[Senate Hearing 108-]
[From the U.S. Government Publishing Office]



 
 DEPARTMENTS OF VETERANS AFFAIRS AND HOUSING AND URBAN DEVELOPMENT AND 
        INDEPENDENT AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2004

                              ----------                              


                        THURSDAY, APRIL 10, 2003

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:10 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Christopher S. Bond (chairman) 
presiding.
    Present: Senators Bond and Mikulski.

             CORPORATION FOR NATIONAL AND COMMUNITY SERVICE

STATEMENT OF LES LENKOWSKY, CEO
ACCOMPANIED BY:
        MICHELLE GUILLERMIN, CHIEF FINANCIAL OFFICER
        J. RUSSELL GEORGE, INSPECTOR GENERAL

            OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

    Senator Bond. Good morning. The VA-HUD and Independent 
Agencies Appropriations Subcommittee will come to order, and we 
will continue hearings on the fiscal 2004 budget. We will hear 
from two of the subcommittee's independent agencies, the 
Corporation for National and Community Service, and the 
Department of the Treasury's Community Development and 
Financial Institutions Fund. We will first hear from the 
Corporation's Chief Executive Officer, Dr. Les Lenkowsky, the 
Corporation's Chief Financial Officer, Ms. Michelle Guillermin, 
and the Corporation's Inspector General, Mr. J. Russell George.
    I welcome back Dr. Lenkowsky, who made his first appearance 
before this subcommittee last year, and a warm welcome, Ms. 
Guillermin and Mr. George, who are making their first 
appearances. Both Ms. Guillermin and Mr. George joined the 
Corporation last fall, and I am sure both feel like it has been 
a baptism by fire. After we hear from our witnesses from the 
Corporation, the subcommittee will turn to the CDFI.
    For fiscal 2004 the administration is requesting a total of 
$962,400,000 for CNCS, of which $957.7 million is for programs 
under the VA-HUD jurisdiction. The budget request is a $165.6 
million, or 38 percent increase over the fiscal year 2003 
enacted level. Further, the Corporation proposes to expand its 
AmeriCorps program participation from 50-75,000 members.
    This year the Corporation is celebrating its tenth 
anniversary. This is no small feat, given the political and 
ideological debate about the AmeriCorps program, the long-
standing and numerous management problems, and the annual 
funding battles. Since its inception, the Corporation has been 
plagued by management problems due to poor financial management 
systems and lack of quality staff and managers.
    In light of the latest management fiasco over enrolling 
AmeriCorps members without the necessary budgetary resources, 
it is truly amazing that the Corporation has survived, but 
there have been, as I mentioned earlier, mismanagement problems 
since its inception one decade ago. One could say that it was 
built on a poor foundation, but despite its occupants' efforts 
to correct the problem, the foundation continues to crack and 
sag. I would even go so far as to say the doors are missing 
locks, the roof is leaking, and the windows are broken. That 
makes it an interesting challenge.
    Despite these problems, the previous and current 
administration embraced the Corporation and proposed an 
expansion of the AmeriCorps program. In my opinion, requesting 
an expansion of the AmeriCorps program right now is like 
proposing to build an addition to a broken house. While I am 
not a building engineer, I think most experts would agree that 
building an addition to a house with a questionable foundation 
is not a wise judgment. Frankly, it will be difficult for the 
Corporation to receive a loan to underwrite this Corporation 
due to its poor credit history, and as the primary funding 
source for the Corporation I can tell you that I am not yet 
ready to support additional funds to expand the AmeriCorps 
program.
    Nevertheless, all hope is not lost. The Corporation has 
hired a very capable and competent CFO. I am impressed with her 
fiscal management and financial aptitude and believe that her 
efforts can put the Corporation's management on the right 
track. I am also pleased with the work of the new IG, who has 
responded quickly to our requests to audit and investigate 
problems swirling around the National Service Trust Fund.
    Unfortunately, the Corporation needs more help. While Ms. 
Guillermin has my utmost confidence, it will be difficult for 
her alone to resolve the long-standing management problems. It 
is absolutely critical that she have the support not only 
through staff resources, but through a cultural shift that 
makes the entire Corporation more sensitive to fiscal 
responsibility. This is the job of everybody there, and it is 
not just one person's. For too long, the Corporation has been 
fixated on public relations and promotion at the expense of 
management responsibility. I think the time has come to say the 
Corporation needs a serious paradigm shift.
    It is disappointing and sad that problems continue to 
persist. I support and applaud the President's call to service, 
and believe that the Corporation can play an important role in 
improving the lives of many Americans in the communities in 
which they serve. Further, with increased insecurities and fear 
of terrorism, there is a huge cry to volunteer. People want to 
help. During my trips across my State of Missouri I have heard 
these cries. I have heard people say, what can I do to help?
    Well, I think if we harness this in the right fashion, 
volunteerism in this country can once again reach the heights 
that it achieved when this country was founded. However, the 
Corporation must make sure that it is responsive to the 
American taxpayer, who demands to know what sort of return it 
is receiving on the investment it is providing to the 
Corporation.
    To date, Congress has appropriated well over $4 billion to 
the National Service programs. However, 10 years later the 
Corporation still cannot tell us how the programs are 
performing and how much money the programs are costing, and in 
some instances cannot even accurately count the number of 
volunteers actually supported.
    When the Corporation discovered last fall that the National 
Trust Fund lacked adequate funds to meet its liabilities due to 
an over-enrollment of AmeriCorps members in the program, it 
then found out that this practice has been occurring for the 
past few years. More recently we learned that last year the 
Corporation approved more than 20,000 more slots than it had 
budgeted. Because of the Corporation's inability to count, it 
had to suspend enrollments last November since it did not have 
the funds to support the 20,000 it had approved.
    In response to the administration's revised request, 
Congress provided $100 million in the 2003 Appropriations Act 
to the Trust Fund to ``back-fill'' these slots and to cover the 
cost of its new members in 2003. While I appreciate the 
Corporation's efforts to address the problems with the Trust, I 
question the Corporation's response. I was troubled to learn 
from the IG's testimony that senior management was aware of 
overenrollments as early as last July. The Corporation did not 
notify Congress until it realized that the Trust Fund ``could 
be in a precarious position if the continuing resolutions did 
not end soon''. These findings raise a number of questions 
about the Corporation's response.
    Second, I remain puzzled by the Corporation's efforts in 
holding the appropriate individuals responsible for these 
programs. While I understand that one individual recently 
retired, other individuals remain employed. In fact, one 
particular employee was moved to a senior management position. 
If this is not rewarding bad behavior, I do not know what it 
is. I find it frustrating and mind-boggling that the 
individuals still employed at the Corporation have not had 
appropriate administrative penalties imposed.
    Because of my concerns about the problems with the Trust, I 
asked the General Accounting Office and the Corporation's 
Inspector General to conduct an audit and investigation into 
the Corporation's management and oversight of the Trust Fund. 
Based on their preliminary findings, both GAO and the IG found 
problems with the Corporation's internal control and 
coordination and communication between appropriate staff. In 
other words, enrollment decisions were done on an ad hoc basis 
with no oversight.
    In addition to the GAO and the IG audits, I asked the GAO 
to review the legal issues surrounding the over-enrollment of 
AmeriCorps members in the Trust. Yesterday, I received GAO's 
legal opinion on the obligation practices, and that opinion 
states that ``the Corporation incurs an obligation for 
education benefits when it enters into a grant agreement.''
    Now, this is a significant finding because it raises 
questions on whether the Corporation complied with the Anti-
Deficiency Act. Under that act, an agency may not incur an 
obligation in excess of the amount available to it in any 
appropriation. In other words, the Corporation has to ensure 
that it has adequate funds to cover all of its obligations.
    We look forward to the Corporation's response to the GAO 
findings. I was disappointed that GAO's statement for the 
record states, ``the Corporation established new policies that 
may improve the overall management of AmeriCorps if the 
policies are fully implemented. The Corporation has not made 
policy changes to correct a key factor, how it obligates 
funds.''
    The GAO recommendation is critically important in 
preventing the stress and disappointment that occurred last 
November when the Corporation had to suspend enrollments of 
AmeriCorps members. As GAO states, ``had the Corporation 
properly tracked and recorded its obligations in the Trust at 
the time of the grant award when it approved new enrollments, 
it likely would not have needed to suspend enrollments.''
    I understand the Corporation disagrees with the GAO's 
finding and legal opinion, but let me help eliminate any 
further debate on the issue. I agree with the GAO, and I will 
assure that future appropriations bills require the Corporation 
to comply with GAO's recommendation.
    It is unfortunate that AmeriCorps is being hampered by 
these legal and management questions. I do not want to belabor 
the problems of the past, but I do expect the current 
leadership of the Corporation to take the necessary steps to 
avoid the mistakes.
    I now turn to my colleague and Ranking Member, Senator 
Mikulski, for her statement and comments.

                STATEMENT OF SENATOR BARBARA A. MIKULSKI

    Senator Mikulski. Thank you very much, Mr. Chairman. I want 
to welcome Dr. Lenkowsky, Ms. Guillermin, Mr. George, and their 
respective teams, and to get right to the heart of the matter, 
as really the principal founder of National Service I fought 
long and hard to uphold the principles that our National 
Service program was founded on over 10 years ago.
    These principles were very much old-fashioned American 
values, to provide qualitative and quantifiable services to 
local communities while we created the habits of the heart in 
the next generation who were losing a sense of obligation to 
their country and a sense of citizenship, and at the same time 
were facing substantial student loan debts.
    The idea behind National Service was to link our values to 
public policy and to help young Americans with the opportunity 
to serve their community, help deal with the issues of going to 
college, and supported these principles when they were not 
popular, while being mindful of the need for responsible 
stewardship of the taxpayer's dollar. I also supported 
President Bush's call to service at this time when the passion 
for patriotism runs higher in this country than at any time in 
my adult lifetime, but I cannot support a bureaucracy that 
violates the law, mismanages taxpayers' dollars, and creates 
uncertainty for our communities and our volunteers.
    I am very proud of what goes on in National Service, all of 
those wonderful volunteers in AmeriCorps out there every day, 
helping build community in our country, the National Civilian 
Community Corps, which has actually responded to compelling 
needs, almost like SWAT teams around the country, have done an 
outstanding job.
    Learn and Serve America has been outstanding, because it 
starts at a very young age to create that sense of volunteerism 
whether you become an AmeriCorps volunteer or not, that you go 
on and you volunteer regardless of where life takes you. From 
that standpoint, in the grassroots I think National Service is 
alive and well, but at headquarters we are deeply troubled 
about its management and financial situation. Unless we get the 
house in order at the top, I do worry that we will be unable to 
take National Service into the new century to meet the new 
challenges and the new opportunities for our country.
    I am so pleased that President Bush has embraced the 
concept of National Service, and I do want to work with him in 
a bipartisan way, but again, we could only repeat the 
management issues that my chairman has stated. I want the 
Corporation to restore confidence in our communities and 
nonprofits and to the graduates of National Service programs 
that the money will be there if they want to be helping our 
community, that the VA-HUD Subcommittee is on their side. 
Second, I hope the Corporation can restore the subcommittee and 
the Congress' confidence that appropriate steps are taken to 
prevent mismanagement and uncertainty.
    I was really troubled when the Corporation revealed that it 
had enrolled more volunteers than the Corporation had funds to 
support. Last year, the Corporation budgeted 50,000 volunteers 
but enrolled 70,000. That was not just a mistake, that was a 
colossal mistake. This created a significant shortfall in the 
National Trust which pays the volunteer education awards.
    I am concerned that the Corporation actually violated the 
law. The law requires that for every volunteer enrolled there 
must be a deposit in the Trust to pay for the volunteer's 
education award. The concept was to be simple and 
straightforward and was spelled out in the Corporation's 
statute. The Corporation's mismanagement of AmeriCorps has 
jeopardized the principles of the program and concern about its 
impact on volunteers. We have had to freeze volunteer 
enrollments, and it creates uncertainty for volunteers waiting 
for assignment, for communities who need these volunteers, and 
for the graduates of the Corporation's program concerned about 
the status of their education award. That is a triple storm 
from my perspective.
    The consequences of the Corporation's mismanagement are 
grave. When the House and Senate met last year in conference, 
the House had zero funding for National Service, and the only 
reason National Service is still alive is because of my 
advocacy and the cooperation of the chairman. When Clinton was 
President, he was really outstanding on how we could keep it 
going. Now Bush is here, and we face the same problems. One of 
the historic characteristics of National Service is, great 
volunteers and a collapse at the top. This cannot continue. I 
could elaborate more on this. I think the chairman has stated 
it, but we are very concerned.
    Then we go to OMB, and they made it worse, by changing the 
rules on the Trust. The Corporation has always been able to 
count on both appropriations and interest when calculating the 
Trust. Now OMB says they can no longer count interest earning. 
Well, I know we want to eliminate the tax on dividends, but I 
do think we should be able to count interest earnings in future 
budgeting.
    So we had to again bail out the Corporation with $64 
million. We are foraging here. We forage for National Service 
to keep it going, so we have got a significant issue here. We 
need to hear your testimony, Doctor. We think you really 
understand National Service, but I think we are coming to the 
end of the line here. We are now truly at a train wreck, and it 
is going to be very difficult to keep this going, yet at the 
same time when we have the passion of the people who want to 
volunteer we want to make use of that. We have a President of 
the United States who is enthusiastic about it, and we now need 
to make sure that we get the organization in order to make use 
of our young people, the President's enthusiasm, and this great 
wave of patriotism, that it keeps going on for the rest of the 
century.
    Thank you.
    Senator Bond. Thank you very much, Senator Mikulski, and 
Senator Mikulski has long been recognized as the foremost 
champion, and I do not know whether godmother of AmeriCorps is 
the appropriate term, but certainly one of the earliest 
advocates.
    But what she said is correct, she and I have kept this 
alive, and there have been lots of people who want to kill it, 
and there are lots more who still want to kill it, and with 
that glum overhang, if you would care to enlighten us with your 
testimony, we are happy to have you, sir. Thank you.

                       STATEMENT OF LES LENKOWSKY

    Dr. Lenkowsky. Thank you very much, Chairman Bond, Senator 
Mikulski.
    I am pleased to be with you this morning to discuss the 
President's budget request for fiscal year 2004 for the 
activities of the Corporation for National and Community 
Service under the jurisdiction of this subcommittee. Joining 
me, as you have noted----
    Senator Bond. Excuse me, if I may interrupt, I think we 
have advised you we will accept your full statements for the 
record, and ask you to keep your testimony to about 7 minutes. 
Thank you.
    Dr. Lenkowsky. Joining me is our Chief Financial Officer, 
Michelle Guillermin. I have submitted written testimony that 
provides detail and justification for the President's request, 
but before answering your questions I would like to give you a 
brief report on the Corporation.
    For the past few months, as you have already noted, there 
has been a lot of bad news about us, but I want to tell you 
some good news. In the budget request before you, President 
Bush has reaffirmed his confidence in the Corporation's 
programs and our role in helping Americans respond to his call 
to service. The amount the President has requested, 38 percent 
above our current spending level for the programs under the 
National and Community Service Act, would enable the 
Corporation to enroll 75,000 AmeriCorps members and engage over 
1 million students in our Learn and Serve America program in 
2004.
    The President's commitment to the passage of the Citizens 
Service Act, which would reauthorize and put some vitally 
needed improvements in place in our programs, remains 
steadfast, as he indicated in his State of the Union message, 
and also steadfast is the President's commitment to sweeping 
management reforms.
    Already, we have made long strides toward developing a new 
culture of management at the Corporation with new leaders or, 
to use your analogy, chief contractors such as our CFO and our 
Inspector General, J. Russell George, who is here today as 
well, and there will be more to come, I can assure you of that, 
new units such as a completely revamped program evaluation 
team, and new procedures aimed at achieving the highest 
standards of public accountability and fiscal integrity.
    We are determined to make our organization a model of 
effective, innovative Government. We have a lot more to do, a 
lot more, but we are pleased to note that as a result of our 
efforts we have recently received our third consecutive 
unqualified opinion from our independent auditors.
    Last but not least, I am pleased to give you the good news. 
Thanks to you and your colleagues in the other chamber, the 
omnibus appropriation bill for 2003 has given the Corporation 
the funds it needs to resume enrollments in AmeriCorps. With 
the adoption of the additional measures President Bush last 
month submitted to Congress, I am confident that AmeriCorps can 
have a solid and fiscally responsible year of accomplishment 
working for our communities and contributing to the development 
of a new culture of citizenship, service, and responsibility in 
the United States.
    Between November and March, the Corporation did not enroll 
a single member of AmeriCorps, despite the fact that thousands 
of Americans were eager to start serving and hundreds of 
organizations were waiting to put them to work meeting the 
countless needs of our communities. I have explained in letters 
to you and in my written statement what caused the Corporation 
to institute an enrollment pause, and am ready to discuss that 
further this morning, but what I cannot adequately convey is 
the anguish all of us at the Corporation have felt at taking 
this drastic but necessary step, and the disappointment and 
hardship it has caused so many people.
    Our Board of Directors, our executive team, our entire 
staff and our grantees never again want to be in a position of 
having to say to Americans who wish only to serve their country 
that we cannot permit them to do so, and we have taken 
aggressive actions inside the Corporation to do all we possibly 
can to ensure that we will not have to say that ever again.
    The GAO opinion to which you referred, Mr. Chairman, we 
just received yesterday. We are studying it. As you know, we 
have a slightly different interpretation from OMB and our 
statute has some inconsistencies about it. As soon as we can 
determine the proper legal standard for our obligations in the 
Trust, I want to assure you that we will live by that and 
report completely and regularly to this committee.
    More than ever before, Americans want to serve in our 
programs and our Nation's charities want to use them, charities 
ranging from nationally known ones like Habitat for Humanity, 
Campfire, and the Sisters of Notre Dame to grassroots community 
groups known only to those whose lives they have changed.
    More than ever before, our fellow citizens need 
opportunities to serve, citizens like Jesus Santiago, II, who 
was by the age of 6, he says, an alcoholic, later moved on to 
using LSD, cocaine, and other drugs, dropped out of school by 
16, and by 17 was jailed for 11 months. Then he found his way 
to the Ohio Conservation Corps, an AmeriCorps grantee, where, 
by helping others, he helped himself to become a new person and 
is now in college studying to become a social worker.

