[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]
PERFORMANCE OF THE EMPOWERMENT ZONE/ENTERPRISE COMMUNITY PROGRAM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
__________
OCTOBER 28, 1997
__________
Serial No. 105-84
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
60-762 WASHINGTON : 1999
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
------
Subcommittee on Oversight
NANCY L. JOHNSON, Connecticut, Chairman
ROB PORTMAN, Ohio WILLIAM J. COYNE, Pennsylvania
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
PHILIP S. ENGLISH, Pennsylvania JOHN S. TANNER, Tennessee
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
CONTENTS
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Page
Advisory of October 10, 1997, announcing the hearing............. 2
WITNESSES
U.S. Department of the Treasury, John Karl Scholz, Deputy
Assistant Secretary, Office of Tax Analysis.................... 21
U.S. Department of Housing and Urban Development, Howard B.
Glaser, Acting General Counsel................................. 32
U.S. General Accounting Office, Stanley J. Czerwinski, Associate
Director, Housing and Community Development Issues, Resources,
Community, and Economic Development Division; accompanied by
Robert E. Robertson, Associate Director, Food and Agricultural
Issues, and Nancy A. Simmons, Assistant Director, Community
Development Issues............................................. 56
------
Blaustein, Joan S., Pittsburgh Department of City Planning, and
Pittsburgh/Allegheny Enterprise Community...................... 93
Caprara, David L., National Center for Neighborhood Enterprise... 142
Cowden, Richard H., American Association of Enterprise Zones..... 136
Fraim, Hon. Paul D., Mayor, City of Norfolk, VA.................. 75
Friedman, Miles, National Association of State Development
Agencies....................................................... 120
Gillot, Beverly Carol, Pittsburgh/Allegheny Enterprise Community. 93
Gundersen, Daniel C., Philadelphia Empowerment Zone.............. 102
Hinchey, Hon. Maurice D., a Representative in Congress from the
State of New York.............................................. 15
Lupke, Diane, National Council for Urban Economic Development,
and Lupke & Associates......................................... 150
Posthumus, Hon. Dick, Majority Leader and State Senator, Michigan
State Senate................................................... 83
Rangel, Hon. Charles B., a Representative in Congress from the
State of New York.............................................. 7
Schmoke, Hon. Kurt L., Mayor, City of Baltimore, MD.............. 71
Van Allen, Terry Wm., University of Houston-Clear Lake........... 131
SUBMISSION FOR THE RECORD
Riordan, Hon. Richard J., Mayor, City of Los Angeles, statement.. 164
PERFORMANCE OF THE EMPOWERMENT ZONE/ENTERPRISE COMMUNITY PROGRAM
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TUESDAY, OCTOBER 28, 1997
House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:10 a.m., in
room 1100, Longworth House Office Building, Hon. Nancy L.
Johnson (Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
[GRAPHIC] [TIFF OMITTED]60762A.001
[GRAPHIC] [TIFF OMITTED]60762A.002
Chairman Johnson of Connecticut. Good morning. The hearing
will come to order.
Today we are going to examine some of the most fascinating
initiatives to revitalize the deteriorating urban and rural
areas that have ever been undertaken by government. During the
many years that Congress debated whether and how to create
enterprise zones, most of the States didn't wait, they
established their own programs. The Connecticut program, for
instance, began in 1982. Today, there are over 3,000 zones
established under State law in 37 States.
The 103d Congress established the Federal program, the
Empowerment Zone and Enterprise Community Program, as part of
the Omnibus Budget Reconciliation Act of 1993. This 10-year
program provided for over 100 urban and rural zones and
enterprise communities. The recently enacted Taxpayer Relief
Act creates an additional 22 empowerment zones primarily as a
result of the interest of our first witness Mr. Rangel.
There are also proposals before the Congress to create
additional zones. Most notably, the Watts-Talent American
Community Renewal Act would create economic empowerment and tax
incentives for up to 100 renewal communities.
The revitalization that is occurring in many neighborhoods
and around the country is innovative and exciting. It is also
costly. The 5-year revenue loss for the Federal program is
estimated at 2.1 billion. An additional 1 billion is available
in Federal social services block grants. In Connecticut alone
nearly 1.7 million in corporate business tax credits have been
claimed by qualified businesses. This is not necessarily too
much to spend on programs that work well, but we owe it to
taxpayers, especially those who are not receiving the tax
breaks, and to people living and doing business in
neighborhoods that are not receiving these initiatives, to take
a hard look at how well the programs are working. We need to
ask some tough questions. The most obvious is how do we define
and measure success.
There is an inherent tension between giving communities the
flexibility they need to develop innovative programs and
establish useful benchmarks for success, a basis for
comparison, and comparing the results of one program to those
of another. This may be difficult, but we have to try. We have
to wrestle with the equities of providing an incentive to hire
people who live in some distressed communities but not others.
We have to ask whether current law provides the right mix of
tax incentives for capital and labor or whether we are
subsidizing capital at the expense of labor. We need to concern
ourselves with whether redevelopment is leading to
gentrification and driving low-income residents into other
neighborhoods. We need to take a hard look at whether the
impediments to capital investment in a zone can be overcome
through tax incentives, or whether they are more closely
related to infrastructure and public services. And finally we
need to ask whether these incentives actually create
opportunities or whether they simply move jobs and investments
from one neighborhood or community to another.
I am also interested in learning more about the interaction
between State and Federal programs. In Connecticut we have 17
State enterprise zones and 12 State enterprise corridor towns.
The programs provide corporate income tax credits, sales and
use tax exemptions, local property tax abatements, and job
incentive grants and vouchers. Bridgeport and New Haven have
been designed as enterprise communities under the Federal
program and qualify for both State and Federal benefits.
How do communities leverage both State and Federal
resources to maximum advantage? As we begin this hearing, I am
absolutely convinced that one of the great strengths of these
programs is that they bring local officials, community leaders,
and business people together to develop a strategy for dealing
with the challenge of revitalizing neighborhoods. I am looking
forward to finding out more about what we are learning in the
various enterprise zones throughout the countries.
I want to thank our witnesses for appearing before us and
at this time I would like to recognize my cochair Mr. Coyne for
his opening statement.
Mr. Coyne. Thank you, Madam Chairwoman. Today the Oversight
Subcommittee of Ways and Means will conduct a hearing to
examine the performance of the Empowerment Zone and Enterprise
Community Program. The EZ and the EC Program were enacted in
1993 and expanded recently in the Taxpayer Relief Act of 1997.
This 10-year program is intended to foster national and local
partnerships to address economic revitalization in our urban
and rural areas.
In December 1994, the Administration announced the
designation of 6 urban EZs, 3 rural EZs, 65 urban ECs, and 30
rural ECs. In legislation enacted this year, 20 new EZs are to
be designated in a second round of competition, using expanded
criteria and additional tax incentives.
I want to commend the subcommittee Chair Mrs. Johnson for
holding this hearing on this important issue. It is critical
that the Congress periodically conduct oversight review of
progress being made throughout the country in reversing years
of economic decline in many of our urban and rural areas.
The U.S. General Accounting Office will join us today to
present the results of their efforts to monitor EZ and EC
implementation at the national and local level. I appreciate
their hard work and encourage the GAO to continue its
ongoingoversight effort.
Also, it is important that the Department of Treasury and
the Department of Housing and Urban Development appear jointly
at our hearing to discuss their mutual efforts to ensure an
effective and coordinated implementation of the EZ/EC Program
and related tax benefits.
Finally, I want to personally welcome as hearing witnesses
our two colleagues, Mr. Rangel and Mr. Hinchey; and also Joan
Blaustein, manager of special projects for the City of
Pittsburgh, and Ms. Beverly Gillot, Coordinator of the
Pittsburgh Allegheny Enterprise Community. Thank you for
joining us here today.
[The opening statement follows:]
[GRAPHIC] [TIFF OMITTED]60762A.003
Chairman Johnson of Connecticut. Thank you, Mr. Coyne.
Mr. Rangel, it is a pleasure to welcome you to our
Subcommittee hearing. You certainly have had a long history of
intense interest in urban problems and legislation to help our
cities revitalize their economic base. I look forward to
hearing your comments this morning.
STATEMENT OF HON. CHARLES B. RANGEL, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW YORK
Mr. Rangel. Thank you. I ask unanimous consent that my
written statement be placed in the record.
Chairman Johnson of Connecticut. So ordered.
Mr. Rangel. Let me thank you, Madam Chairlady and Mr.
Coyne, for showing an interest in this very, very important
subject matter. And in the prior administration, that is,
during the Reagan-Bush administration, I chaired the House
Select Committee Against Narcotic Abuse. During all of that
time while I sat on this committee, when witnesses would come,
I would ask them what really was the cost of addiction in
economic terms, and it was very difficult for me to get
answers, because they said that this type of information was
difficult to measure.
Finally, somebody in the Bush White House had a tragic
event in their family where a Harvard-trained lawyer, relative,
became addicted to drugs. And before I could ask the question,
he made it clear that he was going to get the information
because drug addiction was not confined to poor communities.
When the information came, even I was shocked to see that,
during those years, $300 billion a year was attributed just to
dealing with the criminal justice system as related to drugs.
And by the time they added the cost of jails, the cost of the
health care of AIDS, of unwanted children, of homelessness,
crime and violence, lost productivity as a result of the
mandatory sentences, and lost revenue that could be gained if
indeed these people were working, it came close to a trillion
dollars a year. I could not believe the figures.
And so the question was, then, what are we going to do
about it? Well, unbelievably, wherever we found drug addiction,
we found the worst schools, we found the highest unemployment,
the highest poverty, the highest welfare, the highest crime,
the highest homelessness. And so it really didn't take too much
when you start putting these pins in the map to find that there
were areas in the United States that congressional districts
were getting more per capita than other districts for the wrong
reasons, and that was trying to remedy a bad situation. Our
emergency rooms were costing more. Our hospitals were costing
more. It was $1,500 a day just to keep an underweight baby in
the hospital. And the--it was millions of dollars involved in
rehabilitation of kids that were shooting kids and remain
permanently paralyzed. And so we saw, really, money just going
out of the budget into the poor community, but nothing being
left but misery, pain, joblessness and hopelessness. And so we
said what are we going to do about it?
Well, fortunately, Bobby Garcia and Jack Kemp were around,
and they had these ideas about empowerment zones. I was a
cosponsor, but I wasn't that enthusiastic because they were
just dealing with tax issues, and it just appeared to me that
giving tax incentives to employers to come into communities
that had no health system, no educational system, that was rife
with crime and violence, that the tax incentive wasn't enough.
But I got together with Jack Kemp and Newt Gingrich, and we
were able to put together the type of bill that not only dealt
with tax incentives, but brought in the private sector to work
with the communities in order to determine what the employment
needs were going to be, and also to make certain that we got
the city and the State to come forward to say what they were
going to do to try to remedy this and to get the community to
say that they, too, were going to participate.
The idea was so exciting that we had no problem in passing
the bill. Unfortunately, it was included in a tax bill, and it
was vetoed by President Bush. And then when President Clinton
came, he adopted the idea, and we swiftly incorporated the new
administration's ideas with the old ideas, and we reached a
point that not only where we are today, but in the last bill we
were able to expand the concept.
One of the most difficult things to explain, but yet one of
the most exciting things about the process of empowerment
zones, is that how losers can still be winners, even though
they were not designated to become empowerment zones.
In my particular case, I was able to meet with the mayor,
Mayor Dinkins, and to meet with the Governor, Governor Cuomo.
And in order to come together to put together a proposal, they
had to find out first what was the problem and what they were
doing about the problem. Then if they were going to say that
they wanted the schools to be more responsive to the needs of
the private sector, they had to find out first what were the
schools doing and not doing. Then they had to go to the local
politicians and ask were they going to unify behind a program,
or did they want to fight in a partisan way or in a political
way, or did they want to come there.
Well, I was fortunate because in the city of New York, the
mayor said whatever the Federal Government is prepared to put
up, we will put up. I then took that and went to the Governor
and said, the mayor is putting up $100 million, and HUD would
put up $100 million. He said, put me down for $100million.
We then went to Columbia and said, we have a potential of
$300 million, but we have need some technicians to put a plan
together. Could you ask what they need, and work with HUD?
Columbia said, yes, but we want to work with the city
university system, too.
So we were able to bring community leaders to tell our
architects of the plan what was needed, with the political
support of the city and the State, and even though, as the
prime author of the bill, some people thought I was entitled to
one, in my heart, I knew if I never got one, I had more just in
bringing the people together to take a look at the problems
that we were having in the community. And they were starting to
work on the problems that they had even before we were
designated.
Now, we had a major setback, because both Mayor Dinkins
lost and Governor Cuomo lost, and it was during the budget
time, and this hundred-million-dollar pledge, the first thing
that happened was they acknowledged they were going to keep it,
but then they went to try to find the money, and the city and
the Governor were not compatible, and it took 6 months, really,
of all of this fighting back and forth until HUD had to say
that there were other communities that had plans that they were
rejected because they did not reach the quality of the New York
plan, but if that was going to deteriorate, they could not in
all fairness fulfill their commitment without the city and
State fulfilling theirs.
The adverse publicity caused them to come together. And
even in my opinion, I thought that--well, the $10 million, the
$100 million really, did not mean in their opinion $10 million
the first year, and we lost half of that.
Having said that, that is the negative part. The positive
thing is that once they decided to get together, Madam
Chairperson, the whole city knew it, the whole business area
knew it. And everybody that either did not participate formally
were asking, what can we do to help.
Last night I attended a briefing of the board of directors,
and I would like to add that our board is made up of not just
community people and educators, but private sector people, and
our chairman is the president of Time Warner, who came from a
community like mine. And when I asked whether or not he could
bring his managerial skills and the prestige of his office, he
said he would not only welcome the opportunity to pay back a
community that supported him, but he would encourage others who
were successful not to forget this inner city and to come back
and to try to compensate for the fragile family units that we
have in poor communities that find itself suffering with
joblessness and drug addiction.
And as a result of him doing this, last night, McKinsey,
Incorporated, which is a multinational firm that evaluates the
decisions that are being made by the private sector, not only
evaluated where we were going, but on the Internet was able to
show all of us where we could go if we unified our resources
and was prepared to work together cutting the red tape that
business people find in local and State governments. The tax
incentive is there, but the business people said that if we can
make certain that we are preparing a work force that is
dedicated to being effective and efficient, that they really
didn't need the tax incentives even though smaller businesses
might do it.
And so we can go to the telephone company and to the
stockbrokers, all of which complained about the public school
system not being able to produce literate people, not being
able to produce those that they would not have to spend
hundreds of millions of dollars and retrain, and tell them, for
God's sake, tell us what you want, tell us where the job is,
and our kids can not only look forward to graduation, but look
forward to a job, because the specifications were given to the
schools to produce not just academically a graduate, but
someone that can make a contribution.
I truly believe that the President of the United States
should be given authority to negotiate not only foreign policy,
but trade policy. And yet I cannot see my way clear to support
giving the President fast track authority, because, until
recently, I never heard the President talk about those
Americans that know that they are not included in the progress
that this country expects for the next century.
Oh, we hear a lot of talk about higher-paying jobs and
high-tech jobs, but the schools that produce more kids that go
to more funerals than go to graduations, they know that success
is not in their community. They know that people that have the
skills of television repair, cleaning clothes, selling food
come from outside the community. They know we can't even
produce firemen or policeman because the school system, coupled
with the lack of hope, coupled with the fact that many of the
families don't give the time and attention to the schools that
they should, that they just come to the schools as losers, drop
out of the schools. And when I talk with them and talk with
their parents, they want to know what do they lose with drug
addiction? Do they lose their family's good name? Do they lose
their job? Do they lose their reputation? To many kids going to
jail, it is no big deal. They come out, they have been there,
they are from the hood, they have gone, they have come out.
IV drug disease is costing more than the educational
budget. And right now as we talk, we spend $84,000 a year to
keep a bum kid in Riker's Island, and we are fighting over
whether $6,000 or $7,000 is enough money to keep him in public
school.
And so I beg the President not just to look at this as a
demonstration project, but he has been so successful in
improving the economy and reducing the deficit, and we can
reduce it even more if we did not have to pour this money out
into our jail systems. Our jail system alone costs $450 billion
a year. And it is senseless to see how State legislators are
competing for jails and prisons the same way we did in a
Congress for unneeded military bases, but they are doing it
because jails in our States, and including New York State, not
only excel the costs of our university system, but they are
providing jobs for people, and politicians have to be concerned
about economic development. And we now find that jails get a
higher priority than new schools, and the whole thing is
senseless.
And so I know that to talk about a public works bill where
everyone is able to get the skills, or to talk about a giant
community conservation corps, or to talk about creating jobs
for people with training, that this is not the time to discuss
it. But I know one thing, that we have our schools that have to
be rebuilt, we have our infrastructure that is falling apart,
and if we are going to succeed in the next century, we have to
make certain that transportation, communication, education is
going to be there. And we will not be able to effectively
compete with 1.6 million people in jail, most all of them
young, most of them minorities, andnone of them unemployable.
So I came here really to support Congressman Watts and
anybody else that was saying, isn't it time that we look at
some of our most precious assets, human beings, and be able to
tell the civilized world that we want to educate them, make
them employable, put them to work, make them productive,
because having a million and a half people in jail just doesn't
make any sense at all.
And so I value this oversight. I think the empowerment zone
is exciting. It has been of major success throughout the
country. And even as we talk, HUD advised me this morning that
they are going to have an overall national review system so
that we can find out in Harlem, New York, what they are doing
in L.A., what they are doing in Detroit, what they are doing in
Philadelphia. And I don't think that any urban community or
rural community that suffers the way we are suffering, sure
they should compete and meet the criteria, but they shouldn't
be passed over. Thank you, Madam Chairperson.
Chairman Johnson of Connecticut. Thank you Congressman
Rangel.
I don't know whether you have ever had a blue ribbon school
in New York City, I am just not up on that, but I have had a
number of blue ribbon schools in my district, and for the first
time an urban blue ribbon school. And when you talk to the
schools that applied, whether they won or not, by the time they
get up to the end of the competition, they almost don't care if
they didn't win, because the consequences of the collaborative
effort of preparing the application among the teachers, the
administrators, the parents, and the kids is so important and
so extraordinary and so productive for them that whether they
get the name or not isn't of as much consequence.
And what I hear you saying is that in your experience, the
empowerment zone legislation did succeed in forcing people to
look at what is the problem and how would we solve it working
together. And that is very important testimony.
Did I understand you to say that recently the businesses
were heard to comment that the tax incentives were less
important than the work force quality?
Mr. Rangel. With the larger multinationals, because I have
this area of poverty in one of the most successful political
subdivisions above Manhattan, and they were saying, and they
said it again last night, that if they can go into a community
and bring that community back to life, they know how to make
money, and they don't need the incentives as it relates to the
employers' tax credit. They really wanted to cut out the red
tape, let them get in there and let them do what they can do
best.
But, of course, a community is not big business. A
community really is small business, and that is where the tax
credit really is important as--as employers have to almost
train employees, many of whom have had no work experience at
all, and the tax incentive allows them to be more competitive
in doing it. But with the larger firms that have no
competition, they said give them an even playing field, give
them employees that they can work with, they don't need the
incentive. And this is especially so if we are able to relieve
them of the so-called retraining responsibility.
Chairman Johnson of Connecticut. Thank you, Mr. Rangel.
