes of this report, subrecipients include nonprofit
organizations and businesses.
[5] BLS collects these data under its Mass Layoff Statistics program
using each state's unemployment insurance database. Extended mass
layoff events consist of 50 or more initial claims for unemployment
insurance from an establishment during a 5-week period, with at least
50 workers separated for more than 30 days. According to BLS,
establishments with at least 50 workers represented 4.6 percent of all
U.S. establishments and 56.5 percent of all U.S. workers in 2006. We
consider the BLS data to be reliable based on our use of the data in
prior reports.
[6] GAO, Economic Development; Multiple Federal Programs Fund Similar
Economic Development Activities, GAO/RCED/GGD-00-220 (Washington, D.C.:
Sept. 29, 2000).
[7] For additional information on the leveraging of federal economic
development funds, see GAO, Leveraging Federal Funds for Housing,
Community, and Economic Development, GAO-07-768R (Washington, D.C.: May
25, 2007).
[8] GAO, Tax Policy: New Markets Tax Credit Appears to Increase
Investment by Investors in Low-Income Communities, but Opportunities
Exist to Better Monitor Compliance, GAO-07-296 (Washington, D.C.: Jan.
31, 2007).
[9] GAO-07-768R.
[10] At least 7 of the 50 state Web sites that we reviewed marketed SBA
programs in the form of links to federal Web sites rather than as
direct incentives for businesses.
[11] Congressional Budget Office, Federal Financial Support of Business
(Washington, D.C: July 1995). CBO has not updated this report since
1995.
[12] CBO indicated that it is difficult to provide a total revenue loss
estimate because the interactions between different provisions of the
tax code do not equal the arithmetic sum of revenue losses from
individual tax provisions.
[13] Tim Bartik, "Evaluating the Impacts of Local Economic Development
Policies on Local Economic Outcomes: What Has Been Done and What is
Doable?" Upjohn Institute Staff Working Paper No. 03-89, prepared for
the Organization for Economic Cooperation and Development's (OECD)
Conference on "Evaluating Local Economic and Employment Development"
(Kalamazoo, Mich.: The Upjohn Institute, November 2002); Kenneth
Thomas, Competing for Capital: Europe and North America in a Global Era
(Washington, D.C.: Georgetown University Press, 2000); and Peter Fisher
and Alan Peters, "The Failure of Economic Development Incentives,"
Journal of the American Planning Association 70, no. 1 (Chicago, Ill.:
Winter, 2004).
[14] Bartik.
[15] Thomas.
[16] GAO-03-884T.
[17] We identified 21 additional federal programs with statutory
nonrelocation provisions. We did not focus on these programs because
they did not meet our minimum funding criteria of $500 million annually
or did not meet our definition of economic development.
[18] See appendix I for a more detailed description of our methodology
for identifying the large economic development programs with statutory
prohibitions against using program funds for employer relocation.
[19] SBA voluntarily applies a nonrelocation provision to its 7(a) loan
program, which provides assistance to small businesses to purchase land
and buildings. 7(a) loans also assist small businesses with support
operations, such as payroll and inventory. SBA's standard operating
procedures prohibit the approval of a 7(a) loan if it finances a move
that would cause serious unemployment in the present location. However,
SBA's procedures permit financing the relocation of an applicant's
business when the relocation will accomplish a sound business purpose,
such as preventing the business from closing. The remaining seven
programs--HUD's Renewal Communities, IRS's New Market Tax Credit and
two private activity bonds, USDA's Community Facilities Loans and
Grants, USDA's Farm Ownership Loans and USDA's Farm Operating Loans--do
not contain statutory restrictions on using program funds to relocate
businesses.
[20] See 24 C.F.R. § 570.210 (Entitlement program); 24 C.F.R. §
570.482(h) (State program).
[21] Certified development companies are private, nonprofit
corporations established to promote economic development within a
community. 13 C.F.R. § 120.822 requires each certified development
company to have at least 25 members representing the following groups:
(1) government organizations responsible for economic development; (2)
financial institutions that provide commercial long-term fixed-asset
financing; (3) community organizations dedicated to economic
development; and (4) businesses.
