[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

                              ----------                              
                                                                   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

                              ----------                              


                       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.
    [The prepared statement follows:]
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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.
    [The prepared statement follows:]
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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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    [GRAPHIC] [TIFF OMITTED]60762A.041
    
    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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