Mr. Rangel. And I hope one day to come here, Madam
Chairperson, with a proposal where any kid that lives in public
housing, that is trained to be able to do a job in public
housing, whether it is the manager's job, or whether it is
cleaning the floor, whether it is security or elevator repair
work, whether it is being an electrician or being a plumber.
These public houses should be families, it should be a village,
it should be a community by itself. And job opportunities--
training and job opportunity, they should be given preferential
treatment the same way we have legislation now to give law
enforcement officers preferential treatment if they live there
so that the pride and dignity of having a job can keep together
not only our communities, but to bring together and keep
together our families. Jobs mean so much to human beings'
dignity and how they see themselves in their communities.
[The prepared statement follows:]
[GRAPHIC] [TIFF OMITTED]60762A.004
[GRAPHIC] [TIFF OMITTED]60762A.005
Chairman Johnson of Connecticut. Thank you. Congressman
Rangel.
Congressman Hinchey of New York.
STATEMENT OF HON. MAURICE D. HINCHEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW YORK
Mr. Hinchey. Thank you very much, Madam Chairman, Mrs.
Johnson. I very much appreciate the opportunity to be here
before you today.
Mr. Coyne, thank you also very much for exercising your
oversight responsibility with regard to empowerment zones and
enterprise communities.
I ask unanimous consent that my written statement be
included in the record.
First, I would like to associate myself with the remarks
that were just made by the dean of the New York delegation in
every respect. I think that he continues to put his finger
directly on much of what ails urban America. And if we are
wise, we will heed his advice, particularly with the
misallocation of resources to prisons and the misallocation of
our future locked up in many of those prisons and what that
implicates for the future of our country.
I have had the opportunity in my own district to examine
the efficacy of enterprise communities close at hand. We have
in the mid-Hudson Valley of New Yorkan enterprise community
which is known as the Kingston/Newburgh Enterprise Community. It
combines two old blue collar river communities on the west bank of the
Hudson River.
The city of Kingston suffered recently economically as a
result of the downsizing of IBM and is in need of outside
financial assistance, which has been provided by the
establishment of this enterprise community. The city of
Newburgh has been in decline since the 1950s and gives evidence
of every aspect of what ails our urban communities. It is an
aging city, its housing stock is grossly deteriorated, the
businesses have moved out, and it is in dire need of
assistance. That assistance has begun to be provided by the
establishment of this enterprise community, which combines both
of these communities.
In the city of Newburgh, job training and business
development have been critically important. The KNEC programs
in Newburgh also focus on areas such as housing, child care and
health care. And in addition to encouraging new businesses to
locate in the enterprise community zones, the Kingston/Newburgh
Enterprise Community has opened a ``One Stop Capital Shop'' to
provide small businesses and entrepreneurs with the development
services and job training and the capital that they need to get
started.
The KNEC has also committed over $500,000 to develop or
rehabilitate nearly 75 single family homes and 65 units of
senior citizen housing in Newburgh. That is a lot for a city
with a population of less than 30,000. By year end, the
community will have expended almost $2.5 million on projects in
both Kingston and Newburgh, and these projects have been
everything from the kind of housing projects that I have
described to financial arrangements for new businesses to come
into the community, which are successful, are employing people,
and are showing how effective this program can be.
I would like to point out one problem with the program as
it currently exists, and that problem is being corrected, as I
understand, with the reauthorizing legislation which you are
proposing and moving forward with. That problem relates to one
of the examples that my dean mentioned a few moments ago, and
that is the problem of the relationship between the enterprise
communities or empowerment zones and the States in which they
are located.
The original legislation not only required that the States
provide matching funding for the empowerment zones or
enterprise communities, but it also provided that the State
governments would act as pass-throughs for the Federal funds.
In other words, the Federal funding goes to the State before it
gets down to the empowerment zone or the enterprise community.
Now, in most States this has not been a problem, as I
understand it, because the States have simply taken the Federal
money and then given it to the communities as the need was
apparent. However, in the case of the State of New York,
something different occurred. The State began to act as a
fiduciary and, in effect, blocked the allocation of Federal
funds going down to the enterprise community of Kingston and
Newburgh for a prolonged period of time, thereby holding up the
efficacy of this program. The people who were administering the
program as well as the members of local government were
seriously and severely frustrated in their attempts to break
through this bureaucratic arrangement of the State government,
and that caused some very serious problems for the operation of
this enterprise community and these two small cities.
Now, as I understand it, this problem is being addressed as
you reauthorize this program, and this is pursuant to the
recommendations of the President, because HUD, as the Federal
administrator of this program--which I believe has done an
excellent job in administering the program at the Federal
level--has recognized that in some cases around the country the
States have not been building bridges, but have, in effect,
acted as roadblocks in preventing the Federal funding, not just
the State funding, from getting down into these communities,
and this has created a very serious problem.
So I would urge the committee as it moves forward with
reactivating and reauthorizing this legislation, that it
provide for a system whereby the designated communities, which,
after all, have had to go through an application process and
have had to clear numerous hurdles in order to qualify for the
program, work directly with the Federal Department of Housing
and Urban Development so that the funding they need can be
accessed more readily. And I think if that is done, the
effectiveness of this program will be greatly enhanced.
I would make just two other suggestions with regard to the
bonding apparatus that is set up under the legislation. The
bonding ability of the designated communities is controlled and
regulated by the bonding cap of the States, which is affected
by a number of variables within the particular States. This has
made it very difficult for the communities to exercise this
bonding authority under the State's cap, because if the State's
cap has been reached, then the bonding ability of the locality,
of course, is never able to realize itself.
So I would suggest that in the new legislation, the bonding
authority of the communities not be tied to the State, but
rather, that the bonding authority be tied to another criteria,
say, for example, the population of the enterprise communities
or the empowerment zones or some other variable that the
committee may in its wisdom deem to be more appropriate.
But I think it is important to get it out from under the
cap of the State, because the ability of the enterprise
community and the empowerment zone to go out into the bonding
market and get this capital that it needs is impaired very
seriously by the State cap.
Additionally I would recommend that the bonds of these
empowerment zone and enterprise communities be made bank-
eligible. Under the present arrangement, banks are not able to
participate in the lending regimens in the existing
legislation. The bonds are not bank-eligible. I would suggest
that local banks know very well or perhaps better than anyone
else the needs of the local communities, and they are in a
better position to respond to those needs. And I think that
banks are interested in making these loans should you deem it
appropriate to make these loans bank-eligible, as I am urging.
I think if those two changes were made with regard to
thebonding arrangements in the existing law, a substantial amount of
additional capital would become available. After all, if the loans are
bank-eligible, banks will be able almost immediately to provide a very
substantial amount of financial resources to these communities. And
that, of course, is precisely what the original legislation envisioned.
Those would be my principal recommendations as you move
forward with this. I would say just in closing again that I
have witnessed this program close at hand. I participated in
the application process. I have watched the administrators of
the program work locally. I have worked closely with the two
local governments involved. It is a very good program. I think
even within the constructs of the impediments that I have
mentioned, even in spite of it, I have seen this program
working well.
I believe, however, that it can work much more effectively
if we can get the State out of the way and make these changes
in the bonding arrangements. And I thank you very much for the
opportunity to testify on this matter before you.
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Chairman Johnson of Connecticut. Thank you very much, Mr.
Hinchey. It has been very helpful to have you testify, given
your very close involvement in this program with your midsized
city community, which is more like my experience. It reminds
you--and if you look at the article in today's Washington Post
about Indianapolis, it does remind you about how differently
communities need to be able to choose to handle these problems,
and how important the resources are. Thank you very much for
your testimony.
Mr. Coyne.
Mr. Coyne has no questions, so we will move on to the next
panel. Thank you very much for your testimony this morning.
Mr. Rangel. Thank you, Madam Chairwoman.
Chairman Johnson of Connecticut. Dr. Scholz, the Deputy
Assistant Secretary, Tax Analysis, of the Department of
Treasury; and Howard Glaser, Acting General Counsel and Deputy
General Counsel, formerly General Deputy Assistant Secretary of
the Community Planning and Development of HUD. Welcome.
Mr. Scholz. Thank you.
Chairman Johnson of Connecticut. Doctor Scholz.
STATEMENT OF JOHN KARL SCHOLZ, DEPUTY ASSISTANT SECRETARY, TAX
ANALYSIS, U.S. DEPARTMENT OF THE TREASURY
Mr. Scholz. Madam Chairwoman Johnson and Members of the
Committee, I am very pleased to have the opportunity to present
testimony today concerning the Empowerment Zone and Enterprise
Community Program. My testimony will describe the tax
incentives that are part of the program, recent changes to the
program that reflect taxpayer concerns, and revenue affects of
the EZ/EC program.
Under OBRA 93, nine first-round empowerment zones and 95
enterprise communities were designated at the end of 1994.
Nominated areas were required to satisfy certain eligibility
criteria based on poverty rates, population and geographic
size, among other factors. The recent tax bill authorized the
designation of 22 EZs; two additional first-round EZs, and 20
second-round EZs. These tax incentives are part of a
comprehensive approach to address problems facing the EZ/EC
communities.
The Federal Government provided flexible block grants to
enable communities to undertake a broad range of activities
that cannot easily be funded with tax incentives, such as
community policing. Communities in partnership with the private
sector and local government developed strategic plans for
community revitalization that leveraged Federal resources in a
wide range of creative programs.
The tax incentives which are the focus of my testimony
lower the cost of labor and capital in these distressed
communities. An employment and training credit, for example, is
available to first-round EZs. This is a 20 percent credit
against income tax liability available to employers for the
first $15,000 of wages paid to each employee who lives and
works in the zone. As an additional incentive for both first-
round and second-round EZs and ECs, zone youth are included as
an eligible target group for the work opportunity tax credit or
WOTC. The WOTC is a 40 percent credit of up to $6,000 of wages
paid during the first year of employment.
The capital incentives, there are two of those, are
targeted to businesses that are likely to have a significant
impact in the zone while limiting the possibility of abuse. In
particular, at least 35 percent of employees in an enterprise
zone business must be zone residents, and much of the activity
and property must be in the zone. My written testimony goes
into some detail about these criteria.
The two--both the first- and the second-round EZs are
granted an additional $20,000 in the expensing allowance under
section 179 for depreciable business property. What this does
is lower the cost of capital for small zone businesses by
allowing them to deduct the total cost of an asset in the year
it is purchased. The first-round EZs and ECs also have the
ability to issue tax exempt bonds.
Now, the administration, working with Congress, has tried
to be responsive to communities by modifying the first-round
tax incentives to improve their effectiveness. For example,
there were concerns that the first-round tax-exempt bond
requirements were too restrictive, as it was estimated that
only five bonds were issued since the beginning of the program.
As a result, the new tax-exempt bonds, the empowerment zone
facility bond, was created that was outside the State private
activity volume cap and not subject to the size limits.
A couple other items were also changed in response to
community and other concerns. The definition of what is a zone
business was also relaxed to make it work better, and a new
phase-in period for bonds was instituted.
Now, because the tax incentives are only a part of the EZ/
EC Program, a systematic complete evaluation shouldexamine all
components of the program and their effectiveness. Howard Glaser from
HUD will discuss their plans for such evaluations.
Tax data will eventually provide useful information to
monitor the EZ/EC Program; however, we do not yet have reliable
tax return data on these incentives. Tax return data for the
1995 tax year, the first full year in which the incentives were
in effect, are available, but are based on a small sample that
probably does not reflect accurately the use of the EZ/EC tax
incentives by all businesses. Further, available data are
unlikely to reflect the effects of the EC/EZ Program because
some zones are just beginning to implement their strategic
plans.
To get a more complete understanding of the use of the EZ/
EC tax incentives, the IRS is collecting data from the full
population of business tax returns for the 1996 tax year. We
expect to receive these data early next year. Even with
complete tax return data, consolidation rules can make it
difficult to determine which zone is benefiting from business
taking advantage of a particular tax incentive. For example, a
corporation may have operations in both the Detroit and the
Atlanta EZs that can take advantage of the employment credit.
The tax return for the corporation would just show the total
employment credit taken in both zones.
With these caveats, tax return data should provide insights
on the investment and employment activity benefiting from the
credits as well as the characteristics of the businesses
claiming the credits. When tax return information are available
for several years, it will also be possible to describe changes
in economic activity in the zones over time.
Even so, it will still be difficult to disentangle the
effects of the tax incentives from the other components of the
zone program and other factors that may affect employment and
investment in the designated areas, such as improvements in the
economy or in the area surrounding the zone.
The problem of determining what would have happened in the
absence of these incentives arises frequently in program
analysis and is probably best addressed by the impact and 10-
year evaluations that Howard Glaser will describe. The tax
data, however, which we intend to monitor will play a useful
role in establishing a baseline of how frequently the
incentives are being used and how those patterns change over
time.
That concludes my prepared remarks, and I would be pleased
to respond to any questions.
Chairman Johnson of Connecticut. Thank you very much, Dr.
Scholz.
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Chairman Johnson of Connecticut. Mr. Glaser.
STATEMENT OF HOWARD GLASER, ACTING GENERAL COUNSEL, U.S.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Glaser. Okay. Thank you, Madam Chairwoman, Ranking
Member Coyne, and other distinguished Members of the committee.
I will be very brief with my comments.
We have provided to the committee material on the HUD
performance reports and other supportive material to give you a
really full understanding of where we think the program stands
at this point.
Let me say that we are pleased on behalf of Secretary Cuomo
and the Department to be able to provide this to you today.
Secretary Cuomo asked that I provide to you his thanks for your
continued support of this initiative. It was, after all, this
committee that, 13 years after the first enterprise zone ideas
first came to the United States from England, made it a reality
in 1993 and has continued to support the program as we move
forward.
I will briefly tell you a little bit about some of the
things we measure the program against. This was designed to be
a different kind of Federal program in a number of ways. First,
it was designed to be performance-based, rather than measuring
process or money spent. The empowerment zones and enterprise
communities set performance benchmarks against which both
residents and investors can measure their progress, and which
govern the receipt of future Federal dollars.
Also, unlike typical Federal urban programs of the past,
the empowerment zone approach recognized that economic
opportunity and self-sufficiency are the most important
elements of a comprehensive strategy; also recognized that
private sector investment was critical to the success of
rebuilding communities.
The Federal resources provide seed capital, but,
ultimately, a functioning inner city economy requires building
a private market. We also recognize that communities which have
been starved for investment and experienced extreme poverty for
many decades cannot turn around overnight. And Congress wisely
designed the program as a long-term, 10-year effort instead of
the one-shot, short-term approaches of prior Federal efforts.
And, finally, we recognize that the implementation of the
program must be locally driven, not by a bureaucracy in
Washington. We heard a little bit in the differences between
Congressman Rangel and Congressman Hinchey, how their districts
are so very different. They have very different programs as a
result.
In short, the Federal Government acts in this program much
like a venture capitalist. We say to the communities, if you
bring everybody to the table, you put together a business plan
for reviving your community with some measurable benchmarks for
success, and you bring resources to the table that you are
willing to risk, then the Federal Government will step in and
risk some of our resources as well on the success of your plan.
Those were the general major objectives of the program
design, the original program design. Earlier this year, we
released 72 reports, performance reports, one on each of the
empowerment zones and enterprise communities, which review the
progress of each zone in meeting their own strategic plan. And
we have provided summaries of those plans and can provide you
with the originals of those as well. What those reports show us
in brief is that, although this is designed as a 10-year
effort, the zones and communities are already showing some real
and, in some cases, substantial progress in meeting their
goals.
As you might expect, in any effort of this kind, of course,
cities perform at different levels. There are very high
performers, moderate performers, and, frankly, there are some
weak performers. But throughout, the progress in each zone is
measured against their own goals that they set forthemselves,
not a one-size-fits-all Federal cookie cutter standard.
The overall picture that we get from the reports from the
72 zones is that, nationwide, these zones are stimulating
billions of dollars of new investment, private investment. They
are beginning to revive inner-city neighborhoods once given up
for dead, creating jobs, helping families move from welfare to
work.
We have seen some key lessons emerge from these reports as
well that we can apply as we move forward to the enhancement of
a second round. For example, we know a small amount of Federal
funding can attract significant private-sector investment. We
know that comprehensive results--comprehensive planning has had
better results than piecemeal efforts. We have found that there
is some tension between city hall and community residents over
the investments made in their communities, but that working out
that tension is really essential for residents to have a long-
term stake in the outcome of the empowerment zone process.
Fourth, we found that performance measurement is an
important part of ensuring that Federal resources are used
effectively; and, finally, that interagency coordination at the
Federal, State, and local level is critical to program success.
We could spend some time walking through with what some of
the innovations are. They are in the reports. We will be glad
to share those with you. But even a brief review gives you some
sense of the new ideas being undertaken.
There has been a lot of bipartisan support for this program
throughout based on the early progress of the program, as we
have discussed here. The President proposed and Congress passed
a second round of empowerment zones through the Taxpayer Relief
Act of 1997, and while the establishment of those 20 new zones
is a terrific first step, the addition of flexible grant funds
to accompany the tax incentives will help ensure the success of
that second round. And the Department looks forward to working
with the committee on that challenge.
We will be happy to take any questions.
[The prepared statement follows:]
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Chairman Johnson of Connecticut. Thank you very much.
Dr. Scholz, you give the example of the corporation that
has an operation in both Detroit and Atlanta. Would it be hard
to, early on in the process like this, to get the companies to
report differentially on their tax return what portion of the
wage credit is ascribed to each enterprise zone?
It seems to me in the long run we will want that
information, and we ought to make that clear at the beginning.
In their work papers they must have done it, anyhow.
Dr. Scholz. Right now, to take the wage credit, the company
is filing Form 8844, and companies typically file their tax
returns on a consolidated return basis. No tax rules, however,
are written in stone, and so I can go back and talk both to the
Internal Revenue Service and our office to see whether that is
something that is feasible. Surely the companies internally
have that information, and so it may well be something that we
can do.
Chairman Johnson of Connecticut. Thank you. I would
appreciate it if you would do that, and also, talk with your
department about any other disaggregation of data that we ought
to look at at the beginning, so that over 5 years and 10 years
we do have some understanding of this that will be a sounder
foundation for the future.
I personally, for instance, am very interested in whether
expensing is a more powerful incentive than some of the other
incentives. We have people urging us to do nothing but zero
capital gains. How do we evaluate the use of these incentives,
and how do we get some input from the very beginning as to
whether the wage subsidy was far more important, and maybe on-
the-job training subsidies would be more important than
property tax relief or capital gains relief or corporate tax
relief at the State level or expensing at the Federal level.
And it may be that expensing is more important in communities
like Mr. Hinchey's where you have a lot more small businesses,
and other things are more important in our kind of communities.
I think it would be a mistake not to recognize that right
now our way of collecting tax information from companies
participating in enterprise zones is inadequate to our needs.
So, if you would, get back to your staff about that and get
back to us about their thoughts and working with Mr. Glaser. I
don't think that we can even evaluate the tax portion of this
program with such gross information.
Dr. Scholz. Right. We can start to, I believe, learn
something about effectiveness, about the mix of different
incentives, as you mentioned, since there is variation across
the enterprise communities, the first round enterprise zones
and the second enterprise zones. So by examining the difference
in development outcomes across those different areas, we should
be able to learn some things about the effectiveness of
different incentives.
Then, of course, we have some experience on worker training
programs and efficacy of capital gains taxreductions from other
contexts; but your point is very, very well-taken.
Chairman Johnson of Connecticut. Well, will you be able to
tell us, for instance, in 5 years how much of the enterprise
zone money was spent on expensing and how much of that
expensing was used by companies of XYZ sizes?