                           PREPARED STATEMENT

    Amid all the evil we see in our world we must, as President 
Bush often reminds us, find ways to do some good, one heart, 
one soul at a time, as we did with Jesus Santiago. That is why, 
amid all the bad news you have heard about the Corporation 
recently, I am pleased to share with you some good news and ask 
for your continued backing in enabling more good to come.
    Thank you very much. That concludes my oral statement, and 
both Ms. Guillermin and I would be pleased to answer your 
questions.
    [The statement follows:]
                 Prepared Statement of Leslie Lenkowsky

    Mr. Chairman and Members of the committee, thank you for the 
opportunity to discuss President Bush's fiscal year 2004 budget for the 
Corporation for National and Community Service. It is my pleasure to be 
here on behalf of the President, and our Board of Directors under the 
chairmanship of Stephen Goldsmith.
     I would also like to take this opportunity to thank Chairman Bond, 
Senator Mikulski, and their staff for recommendations with regard to 
management improvements within the Corporation and their recent efforts 
in support of the National Service Trust.
    As you review this first budget for our second decade, it is 
altogether fitting that we collectively consider what the Corporation 
has accomplished, what we have learned, and where we are going. This 
2004 budget affirms that we have a great deal to be proud of. But as we 
have also recently seen, we have had to learn some substantial lessons 
about how to manage and support a decentralized system of national and 
community service, and we have a great deal more to do.
    The past performance of the Corporation, including recent problems 
with the National Service Trust, raises appropriate questions regarding 
the management of the Corporation's national service programs. I am 
here today to answer your questions about fiscal, programmatic, and 
management improvements underway at the Corporation, and to discuss the 
President's 2004 budget request for the Corporation. The work that 
AmeriCorps members do in communities across the country--along with the 
efforts of hundreds of thousands of volunteers supported by the 
Corporation's other programs--makes an important difference in the 
lives of countless individuals. With our Board of Directors, we are 
working to strengthen the management of the program so it can continue 
to support their work.
    I would like to highlight some of the management changes we are 
making, as well as some of the challenges we face in fiscal year 2003. 
In addition, I will discuss the resources we will need in 2004 to 
support President Bush's vision of national service programs that will 
strengthen the vitality of America's many nonprofit organizations, 
including the tens of thousands of non-profit and community and faith-
based organizations that deliver vital services to Americans in need.

                           MANAGEMENT REFORMS

Management and Personnel
    In the past year, the Corporation has made a number of management 
and personnel changes to improve the effectiveness and accountability 
of our programs. Senators Bond and Mikulski, and their staff, have 
generously lent their expertise to the process.
    Just over a year ago, we began to establish a new financial 
management team including Senate confirmed appointees for the posts of 
Chief Financial Officer and the Inspector General. Today I am pleased 
to be joined by our new CFO, Michelle Guillermin, and our new Inspector 
General, J. Russell George. In addition, we have hired new senior 
AmeriCorps officials, among other additions to our top management team.
    The aim of these changes is to strengthen the Corporation's ability 
to complete high-level programmatic and financial analysis; to ensure 
that we are able to exercise strong internal controls over our 
operations; and to be absolutely certain that the resources Congress 
and the taxpayers entrust to us are used effectively to help meet the 
Nation's most pressing needs through fostering citizen service.

Tracking Procedures
    The recent challenges concerning the National Service Trust 
stemmed, in part, from inadequate tracking procedures. Most of the 
Corporation's grant awards were made with the expectation that the 
positions would be renewed for 2 additional years unless the grantee 
performed in an unsatisfactory manner. In the last 3 years, the 
Corporation planned for an AmeriCorps enrollment of 50,000 positions in 
the National Service Trust and exceeded targeted enrollments.
    By law, AmeriCorps cannot enroll new members unless funds are 
available in the National Service Trust to cover the costs of their 
education award. To comply with this requirement, and as a result of 
the increased enrollments, in November 2002 the Corporation instituted 
a pause in enrollments until new appropriations could be deposited in 
the Trust. The pause has since been lifted--an action made possible by 
your efforts and those of your staff, to pass the fiscal year 2003 
Omnibus Appropriations bill which secured funding for the Trust.
    As a response to this enrollment problem, the Corporation has 
instituted a number of reforms around Trust management and accounting 
procedures. From now on, prior to the Corporation approving AmeriCorps 
positions, the CFO will certify that sufficient funds are available in 
the Trust to support the Education Awards that will be earned by 
members serving in those positions. Moreover, we will insist on more 
timely reporting of commitments and enrollments by our grantees. The 
Grants Management Task Force of the Board of Directors, convened last 
fall by Chairman Goldsmith, is charged with examining the procedures we 
use to solicit, review, award, and monitor grants in AmeriCorps, Learn 
and Serve America, and Senior Corps. We look forward to the Task 
Force's final report, due in May.
    At our request and the request of Congress, the CNCS Inspector 
General is examining the circumstances that led to the enrollment 
problem and our corrective measures. We are awaiting this report, along 
with the report of the GAO on these matters that Congress asked for.
    Finally, the development of performance measures and measures of 
financial accountability for both Corporation offices and our grantees 
will continue to be important in the current and upcoming fiscal years. 
We will be providing enhanced professional development, training, and 
technical assistance to ensure that all staff members can fully utilize 
the programmatic and financial information that will increasingly be 
available to them.
    We are in the first year of implementing a new electronic grants 
management system, using funding provided specifically for this purpose 
by the Congress. With development and testing completed, we have begun 
implementation on a phased basis throughout fiscal year 2003, 
consistent with our established grant cycles. When fully operational, 
the Corporation will have an integrated grants management system 
providing comprehensive financial and program management information 
for all grants and cooperative agreements. Grantees in all our programs 
will apply for and receive assistance electronically, greatly reducing 
current paperwork burdens. The design meets the Grants Financial System 
Requirements of the Joint Financial Management Improvement Program, and 
the requirements of the Government Paperwork Elimination Act and the 
Federal Financial Assistance Management Improvement Act.

                    FISCAL YEAR 2003 APPROPRIATIONS

    As the subcommittee is aware, the administration submitted its 2004 
budget prior to Congress completing action on the 2003 appropriation. 
We look forward to continued discussion with you and the committee 
staff to ensure that Congressional intent is carried out in fiscal year 
2003 and to meet the President's objectives for growing and 
strengthening AmeriCorps in fiscal year 2004.
    On Tuesday, March 4, 2003, President Bush sent a letter to Speaker 
Hastert asking Congress to consider amendments to the 2003 Omnibus Bill 
concerning AmeriCorps and the National Service Trust. Specifically, 
this request would provide an additional $64 million to the National 
Service Trust to liquidate obligations incurred in previous years. This 
language was included in the 2003 supplemental appropriation approved 
by the Senate on April 3.
    One area of the 2003 appropriation that remains a concern to the 
Corporation is language surrounding Innovation, Assistance, and Other 
Activities. The current Conference Report language earmarks spending of 
all dollars appropriated. Our intent is to comply with the spirit of 
the specifications provided in the Conference Report. Further 
information on this topic is contained in the Operating Plan which has 
been transmitted to Congress. We have also complied with the Congress' 
request to provide quarterly enrollment reports and are working with 
staff to create an effective and regular reporting system.

                    FISCAL YEAR 2004 BUDGET REQUEST

    The budget request before this subcommittee for fiscal year 2004 
totals $592.7 million. This is an increase of $163.7 million above 
enacted amounts in 2003. The request funds AmeriCorps*State and 
National, AmeriCorps*NCCC, Learn and Serve America, the National 
Service Trust, program administration and State commissions, Innovation 
and Assistance programs, and three additional programs: America's 
Promise, the Points of Light Foundation, and Teach for America.
    The Corporation has identified these five budget priorities for 
fiscal 2004: providing opportunities for 2.5 million citizens to serve 
their communities and their country; meeting critical community needs 
in the areas of education, homeland security, public safety, public 
health, disaster preparedness, the environment and community 
development; promoting civic engagement and member development; 
strengthening accountability and effectiveness; and empowering faith-
based and grassroots organizations. The Corporation will carry out 
these priorities through our AmeriCorps, Learn and Serve America and 
Senior Corps programs.

AmeriCorps
    The President has requested program funding levels that will 
support as many as 75,000 AmeriCorps members in fiscal year 2004, a 50 
percent increase in the number of participating members. The request 
for transfer authority as referenced in the budget justification, which 
requires Congressional notification prior to carrying out any such 
transfer, would ensure that the mix between National Service Trust 
funding and program funding is adequate to support this level of 
participation. We anticipate and look forward to continued discussion 
with the committee on this proposal.
    AmeriCorps members provide countless hours of service in schools, 
health clinics, homeless shelters, wilderness areas, neighborhood 
centers, and other places where public work needs to be done. They 
recruit and manage tens of thousands of their fellow Americans to help 
build homes, tutor children, respond to disasters, enhance homeland 
security, clean up streets and vacant lots, and feed the hungry. They 
promote what is best about our country--individuals helping those in 
need.
    AmeriCorps is a collaboration of governor-appointed State 
commissions and national nonprofits that are largely responsible for 
determining where members can be most useful. After a sometimes 
challenging decade, commissions are now operating in all but one State, 
increasingly meeting financial and administrative standards and playing 
key roles in new initiatives, such as assisting community and faith-
based organizations and enhancing homeland security. AmeriCorps 
partners include many of the Nation's preeminent nonprofit 
organizations.
    Members have the opportunity to earn an education award to help 
finance higher education or pay back student loans upon successful 
completion of service. At present, approximately $750 million in 
education awards have been earned by AmeriCorps members. Awards are 
taxable and are paid directly to the college, university, or lending 
institution for student loans.
    Members serve in full-time, part-time and reduced-part time 
positions. Slightly more than half of the members serve full-time and 
receive a very modest living allowance of about $9,000 per year for 
1,700 hours of service. At least 15 percent of the living allowance 
must be matched in dollars (not in-kind) by the grantee. Part-time 
members receive a reduced living allowance or none at all.
    There are three main components of the AmeriCorps program. Two are 
funded under the National and Community Service Act under the 
jurisdiction of this subcommittee: (1) AmeriCorps*State and National 
provides grants to States and to national nonprofit organizations to 
support members in local communities across the country, and (2) 
AmeriCorps*National Civilian Community Corps, or ``NCCC,'' a 10-month, 
full-time residential service program for men and women, ages 18 to 24 
years, that combines the best practices of civilian service with the 
best aspects of military service, including leadership and team 
building. The third component is funded under the Domestic Volunteer 
Services Act by the Labor-HHS Appropriations bill: AmeriCorps*VISTA 
focuses members' activities on supporting community and faith-based 
organizations in helping build the self-sufficiency of low-income 
communities. These members are also eligible for education awards 
funded through the National Service Trust.
    Focusing on performance measurement and evaluation, we will ensure 
that AmeriCorps programs are accomplishing their objectives and 
training a new generation of civic leaders. Further, AmeriCorps 
programs must show they are enabling national and community based 
programs to develop their own resources and become self-sustaining. The 
Corporation has changed its restrictions on AmeriCorps member 
participation in capacity-building and sustainability efforts of their 
host organizations. We now encourage members to engage in such 
activities as mobilizing resources and developing community 
partnerships intended to strengthen communities.
    Recruiting, supporting, and managing volunteers are among the most 
crucial ways AmeriCorps members have helped build the ``capacity'' of 
the organizations with which they have worked. Our program directions 
seek to foster more--and a broader range of--such activities and some 
of the programs we fund have already begun to meet these capacity 
building needs.
    AmeriCorps has a long tradition of assisting grassroots and faith-
based groups. Often relatively small in size, but large in stature in 
their communities, these organizations are frequently among the most 
successful in reaching needy people. Their impact is sometimes limited 
by their organizational and financial capacity--an area in which 
AmeriCorps members can play a crucial role. Our FACES initiative, or 
Faith and Communities Engaged in Service, seeks to build on our past 
efforts in reaching out to faith-based groups, break down barriers 
small groups face in participating in our programs, and increase their 
administrative, management, and technological capacity.
    In addition to its role in assisting small community and faith 
based organizations, AmeriCorps*VISTA has been a leader in initiating 
asset development and wealth creation programs such as Individual 
Development Accounts (IDA). More recently, AmeriCorps*VISTA has 
dedicated members to entrepreneur education and micro-enterprise 
initiatives, which help low-income people become self-sufficient by 
developing their own businesses. In 2002, AmeriCorps*VISTA launched the 
Entrepreneur Corps to expand its efforts in this area by allocating an 
estimated 400 members to assist organizations in developing wealth-
creation programs for families and individuals while also developing 
the assets of the organizations they are placed with through sound 
technology planning and financial management and development. In fiscal 
year 2004, AmeriCorps*VISTA will further develop the Entrepreneur Corps 
and continue to dedicate substantial resources toward this programming 
area.
    With regard to technology, AmeriCorps*VISTA will also continue to 
support an extensive network of sponsoring organizations that are 
tackling the problems of the digital divide. Members will continue to 
play a significant role in helping community organizations to assess 
their technology needs; develop and design technology plans; set up 
school-based or neighborhood-based computer learning centers; secure 
resources for hardware and software; and recruit volunteers for a 
variety of activities including hardware installation, instruction and 
mentoring, and staffing computer labs.
    The experience all AmeriCorps members have when they work with 
community program sponsors is one of the reasons participation in 
national and community service can help create a lifelong habit of 
civic responsibility. We have also learned that reflection and more 
formal instruction in the role civic activity plays in our system of 
government are necessary components of the service experience. To help 
meet this objective, the Corporation is in the process of completing 
guidance based on pilot efforts to increase members' knowledge, skills, 
and behaviors related to citizenship.

AmeriCorps*State and National
    The President's 2004 budget for AmeriCorps pursues these new 
directions and creates additional opportunities for national and 
community service. Specifically, our fiscal year 2004 budget requests 
$313.2 million for AmeriCorps*State and National Programs. The intent 
is for these funds to be used by State commissions and to fund local 
community-based non-profit organizations to support AmeriCorps 
programs. The budget proposes an increase of $138 million above 2003 
levels in order to support, when combined with the other components of 
AmeriCorps and the allocation for the National Service Trust, as many 
as 75,000 members in 2004.

AmeriCorps*NCCC
    The 2004 budget also requests $27 million for the 
AmeriCorps*National Civilian Community Corps. Under this request, 
AmeriCorps*National Civilian Community Corps would operate five 
campuses, including a new satellite campus and engage an estimated 
1,350 members. In last year's committee language, you requested a 
report regarding the proposed expansion AmeriCorps*NCCC. This report 
has been drafted and we will be sharing it with members and staff of 
this committee shortly. Members will complete about 650 projects and 
invest more than 2.3 million service hours in local communities. 
Homeland security and disaster response will continue to be a high 
priority for AmeriCorps*NCCC. Among their recent projects, NCCC members 
from the Denver campus are assisting the U.S. Forest Service in 
searching for debris from the explosion of the Space Shuttle Columbia. 
The team consists of Forest Service-trained members who normally spend 
the majority of their service at the Arapahoe National Forest in 
Colorado. And a team of AmeriCorps NCCC members were recently in the 
District of Columbia, helping the city recover from record snows.