[22] According to BLS, a labor market area is an economically
integrated area within which individuals can readily change jobs
without moving. According to HUD officials, HUD's regulatory approach
reflects the statutory nonrelocation provision for the CDBG program,
which specifies that a "relocation is likely to result in a significant
loss of employment in the market area from which the relocation
occurs."
[23] We identified another agency--EDA for its Public Works and
Facilities Program--that did obtain congressional removal of a
nonrelocation provision. According to EDA officials, the Secretary of
Commerce requested the removal because the agency had detected only one
violation more than 30 years ago when the provision was effective and
because EDA did not receive separate funding to monitor compliance with
the provision. Senate and House reports do not specifically address the
rationale for removing this provision, but note that the legislative
changes were being made to reflect different economic conditions and a
new emphasis on innovation, productivity, and entrepreneurship. Despite
the statutory removal of the provision, program officials told us they
do not support the use of program funds to relocate jobs among
communities.
[24] A guide compiled by members of the Domestic Working Group (a
collection of federal, state, and local audit organizations tasked by
the Comptroller General of the United States) working on a Grant
Accountability Project. They were tasked with offering suggestions for
improving grant accountability. See Domestic Working Group, Guide to
Opportunities for Improving Grant Accountability (Washington, D.C.:
October 2005).
[25] USDA RD Instruction 4279-B, section 4279.114(b).
[26] Under the 504 program, certified development companies underwrite
up to 40 percent of project financing. Thus, they are involved in
screening 504 program applicants and monitoring their use of loan
proceeds.
[27] CDBG recipients submit a consolidated plan at least once every 3
to 5 years that addresses the housing, homeless, and community
development needs in the recipient's jurisdiction.
[28] USDA only requires an applicant to make this self-certification if
the applicant or related company has a business facility at another
location.
[29] GAO's Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999) provides an
overall framework for establishing and maintaining internal control,
identifying and addressing major performance and management challenges,
and identifying and addressing areas at the greatest risk of fraud,
waste, and mismanagement.
[30] HUD CDBG program officials noted that HUD also can perform off-
site monitoring of recipients if necessary. This off-site monitoring
involves a remote review of files and documents in a HUD office.
[31] A debenture is a certificate acknowledging a debt.
[32] According to HUD officials, the monitoring guidance for the CDBG
program, once finalized, will include a check for business statements
of compliance, required under the CDBG program's nonrelocation
provision. As noted previously, businesses are to complete these
statements as a condition of receiving CDBG funds.
[33] GAO, Rural Economic Development: More Assurance is Needed that
Grant Funding Information is Accurately Reported, GAO-06-294
(Washington, D.C.: Feb. 24, 2006), 32.
[34] For example, GAO, Workforce Investment Act: Labor and States Have
Taken Actions to Improve Data Quality, but Additional Steps Are Needed,
GAO-06-82 (Washington, D.C.: Nov. 14, 2005); Community Development
Block Grants: Program Offers Recipients Flexibility but Oversight Can
Be Improved, GAO-06-732 (Washington, D.C.: July 28, 2006); and
Empowerment Zone and Enterprise Community Program: Improvements
Occurred in Communities, but the Effect of the Program Is Unclear, GAO-
06-727 (Washington, D.C.: Sept. 22, 2006).
[35] The Entitlement and State programs each have their own set of
formulas that take into account population, poverty, overcrowding,
growth lag, and age of housing. The two formulas are similar.
[36] CRS's Tax Compendium lists one combined estimated revenue-loss
figure for the EZ tax incentive program (both HUD and USDA), District
of Columbia tax incentive program, and Indian Reservation tax incentive
program.
[37] The Adult program serves all adults over the age of 18, while the
Dislocated Workers program targets adults who have been laid off from a
job or are displaced homemakers.
[38] Each of approximately 600 local workforce areas throughout the
country has a local workforce investment board that administers WIA
activities within that area.
[39] For customized job training, an employer must pay at least 50
percent of the training costs.
[40] This money also can be used for demonstrations and technical
assistance, but at least 85 percent of the 20 percent set-aside must be
used for national emergency grants.
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "Subscribe to Updates."
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office:
441 G Street NW, Room LM:
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Susan Becker, Acting Manager, Beckers@gao.gov (202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