Mr. Scholz. That specific question we should be able to
answer. Now, trying to get the specific geographic answers for
areas, as my oral remarks made clear, will be more difficult
without moving further in the direction that you suggest, which
of course requires a careful trade-off between the increasing
taxpayer reporting burdens and the benefits of the knowledge
that we gain. I recognize and I am quite sympathetic to your
suggestion, that given it is a new program, we need to learn
something about it, such that the increase in knowledge is very
worthwhile.
Chairman Johnson of Connecticut. I am very concerned with
the bureaucratic reporting requirements. On the other hand, if
we look at what companies would normally be developing, what
information they would normally be developing anyway to do
their taxes and what portion of that background information
would be useful to us, to maybe do that on a supplemental basis
in enterprise zones might very well be worth it. I think it is
important to make those determinations early.
Dr. Scholz. No question about that.
Chairman Johnson of Connecticut. It is also very important
to be able to do it geographically. I, as a Member from the
Northeast, am increasingly sensitive to the extraordinary
regional differences that are totally and completely
nonpartisan. Representing the oldest manufacturing region in
the country, brownfields are a much bigger issue. If you are in
Arizona and you have only been manufacturing a few decades,
brownfields aren't such an issue. Some of the interaction of
the programs and interaction of portions of the tax bill in
these regions, we also need to be able to track, so I would be
interested in your getting back to us about that.
Dr. Scholz. I sure will.
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Chairman Johnson of Connecticut. Mr. Glaser, if you could
just run down a few of the kinds of practical things. You
mention in your report about what works in the enterprise zones
and the general matter of comprehensive planning being an
asset, performance measurement being an asset, interagency
coordination being an asset. Could you give us some examples of
what works?
Mr. Glaser. I'd be delighted to. I want to point out, also,
that we have published last year a book called ``What Works In
The Empowerment Zones/Enterprise Communities.'' This is a best-
practices type of manual.
One of the points of this program was to find out what
works, use these 72 cities as laboratories for urban
experimentation, and then import the ideas that worked to other
communities. Congressman Rangel talked about even the
communities that lost won just by going through this process,
and, in truth, they can use many of these ideas in their own
communities. You can find a whole wealth of them in our Best
Practices Guide. The information is also on the Internet, and
there are all kinds of ways to access this information.
A couple of highlights would be: First, the utilization of
the Federal money is not to fund at 100 percent as in
traditional grant programs, but as leverage, a small amount of
money to leverage a large amount of private capital. In the
first 24 months of the program, communities committed
approximately $200 million of the Federal Title 20 money. There
was approximately $2.7 billion of private investment reported
during that period. It was a very good ratio, and that is
exactly what we sought to have occur, so that is one example.
One way they did that especially is through community
development banks in Los Angeles, in Louisville, in Baltimore,
including some of the rural zones as well. The Mississippi
Delta created empowerment zone banks that enabled us to mix the
private sector leverage along with the Federal money to make
more of it than they originally had. So I would say that if
there was one thing that came out of the process, it was that
you could use the Federal money that way.
Chairman Johnson of Connecticut. Thank you. Would you care
to comment on this issue that is going to come up later in the
hearing, on outputs versus outcomes as a weakness of the
measurement?
Mr. Glaser. Well, as a starting point, performance
measurement is a critical piece of the program. At the
beginning of the process communities were asked to set specific
measurable goals for each of their activities, providing both
themselves as residents and local investors as well as the
Federal Government a way to know whether or not we actually
accomplished something other than how much money did we spend.
That process went on, and I think has been a successful one.
The issue that you raised and that the GAO raised is what
is it that you exactly want to measure, an output versus an
outcome? And we are trying to make our measures more outcome-
oriented. I will give you an example of what we are talking
about here.
Suppose a community has a goal of immunizing children, and
what we would call the goal, the benchmark would be let's
immunize 10,000 children who had not been immunized. That is
specific. It is achievable. It gives them something both to
shoot for and to be measured against.
GAO takes a slightly different point of view. They
sayoutcomes, we want to look did the rate of infection, for the disease
go down. We are concerned about taking that approach because there are
so many external factors to whether or not you will be able to achieve
that goal. Economy is another one, number of jobs that you project that
you want to produce versus the effect on the unemployment rate in the
area.
Obviously, with the stock market going up and down, as we
can see today more than ever, who knows what the outcome is
going to be in local inner-city economies, and how can you hold
accountable local communities for things that they do not have
within their control? That is what that debate has been about.
We all agree we need to be more performance-based. A little bit
of discussion goes on as to whether or not that should be
output versus outcome.
Chairman Johnson of Connecticut. Thank you very much.
Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairwoman.
Mr. Scholz, From what you have witnessed so far of the
program, What would be the most important improvement we would
make in the program?
Dr. Scholz. That is a very difficult question. My take on
the program is it is very new and I think it is a very
promising approach for community development. There has been
tremendous positive response from communities in the process of
making applications. That tells us that there is a very
sensible mix of incentives for labor and capital in the
program.
The one thing to improve the program (it is almost a
negative thing that I am going to say) is that it needs to be
given time to work. In this way, we learn even more from the
kinds of things that HUD is doing and disseminate information
on the program to other communities so that they can see what
are promising economic development processes. However, this
requires giving the program time to work. It is very new. We
want to see what is going on.
Mr. Coyne. So you really haven't had a chance to be able to
formulate some response that would improve the program?
Dr. Scholz. Well, we have made very important
administrative changes to the program between the so-called
first-round designations and the second-round designations. I
mentioned in my oral remarks the bonds program wasn't working
very well, bonds weren't being issued. So we developed, in
working with Congress, a new bond that is going to be a much
more flexible development tool.
In addition, businesses were very concerned about whether
they were, in fact, in an empowerment zone or enterprise
community. In response, HUD and the Department of Agriculture
set up a 1-800 number so businesses can find out. Further, the
definition of ``enterprise zone businesses'' has been relaxed
to make these incentives a more successful economic development
tool. Those sorts of changes have, I think, been quite
important improvements.
Mr. Coyne. What did you think of Congressman Hinchey's idea
about local banks being able to issue the bonds?
Dr. Scholz. Treasury has typically been quite reluctant to
extend tax-exempt bond financing to financial institutions.
Tax-exempt bonds are, I think, a more useful economic
development tool when issued directly to the people who will
use the proceeds rather than to intermediaries, but the idea is
certainly worth additional consideration.
Mr. Coyne. So you wouldn't close your mind to looking at
that proposal?
Dr. Scholz. Not close our minds, no.
Mr. Coyne. Relative to Congressman Watts' and Congressman
Talent's and Congressman Flake's legislation, H.R. 1031, would
either you or Mr. Glaser want to make any comments concerning
the need for this legislation or the impact of this bill?
Dr. Scholz. I would like to make two brief comments, and
then perhaps my colleague would also.
The EZ/EC program is targeted on very distressed
communities. The poverty rate in the Atlanta EZ, I believe, is
50 percent. The poverty rate in the Chicago EZ is 49 percent.
These are very distressed areas. The American Community Renewal
Act has a much broader definition for ``renewal communities.''
For place-based development strategies to work effectively, I
believe they need to be narrowly targeted. That is one policy
concern.
The second policy concern is over the mix of incentives in
the American Community Renewal Act. For example, the zero
percent capital gains rate invites tax sheltering activity.
People are very clever in manipulating these kinds of
incentives so that the price of property transferred between
related businesses is advantageously altered. There is a myriad
of ways of exploiting those tax shelters, and I am afraid that
would be an unproductive kind of use of Federal money.
Similar concerns arise with the revitalization tax credit
and other provisions of this proposal. So we have policy
concerns.
Mr. Coyne. Mr. Glaser.
Mr. Glaser. Not really too much to add to that. We
certainly are very supportive of any efforts to enhance these
targeted kinds of efforts. The question is whether or not there
are going to be conflicts or confusion among communities that
are designated, that now have a separate mechanism or new
bureaucracies perhaps to implement the legislation. I think
that is something we have to look at.
Mr. Coyne. Thank you.
Mr. Watkins. Madam Chair, members of the panel, I am
delighted you are here today, but I come alarmed and concerned.
Madam Chairman and Mr. Coyne, my colleagues, I have had a
longtime commitment to empowerment communities, enterprise
zones. When I served in Congress previously, I worked with Jack
Kemp on this subject. We got one-third of the enterprise zones
set aside for rural areas of this Nation, because originally
the legislation didn't have any planned for rural areas, and I
was deeply bothered by that. Therefore, I was talking to my
good friend, Mr. Rangel from New York, a while ago about this
rural set-aside.
Poverty is poverty, and there is no greater, deeper poverty
than in the small economic rural communities where people are
scattered and their voice is faint and no one is there to hear.
You know, the riots in Watts, California, back a number of
years ago started from a young lad that his parents left
Oklahoma and went there and caused social problems. I have told
people the largest migration of human beings ever recorded in
history was from small rural areas of our Nation, the farms and
all, into the urban centers, the shipyards and manufacturing
plants of this country, the Grapes of Wrath to the Great
Depression.
I came along about 10 years after that, and I know my
family had to leave three times, Madam Chair, from
rural,economically depressed Oklahoma and Arkansas in search of jobs. I
went there three times as a youngster picking up potatoes and onions.
That was pre-Caesar Chavez days, basically. But no one would sound the
alarm, and it created social problems in the inner cities but also
created socioeconomic problems in the rural areas.
I am glad one-third of them have been set aside for rural
areas. But I am deeply concerned. We have got to have someone
at the table. I notice part of the panel is Mr. Robertson from
Agriculture. Is he here?
Madam Chair, why isn't someone in that panel right there,
right now, speaking up for small cities and rural communities,
depressed areas, greater depression. I know in Oklahoma our
capital income is 80 percent of the national average. In the
rural economically depressed areas it is probably 40 percent of
the national average, and I am a product of that. It is
something, my whole public life is to try to change it. I
endorse, you bet, I am a champion in trying to preach the
gospel of what this can do to help our areas.
So let me say I am glad you are here, but I would like to
think there would be someone there and there would be someone
behind you that represents the rural areas and the rural
empowerment communities and the economic areas there. Let me
just ask the question. I noticed under the '97 act, Mr. Scholz,
from your testimony, there are 2 additional first-round EZ's
and 20 second-round EZ's, and the two first rounds are from
urban areas.
Why isn't there at least one for the rural areas?
Mr. Glaser. I guess my understanding is that our
understanding of the law, which is a little bit perhaps
unclear, is that the intent and the emphasis in the budget
agreement was that those two additional zones were, in essence,
upgrades of the two existing supplemental empowerment zones
which did not harbor tax purposes.
Mr. Watkins. In other words, it is political. You know, if
there are two for the urban, there should be one for the rural
areas. I mean, Madam Chair, I hope you will focus on that. I
don't have a big city. I have got rural economically depressed
areas that have got a high percentage of native Americans. In
fact, I was the only non-Indian on the baseball team when I was
growing up as a boy, and I was a minority and I didn't know it.
But I would like to see one crafted that--I don't want it
divided. I want the Native American and also the rural
communities and rural economically depressed areas together,
and we must have something together. Because if we make it
separate, we are going to cause a greater division in this
country, and I did not know, just as a lad, there is any
difference in us as people.
But I am disturbed there is no one here around the table or
invited to represent the rural areas. I don't know if that is
an oversight on our part or oversight on your part or some
others that we don't have someone here.
Mr. Glaser. If I could make one comment, I am here on the
urban perspective. There are two lead agencies in the
empowerment zone program. The Department of Housing and Urban
Development does primarily the urban side, although it contains
many smaller cities as well. And Secretary Glickman and the
Department of Agriculture are the lead agency on the other
side, and they can certainly brief you on what they are doing.
Mr. Watkins. I understand that, but why aren't they sitting
there? Is that our fault, or is it the fault of you folks?
Mr. Glaser. I can't answer that question.
Mr. Watkins. Have we ignored that?
Mr. Glaser. I don't know if an invitation was extended to
Agriculture.
On your point, Congressman, with the empowerment zones in
the second round, there are 20 new empowerment zones in the
second round; and of those 20, and I don't know that this was
specifically in the oral statement, 5 of the new ones are rural
zones. They are full empowerment zones in the second round. I
just wanted to clarify that for the record.
Mr. Watkins. I am just going on Mr. Scholz's testimony here
where he says two new first-round EZ's are located in urban
areas, and they increase to eight but not for rural areas.
Mr. Glaser. I believe that was really a technical fix from
the first round. And the second round are the new zones, the 20
zones. And again, 5 of those are rural zones with the full
package of tax incentives.
Mr. Watkins. Let me ask for additional time. I know we have
a time limit. I served on the Banking and Finance Committee one
time, and the chairman set up a committee called The Cities and
had New York, Chicago, Boston and one else there, and I sat
there and not one small rural community. Ignored totally. That
was on the Banking and Finance Committee.
And I took them to that rural economically depressed area
finally. I had to shame them into it. And I remember one of the
guys landed in Tulsa, wasn't there, and he didn't come to the
rural area because he thought there was only one airport in
Oklahoma. And I said, no, we had people waiting in Oklahoma
City. And he said, ``Well, don't worry about it. I will take a
taxi.'' That was 120 miles away. He didn't understand in rural
areas you don't take taxis.
But I ask the question, though, on the specifics and the
meat of the subject here. How many businesses and industries
have taken advantage of the tax provisions on the 20 percent
wage-to-credit and also the additional 20 percent there?
Dr. Scholz. We don't yet have the information to answer
that question. We are going to have a complete census of the
firms that have taken the incentives in 1996, and those data
will be available early next year.
Mr. Watkins. Run that back by me again.
Dr. Scholz. We don't yet have reliable data to answer that
question. But we are working with the Internal Revenue Service
to get data for the calendar year 1996 to answer that question,
and those data will be available early next year.
Mr. Watkins. Madam Chair, that is all the questions. I
would just like to close by saying I am genuinely alarmed
that--I am a believer. I know in my area of the State we do
have one, but I have got 21 counties and that covers just part
of a county, part of two counties. Some areas do not have one
single manufacturing firm. How do we build jobs? How are we
able to provide gainful employment for the sons and daughters
of people that are there? There is a tremendous work ethic.
They want to stay and live and work and raise their families
there.
And I understand the destruction of families because they
have to leave in the search for a job. It destroyed my family
as a youngster, and that is why I have devoted my life to try
to change that area of the State of Oklahoma. I askyou to not
lose the focus of the rural areas. They are crying out but you cannot
see them.
Sometimes in big cities they just burn down the buildings
and that gets attention. But the people can be dying,
basically, out there in rural areas and it doesn't get much
attention because their voice is scattered and it is faint. I
am their voice to a certain extent here at this table, and I
would like for someone to be on the other side of that table
telling me what they are doing and how they are carrying it out
and maybe have just as much attention for their efforts.
So, Madam Chairman, I appreciate you having these hearings,
and I welcome more opportunities like this to share and talk
about some of the problems there. Thank you.
Chairman Johnson of Connecticut. Well, thank you very much
for your comments. We do hope that the last panel will be able
to address both urban and rural experience. But we certainly
will be, as we move forward, looking very carefully at rural
experience as well as urban experience, though the third panel
is primarily city mayors and people with urban experience.
There are a couple of questions of which I want to
conclude. First of all, Dr. Scholz, it would be very helpful to
me if you would put in writing your concerns about the tax
incentives contained in the Watts-Talent bill, and particularly
some examples of the kinds of things that could go on under
zero capital gains provisions. It is not easy for me to imagine
the gaming, and I am sure it is much easier for you. But I
think we need to understand the problems that could be created
through that mechanism as well as its opportunities.
Also, I would like both of you to think about what would be
the cost and the consequences of letting any community who
meets certain criteria have access to these incentives, because
Wes has brought out a certain aspect of the problem of
enterprise zones is that they create winners and losers. In my
district it is a very significant problem. Adjacent small
cities are treated differently and have different resources to
attract jobs, though their community circumstances are the
same. So one of the things I think we have to look at is, would
it dilute the program to allow any community who was willing to
undertake this planning process and who met certain criteria to
have access to the same benefits?
If you would, get back to me on those two things. And then
I do have a couple questions more for Mr. Glaser.
Mr. Glaser, GAO did interview participants in the urban EZ
program about factors that constrained their efforts. And Dr.
Scholz, you brought to our attention the importance of letting
this program work. One of the things Congress has really done a
terrible job on is letting programs work before they try to fix
them.
Our goal is not to try to fix something, but to understand
how it is working and to see whether or not it is accomplishing
our policy goal, which was revitalizing the cities. Certainly I
understand the problem of the media and the public and the
private sectors all wanting quick action. That is not my
concern. I understand that. We are going to have to deal with
that.
But three issues of some substance were raised by the GAO
interviews: First of all, the need for initial Federal funding
for administrative activities, whether or not that is
significant, legitimate, or whether that is a burden we
legitimately should keep on the local community in your
estimation; the issue of bureaucracy and layers, which Mr.
Hinchey also pointed to; and then the most concerning issue
that they raised was the problem of governance at the local
level, and how you govern the planning process and how you
govern the implementation process. And what happens if you
govern the planning process and then turn the plan over to
those who didn't make it and, therefore, aren't vested in it,
and also were the very same people who didn't think of it to
begin with and who had been governing for many years, and so on
and so forth. We all know those dichotomies.
So would you just comment briefly on your thoughts about
governance?
Mr. Glaser. You put your finger right on some of the key
issues that came out, not only through the GAO study, but
certainly borne out through other daily experience with
empowerment zones, especially in the very early part of the
program.
The governance issue, I will take that one first. You had a
situation where in the application process you set the specific
goal. You said, ``By June 30th, 1993,'' whatever the date was,
'94, ``you must come together and put this plan together.'' And
the community came together because they knew there was $250
million of tax incentives and $100 million of cash on the
table, and suddenly all the problems tend to be subsidiary to
the benefits that could be achieved.
Then they got the designation, and then you have some
internal working out of the tensions that were under the
surface, which have traditionally been there in these
communities over the years and which began to percolate up
again after designation. And it probably took, I think
Congressman Rangel was correct, he said 6 months, I think even
8 to 10 months in the early stage of the program to work most
of that through.
I think you would find today that if the GAO went back,
that would not be a hindrance in these areas. In fact, I think
you would find the fact that they worked through their local
community tensions actually has strengthened the program. They
had to go through that process, as you point out, of bringing
the new people on board, and where they have done that
successfully, they prospered.
On the second issue of the layers of bureaucracy, as was
mentioned by both of the Congressmen--and we heard that issue
before, and you may hear it in some of the other testimony here
today as well--it has not been a widespread problem. But where
State governments in particular have made a decision that they
want to play--well, where they have let their bureaucracies,
frankly, get involved, it has been a hindrance to the program.
On the other hand, where States have said, we want to be
proactive, we want to put our resources on the table and be a
partner, it has been a very, very big help. So it is not that
State involvement, per se, is a problem, it is when it gets
into the machinery of bureaucracies and suddenly you have got
to fill out 20 forms in order to get money that you didn't need
a single Federal form to fill out.
On the third issue of the administrative dollars up front,
I think that was a legitimate issue by and large. There was no
administrative set-aside, per se. The communities were under a
lot of pressure, and, frankly, we put them under some pressure
to minimize their administrative expenses. We want the maximum
amount of money to go to the communities for the programs, not
to find its way back to the city hall or to some new nonprofit
to institute all this.
So we, I think, frankly, pressed pretty hard to keep all
that down, maybe a little too hard. The communities came back
and said, the truth is it takes a while to get this going, and
if we are going to build a real capacity in our community to
administer community development bank, we need administrative
funds; don't beat us up for using administrative dollars.