AmeriCorps Education Award Program
    The AmeriCorps Education Award Program, providing education awards 
without living allowances, is currently funded from demonstration 
authority under Subtitle H of the Act. Pending action by Congress, the 
President's Budget contemplates funding the program within Subtitle C, 
in order to expand the types of programs and organizations in which 
AmeriCorps members may serve, while minimizing the cost to the 
Corporation and the Federal Government. Under subtitle H, the level of 
support is set by the Corporation.

National Service Trust
    The President's budget requests $120 million for the National 
Service Trust. This level of funding--along with transfer authority 
language referenced in the Corporation's budget justification--would 
permit the Corporation to enroll as many as 75,000 AmeriCorps members 
in 2004, cover forbearance costs associated with members holding loans 
during service, and provide 7,000 Presidential Freedom Scholarships 
through the Learn and Serve America program.

Learn and Serve America
    Our budget request includes $43 million to support Learn and Serve 
America, which operates in our Nation's elementary and secondary 
schools and institutions of higher education. Over the last decade, the 
programs funded by the Corporation have committed themselves to 
developing America's tradition of volunteering by integrating service 
with school curricula. Among their accomplishments are improving 
elementary students' school achievement, promoting children's readiness 
for school, improving the English skills of immigrants, and improving 
adult literacy and job skills. In 2002, our grants supported 106 
elementary and secondary programs and 68 higher education programs with 
approximately 1.2 million participants including adult faculty and 
staff.
    This year, and in fiscal year 2004, the Learn and Serve America 
program will focus on helping schools fulfill their primary civic 
mission: to create informed and thoughtful citizens, able and eager to 
participate in America's democratic institutions through their 
lifetime. Studies show that young people's civic knowledge is weak. 
Though more and more of them participate in community service, fewer 
and fewer individuals understand the civic or political principles that 
lie beneath and give meaning to effective community service. Learn and 
Serve America will seek to address this by encouraging its grant 
applicants to design age-appropriate learning activities that foster 
civic knowledge, attitudes, and behavior.
    As with AmeriCorps, we will make the expenditure of Federal funds 
more accountable through the implementation of performance measures for 
all grantees. Learn and Serve America published guidance in January 
2003 to solicit new grant applications with detailed accountability 
expectations for all programs. Performance measures negotiated with 
each grantee will become part of the grant award agreement and programs 
will report on their progress against these measures for the 3-year 
grant period. Failure to make adequate progress will result in 
sanctions.
    In 2004, we propose to allocate the $43 million in funding for 
Learn and Serve America as follows: approximately $20 million by 
formula to State education agencies, which make subgrants to local 
programs; $6.5 million for school-based programs through a competitive 
process in which State education agencies, Indian tribes, and multi-
State nonprofit organizations are eligible; up to 3 percent, or 
$800,000, within the school-based funds to be awarded competitively to 
Indian tribes and U.S. territories; $4.8 million for competitive grants 
to community-based programs serving school-age youth in settings 
outside of school, awarded competitively to the State Commissions on 
National and Community Service, as well as to national nonprofit 
organizations; and $10.75 million awarded competitively to individual 
institutions of higher education or consortia.

Innovation, Demonstration, and Other Assistance
    In the area of innovations and demonstrations, the administration 
is requesting $26 million for various purposes, including: training and 
technical assistance, recruitment, Martin Luther King, Jr. Day grants, 
statutorily-mandated disability grants, unified State plans, and 
external communications. In addition to supporting these services, the 
Corporation will continue to work with the White House, through the 
invaluable umbrella established last year, the USA Freedom Corps, to 
support the President's Call to Service, his challenge to all Americans 
to give at least 2 years of service to their communities and country 
over their lifetimes. We also plan to convene a conference for the new 
AmeriCorps and Senior Corps homeland security grantees to ensure high 
quality implementation of homeland security activities across the 
country. Through our Faith and Communities Engaged in Service (FACES) 
initiative, we will continue to increase its involvement with faith-
based and small community organizations and help to expand the capacity 
of these innovative groups to meet critical needs in their communities.
    With Congressional approval of our request to transfer the 
AmeriCorps Education Awards program from this category, we will have 
greater flexibility to carry out the original intent of this funding 
stream. Through these funds, the Corporation can provide leadership 
development and training and technical assistance support to grantees 
and service programs to make sure that we are supporting best practices 
and that we are training tomorrow's community leaders. The Corporation 
will also be better able to support research aimed at identifying steps 
necessary to renew the ethic of civic responsibility in the United 
States and improve the ability of service programs to address unmet 
community needs.

Evaluation
    The Corporation conducts or contracts for evaluations of its 
programs, initiating several studies each year on a range of issues, as 
mandated by the National and Community Service Act. Other studies are 
an important part of the Corporation's compliance with the Government 
Performance and Results Act (GPRA), and in conjunction with our efforts 
to gauge program performance through the new Program Assessment Rating 
Tool (PART). In fiscal year 2004, we are requesting $7 million to 
support the studies identified in our budget justification and to 
facilitate the implementation of performance measures for our grantees. 
These efforts are critical to enhance program performance and are a 
high priority for both our authorizing and appropriations committees. 
We believe strongly in the centrality of research and evaluation to the 
future of national and community service.
    In addition, the Corporation's Office of Research and Policy 
Development is playing an increasingly central role as a resource for 
other governmental, nonprofit, and philanthropic groups on a wide range 
of research and evaluation issues related to volunteering and service. 
For example, it helped initiate a Census Bureau survey of volunteering, 
which will now be done regularly by the Bureau of Labor Statistics 
(BLS) and should provide information useful to organizations eager to 
enlist Americans in service. It is also in the final stages of 
developing a survey on volunteering among teenagers, a long-time focus 
of the Corporation's efforts. These activities not only enhance the 
impact of the resources available to the Corporation, but also 
contribute to the Corporation's ultimate mission of renewing ``the 
ethic of civic responsibility'' in the United States.

Earmarks
    The Corporation's proposed fiscal year 2004 budget includes 
allocations for three organizations: Teach for America, the Points of 
Light Foundation, and America's Promise--The Alliance for Youth. The 
Corporation has had a long relationship with each of these and believes 
each merits such treatment because of its ability to meet performance 
goals and deliver effective services. However, as a general rule, 
consistent with administration policy, the Corporation seeks to limit 
the use of earmarking funds through the appropriations process.

Program Administration
    Our budget request for fiscal year 2004 includes $36 million for 
program administration, of which 40 percent would support State Service 
Commissions. Our budget materials describe the use of these funds in 
detail.

Office of the Inspector General
    As a separate request, the President's budget requests $5 million 
for the audit and investigative activities of the Office of the 
Inspector General.
    We all value the important work of that office to conduct 
independent and objective audits and investigations and to prevent and 
detect fraud, waste, and abuse. In addition to the number of important 
reviews of program operations conducted by this office in the past 
year, the Inspector General has also formed a new unit within his 
office to facilitate work related to program performance. One example 
of the kind of work this unit will do on a regular basis is the special 
examination undertaken earlier this year of the Corporation's 
innovative ``alternative personnel system'' The final report, which 
will be available later this month, will include a number of important 
recommendations for improvement.

                          LEGISLATIVE REFORMS

    In 2002, the administration and Congress began work on a bill to 
reform and improve the quality of national and community service 
programs. While we are pursuing many reforms administratively, some 
require your assistance through legislation. We appreciate, and are 
encouraged by, the progress this reauthorization bill made during the 
last session of Congress. We will continue to work with the members and 
staff of the authorizing committees to complete action this year on the 
Citizen Service Act of 2003, which the President called on the Congress 
to pass during his State of the Union Address earlier this year.
    Importantly, this legislation will allow us to strengthen our 
management practices and fulfill our commitment to investing in 
programs that produce results. The Corporation is already working to 
ensure that all grantees in our AmeriCorps, Senior Corps, and Learn and 
Serve America programs have specific objectives and accountability 
requirements linked to significant service outcomes and program 
impacts.
    In 2004, 2.5 million Americans of all ages will serve and volunteer 
through the support of the Corporation's programs. To ensure that these 
programs are effectively meeting the needs of our Nation's communities 
this year and in years to come, we encourage Congress to pass the 
Citizen Service Act of 2003.

                               CONCLUSION

    Mr. Chairman, this concludes my statement concerning the 
Corporation's budget request for fiscal year 2004. In preparing this 
statement--and in all of our operations--we at the Corporation have 
kept constantly before us the vital importance of the commitment made 
by our members, their response of the heart to the needs of their 
Nation and their neighbors.
    At the public Board meeting of the Corporation, we had the 
opportunity to hear from some of those people. One of them was Jesus 
Santiago II, a young man from Ohio and a member of the Ohio Civilian 
Conservation Corps. Mr. Santiago is the product of a broken home. By 
the age of 6, he says, he was an alcoholic. He later moved on to using 
LSD, cocaine, and other drugs. At 16, he dropped out of school; by 17, 
he was jailed for 11 months.
    During his incarceration, Mr. Santiago learned about the Ohio CCC. 
He joined when he was released, and it made all the difference in his 
life. Here's what he told the Board of the Corporation: ``While I've 
been out making changes in communities it has given my life new 
meaning. I have helped people in two communities recover from tornado 
damage, worked in parks and forests and regularly participated in 
recycling drives. I've changed from being a bad kid to one who helps 
other young people get their lives back on track. I've been promoted 
twice and now serve as a Corps leader.'' Mr. Santiago is now attending 
college, thanks to his AmeriCorps education award. He's in recovery and 
on the road to a productive life as a social worker so that he can help 
others do the same.
    We hear these kinds of stories from members every day, and they 
help to inspire and motivate our work. I hope that his story will also 
inspire this committee to support our efforts to strengthen these 
national service programs. They are important, and they do make a 
difference--in communities, in the lives of those served and those who 
serve, and for our Nation as a whole. They deserve to be run as well as 
we possibly can. You have my commitment that we will work ever harder 
to do this, because the public expects us to--and because people like 
Jesus Santiago need us to.
    As challenging as the road ahead of us might look, we should be 
heartened by the fact that we start from a decade's worth of 
accomplishments and lessons learned. These should encourage us not only 
to aim higher, but also to be confident we can succeed. With the 
continued assistance and oversight of this subcommittee, I am certain 
that we can accomplish all that we are charged with and appreciate this 
committee's support and guidance. We are available to address any 
questions.

    Senator Bond. Thank you, Dr. Lenkowsky, and now we turn for 
comments and a summary of the full written statement from Mr. 
George.
    Welcome, Mr. George.

                     STATEMENT OF J. RUSSELL GEORGE

    Mr. George. Thank you, Mr. Chairman, Senator Mikulski. 
Thank you for inviting me to appear here today. As requested, 
my oral comments will focus on the issue of the National 
Service Trust.
    The Trust was created to fund education awards and to pay 
interest that accrues on qualified student loans while an 
individual is serving as an AmeriCorps member. If a member does 
not use the award within 7 years, the right to the award is 
forfeited.
    The Corporation's financial statements, which were being 
audited as part of my office's annual review, indicated that as 
of September 30, 2002, the Trust's assets exceeded its 
liabilities by $1,851,000. An unqualified opinion on the 
Corporation's financial statements report was issued on 
February 4, 2003.
    Following up on your request, Chairman Bond, my office 
initiated an investigation into whether the Anti-Deficiency Act 
was violated. As of today, no evidence of a violation of that 
Act was found. The audit confirmed, however, that the 
Corporation had not complied with the Trust Act when it 
approved, although not enrolled, more AmeriCorps positions and 
grant awards over the course of fiscal year 2002 than the Trust 
would have been able to financially support in the future. The 
Corporation concedes that it did not comply with this 
requirement.
    The number of approved National Service positions for 
program years 2000, 2001, and 2002 were approximately 59,000, 
61,000, and 67,000 respectively, yet we found that the 
Corporation based its budget estimates for the Trust on 
anticipated enrollments that ranged from 49,717 to 51,717. The 
Corporation approved more positions than it budgeted because 
historically many AmeriCorps members do not complete a term of 
service and, of those who do, some may not earn a full 
education award or do not use the education award at all.
    The yearly congressional appropriations and investment 
income combined to create Trust fund surpluses that grew at a 
rapid rate. By 2000, the surplus in the Trust was at such a 
level that Congress rescinded $81 million from amounts in the 
Trust. In 2001, the amount was still considered to be in excess 
of its needs, and Congress rescinded an additional $30 million 
from the Trust.
    During discussions with OMB and congressional staff, 
Corporation management was informed that the Corporation's 
budget was going to be reduced. Management decided they could 
meet the administration's budget reduction by not requesting 
appropriations for the Trust. Based on model forecasts, they 
believed that there were sufficient funds in the Trust to cover 
the estimated liabilities even with no appropriations. This 
belief led management to request no appropriations for the 
Trust in the Corporation's fiscal year 2002 budget request.
    My investigation found that Trust liability projections 
were not being made by Trust staff but instead by a senior-
level official in the Corporation's executive office. The Trust 
Director's position description states that the person holding 
that job is solely responsible for all aspects of Trust 
operations, yet in practice the Trust Director managed only 
day-to-day operations. Although Trust staff were aware of the 
liability projections, they did not have ownership of this 
process.
    We also found that the computer programs used to monitor 
the system did not contain any automatic programming to alert 
the appropriate officials when AmeriCorps member enrollments 
reached a predetermined level. No safeguards were built in to 
prevent additional enrollments until reviewed and approved by 
Corporation staff. Although certain Corporation managers were 
aware that enrollments were increasing, the reporting and 
tracking of these enrollments were not timely. This lack of 
automated alerts and safeguards allowed AmeriCorps enrollees to 
exceed expectations, which resulted in a freeze on further 
enrollments.
    Some of the reasons for this included the fact that the 
Corporation did not have effective internal controls to assess 
the impact of enrollments on the Trust prior to authorizing new 
National Service positions. In addition, Corporation staff 
focused exclusively on appropriations made available for 
AmeriCorps grants, and did not adequately consider the impact 
of education awards when making grant decisions to support new 
National Service positions.
    And finally, there was a lack of coordination between 
senior Corporation officials, AmeriCorps, Office of Grants 
Management, and Trust staffs as to how many new National 
Service positions could be allocated annually to the programs.
    Senators, subsequent interviews with Corporation officials 
found that most failed to make the connection between increased 
enrollments and Trust funding levels. One official told my 
investigators that it did not become an issue until they 
realized that the fiscal year 2003 continuing resolutions 
prevented them from budgeting any funds for the Trust, since no 
appropriations had been requested in the prior year.
    The Office of Inspector General determined that the 
Corporation could generate reports showing numbers of 
AmeriCorps enrollments for any given time. Further, through 
interviews with the former Director of the National Service 
Trust and her staff, we discovered that the Corporation 
generated other reports showing the financial status of the 
Trust on a monthly basis. These reports were forwarded to 
senior Corporation management. However, there was no known 
reconciliation of the number of AmeriCorps enrollees to future 
Trust liabilities.
    Additionally, quarterly National Service Trust status 
reports were sent to Congress detailing the Trust's assets, 
model-calculated liabilities, revenues, expenses, and net 
position. The quarterly reports to Congress also contained 
AmeriCorps member enrollment data, but it appears that the 
Corporation member enrollment data was never reconciled with 
the Trust status reports.
    At this stage of our review, the Office of Inspector 
General is in a position to make some preliminary 
recommendations based upon our findings. We recommend that 
policies and procedures should be revised to ensure that the 
staffs of the AmeriCorps Program Office, the Office of Grants 
Management, and the Trust Office are involved in the budgeting 
process, National Service position approval and amendment 
process, too.
    The Trust Office staff should ensure that funds are 
available in the Trust to meet the estimated liability to be 
incurred prior to National Service position approval. And 
finally, reports should be generated on a monthly basis to 
compare the number of approved National Service positions to 
the actual members enrolled.