And GAO, I think, was right in pointing out in the second
round we ought to have some--whatever the number is, 5, 8, 10--
percent of the dollars, that is for administration; you can't
go over that; but we are not going to beat you up for using
that money in the first place.
Chairman Johnson of Connecticut. Thank you.
There is one other question. In reviewing the applications,
the original vision was that there would be a numerical
scoring, that the specific criteria, such as the strategic
plan, the level of innovation, the community partnerships, and
the need, each one of those be examined and there would be a
numerical score developed, and from that numerical score,
choices would be made as to who would become the enterprise
zones.
Since you have 500 applications, or basically 100 slots,
how the winners were chosen is a very important issue. Why was
numerical scoring abandoned?
Mr. Glaser. Well, numerical scoring was never intended to
be used in the first place. When talking about how the typical
Federal grant gets scored, you do it on a very quantitative
basis and you assign numbers. We again said this should be a
different program; let's make a qualitative determination as to
whether or not the plan as a whole meets the specified criteria
which were set out in the notice of funding availability.
We brought out, in one of the most unusual efforts,
approximately 100 Senior Executive Service officials from
around the Federal Government. These career officials worked on
the task force for about 3 months doing an analysis of these
plans that sometimes ran a couple hundred pages, an in-depth
qualitative analysis. And based on that, final, I guess, cuts,
you could say, were made of those that were better and worse,
and I think there was consensus among that group by the end of
the day that the right finalists had been in the selection
process.
Chairman Johnson of Connecticut. Well, I am interested that
you were thinking of bringing in some new people. But the
Inspector General's report, Office of Inspector General audit
report, says--and I quote--``The original documented design of
the EC-EZ task force review process called for a rating of each
application on a relative point scale, where points would be
awarded for specific criteria, such as the strategic plan, the
level of innovation, community partnerships, and need. Before
the application interview process began, CDB officials decided
that applications would not be numerically scored.''
Now, when you bring in senior executive core people, you
give them guidance, and I assume these were the factors they
were asked to consider. But how do you eliminate, in a sense,
the variability and subjectivity of these senior executive core
people who are useful? And that was an interesting approach.
But how do you avoid the possibility of favoritism and bias?
Mr. Glaser. Well, that is an interesting question. You have
what is, basically, a subjective determination about quality of
strategic plan. In fact, that is the major defined
characteristic in the statute: They shall be based on the
quality of strategic plan.
One executive's assigned number versus another executive's
assigned number, it is very difficult to know whether they were
looking at the same thing when they came up with their number
for that quality.
And I will dissent a little bit from the piece of the
report that you suggested. There was not a numerical--there may
have been some discussion like this: What is the best way to
make the judgment? But there was never a numerical scoring
plan.
The approach that they determined instead was to have the
executives reach consensus decisions, so that you forced the
discussion, ``Well, is this commitment of private sector
resources, is it real? Is it better than this other community's
approach?'' And we thought by putting them all in the room
together and forcing a consensus opinion that we could have a
result that was more justifiable than if you simply said,
``Okay, here's the points. Run down the point list.'' And,
therefore, it may look like you have less documentation
perhaps, but you might not get the right answers that way.
Chairman Johnson of Connecticut. So you are saying that
after you made the rough cut, then, as a group, the senior
executives reviewed the applications and held discussions of
that kind of point?
Mr. Glaser. That is correct.
Chairman Johnson of Connecticut. Thank you.
Mr. Coyne, do you have any further questions?
Mr. Coyne. No, I do not.
Chairman Johnson of Connecticut. I thank the panel very
much.
Next we will hear from the GAO. Mr. Czerwinski, associate
director of housing and community development at the GAO;
accompanied by Robert Robertson and Nancy Simmons.
Mr. Czerwinski.
STATEMENT OF STANLEY J. CZERWINSKI, ASSOCIATE DIRECTOR, HOUSING
AND COMMUNITY DEVELOPMENT, U.S. GENERAL ACCOUNTING OFFICE;
ACCOMPANIED BY: ROBERT E. ROBERTSON, ASSOCIATE DIRECTOR, RURAL
AND AGRICULTURE ISSUES, AND NANCY A. SIMMONS, ASSISTANT
DIRECTOR, COMMUNITY DEVELOPMENT ISSUES
Mr. Czerwinski. Madam Chairman and members of the
subcommittee, we are pleased to be here today to discuss the
Federal Empowerment Zone and Enterprise Community program.
As you requested, our statement is based primarily on our
December 1996 report, which focuses on the six empowerment
zones: Atlanta, Baltimore, Chicago, Detroit, New York, and
Philadelphia-Camden. However, beforethat statement, I would
like to note that to my right is Mr. Robertson, who is our associate
director for rural and agriculture development programs.
Mr. Watkins, as we agreed with the committee, we would
focus our statement today on the urban issues. However, Mr.
Robertson has done a similar analysis of rural issues, and we
are prepared in the questions and answers to discuss rural
issues fully with you. So we want to try to give equal
treatment to both urban and rural issues. This is something
that we negotiated with the committee staff to try to cover
both aspects of the program.
Mr. Watkins. Very good. Thank you.
Mr. Czerwinski. You are welcome, sir.
Today I would like to discuss three issues from our report:
The status of the program's implementation, factors that
participants believe either helped or hindered the program, and
the plans for evaluating the program.
In summary, we found that, first of all, the EZ's had in
fact developed strategic plans which, as required, included
details for implementing the program. They also drafted
benchmarks to measure the progress, and they had established
governance structures. The bottom line is that they had done
the things that they were required to do.
We then asked the officials what kinds of factors helped or
hindered them? I would categorize them as saying the glass is
half full and half empty.
For example, the kinds of things that the EZ officials told
us had helped them were community representation on governance
boards; enhanced communications among stakeholders; assistance
from HUD contractors, who are called generalists; and support
from the mayor, the White House, and Cabinet level officials.
On the other hand--and you will see that it is a very
similar type list, and that is why I say half empty, half
full--the kinds of things that hindered them were difficulty in
selecting an appropriate governance board, preexisting
relationships among the stakeholders, lack of administrative
funding, and pressure from the media and public and private
sectors for quick results.
So it is sort of a mixed signal that we got back from the
empowerment zone officials. And this probably makes the final
point especially crucial, and that is measuring what has been
accomplished.
Third, we found that the benchmarks that HUD had asked the
EZs to establish had been compiled. But there is a critical
issue here. These benchmarks describe activities that the EZs
planned to undertake. In most cases, they indicated how much
work they hoped to produce. These measures, in the typical
methodological terms, are called ``outputs.'' However, such
outputs may not fully measure outcomes, or what you truly want
to accomplish.
I would like to give you an example of that in Atlanta. We
just happened to pick them. I could have used any of the EZs.
They came first in the alphabet, so they got lucky for this
example.
Atlanta established a single facility called the one-stop
capital shop, whose objective was to obtain capital resources
and technical assistance for business. The performance measure
that they used to determine whether this was actually working
included the amount of loans and the number of consultations
provided. These are relatively good measures of the amount of
work produced.
However, we believe the performance measures would have
been more useful had Atlanta indicated how such outputs could
help them achieve the desired outcomes that they really wanted
to get for the community, i.e., economic opportunity, reducing
unemployment.
We concluded that HUD and the empowerment zones and
enterprise communities had made steady and commendable progress
toward establishing output-oriented measures, and we believe
they should build on these efforts.
Specifically, we think that HUD and the EZs should now
start to focus on describing the measurable outcomes for key
principles and then indicate how these outcomes can be achieved
in the work outputs that they produce. Unless they can measure
each EZ's progress towards these outcomes, HUD and the EZs will
have difficulty in determining the overall accomplishment of
programs and then identifying specific activities that each EZ
has accomplished that then should be adopted program-wide.
This concludes my statement, Madam Chairman. I will be
happy to answer any questions that you and members of the
subcommittee may have.
[The prepared statement follows:]
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Chairman Johnson of Connecticut. Thank you very much, Mr.
Czerwinski.
There does seem to me to be a legitimate tension between
describing outputs and focusing on outcomes. Do you think that
HUD is pressing communities to make the legitimate transition
or to focus their thinking on outcomes as well as outputs?
Mr. Czerwinski. First of all, I want to thank you for
asking that question. It is a very germane one. And I also want
to thank you for getting my name right. I can't tell you the
numbers of times I have come up and testified and people sort
of stumbled over my name.
Chairman Johnson of Connecticut. I am from New Britain,
Connecticut.
Mr. Czerwinski. Either that or Chicago, Milwaukee. Those
folks tend to get my name right; other places, not so well.
But to return to your question, if you think about getting
to outcomes, it is a very difficult concept. We admit it and
you are talking to some researchers, who tend to have a certain
view of things. But you are also talking to people who get to
the nuts and bolts of what really counts. And the example that
I would use would be the private sector one.
Let's say you head a company and want to measure how well
your company is doing. Are you going to look at the sales that
you have? Maybe you are selling below what it costs you to
produce. Or are you going to look at what your profits are? And
that is the difference between an output and outcome. You can
sell an awful lot of things and drive yourself right out of the
business because your outcome is not what you wanted. So I
think there is a legitimate aspect to that.
But putting ourselves in the shoes of the local
communities, these folks are not quite used to thinking this
way, and it is enough to get them just to measure their outputs
to start with, but it is time for them to start progressing to
get more outcome oriented. And I think that HUD is supportive
of this. It is just a matter of how quickly, and that is
something we can debate.
Chairman Johnson of Connecticut. I think it is very, very
important and it does represent a real challenge at the local
level. The question really isn't, how many loans did you make?
The question is, how many businesses survived? How many jobs
did they create? Were they in the enterprise zone? And did the
people employed come from the enterprise zone? And it would be
nice to know how many of those people were unemployed
beforehand, and so on and so forth.
So it is dangerous--and we know that from a long history of
failure of Federal programs--to look just at output. You can
always train people, and whether you train them for jobs or not
is hidden often by the data about training.
I think that the pressure you are putting on us all to look
at outcomes as opposed to outputs and help communitiesto
rethink those issues is very, very important, because I think our
failure to understand the difference between those two words is really
one of the big reasons why many Federal programs have, in fact, been
failures in spite of the nice-looking data and the nice-sounding names.
So I do appreciate that very much.
On two other issues, the half-full/half-empty issue of how
has this gone, what is your evaluation of the governance board
structure? Having had intermittent involvement with both cities
and urban areas--and I would ask you both, Mr. Czerwinski and
Mr. Robertson, to answer this question--is it your conclusion
that the planning process in and of itself is very productive?
And then is it your conclusion that, if that is so, does it
then follow that communities need to be able to set up
nonprofits or some other entity other than the local government
to implement this plan?
This is a big concern in my mind, because I can see why
there would be a desire to set up a separate entity, but, after
all, we elect local officials to govern locally. And there is a
real danger--and I have seen it in our neighborhood action
groups--to the quality of local government, to its
effectiveness, if it does not become the implementing agency
for community-based planning operations.
On both of those issues, I would like your comments.
Mr. Czerwinski. I think there are two questions that you
asked. The first one, planning, is something that is absolutely
essential. These things have to be planned out; there is just
no question about that. It really goes back to how you measure
your results, because if you don't plan and don't put in the
pipeline the mechanisms for gathering information, for setting
your goals, you won't know what you are going to achieve. So it
is something that just has to be done.
And this, again, if you think about the local government's
orientation, these folks are implementers, they are not
planners. They are not the strategists, to start with, they are
the ones that make things happen. So I am not speaking
critically of them.
So planning, obviously, coming from our perspective, we
would agree with 100 percent.
The other part about who actually does this, I am not
certain that we would take a firm position as to whether it
should be a nonprofit or a local-government-run entity that
essentially leads the zone. However, the key issue is having
the complete involvement of all stakeholders, the private folks
that are going to have to put the businesses in, the
nonprofits, the residents themselves, the local governments. I
think, among them, what you have to look at is who in each
individual community is best suited to lead that.
I think that is probably going to bias you somewhat towards
local governments, because that is their business. But there
may be instances where there is a very strong community group
that really does represent its interest. So I would urge a
little bit of flexibility there.
But the real principle is having sound involvement of all
the parties that are going to have to live with things.
Ms. Simmons. I agree with what Stan said. I would like to
say, in the first round, when communities were setting up
government structure, they had no models. This was a new
program. It was different from other programs that had been set
up. So there wasn't anything for the communities to look to.
And, in fact, some have gone through the local government and
have their government structure through the city government on
the urban side, and others have chosen to set up the
nonprofits.
We have been talking to HUD about this second round even
before it came about. And one thing I know they are hoping to
do is to have some models out there for the next round so that
the communities don't have to go through a struggle and can
choose to go through the city. The nonprofits are set up
differently and have different organizations advising them. But
I think flexibility is the key here.
Mr. Robertson. I would hate to disagree now! I would echo
the great deal of emphasis, the importance, that Stan and Nancy
have put on planning in terms of a factor influencing the
economic success of these communities.
As a matter of fact, Representative Watkins, as you were
speaking, I thought about some work that we did a couple of
years ago that, basically, tried to get a handle on what are
the factors that influence the success or failure of rural
communities. And the long and short of it was, there are an
awful lot of problems associated with economic development in
rural areas, and there are a lot of factors that are, frankly,
beyond the control of those local communities. But the one
factor that isn't, of course, is the leadership of that
community. The fact that this particular program emphasizes the
leadership factor, the community involvement, I think, is
important. It won't guarantee success, but it will certainly
push the odds in that direction.
Mr. Watkins. Madam Chair, I would appreciate a copy of
that. I am fully aware many of our young people cannot go back.
As I tell them, education locks you out of going back to rural,
depressed areas, because there are no jobs that you can do. I
have taken at home to provide--in some cases to try to provide
that kind of leadership, hopefully, the kind of vision and
motive to try to help them overcome some of the problems. And
you have successes and failures, but the biggest failure of all
is to do nothing, as I tell my communities, is the biggest
failure of all. So sometimes we have to work through a few of
those failures on the way.
But I would like a copy of that.
Mr. Robertson. We would be happy to talk to you about the
study.
Mr. Czerwinski. And it would be fun. We love to give out
our products.
Mr. Watkins. Does it include the rural area?
Mr. Czerwinski. It is all about rural areas. It is titled
``Rural Development.''
Mr. Coyne. This program was supposed to involve the wide
range of representatives from the local communities. I wonder
if you could give us some example of the types of
representatives that are involved in implementing programs in
communities throughout the country.
Mr. Czerwinski. Actually, I happen to have a listing from
Baltimore. I understand that Mayor Schmoke is going to be here
following us on the other panel. So he can also talk about the
kinds of those. But, for example, looking at the listing, for
Baltimore, there was the owner of a pharmacy, representatives
of the local residents, folks in the public housing
authorities, from the mayor's office, and also state officials.
Ms. Simmons. Sometimes there are State representatives.
Mr. Coyne. Would you repeat that?
Ms. Simmons. Sometimes there are representatives from the
State government. I don't know if they are specifically on the
board of directors of local governance. There are also church
leaders from the community. Some of them have residents. I know
in Atlanta they have a provision where they have
representatives from the neighborhoods who are affected. There
is representation from them, private sector, academia. Pretty
much anybody who is in the community is represented on these
boards.
Mr. Czerwinski. Baltimore's City Council is represented. I
think our examples are going through the alphabet, we picked
out Atlanta first and then Baltimore. If you want, we can
provide you with an exact listing.
Mr. Coyne. The EZs and ECs have been using social services
block grants for a couple of years now. I wonder if you could
cite some of the activities funded with the grants.
Mr. Czerwinski. Actually, a very wide range of activities
have been funded, from using these grants for administrative
purposes to operate the boards to other things like getting
involved in local programs.
One of the empowerment zones--I can't remember the city
right now--for example, used the seed money to leverage private
investment in a corporation. I believe that their leveraging
was quite high, so that block grant money actually brought in
five or six times the amount of private funding. Also the
typical purposes of something called social services block
grant--for social services, such as, to use Mr. Glaser's words,
treating tenants for health concerns, et cetera. So it is a
very wide range.
Mr. Coyne. Thank you.
Chairman Johnson of Connecticut. Just to follow up on Mr.
Coyne's question, since it is such an important one, do you see
any difference between those communities that have the social
services block grant available to them and those that don't? Is
it representing any drag on the program that the recently
passed law does not provide social service block grants?
Mr. Czerwinski. That question really gets back to how much
you can measure. And it is very early in the program to measure
what is actually being produced. However, one thing that I ask
you to look at is the package of goods that is being given out
for benefits.
The first is the tax bonds. Well, very, very few places
have offered the bonds, partially because of the State cap
issue. But, also, I think there are some issues about the bonds
themselves.
The second is the tax incentives. I believe the previous
panel before us testified that those haven't been that strong
of an inducement either. So what does that leave us? It leaves
us the grants. And the grants range tremendously from 3 million
in some areas to over 100 million in others.
Now, the needs may also range that greatly, too, so I am
not saying that there is an inequity here. By power of
elimination you can say if we eliminated bonds, having done
that much, we have been told that the incentives haven't done
as much, what does that leave us? Grants.
Chairman Johnson of Connecticut. And, Mr. Robertson, the
rural areas, the social services block grants, how important
are they?
Mr. Robertson. Well, I would just echo what Stan said
basically. It is a bit too early to see what we have bought
with the SSBG funds.
Chairman Johnson of Connecticut. Don't the macro figures
indicate that rural enterprise zones, or whatever category,
have used more of their grant money proportionately than the
urban zones have?
Mr. Robertson. That I would have to check for the record. I
don't know.
Ms. Simmons. I believe that is true, that they have drawn
down a higher proportion of their funds. But I guess we have
been reluctant to use that as any indicator that there is
progress, because what we have seen on the urban side is that
some of these cities that have drawn down lesser amounts have
focused on different things. I will give an example that they
have leveraged the money that they had to bring in private
sector investment, and we haven't really done a lot to look at
that.
Chairman Johnson of Connecticut. And, of course, the
planning process in the big cities is much slower and takes
much longer.
Ms. Simmons. Yes.
Chairman Johnson of Connecticut. That doesn't concern me at
all. In fact, it concerned me a little bit to see what
percentage of the funds the rural communities have already
drawn down.
And, Mr. Robertson, you really can't say anything about how
those can be used? Because my recollection is, and the staff
would have to help me here, but it is something like 42 million
out of a possible 60 million.
Mr. Robertson. I can tell you about what the progress has
been in terms of using those funds as well as other funds in
implementing some of the projects.
Chairman Johnson of Connecticut. What kinds of ways have
they used those funds in those areas?
Mr. Robertson. They have used those funds, as well as other
funds, for job training programs. They have used them for 911
service. They have used them for starting small business
incubators. They have used them for a variety of different
social and economic development projects.
Chairman Johnson of Connecticut. Okay. I am sure we will
get into that more. And I would like to also have a copy of
your rural report.
Mr. Robertson. Sure.
Mr. Czerwinski. We love to give them out if anybody else
wants them.
Chairman Johnson of Connecticut. Mr. Watkins.
Mr. Watkins. Thank you, Madam Chairman. And let me say
again I appreciate this input, and I would like to pick that up
later on from you.
I noticed on page 4 of the Community Development Federal
Department Zone Enterprise Community Program, there is acouple
of different areas you have declared, and you provided six communities.
The HUD Secretary has also designated six communities as Supplemental
Empowerment Zone and Enhanced Enterprise Communities.
Do you have any designation like that in the rural area?
Mr. Robertson. I am sorry. Could you repeat the question,
please?
Mr. Watkins. It says, in addition, the HUD Secretary also
designated six communities as Supplemental Empowerment Zones
and Enhanced Enterprise Communities. Like the other EZs and
ECs, these communities each receive grants through HUD's
Economic Development Initiative. The supplemental zones located
in L.A. and Cleveland receive EDI grants of $125 million and
$87 million respectively. The enhanced communities located in
Oakland, Boston, Kansas City and Houston each received EDI
grants of 22 million.
Mr. Robertson. The rural counterpart to that basically
would be the champion communities. And their--their benefits
basically are along the lines of getting preferential treatment
from other Federal agencies in their grant and loan programs.
Mr. Watkins. I have been on a couple, two or three meetings
on the discussion of champion communities. I think Ada,
Oklahoma may be a champion community, but I don't know what
their status is. Are you familiar with that?
Mr. Robertson. Not with that particular community, but we
can certainly talk with you about the concept of champion
communities.
Mr. Watkins. I sure want to get you more familiar with
Oklahoma. But Ada, I know they had an application in. And that
is also an area that is headquarters of the Chickasaw Nation,
and that rural area, that area south and east and to the--kind
of the southwest there, there is really a--I would like to
discuss that with you at a time that you could call me and give
me a little opportunity.
Mr. Robertson. We would be delighted.
Chairman Johnson of Connecticut. I noticed in dividing that
out, there is a breakdown of each urban EZ allocated at 100
million. Each rural area was allocated 40 million. That is out
of 140 EZs. I just wanted to kind of follow up on those dollars
and see where we are on those.
But let me ask, it is my understanding that under the Tax
Relief Act of 1997, the designation would be allowed of kind of
the dual incentives if an area is designated under 168(J),
which is the Indian reservation, in order to form any
territory; and also, number 2, the areas designated EZ or EC,
tax incentive area. Is that your understanding also?
Mr. Robertson. Stan, I am going to refer this question to
you. I am not familiar with it.
Mr. Czerwinski. The interpretation that we have is that
there would be 20 new EZs under this second round, and that the
split would be 15 urban, 5 rural.
Mr. Watkins. I understand that split. I am just talking
about the tax incentives themselves. You may not be familiar
how----
Mr. Czerwinski. We haven't evaluated the specifics of that
proposal, so I really couldn't get into the details of the tax
incentives. I am sorry.
Mr. Watkins. I was talking to Steve and Mac a while ago. If
our interpretation is correct, we will be able to have a dual
designation, which some would be helped a great deal in trying
to get out of that extreme poverty situation.
Ms. Simmons, are you, in your community development as an
assistant director, are you housed at HUD or under a----
Ms. Simmons. I am with the General Accounting Office, so we
are not part of them.
Mr. Watkins. So you have got a dual relationship, also.
Ms. Simmons. Well, I--we work for the legislative branch.
So we are only at HUD to do our audit work of specific
programs, like the EZ program.
Mr. Czerwinski. Mr. Watkins, I probably should have
explained up front, and I apologize for not setting up clearly.
I am responsible for the GAO's housing and community work.
Nancy is my assistant director for the community development
aspect of that. Bob is my counterpart for the rural development
work.
Mr. Watkins. Okay. I should have been probably
knowledgeable about that.
Mr. Czerwinski. No, it is me. It is my apology. I should
have explained that up front. So that is why I was really happy
that we spoke with one voice, because it would have been a long
cab ride back to GAO if we didn't.
Mr. Watkins. Let me say, I look forward to having the
opportunity to visit one on one and discuss some more of these.
And I appreciate the patience of the Chairman and also Mr.
Coyne for his patience allowing me to have this opportunity to
have this chance to interface and have a dialogue.
So thank you. I appreciate your commitment and dedication.
There has got to be a way we can turn some of these depressed
areas around. And I would like to say, Madam Chair, I am one
who has lost sleep also worrying about how do we save the
children in the inner cities. I do worry about that. So my
commitment is not just the rural areas. That is where I am. I
represent that. But I really worry--at least in the rural
areas, lots of times, we know people. I appreciate--in fact, I
grew up in the small community. When I graduated in that little
community, I worked for everyone in the area. When I graduated,
I got 59 pairs of socks, because everyone knew me, and I knew
everyone.
And I think it is sad enough, some of the small communities
that are in some of the urban inner cities, that the children
don't know--have no role models. And you wonder how do we save
them, how do we lift them out of the problems they have there.
So I have high hopes. And I hope and pray they work in the
urban inner cities. And I just know we can make some things
happen good out in the rural economic-depressed area. So thank
you, Madam Chairman.
Chairman Johnson of Connecticut. Thank you very much. And I
thank the panel.
I would like to call now the next panel, Kurt Schmoke of
Baltimore, the mayor of Baltimore; Paul Fraim, the mayor of
Norfolk; Dick Posthumus, the Senate Majority Leader of
Michigan; Joan Blaustein, the Special Projects Manager,
Department of City Planning of Pittsburgh; and Dan Gundersen,
the Director of Economic Development, city of Philadelphia
Empowerment Zone.
I welcome the panel and invite the mayor of Baltimore, the
Honorable Kurt Schmoke, to proceed. But first, I would like to
recognize my Ranking Member, Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairwoman. I just want to say
in welcoming the panel and Mayor Schmoke to the committee here
today that Congressman Cardin is unable to be with us today. He
wanted me to welcome you and to let you know that the testimony
that you are going to give isgoing to be of great interest to
this committee and help us in our deliberations. And I would like
unanimous consent to be able to submit a statement of Congressman
Cardin for the record.
Chairman Johnson of Connecticut. So ordered, Mr. Coyne, and
thank you.
[The information was not available at the time of
printing.]
Chairman Johnson of Connecticut. My apologies, Mr. Schmoke,
for mispronouncing your name the first time away. You may
proceed.
STATEMENT OF THE HONORABLE KURT SCHMOKE, MAYOR, CITY OF
BALTIMORE
Mr. Schmoke. Thank you very much, Madam Chair. If you can
do Czerwinski, you can do Schmoke.
I do appreciate this opportunity and Members of this
subcommittee to allow us to testify concerning the strategies
and accomplishments of the empowerment zone initiative in
Baltimore. I have submitted written testimony and, in the
interest of time, will just provide a summary of some of the
highlights of that testimony.
Before getting into that, though, in listening to some of
your earlier questions, I just wanted to ask you to keep in
mind two factors as it relates to Baltimore's empowerment zone
initiative. The first is that it has been a community-led--from
the time of the drafting of the proposal until today, our
empowerment zone initiative is led by a private, nonprofit
board, Empower Baltimore Management Corporation, which has a
30-member board of directors representing a diverse group from
our city, faith-based organizations, business community,
private, nonprofit groups, public housing residents, and many
others. And so we, from the very beginning, had a consensus
that this should be run not from city hall, but by a private
nonprofit organization, and that has continued until today.
The second factor is that I believe, and it has been the
consensus of our group, that the empowerment zone initiative
should be viewed as not the solution to urban America's
problems, but as a tool towards a solution. It is, in fact, a
very important tool that we have been using, and we believe
that steady progress has been made. And, clearly, of course,
having this initiative occur at a time of an improved national
economy has made a great deal of difference to the quality of
life in our city.
I want to bring you up to date on the progress of our
empowerment zone by focusing quickly on four components of our
empowerment zone strategy: business development, work force
development, improving the quality of life, and community
capacity building.
With respect to the business development, we have worked
hard on creating jobs, on financing businesses, and the
establishment of a Business Empowerment Center. To date, the
Empower Baltimore Management Corporation, the nonprofit
organization that runs our EZ strategy, has created more than
1,900 jobs through business startups, locations, and expansions
in the empowerment zone.
With respect to work force development, we recognize that
it is critical to have a pool of job-ready employees available
to take advantage of opportunities as they arise, so the
management corporation has designated over 3 million of
empowerment zone funds for customized job training,
occupational skills training, and literacy.
To date, about 159 positions for zone residents have been
created through the customized training agreements with
Baltimore area employers; that is, employers who don't--who are
not necessarily located in the zone, but who have turned to our
management corporation to customize a training program for
workers that they would like to have who happen to be residents
of the zone.
Many other zone residents have received job placements
through our Office of Employment Development. Over 800 of those
zone residents have received jobs that way.
With respect to the third part of our empowerment zone
strategy, improving the quality of life for residents and
businesses, we have worked on issues of enhancing community
policing, creating mobile police stations, investing in home
ownership, and curriculum changes in certain schools that are
located in the empowerment zone.
Through this work, among other things, we have seen a
substantial decrease in crime in the empowerment zone area,
almost 24 percent in the last 2 years. And, also, we have seen
an increase in home ownership through a Housing Venture Fund
that has been established.
The final part of our strategy is what we call community
capacity building, and that is enhancing the capacity of the
community to improve its own life. And there we have been
working on improving leadership skills and making sure that the
community is very involved in the implementation of this
program. We do that through what has been called village
centers. These are six community-based organizations, which
were established to identify and mobilize zone residents to
take advantage of the opportunities created by this initiative.
Village centers have worked very well and have helped us in
achieving these goals.
There are many other specifics that I can go into, but I
think, at this point, if there is any significant change that
we would like to see, it is really that we would like to be
able to improve the marketing of this program so that the
business community would understand that the empowerment zone
initiative is far more an investment tool for business rather
than another social program from the Federal Government.
Those businesses that have moved or expanded in the zone
understand the importance of the tools that they have been
given. We would simply like to do more in terms of marketing
this to other corporations.
Thank you very much, Madam Chair, and I look forward to
answering your questions.
[The prepared statement follows:]
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Chairman Johnson of Connecticut. Thank you very much. It
was very interesting
The Honorable Mr. Fraim.
STATEMENT OF THE HONORABLE PAUL D. FRAIM, MAYOR CITY OF
NORFOLK; ACCOMPANIED BY MASON ANDREWS, FORMER MAYOR, CITY OF
NORFOLK
Mr. Fraim. Madam Chairman, I thank you for the opportunity
to appear today to comment on Norfolk's experience as an
enterprise community. It is the only urban EC awarded in
Virginia, one of several ECs identified by HUD as a top
performer.
If I may, I would like to also, Madam Chair, introduce Dr.
Mason Andrews, who is with me today. He is the former mayor of
the city of Norfolk and truly the architect of our very
successful program.
Chairman Johnson of Connecticut. Thank you.
Mr. Fraim. And he is here to answer questions.
Chairman Johnson of Connecticut. We welcome him as well.
Mr. Fraim. And if I may make a comment that the enterprise
community strategy in Norfolk is also led by a private
nonprofit, much like Baltimore's. We have extensive community
involvement in this implementing agency. They range from city
officials to housing authority officials, heads of the business
departments of our two local universities, community groups,
representatives from the Urban League, from the NAACP. We have
residents, other representatives from our community college and
from higher education, community leaders, also business leaders
as well.
Norfolk is a midsized city unable to expand geographically
because we are bounded by water and fixed jurisdictional
boundaries. Norfolk is one of the Nation's older cities, which
means aging public schools and infrastructure and little
undeveloped plan to attract new business. We are, in fact, 96
percent developed. Additionally, nearly 50 percent of our land
is tax-exempt.
This is why the EZ/EC program is vital to Norfolk, to those
who live here, and in the surrounding communities in the
region, and to inner cities throughout the Nation.
Essentially, there are two aspects of the EZ/EC
designation. There are tax incentives and the original Social
Service Block Grant funds provided under title XX. In addition,
Federal EZ/EC designations trigger certain State tax benefits
and grants, which are beneficial.
It is Norfolk's view that SSBG funds and tax incentives
properly crafted and implemented are needed if we are to
revitalize the distressed areas in our Nation's cities. For
Norfolk, however, it is the SSBG, the grants funding, that has
really made the difference. This is the case, despite the fact
that ECs receive only $3 million to be used over the entire 10
year life span of the program.
The central focus of the Norfolk EC program is to enable
substantial numbers of EC residents who would not otherwise do
so achieve economic self-sufficiency, develop their potential
for upward mobility and contribute to the city's economy.
Working through existing neighborhood centers with the city's
organized business community and a number of existing training
organizations, this is happening. Motivation, basic job
readiness training, training in a variety of skills using
existing and new programs, job placement, and on-the-job
follow-up are all involved.
Our job placement rate is about 60 percent, with another 22
percent pursuing additional training or educational
opportunities. Nearly 500 individuals have been employed. The
retention rate is 75 percent. The word is spreading that a
better life is available, and demand for training exceeds
supply. The cost per person trained and employed is about
$2,800, substantially lower than most employment training
programs.
We have been very prudent in using our funds. We have
expended about 60 percent after 2 years in operation. We would
encourage attention to the need for renewal funding in the near
future, at least for communities that are meeting their
objectives.
Madam Chairman, I would ask that you consider rewarding
top-performing communities' priority status for new funding and
be upgraded to the EZ standard.
Our efforts have been devoted to providing a variety of job
training, mostly job readiness training, and placement. We have
been successful, but we need to do more with skills training so
that EC residents can compete for the better-paying jobs. Such
programs are more expensive to provide, but we believe they are
well worth the investment.
Regarding the other aspects of an EC/EZ designation, the
tax incentives, the only one available to ECs is expanded use
of tax-exempt private activity bonds. Other communities may
have a different experience but, for Norfolk, we have no
indication that this incentive has been of value attracting new
businesses to our EC. We are told that it is too restrictive
and complicated; for example, by requiring services provided to
be predominantly in the EZ/EC program--in the area. Perhaps,
too, this incentive is not well directed to attracting small
businesses.
I might offer an observation regarding tax incentives
intended to attract businesses to EZs and ECs. Incentives
should not be viewed as if all other things are equal.
Incentives to cause businesses to locate in ECs or EZs need to
be attractive enough to compete not merely with other areas of
the same city with the same property tax rate, but with
locations outside the city where the cost of doing business may
be lower or appears so to corporate relocators.
Tax incentives to businesses to hire EZ/EC residents are
another matter and should be of significant benefit. However,
ECs do not receive the employer wage credit available to EZs.
Conceptually, the Work Opportunities Tax Credit should provide
similar advantages, but in practice, it is not used
extensively. The employers tell us it is burdensome and overly
bureaucratic. We understand some changes have been made.
Hopefully these will make the WOTC attractive. If not,
additional changes should be considered.
Again, thank you very much for the opportunity to share my
thoughts with you today. As I have already indicated, it is our
view that SSBG funding and tax incentives are needed. Thank you
very much.
[The prepared statement follows:]
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Chairman Johnson of Connecticut. Thank you very much,
Mayor.
And now the Honorable Dick Posthumus, Senate Majority
Leader in the State of Michigan.
STATEMENT OF THE HONORABLE DICK POSTHUMUS, MAJORITY LEADER AND
STATE SENATOR, STATE OF MICHIGAN
Mr. Posthumus. Thank you, Madam Chair. I would like to
thank you for the opportunity to come here today and talk to
you a little bit about what we have been doing in Michigan to
bring new life to some of our blighted areas.
Working together, the Michigan Legislature and our
Governor, John Engler, has taken on a problem that has, really,
leaders throughout the country kind of wringing their hands in
frustration.
Michigan, like most other States, have blighted areas, most
of which are in urban areas, but many of which are in our rural
areas as well. They come in all sizes. They come in all shapes.
And they characteristically are represented by residences that
are decaying to the point to where many of those that are
living there are losing hope or already lost hope. Some have
abandoned their homes and leaving them in the hands of greedy
slumlords or the hands of the runaway drug culture. Many of the
businesses there have already closed down because they couldn't
make it economically, and those that have stayed are barely,
barely hanging on.
The solution that we developed to begin to reverse this
decay is one that we think is so simple that, for many people,
it is hard for them to understand. We have taken the idea that
we believe has transformed Michigan from being the broken
buckle of the Rust Belt, as our Governor has described it, to
changing it to the turbo- charged engine performing the high-
performance heartland economics that we need.
And it is based on the belief that high taxes are negative,
that high taxes hinder communities and their growth, that
government programs make people dependent, not independent. And
is it any wonder, then, that in our decaying areas, where we
have the highest tax rates, where we have the biggest
government programs, that we continue to see blighted problems?
So what we have done in Michigan is told the residences and
the businesses in those areas, just keep your taxes, keep your
State taxes, keep your local taxes that you would normally pay
over the next 15 years. That is right. Boiled down in its
simplest form, we are saying that people in renaissance zones
are not going to pay any State or local taxes. It is based on
the belief that when government lets loose of the reins that
affect investment and production, there will be a change, there
will be a rebirth, there will be a renaissance.
I might point out at this time, there is some difference
between what we are doing in our renaissance zones and what the
Federal Government has done with empowerment zones. In essence,
with the empowerment zones, the Federal Government takes
taxpayer money and redistributes it. What we have decided to
do, instead, is let people keep their own money; let them spend
it on their families, on their homes, on their businesses. I
believe that is government at its best. It is government that
gives individuals and businesses much more room to expand and
to grow.
Our renaissance zones, I believe, serve as a redevelopment
model for States all around the country. It is fairly simple.
It is easy to duplicate. And very honestly, it works. And we
have only had them now less than a year, and I, I think, left
you a format that explains where our zones are, how they
operate, some of the businesses that have already announced
their redevelopment efforts.
Very simply, what we are saying is, to all the homeowners
and businesses, not just the new ones that are moving in, but
to all of them that are in that specific identified area, that
they would be able to waive their State and local property
taxes, almost all of them, and there are seven of them in
particular; that is, Michigan single business tax, which is our
form of the business tax. It is a value-added tax. It includes
Michigan personal income tax. It includes Michigan's 6-mill
property tax for education. It includes the local personal
property tax, the local real property tax, the local income
tax, and, in the case of Detroit, also the utility users tax.
Someone might say, well, what is the catch? There really is
no catch. What you see is what you get.
And I might point out just a couple of the specific
examples of how it has worked in two of our cities, Grand
Rapids and Detroit. The first example is in Detroit where SBF
Automotive, Incorporated, which is located or was located in a
suburb west of Detroit and is a supplier to the auto industry
had decided that it needed to expand. When it did so, based on
the Renaissance zone in Detroit, it decided to move its
facilities into the city of Detroit. In fact, most of the
people that were working there came from the city, and they
were having to bus them out. Now they are not going to have to
do that and, in the process, are helping to rebuild the city
itself.
On the other side of the State, in west Michigan where I
come from, in Grand Rapids, we had a business called P.B. Gast
& Sons. It was located right in the heart of the city, a very
rundown area, and they were faced with a dilemma. It was a 100-
year-old company that was expanding. They were looking, very
honestly, again, to expand to the suburbs, but with our
renaissance zones, they decided that they now could do it right
in the city. And about 3 weeks ago, I was there for the ground-
breaking of a 30,000-square-foot addition right in the middle
of the city of Grand Rapids.
If you take up just in the about 11 months now that we have
been operating, or 10 months we have been operating this
program, already, just in the private sector, we have had
announcement of investors of $290 million of new funding, new
companies, new business and expansions that mean about 3,000
new jobs in our most blighted areas.
We are, in my view, creating a process which is based on
the idea that, in order to rebuild a community, they need good
housing stock, they need good businesses that are doing well in
the industrial sector, as well as profitable retailers. And by
reducing the cost of living and working in these areas, we are
rebuilding these communities for tomorrow.
I appreciate the chance to share that with you, and I will
be glad to answer any of your questions.