                          PREPARED STATEMENTS

    Senior management should review these reports on a timely 
basis to ensure that enrollments do not exceed the 
Corporation's estimates, and I would add that automated 
controls should be implemented to limit approval of additional 
enrollments to authorized officers in the Grants Management 
Office and to prevent grantees from enrolling members after the 
program year enrollment period ends.
    Mr. Chairman, Senator Mikulski, this concludes my prepared 
statement. I would be pleased to answer any questions you might 
have.
    [The statements follow:]

                Prepared Statement of J. Russell George

    Mr. Chairman and members of the subcommittee, thank you for 
inviting me here today. As you know, President Bush nominated me for 
the position of Inspector General of the Corporation for National and 
Community Service in February of 2002, and the Senate honored me by 
voting to confirm my nomination last July. This is my first appearance 
before this subcommittee, and I appreciate the opportunity to discuss 
with you some of the major issues that have come to my attention since 
assuming my position.

                  ESTABLISHMENT OF EVALUATION SECTION

    Before addressing the issue of the National Service Trust, I would 
like to point out that I am altering the structure of the Office of 
Inspector General (OIG) to expand its scope and to better enable it to 
serve its purposes. In that regard, I am in the process of establishing 
an Evaluation Section, and hope to have it fully operational in the 
coming months with an assistant inspector general and three evaluators. 
The mission of the unit will be to review the various functions of the 
Corporation and to make recommendations for improvement, hopefully 
before problems occur. It will also assist grantees and other 
beneficiaries of the Corporation's programs avoid pitfalls through 
proactive educational initiatives.

        REVIEW OF THE CORPORATION'S ALTERNATIVE PERSONNEL SYSTEM

    When the Corporation was established in 1994, Congress permitted it 
to set up an ``Alternative Personnel System,'' one that is different 
from the traditional Title 5 or General Schedule that exists in most 
Federal agencies.
    Following complaints made by Corporation employees to their union, 
to Congress, the Corporation's Chief Executive Officer, and the 
Corporation's Chairman of the Board, the OIG engaged management 
specialists at Deloitte and Touche, LLP, to conduct a study of the 
system. DeLoitte and Touche was tasked to determine if the 
Corporation's personnel policies, procedures, and practices are able to 
accomplish and are achieving the Corporation's need to maintain 
adequate staffing and to administer in a fair and equitable manner the 
use of term appointments, performance bonuses, salary increases, and 
hiring actions under the policies created pursuant to the alternative 
personnel authority.
    Based on this review, a final report will be issued in the coming 
weeks and it will make recommendations for improvement to the system 
that I believe will benefit all employees of the Corporation. Some of 
the recommendations will concern clarifying the roles and the authority 
of Corporation managers in the system, making appointment and 
promotions procedures more clear, and ensuring that the budget process 
identifies the need for adequate funding for salary increases.

                      AUDITS OF STATE COMMISSIONS

    Approximately two-thirds of the Corporation's AmeriCorps grant 
funds go to State commissions, who are appointed by State Governors, 
who subgrant it to organizations in their States that perform 
AmeriCorps programs. We have been conducting audits of these 
commissions since 1999. In March we issued an audit report for the 
Indiana State Commission, and we plan to conduct audits of the State 
commissions in the States of Wisconsin, Ohio, Maine, Pennsylvania, and 
Connecticut in the coming year. As a result of past audits of State 
commissions, our auditors have made numerous questioned cost findings 
of the grantees. These costs were primarily due to inadequate record 
keeping on their part, and we have worked with commissions and 
Corporation management to resolve these findings.
    We have also completed the annual audit of the Corporation's 
Financial Statement. KPMG, who completed the work, gave an unqualified 
opinion on the statements, but noted a reportable condition with 
respect to the situation that arose concerning the Trust. As I will 
discuss in greater detail shortly, we intend to review the 
Corporation's grant management procedures in the coming year.
    Other audits that have been completed in the last 6 months include 
the Points of Light Foundation, Parents as Teachers, Navajo Nation 
Foster Grandparent Program, and RSVP of Bergen County, New Jersey. Work 
in progress includes the 2002 fiscal year Management Letter, and audits 
of congressionally earmarked funds to America's Promise--The Alliance 
for Youth, and Communities In Schools Inc.

             NATIONAL SERVICE TRUST AUDIT AND INVESTIGATION

    On November 11, 2002, Dr. Les Lenkowsky, the Corporation's Chief 
Executive Officer (CEO) informed me it had recently come to his 
attention that in the preceding months the Corporation had approved 
more AmeriCorps member positions as part of their grant awards to 
national service programs than the National Service Trust (Trust) could 
support.
    The National and Community Service Trust Act of 1993 established 
the Trust to fund education awards and to pay interest that accrues on 
qualified student loans while an individual is serving as an AmeriCorps 
member. The Trust does not pay member benefits such as living 
allowances or health benefits, only education awards, interest 
forbearance, and Presidential scholarships. Education awards are for 
AmeriCorps members who successfully complete their term of service and 
request the award. After the award is approved it can be used to pay 
back the member's student loan, current education expenses or approved 
school-to-work programs through the member's qualified institution of 
higher learning defined under a Title IV Program Participation 
Agreement with the U.S. Department of Education. AmeriCorps members, in 
accordance with the National and Community Service Trust Act, have 7 
years to use their approved award. If a member does not use the award 
within 7 years, the right to the award is forfeited.
    In fiscal year 1994, the first year of the Corporation's 
operations, Congress appropriated $93,250,000 for the Trust. For all 
subsequent years, except fiscal year 2002, Congress has appropriated 
between $59,000,000 and $115,070,000 for the Trust. The Trust receives 
these funds under a ``no year'' appropriation, i.e., funds that are 
available until expended. The funds for the Trust are kept in an 
account in the U.S. Treasury and are invested in Treasury securities. 
The National and Community Service Trust Act requires that the 
Corporation ensure that there will be sufficient funds available in the 
National Service Trust to pay for education awards.
    The CEO informed me that to prevent excessive Trust liability from 
occurring he had directed that program grantees cease enrolling members 
for their coming program year until the fiscal situation was resolved. 
The CEO also informed me that he had earlier reported the situation to 
this subcommittee. On November 20, 2002, I received a letter from 
Chairman Bond requesting that my office investigate and audit the 
Corporation's management and oversight of the National Service Trust. 
Part of our review included the audit of the Corporation's financial 
statements being performed at the time by KPMG. I directed the OIG 
investigative staff to identify persons responsible for the situation, 
and to determine if the Anti-Deficiency Act had been violated.\1\
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    \1\ One of the items requested in Chairman Bond's letter was to 
identify the Corporation staff responsible for managing, administering, 
and monitoring AmeriCorps member enrollment and Trust operations. I am 
not able to address this aspect of the request in my testimony, as this 
matter is still under review.
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                           AUDIT OF THE TRUST

    We initially turned to the Corporation's financial statement for 
the year ending September 30, 2002, to determine whether the grant 
recipients had enrolled so many AmeriCorps volunteers that the Trust's 
liabilities had exceeded assets. The Corporation's financial statements 
indicated that the Trust was still solvent. As of September 30, 2002, 
the Trust's assets exceeded its liabilities by $1,851,000. The audit 
firm, KPMG, working under contract to conduct the financial statement 
audit, concurred in this judgment. An unqualified opinion on the 
Corporation's financial statements report was issued by the OIG on 
February 4, 2003, a copy of which is attached to my testimony.
    However, KPMG auditors confirmed that the Corporation had not 
complied with the National and Community Service Trust Act when it 
approved, although not enrolled, more AmeriCorps positions in grant 
awards over the course of fiscal year 2002, than the Trust would have 
been able to financially support in the future. KPMG characterized this 
as a reportable condition but did not consider the matter a material 
weakness.
    Section 129(f) of the National Service and Community Trust Act, 42 
U.S.C. Sec. 12581(f), requires that the Corporation approve National 
Service positions in its grants to AmeriCorps programs by ``taking into 
consideration funding needs for [education awards] based on completed 
service.'' The Corporation concedes that it did not comply with its own 
authorizing legislation.
    The reasons found by the auditors for the Corporation's approval of 
positions in excess of what the Trust could reasonably support were:
  --The Corporation did not have effective internal controls to assess 
        the impact of enrollments on the Trust prior to authorizing new 
        National Service positions.
  --Corporation staff focused exclusively on appropriations made 
        available for AmeriCorps grants, and did not adequately 
        consider the impact of education awards when making grant 
        decisions to support new National Service positions.
  --There was a lack of coordination between senior Corporation 
        officials, AmeriCorps staff, Office of Grants Management staff, 
        and Trust staff as to how many new National Service positions 
        could be allocated annually to the programs.
    KPMG noted that under the grant award process in place during 
fiscal year 2002, the Corporation published Notices of Funds 
Availability based on its approved priorities and guidelines and 
appropriations level. KPMG found that AmeriCorps staff, in consultation 
with other senior staff, decided the funding level and the numbers of 
positions to be awarded to each program. These awards were made with 
regard to funds available for member living allowances and the 
grantee's administrative costs, but not with regard to education awards 
that could be funded by the Trust when members completed service. The 
AmeriCorps staff prepared a certification form that specified the grant 
budget and the number of positions allocated to that grantee's program.
    Based on the certification prepared by the AmeriCorps staff, the 
staff of the Office of Grants Management issued a Notice of Grant award 
to the grantee. This document includes the grant number, and specifies 
the project period, award amount and number of approved National 
Service positions for the program. Grants management staff sent the 
number of approved National Service positions to the staff of the 
Trust. The information was entered into two distinct databases, the 
System for Programs, Agreements, and National Service Participants (now 
known as eSPAN),\2\ and the Web Based Reporting System (known as 
WBRS).\3\
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    \2\ eSPAN is a database used principally by Trust personnel for the 
tracking and reporting of AmeriCorps members and their education award 
use. AmeriCorps member's ultimate approval and payment of their 
education award is initiated from this database.
    \3\ WBRS is a database established to facilitate program and member 
data input from the field. Grant recipients are responsible for 
inputting data for each new AmeriCorps member they enroll.
---------------------------------------------------------------------------
    The auditors noted that AmeriCorps program officers and grant 
officers had access to the WBRS database and could approve additional 
AmeriCorps member enrollments in excess of what had been originally 
approved in the Notice of Grant Award, contrary to the rule specified 
in the Program Director's Handbook, which allows approval only by a 
grants officer. In addition, there were no controls in WBRS to prevent 
grantees from enrolling members after their program year had officially 
ended.
    The number of approved National Service positions uploaded into 
eSPAN and WBRS for program years 2000, 2001, and 2002, were 
approximately 59,000, 61,000, and 67,000 respectively, yet an inquiry 
by the OIG's investigative staff found that the Corporation based its 
budget estimates for the Trust on anticipated enrollments in the Trust 
that ranged from 49,717 to 51,717 for these years. The Corporation, as 
a matter of practice, previously approved more positions than it 
budgeted because historically many AmeriCorps members do not complete a 
term of service, and of those that do complete their term of service, 
some may not earn a full education award or do not use the education 
award.
    Our investigation has determined that the Corporation successfully 
suspended enrollments of AmeriCorps volunteers into the National 
Service Trust before the liabilities created by new enrollees exceeded 
the Trust's assets.\4\ KPMG noted that the Corporation gives grants to 
AmeriCorps programs for specific budget periods, and for approved 
National Service positions documented on the Notice of Grant Award. 
Once a program receives an award it has 1 year to recruit AmeriCorps 
members for their particular projects and enroll them into the Trust. 
The beginning date for a program may start at anytime during the 
grantee's budget period. Even when the program's beginning date is the 
last month of the grantee's budget period, the program still has 1 year 
from that date to enroll all their approved members for that particular 
program year. This time lag allowed the Corporation to successfully 
pause enrollments of prospective AmeriCorps members before the Trust 
became insolvent.
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    \4\ During the enrollment pause, the Chief Financial Officer's 
office performed an analysis of the Trust. This analysis assumed that 
if the Corporation ceased to exist and no new additional appropriations 
were received, the Trust's assets were sufficient to pay out awards for 
enrolled members.
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                       INVESTIGATION OF THE TRUST

    Following up on Chairman Bond's November 20, 2002, request the OIG 
initiated an investigation into whether the Anti-Deficiency Act had 
been violated with regard to the funding of the number of AmeriCorps 
members enrolled in the Trust. No evidence of a violation of the Anti-
Deficiency Act was found. The inquiry confirmed KPMG's findings that 
conditions existed that contributed to a breakdown in communication and 
coordination between the Corporation's budget development function, the 
AmeriCorps Program staff and the Trust staff.
    Our inquiry found that in the first years of the Corporation's 
existence, specifically 1994 and 1995, the Director of the National 
Service Trust at that time expected no more than 24,000 AmeriCorps 
members to enroll in the Trust, but this number was no more than a 
guess as there was no historical data to draw upon. During these first 
years, the Trust's liability was based on the number of enrollee's 
multiplied by the actual amount of the education awards.
    Toward the end of 1995, it became evident to Corporation officials 
that actual AmeriCorps enrollment never reached the expected enrollment 
number and it was clear that not all enrollees were successfully 
completing their service. The pattern became clearer over subsequent 
years. For example, from program year 1994 through program year 2000, 
the actual number of AmeriCorps enrollments ranged from 25,149 in 
program year 1994 to a high of 52,891 for program year 2000, but the 
number of AmeriCorps members who actually earned an award ranged from 
18,778 in program year 1994 to 36,353 for program year 2000.
    Moreover, it later became evident to Corporation officials that 
many AmeriCorps members, who successfully completed a term of service 
and earned an education award, never used the award. OIG staff 
calculates that had the Corporation continued to base the Trust's 
liability along a straight line computation of one award per one 
enrolled AmeriCorps member, the Corporation would have had to commit a 
cumulative amount in excess of over $1 billion dollars from fiscal year 
1994 through fiscal year 2002.
    In 1996, based on the experience of these early years, the then 
National Service Trust director developed a series of formulas to 
estimate the number of enrollees who would successfully complete their 
service, when during their enrollment they would complete their 
service, and when, after completing their service, they would claim 
their education award. In addition to estimating raw numbers of 
AmeriCorps members, the formulas also estimated dollar amounts 
associated with the estimated education awards. These early formulas 
were also used to forecast estimated future funding requirements for 
the Trust, and became known as the Service Award Liability Model. The 
goal of the model was to provide better management of the Trust funds 
and to provide more realistic liability data for the Corporation's 
financial statements versus a strict liability of one award per one 
AmeriCorps member.
    Despite the liability forecasts derived from the Service Award 
Liability Model, the yearly Congressional appropriations and Trust 
investment combined to create Trust fund surpluses that grew at a rapid 
rate. By 2000, the surplus in the Trust was at such a level that 
Congress rescinded $81 million from amounts in the Trust. In 2001, the 
surplus in the Trust was still considered to be in excess to the 
Trust's needs, and Congress rescinded an additional $30 million from 
amounts in the Trust.
    In 2001, PriceWaterhouseCoopers was engaged to assess the 
Corporation's model. PriceWaterhouseCoopers found that the model 
produced reliable estimates and made recommendations for enhancements 
to it. Some of these enhancements included a fiscal versus program year 
approach, weighted average outlays to reflect changes in program year 
award amounts, a standardized discount and Treasury rate assumption, a 
centralized input worksheet, and a quarterly-basis approach versus 
yearly. The Corporation adopted these changes.
    During discussions with the Office of Management and Budget and 
Congressional staff, in this same year (2001), Corporation management 
was informed that the Corporation's budget was going to be reduced. In 
an effort to prevent the perception that the Corporation's budget was 
going to be cut, Corporation management decided they could meet the 
administration's budget reduction by not requesting appropriations for 
the Trust. Corporation management, based on model forecasts, believed 
that there were sufficient funds in the Trust to cover the estimated 
liabilities, even with no appropriations. This belief led Corporation 
management to request no appropriations for the Trust in the 
Corporation's fiscal year 2002 budget request. In the Fiscal 2002 
Budget Estimate and Performance Plan, dated April 2001, page 17, the 
Corporation stated:

    ``We have calculated the requirements for the Trust and have 
determined that no new authority is required in fiscal 2002 for the 
Trust Fund costs associated with new AmeriCorps members. This 
determination reflects several changes to policies and estimating 
procedures when compared to prior year Trust Fund requests, including:
  --``The explicit recognition that future interest earnings in the 
        Trust lower the requirements for new authority in the current 
        year's budget request. We have made this change as a result of 
        the review of the estimating model. In the past, the assumption 
        was that future interest earnings would affect budget authority 
        needs in the out years.
  --``A program budget that is based on no growth in the number of 
        AmeriCorps members in 2002.
  --``An assumption that AmeriCorps will remain at 48,000 members 
        beyond 2002.
    ``There are sufficient balances in the Trust to cover the estimated 
education award liability associated with the members supported in the 
fiscal year 2002 program budget.''