[The prepared statement follows:]
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Chairman Johnson of Connecticut. Thank you very much. I
appreciate your testimony. And we will get back to questions.
Ms. Blaustein.
STATEMENT OF JOAN S. BLAUSTEIN, MANAGER, SPECIAL PROJECTS,
DEPARTMENT OF CITY PLANNING, CITY OF PITTSBURGH; ACCOMPANIED BY
BEVERLY CAROL GILLOT, PITTSBURGH/ALLEGHENY ENTERPRISE COMMUNITY
COORDINATOR
Ms. Blaustein. Thank you. I would like to thank you, Madam
Chairwoman, for the opportunity to talk to you today. In
particular, I want to thank your distinguished colleague
Representative Bill Coyne for his ongoing support of our
program, as well as Congressman Mike Doyle, who has been
instrumental in forming and maintaining this partnership.
Although their districts aren't in the enterprise community, I
want to thank Congressmen Frank Mascara and Ron Klink for their
support of our efforts.
The Pittsburgh/Allegheny Enterprise Community won
designation in December of 1994 and was awarded just about $3
million in Social Services Block Grant funds.
Our enterprise community is made up of six municipalities,
the cities of Pittsburgh, Duquesne, McKeesport, the boroughs of
Homestead, West Homestead, Rankin, and Allegheny County.
Over the past 3 years, this partnership has made tremendous
strides in implementing the objectives set forth in the
Strategic Vision for Change. In that plan, we identified four
major strategies for realizing this vision: First, to create a
new neighborhood housing model that includes the elimination of
concentrated public housing developments and the creation of a
broad range of housing choices; establish a community-owned
preventative service system that includes family support
centers, after-school safe places, community centers, and
community college center of opportunity; to create a state-of-
the-art community policing program; and to create employment
and investment opportunity through capital formation and the
development of brownfields.
One of the most critical accomplishments of this program
has been the formation of the 26-member Governance Committee.
This committee is unique compared to others in the country in
that it is made up of more citizens than elected officials. The
Governance Committee task forces are organized by functional
areas rather than geographic areas.
The areas that make up the Pittsburgh/Allegheny Enterprise
Community are generally more distressed than the surrounding
area. Family incomes in the EC range from 18 to 42 percent
below the county averages. The poverty rate overall in
Allegheny County is 11 percent, but the poverty rates in the EC
communities range as high as 42 percent. Housing values and
rent levels are lower in these communities. The elderly
population is proportionally higher there.
Pittsburgh grew as a central city that was the focal point
for commerce, trade, and manufacturing and services for the
region. Historically the area has been very dependent on large
companies and heavy manufacturing industries. These industries
were fueled by the availability of raw materials and the inland
waterways that provide inexpensive and ready transportation.
But in the past several decades, Pittsburgh's economic base
has shifted dramatically. With the well-documented decline in
the region's integrated steel industry, Pittsburgh's economy
has moved from manufacturing-oriented to service-oriented. This
economic restructuring has been very painful. The basic steel
industry lost 66,000 jobs, while other manufacturing industries
lost about 81,000 jobs between 1979 and 1996. Many of these
jobs are located in the enterprise community areas.
Manufacturing now represents only 12 percent of the employment
base, down from 30 percent in 1970. While manufacturing is
still important, it is not the driving force behind the local
economy any longer.
Politically, our area is extremely fragmented. This
situation has made previous redevelopment efforts difficult, if
not impossible. Allegheny County is the most fragmented county
in the United States, with 130 municipalities, 116 police
departments, 58 public service dispatching points, 100
comprehensive land use plans, and 43 school districts. With
more than 40 economic development groups in the region, there
are multiple goals and fragmented efforts.
Our region is in transition stage now, though. Many
initiatives under way in the area reflect a mix of attention to
the economy, the environment, education, quality of life, and
local communities. An area like ours that has had to confront
so many challenges has to avail itself of Federal intervention
that allows opportunities to leverage other funds and harness
local energies. The Empowerment Zone/Enterprise Community
Program has given us those opportunities.
The partnership that was created through the designation of
the Pittsburgh/Allegheny EC, which is unprecedented both in our
region and in the EZ/EC Program, has brought together areas
whose common thread is not political boundaries or geographic
location, but the desire to overcome obstacles of unemployment,
family distress, and disinvestment.
The designation as an EC has been the catalyst for
institutional reform, reinvestment, and a minute hope for the
future by stengthening our communities from the family up.
The $3 million in Social Services Block Grant funds has
been able to leverage over $182 million in private and other
public funds. These funds have been used for the demolition of
over 1,500 existing public housing units to make way for new
neighborhood housing models that include mixed income, mixed
tenure, racially integrated developments with both rental units
and home-owned households.
The expansion of the McKeesport Family Support Center that
will serve as an incubator for the provision of human services
to that community could be a national model for human services
reform.
The creation of a multijurisdictional weed and seed zone
has resulted in the reduction of crime and the addition of 17
new police officers. We have created a serious offenders
program that will serve 120 habitual juvenile offenders over 3
years. The creation of a pool of $60 million in flexible public
capital for economic development in the Pittsburgh portion of
the EC.
We have created an economic and industrial development
corporation to purchase real estate for development in the
Pittsburgh area, too. Seven projects have begun, which will
lead to the retention of 789 jobs and the creation of 384 new
jobs. These projects have leveraged over $122 million in
private investments.
There has been the development of a 210-boat slip marina in
an old industrial mole site in the McKeesport section of the
EC, and the creation of 17 equipped Internet access sites for
low-income communities. Three hundred individuals havebeen
trained to date.
These accomplishments detail some of the successes in the
Pittsburgh EC during the first 3 years of this 10-year
designation. The continued success of the partnership will
ultimately be measured by whether there will be substantially
more employed residents, by whether there are substantially
more investments in land, building, and businesses, and most
importantly whether the economic characteristics of the areas
in the EC become closer to that of the rest of the region
through increases in household income, home ownership, business
investment, and the amount and accessibility of capital.
The next hurdle our community faces is the challenge of
demonstrating the value and market advantages as former
industrial sites. Over 1,500 acres in the city of Pittsburgh
and the municipalities are in various stages of cleanup, reuse,
nonuse, and development.
As the Pittsburgh/Allegheny region was once the heart of
this country's industrial production, now it is the locus of
one of the greatest concentrations of former industrial sites
with the potential for economic reuse anywhere in our country.
Our riverfront land, ripe for redevelopment, represents one of
our region's greatest assets.
The enterprise community now has the dual challenge of
dealing with all the issues of site reuse and dealing with the
legacy of multiple jurisdictions that have historically had
difficulty collaborating around almost any issue. The EC
provides the structure that will serve as the platform to begin
that collaboration, allow for knowledge transfer leading to
site development and economic revitalization, and bring the
stakeholders to the table with the goal of embracing the
advantages of a regional approach to development.
The skills and tools we need to attack the technical
aspects of brownfield redevelopment are readily accessible in
our EC, but the adaptive aspect of the problem is a greater
hurdle and can be approached on the enterprise community
platform given the proper guidance and support.
I want to thank this committee for the opportunity to speak
about our Pittsburgh/Allegheny Enterprise Community. And I look
forward to our continued participation and your continued
support of the Empowerment Zone/Enterprise Community Program.
Thank you.
[The prepared statement follows:]
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Chairman Johnson of Connecticut. Thank you. Thank you very
much. Very interesting.
Ms.--is it Gillot?
Ms. Gillot. Yes. I am just here to answer any questions you
may have.
Chairman Johnson of Connecticut. Thank you.
Mr. Gundersen.
STATEMENT OF DANIEL C. GUNDERSEN, DIRECTOR OF ECONOMIC
DEVELOPMENT, CITY OF PHILADELPHIA EMPOWERMENT ZONE
Mr. Gundersen. Congresswoman Johnson, Members of the
Oversight Committee, thank you for this opportunity to comment
regarding conditions existing within the Philadelphia
Empowerment Zone and impacts that the program has had within
the city of Philadelphia.
In late 1994, about 2\1/2\ square miles of Philadelphia and
a portion of Camden, New Jersey, were selected as one of only
six urban zones in the country, the smallest of the zones.
These neighborhoods were chosen precisely because of their
pervasive poverty, unemployment, and distress. Here are some
statistics available at about the time of designation as an
empowerment zone. Of the 39,000 residents in the Philadelphia
zone, 49 percent live below the poverty line, and at least one
in four adults are unemployed. The largest private employer in
the Philadelphia zone has a work force of less than 140. The
two largest employers are both not-for-profit inner-city
hospitals. Over two-thirds of the employment base is with
retail, religious, human, or social organizations. In most
every corner of the Philadelphia zone, there has been no new
construction in over 30 years. In fact, most of the zone is in
an area of the city that has lost 100,000 jobs over the last 25
years.
Things are changing. We are witnessing an unprecedented
degree of public/private collaboration. Zone funds have
leveraged local, State, and additional Federal dollars and a
small army of help from the grass roots to Washington, D.C.
I am pleased to report that the Federal Government has
delivered on its promises to deliver support. A representative
from the Regional Secretary's Office of the U.S. Department of
Housing and Urban Development meets with senior-level zone
staff several times each month. This hands-on approach is
apparent at the highest levels, too, from the Community
Empowerment Board, chaired by Vice President Gore, and its
member agencies in the Cabinet. For example, representatives of
the General Services Administration, as I speak to you today,
are conducting a workshop for Philadelphia zone businesses
wanting to compete for Federal contracts.
All of our combined efforts are beginning to bear fruit.
Today there are several indicators of early success and signs
that fundamental economic change is under way. Approximately 50
new businesses have been attracted to this Federal urban zone,
and several existing businesses have expanded operations. They
join the approximately 800 now operating in the Philadelphia
zone.
There has been over $32 million in public and private
lending in the Philadelphia zone since designation, resulting
in a commitment from businesses to hire 1,000 new employees
over the next 3 years. The zone has tracked an additional 3
dozen new companies to the zone that received no public
financing.
Once-vacant buildings throughout the zone are being sold
and put back into productive use. New construction is finally
taking place; a large supermarket, a sports arena, pharmacy, a
new office complex, an infrastructure to establish an
industrial park. The total financing for business-related
projects has been calculated at over $32 million since
designation. Seventy percent of this has occurred in the first
9 months of this year, an explosion of activity for such a
small section of the city.
These economic indicators are affected by the empowerment
zone investments being made at the community level. Hundreds of
residents participate in a democratic process for deciding how
best to solve the problems of their neighborhoods. Contracts
totaling over $33.8 million have been awarded to service
providers to execute community-based benchmark projects. They
include establishment of three community lending institutions
and 21 community development projects, five relating to family
and children's issues, two to support housing issues, five to
support a healthy community, six toenhance community safety,
and three to support arts, culture and recreation.
Despite this progress, serious economic development
challenges remain. This summer we conducted a survey of 793 EZ
businesses in Philadelphia. Fifty-four responded. We found that
16 percent utilized the EZ wage tax credit. Sixty-three percent
reported having EZ residents employed, and of these businesses,
26 utilized the credit. Greater than 60 percent of all
respondents have future hiring plans.
This suggests that while the credit can be of value, some
businesses may not understand or have the accounting controls
to utilize the credit, or do not have or show a Federal tax
liability and cannot utilize the credit. In the Philadelphia
zone where most businesses are very small and likely not very
profitable, this suggests the need for more technical
assistance to help businesses grow to the point where the
credits can be utilized.
Businesses are finding it difficult to locate suitable
space in the zone. The Philadelphia zone is only 2.5 square
miles. There are only so many good prospects. We need to find
ways to renovate older structures more cost-effectively, we
need to spur new development, and we need to compete with
suburban areas for construction of state-of-the-art buildings.
And we need to make it easier for parcels of land to be
assembled for business purposes.
A big challenge is providing full-scale technical
assistance for entrepreneurs in the preventure stages, early
start-up businesses and struggling enterprises.
To conclude, while significant challenges remain, there is
evidence to suggest that the Philadelphia Empowerment Zone is
experiencing a critical shift in the neighborhood economy. New
businesses are forming. Aggressive real estate transactions are
taking place. And there is solid and active interest from
prospective businesses.
In one of the zones we can envision high technology
companies finding a home; in another, retail and entertainment
venues are blossoming; and in the third area, distribution and
light manufacturing is making a comeback.
It is too early to claim unqualified success. Our momentum,
however, indicates that the zone benefits are being multiplied.
Mayor Rendell commends the administration and Congress for
recognizing the positive influences that the Empowerment Zone
Program has had in communities around the country by expanding
the program under the Taxpayer Relief Act of 1997. Moreover,
Mayor Rendell applauds the Federal Government for its
willingness and follow-through in making continuous
improvements that strengthen the program.
Thank you for this opportunity to submit testimony on the
performance of the Philadelphia Empowerment Zone before this
Subcommittee on Oversight of the House Ways and Means
Committee. Thank you.
[The prepared statement follows:]
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Chairman Johnson of Connecticut. Thank you. I appreciate
the testimony of the panel. It has been very helpful, and I
would also say very impressive.
Ms. Blaustein, it was very useful to hear your experience
in applying this concept regionally. In so many parts of the
country, regional cooperation has been difficult to achieve,
but is essential to solving the problems of the major cities.
That was extremely helpful to me.
It has also been impressive--would you all agree, a number
of you mentioned, that there hasn't been that much loaning;
that the tax incentives, with the exception of you, Mr.
Gundersen, the tax incentives don't seem to be that powerful,
the grants seem to be very powerful, and you'd like it if the
wage subsidies were better.
Mr. Schmoke. That is a good summary.
Chairman Johnson of Connecticut. Why are the wage subsidies
not working? I know some of you are in enterprise zones or
enterprise communities. At least under the new law they won't
have access to as much wage subsidy. I think I am recollecting
that properly. But the Work Opportunities Tax Credit was
supposed to be also a complementary proposal. I don't hear much
enthusiasm for either of the wage subsidy provisions.
Mr. Fraim. Madam Chairman, we think that the tax credits
are an excellent idea. It has been in the application that we
seem to have had some problems, that paperwork seems to be
cumbersome. There is not a good understanding among the local
business community of what is being asked of them. The short-
term application of some of these credits, the year-to-year
types of things, don't really place a lot of confidence in the
program, to be honest with you.
It might be well--we can produce several businessmen from
the city, small and large companies, who might be able to
provide some information that would help streamline the
application process so it can be of greater benefit.
But we do find that the grants are a great help to us. They
are very flexible, allow us to do more than just move people
from welfare to work, but also the unemployed, the
underemployed, it is helping in a lot of ways.
Chairman Johnson of Connecticut. Mr. Gundersen, you mention
the need for more technical assistance in part to help
businesses understand the tax credits and what they can do. You
know, would you say that the majority of the 32 million in
investment that you have leveraged, was a lot of that as a
result of the tax benefits available?
Mr. Gundersen. I think a portion of that--of those
businesses--may be taking advantage of the tax credits. I don't
know the exact number. The 32 million that I reference refers
to public and private lending within the zone. What we have
noticed is that in this year alone we have seen 33transactions,
and that is up from 5 of last year. I think that is a pent-up demand
for the capital, and particularly the coming on-line of our community-
based lending institutions that are controlled by the community, which
is to say they have representatives on their board from the community,
and they are making the loans that the banks had not made in the past.
I should mention that community lending institutions were
capitalized with the title 20 funds.
Chairman Johnson of Connecticut. Well, that is interesting
with the title 20 funds.
So the bonding mechanism hasn't been very useful to you,
but you have been able to meet the loan needs through using the
Community Service Block Grant dollars that way?
Mr. Gundersen. That is right. Of the $79 million that
Philadelphia received, about $24 million has been directed to
the establishment of three separate lending institutions, one
for each of the three distinct areas within the empowerment
zone. They are set up as 501(c)(3) nonprofit organizations with
their own board and with their own loan committee. And each of
those does have community-based representation.
They are making loans at a very small level, microloans,
from $500 to $1,500. They are making small business loans up to
$500,000 that many of the commercial lenders may have been
reluctant to make. And they also have the capacity to become
equity partners in business deals if we have a business--that
might be interested in pursuing that.
Chairman Johnson of Connecticut. That is very interesting
and very helpful.
Senator Posthumus, what is happening to the local tax
revenues as a consequence of the State government relieving
people of local property taxes?
Mr. Posthumus. What we have done is, when we created the
act, which was a legislated act, we said we were only going to
create 11 zones. We have got six urban zones, three rural and
two enclosed military installations.
We gave communities the option--no community has to be part
of a renaissance zone. Every community in this State was given
the option of applying to be part of the renaissance zone so
that there would be a partnership between the State and local
government. And there are--I think there were 21 communities
that applied, of which we got 11. And they had a very short
time period because we wanted to put it in place very quickly.
When they did that, they knew that, in the short term in
the zone, and they got to pick the zone. Each community picked
the zone. The State didn't pick it. The community picked it and
recommended it. They knew that in that zone they would forgo
all taxes, local taxes, and the State would forgo all State
taxes. And that is part of the agreement in order to rebuild
the community.
We just felt that--one of the problems you heard earlier,
that tax credits were difficult and weren't having as much of
an impact, the problem is for an employer or job provider, the
cost for locating or expanding in a blighted urban area is
significantly higher, and so we felt we had to do something
very bold in order to reduce that cost. And that is why we
said, we are going to do away with all of your taxes for the
next 15 years or up to 15 years. And we are finding a much
quicker response to that, as I said, in just in the last 10
months.
I visited an old foundry that had been closed down for 10
years in Grand Rapids. Nobody was doing anything with it. As
soon as the renaissance zone came about, developers went in
there, took the old foundry and are recreating it into a
building that will be partially for offices, partly for small
business start-ups.
So I think it is critical, if we are going to do something
to blighted areas, we have to create some new ideas. I think
the empowerment zones are working, but I think we need to even
go beyond that.
Chairman Johnson of Connecticut. I think your idea is a
very exciting one and a very dramatic one. The goal is to
reduce the cost of doing business to encourage people to come
in and create businesses and create jobs.
Mr. Posthumus. And homeowners as well. Remember, this is
also for the residents as well as the business. This is for
everybody in the zone.
Chairman Johnson of Connecticut. That is right. Nobody pays
any taxes, the people who live there and the people who do
business there. It is really quite a dramatic concept. And it
is interesting that you have gotten so much activity in such a
short time. But just to make it clear, not all of Grand Rapids
and not all of Detroit are in these renaissance areas. They
choose a smaller area. Do you limit the amount they can choose?
Mr. Posthumus. We said that they can take up to 5,000
acres. And initially, the idea was to create one zone in every
community. The cities came back to us and said, wait a minute,
we think that just by putting it all in one area, we are going
to create some problems, because within those areas, we have
some that are doing pretty well. Why should we be helping those
areas that are doing fairly well?
So we gave them the ability to divide it up into areas that
there is still--I think they can't be any smaller than 1/250th
of the city's geographical area. But the city of Detroit, for
example, will have--has five separate zones equaling about
1,300 acres. I think Lansing has two separate zones. So it is
each up to--each community can then kind of make it fit their
needs.
Chairman Johnson of Connecticut. Is there any resentment by
other homeowners in these cities of the people who are
homeowners in the zones and don't have to pay any taxes, and,
likewise, the business down the street who was carved out?
Mr. Posthumus. Certainly there is some of that, no
question. And somebody is going to say, why do they get the
break, and we don't? But, in fact, we believe that it is a risk
worth taking in order to redevelop our blighted areas. You have
got even some are arguing, if they are not even in a city that
has a zone, why should the business that is located in this
blighted area get the break?
But, in effect, they have had to pay a larger cost for
locating there. P.B. Gast & Company in Grand Rapids has had to
pay a higher cost for staying in the city of Grand Rapids than
a company that was willing or went out to the suburbs and
located in the greenbelt. So all those factors are--we just
took them into account and said it is worth it to redevelop
those blighted areas of the State.
Chairman Johnson of Connecticut. That is very interesting.
Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairwoman.
Ms. Blaustein, what are the biggest obstacles that you run
into relative to redeveloping brownfields, and what do you
think the Federal Government could do to make it easier to
overcome those obstacles?
Ms. Blaustein. It varies from area to area. There are
certainly a large number of variables in each case. Some sites
have no cleanup at all yet, and they need help from the ground
up. And other areas are well on their way to being cleaned up,
but need help in marketing these areas and finding businesses
that are interested in developing there.
There is a lot of education that has to happen, both in
marketing these sites and in bringing the community members
together to understand what the value of these sites are.
Certainly, we have had some help in the city of Pittsburgh
from the Federal Government in terms of EPA funds to redevelop
some of our sites. The Mon (Monon GAHELA) Valley sites are far
behind. They have no paid staff people to manage this
redevelopment. They need capacity from every level in order to
market these sites, clean them up, and find developers.
But we are competing against each other. And there needs to
be a concerted effort that is now under way to market these
sites and clean them up jointly. We have learned things in the
city of Pittsburgh that can be of use to the Mon Valley
communities in terms of dealing with some of the contaminants
there.
If we could share our resources of knowledge and market
these regionally, rather than individually, we have a much
greater potential of competing with the suburban sites that are
green and ready to go and that attract a lot of businesses more
quickly. But we need to educate ourselves and the public at
large and the business community about what the advantages are.
Mr. Coyne. I assume from reading your testimony that the
benchmarks that you are using to measure the progress on the
enterprise zone project are employment, investment, household
income, home ownership, and access to capital; is that correct?
Ms. Blaustein. Uh-huh.
Mr. Coyne. Have you compared your progress to the
benchmarks as of yet?
Ms. Blaustein. Yes, we have. We have finished a performance
review in July that measured our performance based on what we
had set out to do. We have made a tremendous amount of
accomplishment in terms of housing. That was our biggest
commitment.
We have begun the change from concentrated public housing
to rebuilding those sites and bringing in not just subsidized
housing, but a range of rental and home ownership. We had an
opportunity to show the Manchester area off to HUD when they
were here about a month ago to see how these homes had been
redeveloped and the increased pride of those communities in
having real homes with real quality as their basis.
The other area that a tremendous amount of effort has gone
into but was a very great challenge was the development of
family support centers. We are now under way with developing
the first one that will bring together agencies that had been
scattered throughout the area of McKeesport into one central
location. People can come there and find all the services they
need under one roof, as well as with Internet access connecting
to those other service agencies that may not be located right
in that location. That took a long time to get under way, but
now they have started. And our next set of reviews will show
what accomplishments that has made and will be a model we can
use in other areas of the city as well.
Ms. Gillot. If I can jump in here, one of the things that
is not reflected in the performance review that I think should
be, especially in our area, is the amount of effort and time it
takes for the process, for the capacity-building process, and
that is not reflected in an evaluation. You know, and because
of the fragmentation in our enterprise community and the
turnover in the county government after 60 years, there was a
major turnover right in the middle of our first 3 years of
designation, we had to bring all kinds of players up to speed,
and that process, and that catharsis, is so important, and it
is not reflected anywhere in the performance review.
We have talked to HUD about this. We are hoping that that
is at least incorporated if not in this current designation, in
the second round. But that partnership is what is going to
expand into other opportunities, like the brownfields and other
opportunities that we have seen in our area, and we need to
evaluate that, and that is not reflected. But that is one of
our main accomplishments, also, is the partnership that has
been formed among these municipalities that may have--that have
never worked together before.
Mr. Coyne. The Family Support Services Program, that was
initiated by the prior administration at the county level?
Ms. Blaustein. Uh-huh.
Mr. Coyne. And at that time, were any of those facilities
in the city?
Ms. Blaustein. No. None existed the way they do now, no.
Mr. Coyne. But now we will be able to have those in the
city with this----
Ms. Blaustein. Yes.
Mr. Coyne. Very good.
What is the biggest obstacles that you run into in
implementing the enterprise program?
Ms. Blaustein. I think, as Beverly said, it was getting
everybody at one table. There has been a lot of distrust from
one area to the other, and to deal with this many
municipalities who had preconceived notions about what their
role was going to be and how they would work with each other
and with the city, it took a long time to develop a level of
trust that we have finally developed.
I mean, there are people talking to each other who may have
only lived 10 miles apart but have never spoken about these
common interests before. We do share a lot of common problems.
And we have to work on them together, because there is no way
that any of these municipalities can deal with them
individually. We simply don't have the resources to do it. The
only way to be successful is to do it jointly.
Mr. Coyne. Thank you very much.
Chairman Johnson of Connecticut. I am pleased to welcome
Congressman Cardin. And thank you. It is nice that you have
been able to join us.
Mr. Cardin. Well, Chairman Johnson, I really want to first
applaud you for holding these hearings. This has been very
helpful to us to see not only how the Federal empowerment zone
legislation is operating, but also to see what other local
governments are doing in an effort to encourage economic
development in difficult areas.
And I want to thank Mr. Coyne for welcoming my mayor here
at the beginning of this panel.
Kurt, I am sorry I was not here to hear your testimony, but
I have read it, and I certainly concur in your comments.
Let me just make, if I might, just one quick observation;
and that is, I think this program in Baltimore has worked
better than Congress had anticipated.
I was present with Mayor Schmoke at community meetings in
the planning stages. And to see that, how local communities
have organized to have a meaningful role in their community and
using the empowerment zone legislation, has been very, very
encouraging. And in Baltimore we have not only used the local
community, we have also energized our private sector under the
umbrella of the Federal program to accomplish the goals I think
all of us had hoped would be done under the empowerment zone
legislation.
Mr. Mayor, I have read your testimony. I concur in it. But
I just really want to underscore the point about improving the
quality of life, because I have seen the communities come back
to life and crime rates drop. That is very noticeable to the
people who live in those communities. I have seen home
ownership grow one building at a time. As we increase home
ownership in these areas, we also improve the public schools.
So I just really want to applaud you in the effort you have
made in Baltimore using this program. I think it has been a
model program. And congratulations. Anything we can do to help,
please let us know.
Mr. Schmoke. Thank you, Congressman.
I forgot to mention with me is Diane Bell, who is the
president of the Empower Baltimore Management Corporation, the
nonprofit that operates our empowerment zone, and it has been
her leadership in working with the various elements of the
community that has allowed us to move forward. And I did want
to acknowledge her. And thank you very much for your very
strong support throughout this entire endeavor.
Chairman Johnson of Connecticut. Thank you.
One of the problems with hearing everybody individually and
then going to questioning is that you forget the questions you
were going to ask one person by the time you get to the end.
But I did want to ask you, in terms of the curriculum
project, did that just come out of the larger planning process,
or was some of the Community Services Block Grant money used to
accomplish that? Were there things that were done as a result
of the enterprise zone effort that actually didn't involve
using incentives or grant money, but just were spinoffs of the
planning process, or did they in some way all include usage of
grant monies?
Mr. Schmoke. There was a mixture. Some were spinoffs.
Others, however, needed the block grant in order to succeed.
The focus on the curriculum was something that occurred during
the course of the planning process. That was something that the
communities agreed to and all of us bought into that plan and
felt that it was--it would be essential for certain of those
neighborhoods to have that increase. The implementation
wouldn't have occurred, however, without the use of a grant.
Chairman Johnson of Connecticut. I would be interested to
have any of you who care to undertake it to list out for us how
other Federal grants also fed into this planning process; once
you got the plan, that that directed how you used, perhaps,
some of your education dollars, perhaps some of your job
training dollars, perhaps other Federal grants, because we need
to sort of see how does the enterprise zone planning process
affect the implementation of other Federal programs and the
usage of other public dollars.
Mr. Schmoke. Madam Chair, we tried throughout the process,
and the board focuses on this, to try not to duplicate existing
programs, but to make sure that things are working in a
complementary fashion so that we do get the benefits from other
programs, not only the Federal level, but the State and the
private sector level.
Chairman Johnson of Connecticut. So did you then use the
block grant money available under the enterprise zone
legislation to establish your six community-based village
centers, but then they just made more efficient use of all of
the various foster care dollars, food stamp monies, and all
those other things?
Mr. Schmoke. The village centers have been primarily
information and referral. They were not set up to be the
service provider. They were to make sure that the community
groups had access and individuals had access to all these other
programs.
Chairman Johnson of Connecticut. Thank you. Thank you very
much for your testimony. I appreciate the panel's
thoughtfulness and the complete record that you created in your
written statements. And thank you for your summaries and this
discussion. Thank you.
And I would like to call our last panel.
Miles Friedman, the Executive Director of the National
Association of State Development Agencies; Terry Van Allen,
Director of Research Initiatives at the University of Houston;
Richard Cowden, Executive Director of the American Association
of Enterprise Zones; David Caprara, Director of Policy for the
National Center for Neighborhood Enterprise; and Diane Lupke
from Indianapolis on behalf of the National Council of Urban
Economic Development.
Chairman Johnson of Connecticut. Mr. Miles Friedman.
STATEMENT OF MILES FRIEDMAN, EXECUTIVE DIRECTOR, NATIONAL
ASSOCIATION OF STATE DEVELOPMENT AGENCIES
Mr. Friedman. Madam Chairman and Members of the Committee,
thank you very much for having me here today. I am Miles
Friedman, Executive Director of the National Association of
State Development Agencies. We are the umbrella organization
nationally for State economic development agencies, and we
coordinate and provide support services to those who administer
State enterprise zone programs and to those who work with the
Federal Empowerment Zone/Enterprise Community Program.
I am particularly pleased for the States to have the
opportunity to provide some input today and to be recognized as
important partners in the process. Thank you.
We want to express our support for the Federal Empowerment
Zone/Enterprise Community Program and for the designation of
additional zones under a second round.
I do have a number of points I would like to make in terms
of clarifying the State role and how we see the States being
most effectively utilized in this program. I think you could
classify these under two general headings. One is the
relationship of the program to States and how they do
]business, and the second is to the potential role that States can play
in the program and have played in the program.
I think, in looking at enterprise zones, the whole
enterprise zone concept, whether it be the current Federal
program or the programs that have been in place in 42 States
now for some 16 or 17 years, we look at the issue of targeting
as being critical. For States, this was a new way of doing
business by and large.
And I know that there is a lot said in Washington and other
places about how little attention States pay to targeting to
communities, especially to distressed communities and
distressed areas. And, in fact, what has happened is virtually
a revolution in the way States do business over the last 17
years in that States largely under the rubric of enterprise
zones have begun targeting resources not only in direct support
of State enterprise zone programs and now in support of the
Federal Empowerment Zone and Enterprise Community Program, but,
in fact, States are targeting more and more of their other
programs in areas like job training, finance, lessening of
taxes and regulations on businesses, training for
entrepreneurs, assistance with insurance issues, and other ways
that States can become actively involved in helping largely the
smaller communities and the smaller businesses that are trying
to grow, that are struggling to make it in the world. States
are now targeting resources more than ever before to these
businesses and these individuals in these communities. That is
a very important issue for us because the States are now
spending several billion dollars a year on economic
development.
Secondly, as much as we appreciate and applaud the fact
that States are recognized as partners, we also believe that
States could play an even more active role in supporting the
program, not so much from an administrative point of view. You
will find that the State economic development agencies are less
anxious to be in charge, less anxious to administer, less
anxious for control, and more anxious to play a technical
support role. They would like to be more involved in the
application and designation process. They would like to be more
involved in providing technical assistance. They would like to
be more involved in trying to help develop the strategies that
are being used to support the economic recovery in these
distressed areas.
The States can be very good partners in these communities,
and it is in that role, in the technical role and the
substantive participation in the program, that we think States
could be recognized and allowed to play an even more active
role.
We think the current Federal program is a very good start.
As I say, we support designation of a second round. We also
believe that, in at least one area, the expansion of the State
role on the substantive side and, secondly, in allowing more
time for strategy development, because if we have learned
nothing else from the State experience, it is that enterprise
zones must be seen as part of a larger concept, part of an
overall economic development program.
On their own, they are not the be-all and the end-all for
economic development, nor should they claim to be. But States
who last year put about $2 billion into their participation in
the program feel that the communities, especially the smaller
communities, need time to truly develop the strategies that
they are going to use so that they can most effectively utilize
the dollars that are being directed their way.
I have many other things I could say, but I want to
conclude, if I could, by talking about the real impact on real
people for just a moment.
We convene the State enterprise zone administrators and
those who participate in the Federal program once a year in
February. And last February, here in Washington, we had many of
those people here for a conference, and we gave out some
awards. And one of the most exciting things was to see the
mayor of a small community in Michigan talk about the enormous
decrease in the unemployment rate in her community and talk
about how much it meant to have the Federal Government provide
some recognition, and not only tools, but recognition, of what
was happening.
And to see a small town in Louisiana, Macon Ridge, actually
send about 20 people here to Washington to accept the award and
talk about the community involvement in Macon Ridge and how
much it meant to them to have the State and Federal Government
recognize what they did, and perhaps most instructive was that,
in both cases, with the communities who were there to accept
the awards were people from their State economic development
agencies.
So I thank you for this opportunity. I hope it has been
helpful. There is a more complete statement that has been
supplied for the staff. And, again, I will be happy to answer
any questions.
[The prepared statement follows:]
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Chairman Johnson of Connecticut. Thank you very much, Mr.
Friedman.
Mr. Van Allen.
STATEMENT OF TERRY VAN ALLEN, PH.D., DIRECTOR OF RESEARCH
INITIATIVES, UNIVERSITY OF HOUSTON-CLEAR LAKE, HOUSTON, TX
Mr. Van Allen. Thank you, Chairwoman Johnson, and the
committee. I have studied enterprise zones across the Nation,
and I have had an opportunity to investigate and see some of
the outcomes to some of the questions that you had asked
previously, at least in regard to State zones. The Federal
zones, of course, have only been around a couple of years.
I just, first of all, wanted to say that I support the
program and would very much like to see it improve. I think
that the empowerment zone program needs to be greatly improved.
One thing that I wanted to point out is that where zones
are successful, existing businesses are able to expand. So many
times people concentrate on some big home run where they are
going to attract a big business, but in reality it is the small
businesses and medium-sized businesses that are expanding. They
have community roots, and new startup businesses like them
occur in the more successful zone areas across the Nation. So,
therefore, I always try to steerpeople away from the zero sum
model where one community loses while another community gains.
I am from Houston, and in Houston we have an enhanced
enterprise community. And many of you may know that in Houston,
we are the number one city in the Nation for creating
businesses, but in our empowerment zone, we have created zero
businesses with the incentives, because the incentives are so
meager.
Again, we are an enhanced community, which means that we
only receive 3 million in social service grants. So we really
have not seen the success that we would like to see. And we, of
course, will keep working at it.
Speaking of businesses in Houston, for instance, Magic
Johnson, who is a basketball legend, has been creating
businesses across the Nation, actually movie theaters. He has
one in Houston, but, unfortunately, it is not in the zone. And
one of the things that I have felt, that with much better
incentives, that people like Magic Johnson can give to the
communities that they have--that people have come from.
So many people that succeed leave their communities, and I
think that one of the things that I am attracted to with
enterprise zones is that, if there are incentives, individuals
can create jobs and businesses in communities where they feel
that they have roots.
Another thing that I have been concerned about with the
program is that a former HUD official, I won't name him at the
moment, but he said that his concern was this program is
turning out to be too much like a--just another grant program
and because not enough jobs are being created. Again, the
program has only been around a couple of years. And I think
that there is success in the program. I do believe that there
is modest success. I just would like to see much greater
success because the need is so great and so desperate in so
many poverty areas.
That is why I have very much promoted and supported the
Watts-Talent bill, because the Watts-Talent bill does provide
capital gains tax exemptions, just like the new District of
Columbia zone, and I feel that that is a key provision, because
what I have found in investigating zones across the Nation is
that, just looking at it from a job creation perspective--and I
realize that there are other aspects to zones than just job
creation, but that is my primary focus, is that the amount of
incentives are correlated to the amount of jobs that are
created in zones. And there doesn't seem to be any way around
that.
So that is why I find it to be vital to have stronger
incentives, especially in the Watts-Talent bill. The Senate has
a companion bill; Joseph Lieberman and Senator Abraham have a
companion bill that supports the same type of legislation.
My light is on here. Do I still have a minute?
Chairman Johnson of Connecticut. Probably 30 seconds.
Mr. Van Allen. Okay. And you have heard a lot of testimony
today. And I think that, for instance, the Michigan zone
program is an example of one that is going to have a major
effect as far as the State zone program because of their
incentives.
And the gentleman here, Congressman Watkins, talked about
how in rural areas people leave because, if they get skills,
there aren't jobs. And my concern, of course, is to create jobs
and to support businesses so that they can succeed in a higher
risk environment.
[The prepared statement follows:]
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Chairman Johnson of Connecticut. Thank you very much, Dr.
Van Allen.
I would like to recognize Mr. Cowden, executive director of
the American Association of Enterprise Zones.
STATEMENT OF RICHARD H. COWDEN, EXECUTIVE DIRECTOR, AMERICAN
ASSOCIATION OF ENTERPRISE ZONES
Mr. Cowden. Thank you, Madam Chairwoman. We greatly
appreciate this opportunity to offer testimony that reflects
the experiences of many city and State officials who work with
a wide variety of targeted redevelopment programs. I will
summarize our written testimony briefly.
I should note that, from the outside, enterprise zones were
not expected to operate simply as a set of local tax breaks.
They were designed to create a linkage among local, State, and
Federal initiatives. Because Congress did not act on Federal
zone legislation until 1993, virtually all the research in this
area has focused on the effects of State and local tax
incentives, which have only a moderate impact on business
location decisions.
But most studies the State designated zones did not measure
was the degree to which cities and States used the program as a
targeting mechanism for a wide range of strategies. In many
cities, local officials have learned to deal comprehensively
with several factors, not just taxcosts, that deter
reinvestment in aging areas. By far the most successful zones have
combined the idea of incentives with practical measures to improve
infrastructure and basic services.
Since our organization formed in 1985, we have consistently
advocated a Federal zone policy that is based on the knowledge
that cities and States have already gained about such programs.
Although the new empowerment zone program parallels rather than
dovetails with the State zones, we are encouraged that some new
Federal measures, such as the brownfields program and new
empowerment contracting program, may well compliment both
Federally and State designated zones. Congress and the
administration should explore additional policies like these.
Those of us who have come to appreciate enterprise zones as
a routine redevelopment planning technique have urged
Washington lawmakers to adopt our demystified view of the
concept. We note that only here within the beltway are
enterprise zones still considered to be new and exotic.
Washington has fallen behind the curve almost entirely because
of its partisan differences.
Throughout the 1980's, most Democrats rejected such bills,
largely because Jack Kemp had introduced them. Most Republicans
would only support a bill that was designed as a demonstration
of supply side economics. Neither party sought to enact a
consensus-driven zone proposal until civil disturbances shook
Los Angeles in 1982.
I realize that today's hearings are for oversight purposes,
but as we work toward new legislation, all parties at interest
should bear in mind some sound guiding principles.