    In May 2001, Chairman Bond requested that the OIG review the 
methodology used by the Corporation to determine that no additional 
Trust appropriations were necessary for fiscal year 2002. The OIG 
contracted with KPMG to perform this review. KPMG found adequate 
support for the Corporation's decision to request no additional Trust 
funding for fiscal year 2002:

    ``The Corporation's decision not to request additional funding for 
the Trust Fund for fiscal year 2002 is supported by the documentation 
and analysis reviewed. It indicates that sufficient Trust Fund assets 
will be available to fund educational awards, Presidential 
scholarships, and interest forbearance earned and expected to be paid 
for all service performed by Members through program year 2002.''

    KPMG noted that it was likely that Congress would need to 
appropriate approximately $75 million in fiscal year 2003 to fund the 
additional awards for the 2003 program year, assuming Congress elected 
to continue the AmeriCorps member levels consistent with historical 
experience over the past several years.
    My investigation found that Trust liability projections were not 
being made by Trust staff, but by a senior-level official in the 
Corporation's Executive Office. The Trust Director's position 
description states that the person holding that position is solely 
responsible for all aspects of Trust operations, yet in actual 
practice, the Trust Director managed only day-to-day operations. 
Although Trust staff were aware of the liability projections, they did 
not have ownership of this process.
    We also found that neither the WBRS nor eSPAN systems contained any 
automatic programming to alert Grants officers, AmeriCorps Program 
officers or Trust Office staff when AmeriCorps member enrollments 
reached a predetermined level. No safeguards were built in to prevent 
additional enrollments until reviewed and approved by Corporation 
staff. Although certain Corporation managers were aware that 
enrollments were increasing, the reporting and tracking of these 
enrollments were not timely. This lack of automated alerts and 
safeguards allowed AmeriCorps enrollees to exceed expectations, which 
resulted in a freeze on further enrollments.
    In the summer of 2002, Corporation senior staff were aware that 
actual enrollments of AmeriCorps members in the Trust had exceeded the 
model forecasts, but it was not until late in the year that Corporation 
management realized that Trust liabilities could exceed assets. 
Congress passed a series of continuing resolutions to allow the 
Corporation and other Federal agencies to re-budget based on the prior 
year's authorizations. Since the Corporation had not requested or 
received fiscal year 2002 appropriations for the Trust, they were 
unable to budget any funds for the Trust from the continuing 
resolutions.
    On July 11, 2002, the senior Corporation manager who had been 
tracking Trust enrollments sent an e-mail message to the CEO, the CEO's 
senior aide, the Chief Operating Officer, and the Director of 
AmeriCorps. This message informed the recipients that AmeriCorps member 
enrollment had reached 56,500 for program year 2001, that the estimated 
enrollment could reach 58,000 by year end, and that ``down the line'' 
the Corporation would have to be sure the Trust had sufficient funds to 
handle the increased enrollment.
    On August 28, 2002, this official sent another message to the same 
addressees as his July 11, 2002, e-mail and also included the Director 
of Research and Policy Development, the Director of the Office of 
Public Affairs, and the Deputy Chief Financial Officer who at the time 
was serving as the acting CFO. This message stated that AmeriCorps 
enrollments had hit 60,000, an all time high and that the Trust budget 
funding estimates need to be updated ``as we go forward.''
    Subsequent OIG interviews with the Corporation officials who 
received the messages found that most failed to make the connections 
between increased enrollments and Trust funding levels. One official 
stated he responded to the e-mail saying he would be careful about 
publicizing the good news because readers may question how the 
Corporation could exceed their target goal and still pay the additional 
amounts. Another official said that it did not become an issue until 
they realized that the fiscal year 2003 continuing resolutions 
prevented them from budgeting any funds for the Trust since no 
appropriations for the Trust had been requested in the prior year.
    We found that during early November the Chief Financial Officer's 
staff informed her that there might not be enough funds in the Trust to 
cover future education awards due to the continuing resolutions. 
Shortly after this, she and other Corporation senior staff reviewed the 
situation and determined that the Trust's funding could be in a 
precarious position if the continuing resolutions did not end soon. The 
next day the CFO notified the CEO of the potential problem.
    We determined that the Corporation could generate eSPAN reports 
showing numbers of AmeriCorps enrollments for any given time. Further, 
through interviews with the former Director of the National Service 
Trust and her staff, we discovered that the Corporation generated other 
reports showing the financial status of the Trust on a monthly basis. 
These reports were forwarded to senior Corporation management; however, 
there was no known reconciliation of the number of AmeriCorps enrollees 
to future Trust liabilities. Additionally, quarterly National Service 
Trust status/financial reports were sent to Congress detailing the 
Trust's assets, model calculated liabilities, revenues, expenses, and 
net position. The quarterly reports to Congress also contained 
AmeriCorps member enrollment data, but it appears that the AmeriCorps 
member enrollment data was never reconciled to the Trust status/
financial reports.

                            RECOMMENDATIONS

    At this stage of our review, the OIG is in a position to make some 
preliminary recommendations based upon the findings from our 
investigation, as well as conclusions reached by our auditors:
  --Policies and procedures should be revised to ensure that the 
        AmeriCorps Program Office staff, the Office of Grants 
        Management staff and the Trust Office staff are involved in the 
        budgeting process, National Service position approval and 
        amendment process. The Trust Office staff should ensure that 
        funds are available in the Trust to meet the estimated 
        liability to be incurred prior to National Service position 
        approval.
  --Reports should be generated on a monthly basis to compare the 
        number of approved National Service positions to the actual 
        members enrolled. Senior management should review these reports 
        on a timely basis to ensure that enrollments do not exceed the 
        Corporation's estimates.
  --Automated controls should be implemented in WBRS to limit approval 
        of additional enrollments to authorized officers in the Grants 
        Management Office, and to prevent grantees from enrolling 
        members after the program year enrollment period ends.
    On January 7, 2003, the CEO directed that new procedures be 
implemented regarding AmeriCorps enrollment. My office has initiated 
work to assess these procedures and will issue a report on the matter. 
Initial meetings have been held with senior management. We are in the 
process of gathering and reviewing procedures that have been developed 
and are currently being implemented. Every 2 weeks, Trust enrollment 
Summary Reports are now being provided to senior management. These 
reports show the number of positions awarded and enrolled.
    Mr. Chairman, this concludes my prepared statement. I will be 
pleased to answer any questions you might have.
                                 ______
                                 
Prepared Statement of Cornelia M. Ashby, Director, Education, Workforce 
  and Income Security Issues, and Susan A. Poling, Associate General 
                   Counsel, General Accounting Office

             CORPORATION FOR NATIONAL AND COMMUNITY SERVICE
 PRELIMINARY OBSERVATIONS ON THE NATIONAL SERVICE TRUST AND AMERICORPS

Why the GAO Did This Study
    In November 2002, the Corporation for National and Community 
Service suspended enrollments in the AmeriCorps program due to concern 
that the National Service Trust may not contain enough funds to meet 
the education award obligations resulting from AmeriCorps enrollments. 
This testimony reflects GAO's preliminary review of the factors that 
contributed to the need to suspend enrollments and GAO's preliminary 
assessment of the Corporation's proposed changes.

What GAO Found
    As shown in the figure below, the number of participants enrolled 
in AmeriCorps increased by about 20,000 from program year 1998 to 
program year 2001. However, the number of AmeriCorps participants was 
not reconciled with the number of education awards that the National 
Service Trust could support.
    GAO identified several factors that led the Corporation to suspend 
enrollments. The factors included inappropriate obligation practices, 
little or no communication among key Corporation executives, too much 
flexibility given to grantees regarding enrollments, and unreliable 
data on the number of AmeriCorps participants.
    The Corporation has established new policies that may improve the 
overall management of the National Service Trust if the policies are 
fully implemented. However, the Corporation has not made policy changes 
to correct a key factor--how it obligates funds for education awards.



    Source: 1998 through 2001 data from the National Service Trust 
database. 2002 data provided by the AmeriCorps program office.
    Note: Participants shown are for AmeriCorps*State and National 
programs only. Participants for AmeriCorps*National Civilian Community 
Corps and its VISTA programs are not included. Data for program years 
1998 through 2001 represents actual participants. Program year 2002 
data represent awarded positions. Program year varies by grantee.

    Mr. Chairman and Members of the subcommittee, we are pleased to 
have the opportunity to comment on the preliminary findings from our 
ongoing study of the Corporation for National and Community Service's 
(the Corporation) management and oversight of the National Service 
Trust (the Trust). The National Service Trust is a dedicated fund 
within the Corporation that is to maintain sufficient funds to pay 
National Service educational awards to participants in the 
Corporation's AmeriCorps program. In November 2002, AmeriCorps 
suspended enrollment of program participants. This statement will 
identify some of the factors that contributed to this suspension and 
related policy changes the Corporation has made since then.
    These comments are primarily based on our preliminary analysis of 
documents and information obtained through interviews with Corporation 
staff. In addition, this statement reflects the April 9, 2003, opinion 
we provided the committee concluding that the Corporation incurs an 
obligation for education benefits when it enters into a grant agreement 
for the approved number of new participants and therefore it must 
record the obligation against the budget authority available in the 
Trust. See Appendix I for the opinion. In summary, the factors we 
identified, to date, that led the Corporation to suspend enrollments 
include inappropriate practices for obligating funds, little or no 
communication among key Corporation executives, and too much 
flexibility given to grantees--they were allowed to adjust authorized 
positions and were not required to provide timely information about the 
number of participants. While the Corporation has established new 
policies that may improve the overall management of AmeriCorps if the 
policies are fully implemented, the Corporation has not made policy 
changes to correct a key factor--how it obligates funds.

                               BACKGROUND

    The Corporation for National and Community Service was created to 
help meet community needs in education, the environment, and public 
safety and to expand educational opportunity by rewarding individuals 
who participate in National Service.\1\ The Corporation is part of USA 
Freedom Corps, a White House initiative to foster a culture of 
citizenship, service, and responsibility and help all Americans answer 
the President's call to service. The Corporation receives 
appropriations to fund program operations and the National Service 
Trust. The Corporation makes grants from its program appropriations to 
help grant recipients carry out National Service programs.
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    \1\ The National and Community Service Act of 1990 created the 
Corporation.
---------------------------------------------------------------------------
    AmeriCorps is one of three National Service programs the 
Corporation oversees.\2\ Most of the grant funding from the Corporation 
for AmeriCorps programs goes to State service commissions, which award 
subgrants to nonprofit groups and agencies that enroll the AmeriCorps' 
participants. Participants in the AmeriCorps program can receive a 
stipend as well as health benefits and childcare coverage. For example, 
about one-half of AmeriCorps' participants received an annual living 
allowance of $9,300 and health benefits. Those participants who 
successfully complete a required term of service earn an education 
award that can be used to pay for undergraduate school, or graduate 
school, or to pay back qualified student loans. In exchange for a term 
of service, full-time AmeriCorps participants earned an education award 
of $4,725 in program year 2002. Participants have up to 7 years from 
the date of completion of service to use the education award. 
AmeriCorps also enrolls participants on a part-time basis and as 
``education awards only'' participants. Part-time participants who 
serve 900 or fewer hours annually earn education awards proportional to 
those earned by full-time participants. Under the ``education awards 
only'' program, AmeriCorps does not pay the participant a living 
allowance or other benefits, but provides grant funding for 
administrative purposes only, about $400 per full-time participant 
annually. However, each participant receives an education award 
equivalent to that earned by a paid AmeriCorps participant. The number 
of AmeriCorps participants increased by nearly 20,000 from 1998 to 
2001. The program year 2002 data indicate the number of positions 
awarded will decrease by about 8,000. (See figure 1.)
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    \2\ The Corporation oversees the Senior Corps, AmeriCorps, and 
Learn and Serve America. AmeriCorps consists of three programs: 
AmeriCorps*State and National, AmeriCorps*VISTA, and 
AmeriCorps*National Civilian Community Corps. 



    Source: 1998 through 2001 data from the National Service Trust 
Database. 2002 data provided by the AmeriCorps program office.
    Note: Participants shown are for AmeriCorps*State and National 
programs only. Participants for AmeriCorps*National Civilian Community 
Corps and its VISTA programs are not included. Data for program years 
1998 through 2001 represents actual participants. Program year 2002 
data represent awarded positions. Program year varies by grantee.

    In November 2002, the Corporation suspended enrollments in 
AmeriCorps because total enrollments were potentially higher than the 
Corporation had expected. No new funds had been requested by and 
appropriated to the Trust for fiscal year 2002, and under the 
continuing resolution at the start of fiscal year 2003, no new funds 
would be deposited into the Trust until the Corporation's fiscal year 
2003 appropriations were enacted. The Corporation concluded that if its 
grantees and subgrantees were to fully enroll new participants up to 
the maximum number of enrollments the Corporation had approved in its 
grants, the Trust would not have a sufficient amount to provide the 
educational awards to those participants. Enrollments in AmeriCorps 
were frozen from November 2002 through March 2003.
three factors contributed to the need to suspend americorps enrollments
    Three factors contributed to the Corporation's need to suspend 
enrollments in AmeriCorps. Although the Corporation specified the 
maximum number of new participants in the grants it awarded, the 
Corporation did not recognize its obligation to fund participant 
education awards until it actually paid the benefits. Had the 
Corporation properly tracked and recorded its obligations in the Trust 
at the time of grant award when it approved new enrollments, it likely 
would not have needed to suspend enrollments. In addition, there was 
little, if any, communication among the AmeriCorps program office, the 
grants management office, and the Trust about the number of positions 
that the Trust could support. Furthermore, by allowing grantees various 
flexibilities and not requiring them to provide timely enrollment 
information, the Corporation and AmeriCorps managers could not be 
certain about the number of participants.

Inappropriate Obligation Practices
    The Corporation did not appropriately record or track its 
obligations for education awards to program participants. Generally, an 
agency incurs an obligation for the amount of the grant award with the 
execution of a grant agreement. The Corporation enters into grant 
agreements with State service commissions in which it specifies the 
budget and project period of the award, the total number of positions 
approved, the total amount awarded for program costs for the approved 
positions, and the terms of acceptance. The award for the program costs 
is used to pay participants' stipends and health and child care 
coverage. The Corporation incurs an obligation for these program costs 
at the time of grant award.\3\ While the costs of education awards for 
the new participants are not specified in the grants, in the grant 
agreements the Corporation commits to funding education awards for all 
of the qualified positions initially approved in a grant if the 
subgrantee enrolls all of the participants before the Corporation 
modifies the terms or conditions of the grant. In other words, upon 
award of the grant, the Corporation, at a minimum, has accepted ``[a] 
legal duty . . . which could mature into a legal liability by virtue of 
actions on the part of the other party beyond the control of the United 
States.'' However, the Corporation has concluded that it is not 
necessary to obligate funds until an individual actually enrolls in 
AmeriCorps. Therefore, the Corporation recorded education award 
obligations on an outlay basis. That is, obligations were recorded at 
the time of the quarterly drawdown of amounts for education awards from 
the Trust.
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    \3\ We have not examined and accordingly express no opinion on 
whether the Corporation is appropriately obligating program costs in 
the applicable appropriation account.
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    By failing to recognize and record its obligations at the time of 
grant award, the Corporation had no assurance that the number of 
positions approved in grant awards did not exceed the amount of 
educational awards the Trust could support. Proper recording of 
obligations serves to protect the government by ensuring that it has 
adequate budget authority to cover all of its commitments and prevent 
agencies from over-obligating its budget authority.

Lack of Communication
    Corporation executives we interviewed said that there was little if 
any coordination between the AmeriCorps program office and officials 
responsible for the management of the Trust about the number of 
positions that the Trust could support. The AmeriCorps director said 
that she considered the grant budget independent from the Trust and she 
neither consulted with nor received direction from the Trust director 
when making decisions about the grants. In addition, in recent years, 
AmeriCorps has tried to increase the number of participants by 
enrolling them in the ``education awards only'' program. Under this 
program, which was an effort to lower the per participant program cost, 
AmeriCorps provides funding to grantees for administrative purposes 
only, currently about $400 per full-time participant annually. 
Increasing the number of participants in this way is at a low cost to 
the AmeriCorps program appropriation, but at full cost to the Trust, 
which funds the education awards, because each participant receives an 
education award equivalent to that earned by a paid AmeriCorps 
participant. Consequently, the number of positions funded by AmeriCorps 
grants was not reconciled with the number supportable by the Trust. 
According to Corporation officials we spoke with, the Trust's funding 
needs were based on an expected enrollment of 50,000, while the 
AmeriCorps program office approved grants for about 75,000 
participants.
    Corporation officials also said that prior to suspending 
enrollments in AmeriCorps, the Trust was so well funded it did not 
warrant their attention. They told us that early in the AmeriCorps 
program, a goal of 50,000 participants annually was used for Trust 
budgeting purposes. However, it was found that fewer than that number 
of participants enrolled, and not all of those who participated earned 
education awards. Additionally, a Corporation budget official said that 
in the past those who earned education awards were not using them as 
quickly as expected. Even as the number of AmeriCorps participants 
grew, the Trust's accounting records showed an unobligated balance that 
was high enough for Congress to rescind $111 million over fiscal years 
2000 and 2001, resulting in the deobligation of the Trust by this 
amount. Given this history, Corporation managers did not see the need 
to reconcile the number of positions created by grant funding with the 
number the Trust could support. The Trust balance was not viewed as a 
constraining factor. Because the number of positions approved in the 
grants was not reconciled with the Trust before grants were awarded, 
there was the potential for grantees to enroll more participants than 
the Trust could support.

Grantees Allowed to Adjust Authorized Positions and Not Required to 
        Provide Timely Participant Information
    Two program management policies affected the number and type of 
participants and, therefore, the use of Trust funds. One policy 
permitted grantees to over enroll participants under certain 
circumstances with approval from their AmeriCorps program officer. 
Specifically, the policy allowed grantees to over enroll up to 20 
percent. The program year 2002-2003 data indicate that while only a few 
of the grantees increased their enrollment, some increased theirs by 
more than 20 percent. Another policy allowed grantees to convert 
positions from full-time to part-time as long as the total number of 
full-time equivalents supported by the grant did not change. While this 
practice did not affect the program funds, it did affect the Trust. 
After the enrollments were suspended, Corporation officials determined 
that part-time participants used their education awards at a higher 
rate than full-time participants and therefore the number of part-time 
participants resulted in a relatively higher level of use for the 
education award.
    The Corporation did not have reliable data on the number of 
AmeriCorps participants during the period leading up to the suspension. 
Enrollments are recorded by grantees through the Corporation's Web-
Based Reporting System (WBRS). While the enrollment information in WBRS 
was uploaded into the Corporation's database and used to track 
education award obligations on a weekly basis, Corporation officials 
said that discrepancies existed between the number of participants 
enrolled and the number the Corporation was aware of, because of the 
length of time between when a participant started to serve and when the 
grantee entered information into WBRS. A Corporation official said that 
it was not unheard of for some grantees to be 60 to 90 days late in 
entering an enrollment into WBRS.
    By allowing grantees the flexibility to change the number and type 
of participants coupled with delays in receiving information on 
enrollments, the Corporation and AmeriCorps managers could not be 
certain about the number of participants. Corporation officials said 
that this resulting lack of confidence in the data was a contributing 
factor to the decision to suspend enrollments.

     NEW POLICIES ESTABLISHED, BUT ADDITIONAL CHANGES MAY BE NEEDED

    In response to concerns that the AmeriCorps program may have 
enrolled participants without adequately providing for their education 
awards, the Corporation has developed several new policies. While the 
Corporation is modifying its practice of when it records obligations, 
the Corporation overlooks the legal duty it incurs at the time of grant 
award. Other policy changes are directed to improving communication 
among key executives, limiting grantees' flexibilities and requiring 
more timely information on participants. While these policies were only 
recently introduced, they could, if implemented, help the Corporation 
keep track of the day-to-day aspects of the AmeriCorps program and 
provide information needed to monitor the use of the Trust in order to 
determine whether the Corporation should make adjustments, such as 
deobligating excess funds. However, data integration problems between 
WBRS and the program the Corporation uses to track the education awards 
earned by AmeriCorps participants may hamper the effectiveness of the 
new procedures.

New Policies for Obligating Funds
    The Corporation is in the process of modifying its practices 
regarding when it will record obligations. The Corporation's General 
Counsel explained that the Corporation will record obligations at the 
time of enrollment, instead of on a quarterly drawdown basis and that 
the obligations will be based on estimates of what these enrolled 
members will draw down in the future. The Corporation is of the opinion 
that it does not incur an obligation for an education award until the 
time of enrollment because it may modify the terms and conditions of a 
grant, including a reduction in the number of new participants the 
grantee may enroll, prior to the enrollment of all positions initially 
approved in a grant, to prevent a shortfall in the Trust. The General 
Counsel also said ``. . . binding agreement between the Government and 
an AmeriCorps member [participant] exists only upon the member's 
[participant's] authorized enrollment in the Trust.''
    While it may be true that the Corporation has no binding agreement 
with a participant until the participant enrolls in AmeriCorps, this is 
not the controlling consideration for fund control purposes. In our 
opinion, this view overlooks the legal duty the Corporation incurs at 
the time of grant award when it commits to funding a specified number 
of participants and the constraint imposed on the Corporation by the 
National and Community Service Act. Specifically, the act says ``. . . 
[t]he Corporation may not approve positions as national service 
positions . . . for a fiscal year in excess of the number of positions 
for which the Corporation has sufficient available funds in the 
National Service Trust for that fiscal year . . .''. The Corporation, 
by its own admission, may modify the number of approved participants 
only if it amends the grant agreement to reduce the number of enrolled 
positions prior to enrollment. When a grant is awarded, the number of 
new participants approved in the grant establishes a legal duty that 
can mature into a legal liability for education awards by virtue of 
actions of the grantee, unless the Corporation modifies the grant prior 
to participant enrollment. While the Corporation may unilaterally 
reduce the number of authorized positions awarded to a grantee prior to 
participant enrollment, from the time of grant award until the 
Corporation acts to reduce the approved number of positions, the 
grantee and its subgrantee, not the Corporation, will control the 
number of participants who may enroll, up to the maximum number of 
participants the Corporation has approved in the grant agreement.
    It is also significant to note that the grantee and subgrantee, by 
their actions in enrolling participants, not the Corporation, control 
the amount, ultimately, of the Corporation's liability. If the amount 
of liability to the government is under the control of the grantee, not 
the Corporation, the government should obligate funds to cover the 
maximum amount of the liability. As more information is known, the 
Corporation should adjust the obligation--deobligate funds or increase 
the obligation level--as needed.
    The Corporation also said that at the time a member enrolls it 
would record its ``. . . best estimate of the Government's ultimate 
liability of education awards provided to members [participants] 
enrolled in the National Service Trust.'' According to the 
Corporation's General Counsel, the Corporation's estimates of the 
amount that enrolled members [participants] will draw down is based on 
historical information, such as attrition rate and actual usage by 
participants who complete a term of service and earn an education 
award. It appears to us that the Corporation is confusing its 
accounting liability--projections booked in its accounting systems for 
financial statement purposes, with its legal liability--amounts to be 
recorded in its obligational accounting systems and tracked in order to 
ensure compliance with fiscal laws. One of the Federal financial 
accounting standards States that a liability for proprietary accounting 
purposes is a probable and measurable future outflow or other sacrifice 
of resources as a result of past transactions or events. Traditionally, 
projections of accounting liability consider the same factors, such as 
historical trends, that are considered in the Corporation's model. To 
track its obligations, the Corporation should be recording its 
unmatured legal liability for the education awards, which is the total 
cost associated with the enrollment of all approved positions. The 
Corporation's obligation should be recorded as it is incurred and 
should be calculated by multiplying the number of approved positions in 
a grant by the total cost of a National Service educational award.

More Communication Planned Among Key Corporation Managers
    Policy changes at Corporation headquarters are designed to improve 
communication between several key offices and officials. A major change 
is that the Trust balance is to be a limiting factor on grant awards 
and, therefore, enrollment levels. In addition, beginning with the 2003 
grant cycle,\4\ one new policy calls for the AmeriCorps director to 
work with the grants director, the Chief Financial Officer (CFO), and 
the Trust director to compare projections of positions to be approved 
in grants with those supported by actual appropriations, and the Chief 
Executive Officer (CEO) will only approve the number of positions the 
Trust can support. Additionally, the CEO will approve all AmeriCorps 
grants after consultation with the CFO on the number of education 
awards that can be supported by the Trust. Also, the policy states that 
the CEO, CFO, the Trust director, and the AmeriCorps director will meet 
at least monthly to review and reconcile enrollment data and Trust 
data. Through bi-weekly reports, the AmeriCorps director and the Trust 
director are to keep the CEO and CFO informed of the number of approved 
and filled positions. The Trust director is to monitor factors relevant 
to forecasting Trust liabilities and report regularly to the CFO, 
highlighting deviations from assumptions in the model. Each month the 
CFO is to use actual enrollment data to re-evaluate the model for 
forecasting Trust liabilities. If the revision results in a need to 
change enrollment targets, the CFO will notify the CEO and AmeriCorps 
director immediately. The CEO will take appropriate action and report 
any such action to Congress, the Corporation's Board, and the Office of 
Management and Budget.
---------------------------------------------------------------------------
    \4\ The Corporation's 2003 grant review cycle began in the spring 
of 2003.
---------------------------------------------------------------------------
    Regular meetings and attention to the enrollment data should help 
the Corporation keep track of the day-to-day aspects of the AmeriCorps 
program. Such updated information is an important step in monitoring 
the use of the Trust in order to determine whether the Corporation 
should make adjustments. For example, if the Corporation obligated the 
full cost for each of the positions approved at the time of grant 
award, and later determined that many of the positions will not be 
filled, it could reduce the number of approved positions and deobligate 
some of the funds. The policy changes and new procedures were announced 
in January. We will continue to monitor the implementation of these 
policy changes.

Grantees No Longer Permitted to Change Authorized Positions
    The Corporation has changed policies regarding its grantees ability 
to over enroll participants, replace participants who leave with new 
enrollees and change positions from full-time to part-time. In a 
January 22, 2003, memorandum, the director of AmeriCorps cancelled the 
policy that allowed grantees to over enroll members by up to 20 percent 
over the ceiling established in the grant award in order to take 
account of attrition. Furthermore, an official said AmeriCorps now 
considers a position to be filled for the term of the grant once the 
grantee enrolls a participant, even if the participant later drops out 
of the program, whether or not an education award was earned. The 
official said that in the past, grantees could enroll a new member to 
serve out the balance of the term if grant funds were available. A 
Corporation official also said that there is a new policy that 
restricts grantees from converting full-time positions to part-time 
positions. Grantees must now request and receive approval from the 
Corporation before such changes can be made.
    Since grantees will not be permitted to modify the number and type 
of authorized positions, the Corporation's ability to manage the 
AmeriCorps program should improve. Most 2003 grant positions have not 
yet been awarded; therefore, it is too early to tell whether these new 
policies will be effective. We will monitor these policies and assess 
the extent to which they have been implemented as we complete our work.

Grantees Will Be Required to Report Participant Information Within 30 
        Days, but Data Reconciliation Problems May Need To Be Addressed
    In January 2003 the Corporation informed all grantees that 
AmeriCorps will require timely reporting of participant information to 
ensure that the Trust database receives current information on the 
number of participants eligible for an education award. Grantees will 
be required to keep AmeriCorps informed of the number of participants 
offered positions and the number who accept and enroll and to document 
enrollment through WBRS no later than 30 days after participants start 
working. The memorandum warns grantees that failure to comply with this 
requirement could result in reductions in the number of positions or 
termination of the grant. Additionally, the memorandum directs State 
commissions and other AmeriCorps grantees--the organizations 
responsible for the oversight of subgrantees--to implement procedures 
to ensure that timely notification of participant commitments and 
enrollments is part of their review and oversight functions.
    Furthermore, the Corporation has made changes to WBRS, which is 
used to track participant, grant, and budget information. First, 
controls have been put in place to limit the number of positions listed 
in WBRS to no more than the number of approved positions. The 
Corporation's Biweekly Trust Enrollment Summary, as of March 2003, 
shows that award totals are being tracked and compared with the data 
estimates in the Trust. However, officials told us that there are some 
data reconciliation problems between WBRS and the program used by the 
Corporation to track the education awards earned by AmeriCorps 
participants. Corporation staff have had to make manual adjustments to 
reconcile the data.
    Accurate and timely information about enrollments should help the 
Corporation and AmeriCorps manage the program. As grants are awarded, 
we will be able to assess whether the policies have been fully 
implemented.

                               CONCLUSION

    The Corporation's new policies, if fully implemented, should help 
the Corporation manage the AmeriCorps program by providing better 
information on day-to-day operations. However, without obligating the 
full amount associated with all of the positions authorized in the 
grants, the Corporation remains at risk of having the actual number of 
enrollments exceed the estimated number the Trust can support. We will 
monitor the implementation of the Corporation's new policies as we 
continue our review.

                    GAO CONTACT AND ACKNOWLEDGMENTS

    For further information regarding this statement, please call 
Cornelia M. Ashby or Susan A. Poling. Individuals making key 
contributions to this testimony included Carolyn M. Taylor, Tom 
Armstrong, Anthony DeFrank, Joel Marus, and Hannah Laufe.

APPENDIX I: OBLIGATIONAL PRACTICES OF THE CORPORATION FOR NATIONAL AND 
                           COMMUNITY SERVICE

                   United States General Accounting Office,
                                     Washington, DC, April 9, 2003.

Subject: Obligational Practices of the Corporation for National and 
        Community Service

The Honorable Christopher Bond,
Chairman,
The Honorable Barbara Mikulski,
Ranking Minority Member,
Subcommittee on VA, HUD, and Independent Agencies, Committee on 
        Appropriations, United States Senate.

    This responds to your letter dated February 25, 2003. You requested 
that we determine whether the Corporation for National and Community 
Service (Corporation) incurs a legal liability for the award of 
National Service educational benefits of AmeriCorps participants at the 
time it enters into a grant agreement authorizing a grantee to enroll a 
certain number of AmeriCorps participants, or at the time a participant 
enrolls in the AmeriCorps program. Subsequent to your letter, your 
staff explained to us that your question arises in the context of your 
efforts to ensure that the Corporation is properly recording 
obligations of the Corporation for National and Community Service 
National Service Trust (Trust).
    As we explain in further detail below, the Corporation incurs an 
obligation for education benefits when it enters into a grant 
agreement. At the time of grant award, the Corporation approves the 
grantee's enrollment of a specified number of new participants in the 
AmeriCorps program. By this action, the Corporation incurs a legal duty 
that once fully matured, by action of the grantee and participants 
outside the Corporation's control, will require the Corporation to pay 
education benefits to qualified participants from the National Service 
Trust. As the Corporation incurs an obligation for the education 
benefits, it must record the obligation against the budget authority 
available in the Trust.
    You also requested that we review the Corporation's request for a 
deficiency appropriation for the Trust. We will provide a subsequent 
response addressing this request.