First, the legislative process should start with an
understanding that a geographically targeted initiative can be
a sensible component of our overall policy on cities. It should
be flexible enough to accommodate proposals from across the
political spectrum. This can be done only if those who develop
the legislation can agree to iron out their ideological
differences through compromise.
Second, the legislation should not be aimed at identifying
one or two Federal benefits that are the answer to urban
poverty. Economic problems in cities relate to a complex of
causes and therefore are unlikely to respond to simplistic
solutions. Congress should not overestimate the power of any
given Federal incentive, nor should it underestimate the power
of zone programs to stimulate local problem-solving activities.
Third, experimentation was central to the original
enterprise zone proposal. Any new program should incorporate
that principle. Lawmakers should be willing to sign on to a
program that includes provisions they favor, as well as to
those about which they have doubts. Incentives should be tested
at more than one rate in order to identify their marginal
levels of efficiency.
Finally, regardless of what benefits ultimately are
included in a prospective zone program, it is critical that all
sides accept a single set of implementation criteria as the
ongoing policy framework. As of today, the empowerment zone
program relies on one set of eligibility standards, and H.R.
1031 would use another. The differences are immaterial, and yet
adoption of H.R. 1031 in its current form would give us two
entirely separate Federal zone programs with incompatible sets
of regulations and implementation systems. A better option
would be to use the existing EZ-EC methodology and improve on
it over time.
Thank you for your attention, and I will be happy to answer
questions later.
[The prepared statement follows:]
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Chairman Johnson of Connecticut. Thank you, Mr. Cowden.
Mr. Caprara.
STATEMENT OF DAVID CAPRARA, DIRECTOR OF POLICY, NATIONAL CENTER
FOR NEIGHBORHOOD ENTERPRISE
Mr. Caprara. Madam Chair, Mr. Coyne, at the beginning of
the 104th Congress the Speaker asked the National Center for
Neighborhood Enterprise to convene neighborhood leaders to look
at pressing problems of poverty in the inner cities. And from
our neighborhood leaders task force recommendations, many are
found in the Community Renewal Act sponsored by Messrs. Talent,
Watts, and Flake, including measures for expanded capital
access for small businesses, removing the discrimination
against faith-based service providers in our cities,
strengthening the role of parents in education, and directly
empowering neighborhood groups though vehicles like charity tax
credits.
We believe this approach will be a complement to the
Administration's program by recognizing the role that
grassroots groups play in moral and spiritual and cultural
renewal that underpins development.
In the past year, we demonstrated that the restoration of
civil order is a key prerequisite for development. When 12-
year-old Darrell Hall was murdered here in D.C. in a housing
project in January, in a housing development called Benning
Terrace, our president, Bob Woodson, stepped in with a group
called the Alliance of Concerned Men and together forged a
truce between rival youth factions in that community. That was
the subject of a special hearing by House Judiciary on May 8.
Today this area, which was once known as the most murderous
section of D.C., is now being hailed as one of the best kept,
with manicured lawns and gardens, that are actually kept up by
a group called Concerned Brothers of Benning Terrace.
In today's Washington Post is an article about common-sense
capitalism in the City of Indianapolis, which is another area
where we trained neighborhood leadership with the support of
Mayor Goldsmith over the last 3 years. And I think the
neighborhood leaders there again demonstrated the importance of
civic order as a prerequisite for the rebirth of community
capitalism.
This weekend, we are meeting with grassroots leaders from
Hartford, Connecticut, Dallas, L.A., and Washington to further
develop this youth crime intervention model as a grassroots
prototype. And I do commend your joint consideration of this
model with House Judiciary and the Housing committees as one
key element for urban revitalization.
In the District, as you know, the Enterprise Community
program has not gotten off the ground, where $3 million hasbeen
allocated but stalled. I commend to this committee the work of former
Representative Fauntroy and longtime ESOP pioneer Norman Kurland, who
have called for a D.C. ``capital homesteading plan.'' This approach
would fund a new stream of economic development not through the Tax
Code or social service appropriations, but by dramatically accelerating
growth through the use of the discount window of the Federal Reserve
system to provide low-cost, unsubsidized capital credit through D.C.
banks to finance new enterprise formation.
This so-called ``super-empowerment zone'' would expand
asset ownership for D.C. residents through mechanisms such as
ESOPs and comparable profit-sharing mechanisms at the community
level.
I would like to acknowledge the presence of Antonio
Bentancourt, president of the World Institute for Development
and Peace, that has been involved in championing this program
throughout D.C. and the developing world.
Given the nonperformance of the D.C. Enterprise Community
to date, I urge this committee to examine the efficacy of
testing this alternative strategy as a national exemplar to
promote expanded capital ownership, through community
intermediaries in the private sector that would spur high rates
of growth independent of taxpayer subsidies.
I would note that many members on this committee, including
Chairman Archer, previously cosponsored expanded capital
ownership legislation, dating back to 1975 with the Jobs
Creation Act.
Another comparable approach, individual development
accounts, or IDA's, have been pursued by the Corporation for
Enterprise Development and others as a universal savings
mechanism for low-income residents for education, health,
business start-up, retirement, and home ownership. And I
suggest that these asset development mechanisms for persons at
the lower rung of the economic development ladder be looked at.
I was involved with Jack Kemp as a Deputy Assistant
Secretary at HUD. I also served on the President's task force
after the L.A. riots. And I must say, when I went from that
post to work with Governor Allen to run the Virginia enterprise
zone program, I was heartened by the vigor that Secretary Cuomo
brought to the EZ-EC program. I give high marks to the way it
was packaged.
I wish I could say the same with regard to HHS. Many of the
Title XX block grants, as you are aware, have reflected
unwieldy coordination not only at the Federal level but at the
State level as well, where I think this ``two-stop shop''
approach has created problems.
So I conclude by noting the wisdom of this Congress in the
last session in devolving many welfare and domestic programs to
greater and greater coordination and leadership roles at the
State level, and would suggest that this committee, HUD,
governors and mayors, grassroots leaders, and Representatives
Talent and Watts perhaps team up to incorporate some of the
other recommendations we have heard here, to offer new
incentives, ``by right'' or right of first refusal, to State
enterprise zone departments.
I like something Dick Cowden has pushed for years, a two-
tiered program that would again make a number of Federal
incentives available ``by-right'' to State zones. And I would
suggest that this one-stop shop, at the State level, will be
closer to the people and the engines of private enterprise.
Thank you.
[The prepared statement follows:]
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Chairman Johnson of Connecticut. Thank you very for your
interesting testimony.
And now Ms. Lupke. I understand you are from Indianapolis.
I missed that. I compliment you on the article in the paper
today.
STATEMENT OF DIANE LUPKE, PRINCIPAL, LUPKE & ASSOCIATES,
INDIANAPOLIS, IN, ON BEHALF OF THE NATIONAL COUNCIL FOR URBAN
ECONOMIC DEVELOPMENT
Ms. Lupke. Thank you, Chairman Johnson and Mr. Coyne. I
appreciate your inviting me to testify on the performance of
the empowerment zones and enterprise communities program.
I am a consultant who specializes in community economic
development work and have worked with zones, the State-
designated enterprise zones over the past 15 years, and now
with empowerment zones and enterprise communities. Today I am
here on behalf of the National Council for Urban Economic
development. CUED is a nonprofit membership organization
representing over 1,900 public and private economic development
professionals and elected officials from cities, counties, and
States.
Our members strive to develop and revitalize economically
distressed areas by helping to create, expand, and retain job
opportunities and increase local tax revenues, clearly the
intent of our members, as reflected in the purpose of the EZ-EC
program. I appreciate the opportunity to share some of their
experiences today. I would like to summarize some of the
comments from our members from my written testimony.
First, let me begin by saying that the EZ-EC program has
broken new ground, in terms of building unprecedented
partnerships within the community, coordination between
agencies and levels government, and marrying the socioeconomic
agenda with the more market-oriented economic development goals
that the State zones had. These challenges are critical to
successful community revitalization.
The basic framework and the intent of the program can work
more effectively, but with refinements, certain key economic
development provisions. In short, the foundation has been laid,
but the house is yet to be finished. The house will, in large
part, be built by private-sector dollars.
Thus, it is incumbent upon any program that seeks to
revitalize blighted areas to leverage public funds with
private-sector investments. The EZ-EC program must enhance the
capacity of communities to attract private-sector resources by
providing them with the adequate tools needed and further
resources.
There are a number of provisions in the EZ-EC program that
can specifically support economic developmentactivities, but
they have not reached their optimum potential. In a membership survey
conducted this last summer on the empowerment zone and enterprise
community program, our members rated the economic development impact of
the program as, on average, somewhat effective, with 16 percent
responding that the program was currently ineffective.
I would like to focus on three of the programmatic elements
that require attention: The EZ bond, the employment tax credit,
and brownfields redevelopment.
First, let me comment on the EZ bonds. The tax-exempt
private activity, EZ facility bond, the EZ bond, could allow
for greater funding opportunities for business expansions,
especially for midsized cities that are located in low-density
States.
One of our members, the city of San Diego, began marketing
the new EZ bond to businesses soon after receiving the
designation, but they encountered a number of difficulties in
attempting to work with the bond.
First, in attempting to put together a data base, the city
staff actually had to walk the boundaries of the zone to gather
the street addresses to form a database of zone residents. This
is really too expensive for most communities.
Secondly, the low $3 million tax-exempt cap created another
hurdle, this time with bond underwriters. The maximum bond
issue size made the investment of numerous hours of legal work
seem unappealing and, of course, very expensive.
Over a period of months, the city was able, at considerable
cost, to create the necessary forms and develop criteria. And,
most importantly, they did find an eligible business to work
with. Figi Graphics, a giftware manufacturer and distributor,
was able to keep 227 jobs in the EC and, in addition, create 61
more jobs with the use of the EC bond to finance its expansion.
The bond is important, and I think it should be kept, but
two changes must be made: First, raise the tax-exempt cap; and,
second, streamline regulations. These changes would allow the
bond to reach its potential as a financing mechanism and raise
important capital for cash-strapped businesses.
Let me turn now to a second benefit, the employment credit.
Linking zone residents with job opportunities has been a
challenge since the first State zones were designated some 15
years ago. An important part of our ability to place zone
residents in employment opportunities has been employment
credits. With regard to the federal program, selected companies
have been able to use the work opportunity tax credit.
One of our members, Wal-Mart, the retail giant who is
located in all 50 States and in nearly all of the enterprise
communities, has been successful using this credit.
Unfortunately, most of our other smaller business members
within EZ-ECs have not been able to use it. In addition some
nonprofit corporations who work with businesses in helping them
to access benefits have chosen not to offer that benefit any
longer because it is simply too difficult for most of our
businesses to access. Our members encourage the continuance of
the WOTC but with refinement to make it easier to access.
I would also suggest that there needs to be a continued
connection with the brownfields program. EPA's program has been
helpful, and we appreciate that, but there needs to be a direct
incentive to businesses to invest, clean up, and develop
brownfields areas. Individual investors and developers cannot
be expected to take on the entire cost of clean up and
development.
Finally, let me mention a couple of other issues of
coordination. The empowerment zone and enterprise community
program is on track. The design acknowledges the fact that
revitalization is not just a result but it is a process and it
is a process of shared vision, coordinated action, and
entrepreneurial ingenuity.
The empowerment zone program has brought many changes to
the initial investments that were made by State zones. The
Federal program has encouraged partnerships among the levels of
government, different government agencies, residents,
businesses, and institutions in each community that have been a
very valuable part of the process of revitalization.
These partnerships have been invaluable in creating a sense
of empowerment among program participants by returning the
responsibility for the community to its citizenry. However, the
empowerment that is created by this program should be
sustainable and the impact of the program should not stop once
the public program funds have been depleted.
Investment now in public resources, if properly leveraged,
will result in an ongoing process so that revitalization leads
to more long-term development. The EZ-EC program still does not
offer enough incentives to really capture business investments
for revitalization.
Madam Chairman, thank you, and members of the subcommittee,
thank you again for the opportunity to share the experiences of
our members at CUED.
[The prepared statement follows:]
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Chairman Johnson of Connecticut. Thank you very much for
your testimony. It was very helpful and very interesting.
I would like to go back through a couple of little things.
This business of a nonprofit and setting up an entity, one
possible way to manage this would be to always require that
they be sunsetted, so that after 5 years they would have to be
recreated.
The reason is that they can, after the initial period of
change, take on a life of their own, and since they are not
elected officials and since they are governing public money, it
can become a problem. They can become the captive of one group
in the city, as opposed to a synthesis of all groups in the
city. So the issue of sunsetting is something I hope some of
you who have more experience than I do will think about.
I would also like to go back to Mr. Caprara's issue of the
ESOP mechanism. For many years I have been talking about this,
those of us who are interested in the microenterprise zone
legislation, the micro loans, and we had testimony from the
earlier panel about how the bonding mechanism wasn't as useful
as using title 20 funds to give microloans.
ESOP's would allow, as part of this community planning
process, communities to decide what kind of businesses they
wanted, and people to make, like, $50 investments in ownership,
and those who invested could be given an automatic employment
preference because they owned a trainingpreference.
So I think that is a tool for commitment and involvement
that has enormous possibilities for us, because we have seen,
through community policing, we have seen through a lot of other
mechanisms, that if you can get people to buy in, a lot of
other things happen, just like the things that have happened in
the D.C. neighborhoods as we got people to buy in.
Do we need to change the ESOP law in any way to make it
more usable in these circumstances?
Mr. Caprara. Well, I really share your desire to see from
the bottom up microenterprise and individual development
accounts, mechanisms to expand ownership in the neighborhoods
being a pivotal part of this program.
What Mr. Kurland, in a detailed paper that I will provide
to the committee, explained would be the notion of low-cost
capital credit being made available through the Federal Reserve
Bank under section 13, under its current powers. He has
recommeded a demonstration of, basically, through the banks as
an exemplar for what could be done around the country, making
low-cost credit available for firms in this sort of super-
empowerment zone that would be tied to asset or stock
ownership, not only through ESOP's, but related community
ventures--taking the CDC the next step further to actually
vesting residents in the community in that stock ownership
capacity.
So it is a very innovative idea that I think has been ahead
of our time for a while. But, as you know, since 1975 ESOP's
have been gaining hold in the country, and I will leave with
the committee information that would describe approaches to
expand dramatically the access to that capital credit for
ESOP's in the District and around the country, without
requiring costly new appropriations or tax subsidies.
Chairman Johnson of Connecticut. Thank you. I would
appreciate that very much.
[The information was not available at the time of
printing.]
Chairman Johnson of Connecticut. And for those of you who
testified that you think--Dr. Van Allen, you were certainly one
of them--that zero capital gains would be a useful additional
incentive, those who did testify and didn't testify, I am happy
to hear your comments on this.
My concern about that is that capital gains is such a long-
term thing that really expensing is much more powerful. I got
the Renaissance testimony in Michigan, where your immediate
relief from current tax liabilities is much more powerful.
I guess I don't get it about the zero capital gains as an
incentive, and I am concerned about Treasury's comment that you
can really game this.
Mr. Van Allen. Well, let me just say that, as I am sure you
are well aware, capital gains is all about investment. And I
think for these communities, to turn around, it is going to
take a long-term approach, and I think that time is an
important factor as far as incentives and the impacts over the
long run.
Treasury historically has been against any tax incentive. I
worked for HUD in the early/mid-1980's when we were discussing
legislation, and Treasury was always against enterprise zones
to begin with although I think that they are more on board now,
at least with this program.
I just see that there are major investment incentives
needed. I think that the empowerment zone program has a lot of
good aspects to it. I just know that in Houston there is no way
we could convince some Magic Johnson or anybody else to build a
business or to renovate buildings in a low-income area without
that.
Chairman Johnson of Connecticut. I think one of the things
we all need to think about a little bit more than we have in
the policy-making process in the past is long-term/short-term
impacts, and with some of the incentives in the current law,
they are, in a sense, easily withdrawn. You know, expensing for
what equipment you buy during this period, they are easily
withdrawn.
With capital gains, you set up different action for
different people over a very long period of time. That concerns
me. That is what happened with the notch issue in Social
Security. There have been other instances in which we have set
up, in a sense, long-term varied treatment depending on sort of
time and place of what you did.
One of the problems with enterprise zones is that it sets
up inequities, and I think the Renaissance program, as
interesting as it is, also does raise, you know, ``You across
the street don't have to pay property taxes, and I on the other
side do, and I send your kids to school.''
So I am very concerned about the capital gains issue
because the benefit is only long-term, and with the reduction
in rates that we just passed, and particularly the advantage
that we give holdings over 5 years, it seems to me that we are
rewarding long-term capital gains much more generously than we
have in the past.
Mr. Van Allen. Madam Chairman, I was going to quickly
comment that for large-scale investment by business, there has
to be an incentive to do so if you are in an enterprise zone,
if you are someplace else. Actually, the tax rates in
enterprise zones tend to be higher than outlying communities,
and, of course, there are crime issues and much more things. So
to even cut taxes in an enterprise zone area, in essence,
levels the playing field somewhat.
Chairman Johnson of Connecticut. Actually, that is a very
good point, Dr. Van Allen. Tax rates in the cities do tend to
be very much higher, and enterprise zones would only marginally
cut into that.
Mr. Cowden.
Mr. Cowden. We have been interested in a variation on the
capital gain incentive, actually a rollover, which provides a
more immediate benefit rather than a long-term benefit, in
which you would have to hold your assets in a particular
company for a time. The idea would be to give a company or give
a taxpayer an incentive to get out of one investment and invest
those funds in a zone-based business.
One way to avoid the problem that you have identifiedwith
being in the zone or out of the zone situation, if the incentives were
targeted to or reserved for value-added or, you know, manufacturing-
based businesses, you would have less problems of the--you know, the
mom-and-pop store across the street not getting an incentive while
another one does. You would tend to have fewer of those kinds of
concerns.
At the same time, you get a better economic bang for your
buck if you do target incentives to the value-added sector.
Chairman Johnson of Connecticut. Dr. Van Allen, you did not
comment on the planning process. I thought your testimony was
very interesting, and has been echoed in the preceding panel,
that this is primarily about expanding businesses, about
creating small businesses, it is rarely about attracting very
big businesses into an enterprise zone. But you don't comment
on the power of the planning process. It is kind of an
interesting distinction between your testimony and others.
Do you think it hasn't had an effect in Houston?
Mr. Van Allen. Well, unfortunately, Houston is probably the
case that HUD wouldn't want us to cite today. But the planning
process has not worked. People have not been able to get
together very well. There just has not been strong enough
leadership from the mayor's office. And, in reality, the
incentives are not that strong with the enhanced community that
Houston was designated. It is just 3 million in social service,
welfare grant, and minimal other incentives.
So the engine in Houston, unfortunately, has not
transferred into the zone as much as we all would like.
Chairman Johnson of Connecticut. Thank you very much.
Does anyone have any comment on any aspect that I didn't
ask about and you are burning to share with us?
Thank you very much for your testimony. It has been very
helpful.
I am sorry, I didn't realize my colleague, Congressman
English, had joined us.
Mr. English. No, Madam Chairman. Actually, I enjoyed the
testimony, and I don't have any further questions that need
delay this. I appreciate the recognition.
Chairman Johnson of Connecticut. I am very glad you can be
with us. Some of the time, this is the day when Members are
traveling, so they are not able to be back as early as they
would have liked to. It is a pleasure to have you here.
Thank you.
[Whereupon, at 1:50 p.m., the hearing was adjourned.]
[A submission for the record follows:]
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