Background
    The Corporation for National and Community Service was created to 
help community needs in education, the environment, and public safety, 
to expand educational opportunity by rewarding individuals who 
participate in national service, and to encourage citizens to engage in 
national service. National and Community Service Trust Act of 1993, 
Pub. L. No. 103-82, 107 Stat. 785, 42 U.S.C. Sec. 12501. One of the 
three National Service programs the Corporation oversees is AmeriCorps. 
Participants in the AmeriCorps program who successfully complete a 
required term of service earn a National Service educational award of 
up to $4,725 that can be used to pay for college, graduate school, an 
approved school-to-work program, or qualified student loans. 42 U.S.C. 
Sec. 12604(a); 45 C.F.R. Sec. 2527.10. Participants who earn the award 
have up to 7 years in which to use it. 42 U.S.C. Sec. 12602(d)(1). 
While the Corporation pays the education benefits directly from the 
Trust, 42 U.S.C. Sec. 12601(c), the Corporation also is authorized to 
make grants for the purpose of assisting grant recipients in carrying 
out National Service programs. 42 U.S.C. Sec. 12571(a). The Corporation 
provides grant funds for program costs, including a stipend, and health 
and child care coverage. In its grants, the Corporation also approves 
enrollment of a specified number of new participants. See, e.g., 
AmeriCorps Grant Award to City Year, Inc., Aug. 3, 2000.\1\ Most of the 
grant funding from the Corporation for AmeriCorps programs goes to 
governor-appointed State service commissions, which award subgrants to 
nonprofit groups, who then enroll the AmeriCorps participants. 
Corporation for National and Community Service website, http://
www.national service.org.
---------------------------------------------------------------------------
    \1\ The Corporation provided us with a copy of this grant 
agreement.
---------------------------------------------------------------------------
    The AmeriCorps program is funded through the Departments of 
Veterans Affairs, Housing and Urban Development, and Independent 
Agencies Appropriations Act (VA-HUD Appropriations Act). Congress 
appropriates amounts in the VA-HUD Appropriations Act on a no-year 
basis to the National Service Trust. See, e.g., VA-HUD Appropriations 
Act, 2001, Pub. L. No. 106-377, 114 Stat. 1441 (``not more than 
$70,000,000, to remain available without fiscal year limitation, shall 
be transferred to the National Service Trust account for educational 
awards authorized under subtitle D of title I of the Act''). The 
National Service Trust is a dedicated fund within the Corporation used 
to pay National Service educational awards to eligible participants. 42 
U.S.C. Sec. 12601(c) (``[a]mounts in the Trust shall be available, to 
the extent provided for in advance by appropriation, for payments of 
National Service educational awards in accordance with section 12604 of 
this title''). The amount deposited into the Trust is to be equal to 
the product of the value of a National Service educational award and 
the total number of approved National Service positions. 41 U.S.C. 
Sec. 12571(c). Of significance is a provision that prohibits the 
Corporation from approving positions for a fiscal year unless 
sufficient funds are available in the National Service Trust. It states 
that ``[t]he Corporation may not approve positions as approved national 
service positions . . . for a fiscal year in excess of the number of 
positions for which the Corporation has sufficient available funds in 
the National Service Trust for that fiscal year . . .'' 42 U.S.C. 
Sec. 12581(f).
    Your question arises in the context of the Corporation's decision 
to suspend participant enrollment in the fall of 2002 because the 
Corporation feared that the Trust would not have sufficient funds to 
cover education awards for all approved enrollees. For fiscal year 
2002, the President did not request and the Congress did not 
appropriate funds for the Trust, based apparently on the 
administration's determination that sufficient funds were available to 
support fiscal year 2002 education benefit outlays. Letter from Phillip 
J. Perry, General Counsel, Office of Management and Budget, to Susan A. 
Poling, Associate General Counsel, General Accounting Office (GAO), 
Mar. 31, 2003. According to the Corporation's General Counsel, in the 
fall of 2002, internal controls alerted the Corporation to the fact 
that grantees were enrolling members at an unexpectedly high rate, and 
the Corporation determined that ``in all likelihood the obligations 
associated with those approved positions would exceed budgetary 
resources in the National Service Trust.'' Letter from Frank R. 
Trinity, General Counsel, Corporation for National and Community 
Service, to Susan A. Poling, Associate General Counsel, GAO, Mar. 21, 
2003. In response, the Corporation amended all AmeriCorps grants to 
suspend enrollments as of November 15, 2002, and did not permit any 
additional enrollments until Congress appropriated additional funds to 
the Trust. Id. Notwithstanding these actions, according to the audit of 
the Corporation's fiscal year 2002 financial statements, in fiscal year 
2002, the Corporation had approved AmeriCorps National Service 
positions in excess of the number of positions that the Trust could 
support and thus violated 42 U.S.C. Sec. 12581(f). Audit of the 
Corporation for National and Community Service's fiscal year 2002 
Financial Statements, Audit Report 03-01 at 24, KPMG, Feb. 4, 2003.

Analysis
    The issues presented are (1) when does the Corporation incur an 
obligation for education benefits, and (2) in what amount does the 
Corporation incur an obligation for these benefits. Understanding the 
concept of an obligation and properly recording obligations are 
important because an obligation serves as the basis for the scheme of 
funds control that Congress envisioned when it enacted such fiscal laws 
as the Antideficiency Act. 31 U.S.C. Sec. 1341(a); B-237135, Dec. 21, 
1989. Under that act, an agency may not incur an obligation in excess 
of the amount available to it in an appropriation, 31 U.S.C. 
Sec. 1341(a); accordingly, proper recording of obligations permits 
compliance with the Antideficiency Act by ensuring that government 
agencies have adequate budget authority to cover all of their 
obligations. 42 Comp. Gen. 272, 275 (1962).

            Determining the Obligational Event
    A general definition of an obligation is ``a definite commitment 
that creates a legal liability of the government for the payment of 
goods and services ordered or received.'' B-116795, June 18, 1954. A 
legal liability is defined, generally, as any duty, obligation or 
responsibility established by a statute, regulation, or court decision, 
or where the agency has agreed to assume responsibility in an 
interagency agreement, settlement agreement, or similar legally binding 
document. See Black's Law Dictionary 925 (7th ed. 1999). While we 
ordinarily consider obligations as ``legal liabilities,'' for the 
concept to be meaningful for funds control purposes, we have not 
limited the definition solely to agency actions that create legal 
liabilities, but also have extended the definition to include ``[a] 
legal duty on the part of the United States which constitutes a legal 
liability or which could mature into a legal liability by virtue of 
actions on the part of the other party beyond the control of the United 
States . . .'' 42 Comp. Gen. 733, 734 (1963); see also McDonnell 
Douglas Corp. v. United States, 37 Fed. Cl. 295, 301 (1997).
    When the Corporation awards a grant, it enters into a binding 
agreement authorizing the grantee to enroll a specified number of new 
participants in the AmeriCorps program. In addition, when the 
Corporation enters into grant agreements with State service 
commissions, it specifies the budget and project period of the award, 
the total number of positions approved, the total amount awarded for 
related program costs for the approved positions, and the terms of 
acceptance. See, e.g., AmeriCorps Grant Award to City Year, Inc., Aug. 
3, 2000. The amounts awarded for related program costs are used by the 
grantee to pay participants' stipends and health and child care 
coverage. The Corporation incurs an obligation for these program costs 
at the time of grant award.\2\ See, e.g., B-289801, Dec. 30, 2002; B-
167790, Jan. 15, 1973. The costs of education benefits for the new 
participants are not specified in the grants.
---------------------------------------------------------------------------
    \2\ We have not examined and accordingly express no opinion on 
whether the Corporation is appropriately obligating these costs in the 
applicable appropriation account.
---------------------------------------------------------------------------
    Nevertheless, at the time of grant agreement, the Corporation 
commits to fund education benefits for all of the positions approved in 
the grant if all of the positions are enrolled before the Corporation 
modifies the terms or conditions of the grant. Letter from Frank R. 
Trinity, General Counsel, Corporation for National and Community 
Service, to Susan A. Poling, Associate General Counsel, GAO, Mar. 21, 
2003. At the time of grant award, when the Corporation approves 
enrollment of a specified number of new participants, the Corporation 
has taken an action that can mature into a legal liability for the 
education benefits of the new participants by virtue of actions taken 
by the grantee and participants, not the Corporation. In other words, 
upon award of the grant, the Corporation, at a minimum, has accepted 
``[a] legal duty . . . which could mature into a legal liability by 
virtue of actions on the part of the grantee beyond the control of the 
United States.'' 42 Comp. Gen. 733, 734 (1963). In our view, therefore, 
the Corporation incurs a recordable obligation at grant award for the 
education benefits of the approved number of new participants.
    We think our view of when the obligational event occurs is entirely 
consistent with applicable provisions of the National and Community 
Service Trust Act. As noted above, the Act requires the Trust to have 
adequate funds to cover the total number of approved positions. 42 
U.S.C. Sec. 12581(f). The language of section 12581(f) focuses on the 
Corporation's approval of positions as the obligational event for fund 
control purposes: ``[t]he Corporation may not approve positions as 
approved national service positions . . . for a fiscal year in excess 
of the number of such positions for which the Corporation has 
sufficient available funds in the National Service Trust for that 
fiscal year . . .''.
    The General Counsel of the Corporation has concluded, however, that 
the obligational event with respect to the education award occurs no 
earlier than the enrollment of an individual in the Trust. Letter from 
Frank R. Trinity, General Counsel, Corporation for National and 
Community Service, to Susan A. Poling, Associate General Counsel, GAO, 
Mar. 21, 2003. In the past, the Corporation recorded education award 
obligations on an outlay basis, i.e., it recorded an obligation at the 
time of the quarterly drawdown of education awards from the Trust. Id. 
The General Counsel explained, however, that the Corporation is in the 
process of modifying its procedures for recording obligations and now 
will record obligations at the time of enrollment based on estimates of 
what these enrolled members will draw down in the future. Id. The 
General Counsel stated that the Corporation does not incur an 
obligation for an education award until the time of enrollment because 
the Corporation may modify the terms and conditions of a grant, 
including suspension of enrollment into the Trust, prior to the 
enrollment of all positions initially approved in a grant. According to 
the General Counsel, this permits the Corporation, if necessary, to 
prevent a shortfall in the Trust. The General Counsel also stated that 
``a binding agreement between the Government and an AmeriCorps member 
exists only upon the member's authorized enrollment in the Trust.'' Id. 
While it may well be true that the Corporation has no binding agreement 
with a participant until the participant enrolls, we do not view this 
as the controlling consideration for funds control purposes. In our 
opinion, this view overlooks the legal duty the Corporation incurs at 
time of grant award when it commits to funding a specified number of 
participants and ignores the constraint imposed on the Corporation by 
section 12581(f).
    The Corporation, by its own admission, may modify the number of 
approved participants only if it amends the grant agreement to reduce 
the number of enrolled positions prior to enrollment. While the 
Corporation may unilaterally reduce the number of authorized positions 
awarded to a grantee prior to participant enrollment, from the time of 
grant award until the Corporation acts to reduce the approved number of 
positions, the grantee and its subgrantee, not the Corporation, 
controls the number of participants who may enroll, up to the maximum 
number of participants the Corporation has approved in the grant 
agreement. The fact that the government may have the power to amend 
unilaterally a contract or agreement does not change the nature or 
scope of the obligation incurred at time of award. Were it otherwise, 
every government contract that permits the government to terminate the 
contract for the convenience of the government (48 C.F.R. Sec. 49.502), 
or to modify the terms of the contract at will (48 C.F.R. 
Sec. Sec. 52.243-1, 243-2, 243-3), would not be an obligation of the 
government at time of award. Long-standing practice and logic both of 
the Congress (31 U.S.C. Sec. 1501, 41 U.S.C. Sec. 5) and the accounting 
officers of the government (B-234957, July 10, 1989, B-112131, Feb. 1, 
1956) have rejected such a view. As we explained earlier, at the time 
of grant award, the Corporation's approval of a specified number of new 
participants establishes a legal duty that can mature into a legal 
liability for education benefits by virtue of actions of the grantee 
that are beyond the control of the Corporation unless the Corporation 
takes affirmative action to modify the grant.

            Amount of the Obligation
    For purposes of identifying the amount of the Corporation's 
obligation at grant award, it is also significant that the grantee and 
subgrantee, by their actions in enrolling participants, ultimately 
control the amount of the Corporation's liability. If the amount of 
liability of the government is under the control of the grantee, not 
the Corporation, the government should obligate funds to cover the 
maximum amount of the liability. See, e.g., B-238581, Oct. 31, 1990; B-
197274, Sept. 23, 1983. As more information is known, the Corporation 
may adjust the obligation, i.e., deobligate funds or increase the 
obligational level, as needed.
    The General Counsel stated that at the time a member enrolls and 
the Corporation records an obligation for the member's education 
benefits, the Corporation will record its ``best estimate of the 
Government's ultimate liability for education awards provided to 
members enrolled in the National Service Trust.'' Letter from Frank R. 
Trinity, General Counsel, Corporation for National and Community 
Service, to Susan A. Poling, Associate General Counsel, GAO, Mar. 21, 
2003. According to the General Counsel, the model the Corporation will 
use to make estimates of what enrolled members will draw down in the 
future, i.e., the amount the Corporation will obligate, uses historical 
information, such as attrition rate and actual usage by members who 
complete a term of service and earn an education award.
    It appears to us that the Corporation is confusing its accounting 
liability, projections booked in its proprietary accounting systems for 
financial statement purposes, with its legal liability, amounts to be 
recorded in its obligational accounting systems and tracked in order to 
ensure compliance with fiscal laws. For proprietary accounting purposes 
a liability is a probable and measurable future outflow or other 
sacrifice of resources as a result of past transactions or events. 
FASAB Statement of Federal Financial Accounting Standards Number 1. 
Some types of projections of accounting liability consider the same 
factors, such as historical trends, that are considered in the 
Corporation's model. For purposes of tracking its obligations, the 
Corporation should be recording its unmatured legal liability for the 
education benefits, which is the value of an educational award 
multiplied by all approved positions. At the time of grant award, the 
Corporation should record an obligation incurred for the education 
benefits against the National Service Trust and the obligation incurred 
for the related program costs awarded for each of the approved 
positions against the appropriate account in the VA-HUD Appropriations 
Act. As the grantees' authority under the grant agreement to enroll 
participants in the AmeriCorps program expires or if the Corporation 
modifies the grantees' authority, under the grant agreement the 
Corporation should deobligate previously obligated amounts to reflect 
the change in the Corporation and the Trust's legal exposure.
    We trust this is responsive to your request. If you have any 
questions, please contact Susan A. Poling, Associate General Counsel.
                                         Anthony H. Gamboa,
                                                   General Counsel.

    [Clerk's Note.--The audit documents submitted as 
attachments to the statement from the Corporation for National 
and Community Service have been retained in Committee files.]

                      EDUCATION TRUST ENROLLMENTS

    Senator Bond. Dr. Lenkowsky, I have expressed my 
disappointment about the overenrollment problems. The IG found 
that the senior staff was aware of the problem as early as last 
July, but you did not inform the committee or take action until 
November.
    When these warnings were first disclosed, were they 
disclosed to you in July? What did you do? What specific steps 
did you take to address the problem and respond, and why did 
you not notify the committee or suspend enrollments sooner?
    Dr. Lenkowsky. Mr. Chairman, I was informed in late July 
that the enrollments were going above 50,000, and I think the 
full memo will be in the Inspector General's report that 
minimized the relevance of that for the Trust. It said, in 
effect, down the line we may have to look at the Trust. Most of 
the memo was devoted to explaining that the reason we were 
getting such high enrollments was because we were lowering the 
cost per member.
    I have been concerned from the day I walked into the 
Corporation about two things, and I have been making that point 
pretty clearly, including my testimony here last year. One was 
our inability to tell what was happening. We knew applications 
were going up, but we were unable to tell where the applicants 
were going, whether they were filling positions.
    And the second, which was the point I made at this 
committee last year, was that our program staff and grantees 
were not always connecting program expenditures to Trust 
expenditures. This was the first warning sign.
    The second came about 6 weeks later, in August. At that 
point I was advised that certain individuals in the Corporation 
were going to examine this in more detail and get back to me. 
At that point, I went over to our congressional people. The 
President had nominated Ms. Guillermin to be our new Chief 
Financial Officer. The nomination was pending before Congress 
at that point, and I asked our congressional people to make 
sure Congress understood the importance of getting a new Chief 
Financial Officer in place.
    In retrospect, I probably should have advised the 
committee, once we began to see these numbers going up, but I 
wanted to make sure I understood properly what was going on and 
what the implications were.
    Ms. Guillermin arrived in October, mid-October. She 
immediately went to work on this problem, notified me there 
might be a problem, spoke to me--I was actually on a brief 
vacation at the beginning of November--and upon receiving that 
information I made the decision first to pause and at the same 
time to brief this committee--as soon as I had a full 
understanding of the nature of the problem I believe we came up 
here.

                        MANAGEMENT OF THE TRUST

    Senator Bond. Mr. George, your testimony indicates that the 
Corporation did not respond until it realized that the CR 
prevented them from budgeting funds for the Trust. Are you 
implying that if the CR did not occur we may not have found out 
about the problem?
    Mr. George. That is a possibility, Senator, yes.
    Senator Bond. Mr. George, your testimony states that your 
investigation found that Trust liability projections were not 
being made by Trust staff but by a senior-level official in the 
Corporation's executive office. I understand this investigation 
is going on, so I will not ask you to name names, but can you 
tell me about the position of the senior-level official in the 
Corporation's executive office? In your opinion, was it 
appropriate for this official to be in charge of the Trust 
liability projections?
    Mr. George. The person held the position of the Coordinator 
of National Service Programs, and under the position 
description of the Trust's Director, it was not the 
Coordinator's responsibility to make that call, so the answer 
is, while input, of course, could have been provided, the final 
decision should have been with the Trust's Director.
    Senator Bond. Dr. Lenkowsky, how have you responded to the 
findings about the involvement of the senior-level official in 
those projections?
    Dr. Lenkowsky. As you know, Senator, I have reassigned two 
very senior officials in our organization, one of whom is, as 
noted in your remarks, planning to retire. Based on the 
evidence before me I felt those were the actions I could take 
at that time. I am awaiting the results of the Inspector 
General's report and the GAO report to determine whether, on 
the basis of their analysis, there is sufficient cause for 
further personnel action. I will be glad to discuss any of this 
with you, since it involves individuals, in executive session.
    Senator Bond. Let us know. Let me ask Ms. Guillermin if you 
could briefly describe the steps that have been implemented to 
correct the past problems of overenrolling AmeriCorps members.
    Ms. Guillermin. We have not had the opportunity to 
implement the full range of new procedures because we have not 
gone through the full grant cycle, so as the opportunity arises 
because of the cycle of the process we are implementing the new 
procedures.
    The procedures will span, going forward, the period that 
begins with our budget development, 2 years before our fiscal 
year begins, through to analysis, throughout that time frame. 
We will during the budget development process perform 
calculations to determine what the targeted enrollment levels 
are and the appropriate funding against those levels.
    What needs to change in addition to very simple review and 
oversight procedures is a change in culture, as you mentioned, 
which includes transparency, involvement of all appropriate 
areas, and analysis and reforecasting. The changes are very 
simple and easy to implement, but will require a company 
changing culture to make effective.
    Senator Bond. We wish all of you luck in making those 
changes.
    Senator Mikulski.

                         CNCS SENIOR LEADERSHIP

    Senator Mikulski. First of all, Mr. George, thank you very 
much for this report. I think it is excellent. It is like you 
are both a fiscal and management radiologist and I think we all 
see some very serious issues here.
    What is so troubling to me is, both your report, sir, and 
then the GAO report that we asked for, indicate that there have 
been inappropriate obligation practices, little or no 
communication among key Corporation executives, a whole culture 
of one group not talking to the other, and a lot of flexibility 
given to grantees regarding enrollments, but no reliability on 
the number of AmeriCorps participants.
    I think there has been a complete lack of leadership here. 
First, you have to know I am very disappointed in the 
Corporation's Board. I am very, very, very disappointed in the 
Corporation's Board.
    One of the reasons we established this as a Corporation is 
so that there could be the best practices from the private 
sector. That it had to exercise oversight and accountability so 
it would not run wild, that was number 1, and also to allow 
creativity and ingenuity. I think the Board has been a bust. I 
think it has been like Enron goes nonprofit. I think they have 
exercised no stewardship, no responsibility, no accountability, 
and if this does not get fixed in the next year I will most 
respectfully ask President Bush to terminate the Board 
membership.
    I am truly serious, because we cannot, as appropriators, be 
the kind of watchdogs and stewards that we would like to be, so 
that was the whole point of establishing the Board. There were 
so many questions about National Service when it started that 
we felt the Board would be the proper balance of good business 
practices, sound financial accounting and stewardship, and it 
has been a B-U-S-T, and I think there has been a lack of 
leadership on the Board.
    Second, I am not going to pinpoint here, but I think there 
is a lack of leadership in Headquarters culture. There is a 
huge lack of communication. The Trust Director's position 
states that the Trust Director was supposed to be in charge of 
the Trust, but the person in charge of the Trust was like a 
day-to-day accountant rather than a Trust manager, and I do not 
get a sense that everybody gets into the same room, or the same 
virtual room, because of data, to really be able to stand 
sentry to be sure we are getting taxpayer's value for 
taxpayer's dollar but we are not violating the law.
    So I again think if this leader, if there is not a change 
in culture and a change in leadership, we then have to look at 
where we are going, Mr. Chairman. I think this is the most 
serious we have come to, so I have a series of questions, but I 
feel very strongly.
    I would like, with your concurrence, Mr. Chairman, that we 
take the Inspector General's report, the GAO report and others 
that are appropriate that have been briefed to us, and we send 
it to the Board, and we ask the Board to get their act together 
and get the Corporation's act together, and if not, then we 
will have to take this to the White House.
    That is where the accountability needs to be, along with, 
quite frankly, Mr. Lenkowsky, you and your team, but I am going 
to say this to you and your team. I think you really know 
National Service cold, but we have got real issues here. What I 
do not understand is how the Corporation approved more 
positions, and we keep approving positions, but there seems to 
be no data on why volunteers do not earn an education award and 
do not use the education award at all. This should be the very 
first thing that every year you decide how much money you have 
got, how much is in the Trust, and therefore how many 
volunteers you can enroll. Why do you not know this?

                         EDUCATION TRUST MODEL

    Dr. Lenkowsky. We do have a model that forecasts 
obligations for the Trust that is based on estimates using 
historical data.
    Senator Mikulski. But you do not have good data.
    Dr. Lenkowsky. We are getting better. Remember, we have 
just gone through a first class----
    Senator Mikulski. But you do not have good data. The model 
is a bust.
    Dr. Lenkowsky. I think I would like to ask Ms. Guillermin 
to comment on that. She has been working on the model. My 
understanding of the situation is that we had one of those 
garbage-in, garbage-out problems.
    Senator Mikulski. That is exactly right.
    Dr. Lenkowsky. The garbage, though, was not the model. It 
was the numbers going into the model. I think the model was 
basically sound, but I would like Ms. Guillermin to comment on 
that because she has been looking at that very closely.
    Ms. Guillermin. The model has been reviewed, and it 
operates in accordance with the assumptions that it was built 
to operate around. What we are finding, given the OMB feedback 
and now this GAO feedback, is that the assumptions upon which 
the model were based were erroneous and the model should never 
have been built around those assumptions at all.
    Senator Mikulski. So what are you going to do about it?
    Ms. Guillermin. We need to modify the model. We need to----
    Senator Mikulski. We need to, but what are you going to do 
about it, when are you going to do it, and how will you know 
that the model is accurate? I need urgency, urgency, urgency 
here.
    Ms. Guillermin. Yes, ma'am.
    Senator Mikulski. I need passion. I need from you all such 
an outrage. Do you have the outrage?
    Ms. Guillermin. We have the outrage and we are exhausted 
from spending many, many hours on this issue over the past 6 
months. We have implemented new procedures. We have changed the 
culture. We are determining, because as you have noted there 
have been a number of different opinions as to what the right 
accounting is, when the obligation should go into effect, and 
how much that obligation should be, and we can implement 
immediately--we have the GAO report as of yesterday and can 
implement today the recommendations that they have made.
    Dr. Lenkowsky. May I just add to that? As I said in my 
opening statement I think there is deep and profound anguish 
over what has gone on and a determination to change it on the 
part of senior leadership and on the Board itself. I speak for 
my chairman in this, that he, too, realizes the Board has not 
been implementing effective oversight, and we are making steps 
to change that, including regular metrics for the Board's use 
at each Board meeting.
    Now that we have both the IG and the GAO, now that OMB has 
weighed in, what we intend to do is determine once and for all 
what the proper legal standard is for developing obligations. 
We actually spoke a little bit about this at last year's 
hearings, as you may remember, Mr. Chairman. Once we get that 
down, we will get that right in place immediately----
    Senator Mikulski. Well, when are you going to get it down?
    Dr. Lenkowsky. Now that we have those reports in we are 
going to move with all deliberate speed to get this down.
    Senator Mikulski. Can I have a due date?
    Dr. Lenkowsky. I think what we need to do is get OMB, GAO, 
our Appropriations Committee----
    Senator Mikulski. That is a process answer. I want a due 
date. I am done with process.
    Dr. Lenkowsky. Yes, I think I can give you a due date. I 
believe our first round of grants for 2003 is scheduled to be 
made at the beginning of June, and everything will be in place 
before then.
    Senator Mikulski. Well, we want the legal definition to 
this committee by Memorial Day.
    Dr. Lenkowsky. Fine.
    Senator Mikulski. Mr. Chairman, you have been generous, so 
I will wait for a second round.

                    RELATIONSHIP WITH FREEDOM CORPS

    Senator Bond. Thank you, Senator Mikulski. We will note the 
June 1 date. I would say that we will certainly forward this 
information, along with our opening statements, to the Board. 
We will also forward them to the White House.
    I would tell you I have been getting regular calls from the 
White House, because the President does support the concept 
very strongly, and I have told him, I have told the 
representatives of the White House the concerns we have. We 
will share this with them, and I expect we will all be hearing 
a lot more from them, but with all the respect I have for the 
White House and all of the wonderful members of the Board, they 
ain't going to get no more money until we get the thing cleaned 
up, so that just happens to be my opinion. Now, somebody may 
beat me on the floor, but I doubt it.
    Dr. Lenkowsky, the Corporation plays a significant role in 
supporting U.S.A. Freedom Corps. The budget justification for 
2004 indicates that collaboration will continue with U.S.A. 
Freedom Corps, but there are no details. Besides the mainstream 
AmeriCorps programs, what other activities, what amount of 
funding does the Corporation expect to provide in supporting 
U.S.A. Freedom Corps initiatives? Do you expect to fund the 
President's Council on Service and Civic Participation? What 
are you going to do? Where are you going to spend the money, 
please?
    Dr. Lenkowsky. Senator, we work very closely with the 
Freedom Corps, which as you know is a White House Coordinating 
Council aimed at implementing the President's call to service. 
Everything we do with the Freedom Corps is completely 
consistent and, indeed, adds to the value of the Corporation's 
own programs within that larger context.
    In our operating plan which we have submitted to this 
committee we have identified--I think it is a good thing to ask 
us to identify this and I am glad we have now established that 
procedure--the items that we expect to spend on Freedom Corps 
in 2003. They do include the Council. They will include support 
for the 800 number, the web site, things like that. They will 
include some collaborative research efforts aimed at gauging 
some of the motivations that may or may not affect the 
willingness of Americans to volunteer.
    As we go forward in 2004, we would expect to do exactly the 
same with you, which is to identify within an operating plan 
context what items within our budget will be part of our 
collaborations with Freedom Corps.
    Senator Bond. If you expect to get the money for this 
collaboration in 2004 we do not want to wait until sometime in 
2004, after we pass the budget, to get your operating plan. We 
need to know now what you plan to do, how you plan to support 
it, where you plan to spend the money. This should be part of 
your budget submission to us so we know what you plan to do. 
Just telling us you are going to collaborate does not get it.
    Dr. Lenkowsky. We will provide that information to you as 
we know it. As you can appreciate, Senator, in the course of 
the year, especially with the new effort like the President's 
call to service, there are things that are developing, but I 
think we have established the procedures so that as soon as we 
are aware of potential collaborations we will make sure this 
committee is.

                FISCAL YEAR 2004 CHALLENGE GRANT REQUEST

    Senator Bond. Well, if you want us to fund them, you need 
to tell us about them in the process.
    My last question, Dr. Lenkowsky, on challenge grants. We 
provided in the 2003 budget $6 million for new challenge grants 
because we think that having you decide among all of the worthy 
recipients is the best way to do it. We provided funds in 
response to huge demands and earmarked requests from Teach for 
America, Girl Scouts, National Mentoring Partnership, to name a 
few.
    I am very disappointed the administration zeroed out this 
program and instead added a new earmark of $3 million for Teach 
for America. Why do you not want to be able to make the 
judgments on how the work of these many worthwhile groups will 
best complement the objectives of the Corporation for National 
Service, and does this mean now that OMB, which criticizes 
Congress for earmarking, now OMB believes that we should be 
earmarking? Do you know what is going on there?
    Dr. Lenkowsky. I do. I think this was a quirk of the 
unusual budgeting process we had in the past year. At the time 
we were putting in the 2004 request we did not have, as you 
know, the 2003 request in place. Consequently, as we discussed 
this with OMB we were advised that they did not want to put a 
number in, not knowing if Congress would have put the $6 
million in. Let me say to you that now that we have the $6 
million in there, we are prepared to work with this committee 
to put in the challenge grant provision with funding in the 
future.
    I should also add we did issue a request for proposals 
under the $6 million challenge grant. The response has been 
extraordinary. It exceeded our expectation in terms of letters 
of intent to apply, and we are hoping to make the first awards, 
and we will be notifying you well in advance of who those 
awardees will be. I believe our timetable might even be as 
early as next month, or perhaps early June, but it is very 
quick.
    Senator Bond. Well, number 1, you knew what the 
appropriations bill was going to be because you saw the bills. 
Essentially we did the bills last summer and then we finally 
got them passed, so you knew what was coming.
    Number 2, I have no doubt that the total requested is 
probably far beyond $6 million. I would like to know what you 
see the total is, what your estimate of the worthy ones is, and 
what you think we should set aside, because we have got to have 
a number in it. We have got to take money and put it in this 
Challenge Grant Program to the extent that it really performs a 
necessary service for the Corporation, and if you can do well 
through those, it seems to me to be a good idea.
    So what is the total, what do you estimate we need, and 
what do you request for 2004?
    Dr. Lenkowsky. I will be able to give you a better answer 
to that when we see the proposals. Right now, we do have 
letters of intent to apply. I do not have in front of me the 
data. I believe we have shared the RFP with the committee 
staff. If not, we will, and as soon as we get that information 
together I will be glad to supply it to you.
    Again, with respect to the budget process, I can assure you 
that in our discussions with OMB the Corporation did emphasize 
the value of the Challenge Grant Program. We are very excited 
by it.
    Senator Bond. I would like to know how much you can use. My 
staff did find it on the web, so it did not come from you.
    Senator Mikulski.

                        ADMINISTRATION EARMARKS

    Senator Mikulski. Thank you very much, Mr. Chairman. I 
would like to follow up on that, because first of all we like 
Teach for America, but we also note that there is more money in 
here earmarked by the White House for Points of Light, we 
understand its historic point of interest to this 
administration and the role that it has played.
    Then we earmarked something for America's Promise, which 
was started by General Powell, now Secretary Powell. There is 
very little anecdotal evidence that this has had very much 
traction. I am not a real enthusiast of America's Promise, only 
because I do not know what it has done. I am not going to argue 
with it. I would argue why should they get $7.5 million, but 
let's go to the challenge grants. How many proposals did you 
get?
    Dr. Lenkowsky. Right now we are at the stage of the process 
where we are soliciting letters of intent to submit proposals.

                       CHALLENGE GRANT PROPOSALS

    Senator Mikulski. But you said it was overwhelming.
    Dr. Lenkowsky. We have received 60 of them. At last count 
from the program officer responsible, she told me she had 60 
letters of intent to apply. I believe that is the stage we are 
at.
    Senator Mikulski. Okay, so that would be 60, and then 
roughly what were they applying for?
    Dr. Lenkowsky. I believe the minimum grant we are going to 
give is $500,000.
    Senator Mikulski. And what is the maximum?
    Dr. Lenkowsky. The maximum grant level is $3 million. I am 
also told, by the way, that many of these are organizations 
that are not otherwise engaged in working with the Corporation, 
so we are really reaching out.
    Senator Mikulski. Well, let us go back, then, to the 
intent. Well, so just using this sum already, Mr. Chairman, we 
are talking $20-30 million.
    Senator Bond. If you only gave half of them----
    Dr. Lenkowsky. If they only applied for half, it is 
probably $20-30 million.
    Senator Mikulski. That is exactly right, and if you recall 
last year, just in our subcommittee, we received $40 million in 
requests, and they were all bona fide requests. These were the 
Scouts, the Boys and Girls Clubs, bona fide track records, and 
they had a track record for criteria. First of all they were 
national organizations. They have national organizations with 
local delivery systems. They therefore came there with their 
own financial dowry. We were not their bankroll.
    The other thing is that they had an organized, systematic 
way of recruiting and training volunteers that we thought was 
great. Boys and Girls Clubs do background checks to make sure 
the kids are safe. We know what the Girl Scouts do. We know 
what Teach for America does, that they have to be fit for duty 
to be in the classroom.
    So I am glad that you are hearing, they are new, but the 
whole idea of the challenge grant was to do this. Number 1, get 
us out of the earmark business so that we did not all come with 
our teachers' pets. I have some of my own, so does Senator 
Bond, et cetera, so that earmarks were not based on, who is our 
teacher's pet.
    We all agreed Teach for America was a teacher's pet, but at 
the same time our criteria was that these were national in 
scope but local delivery, and yet we could count on them for 
the way they recruited, screened, and trained volunteers, that 
there would be a consistency, not necessarily uniformity, 
because we want responding to the local context, but there 
would be consistency in those volunteers so we could have 
confidence in them.
    So it was to get us out of the earmark business and it was 
putting us into helping these groups of national scope, coming 
with their own matching funds, and they had that 
infrastructure. I would hope we would stick to this and not 
think about breaking new ground. Was that your understanding?
    Dr. Lenkowsky. That is exactly our philosophy. We are very 
excited----
    Senator Mikulski. I am not talking about philosophy. I am 
talking about real criteria here.
    Dr. Lenkowsky. Yes. We are beginning the review process now 
and I think----
    Senator Mikulski. Is that your criteria?
    Dr. Lenkowsky. Those will be the criteria.
    Senator Mikulski. Is that currently your criteria?
    Dr. Lenkowsky. I think those criteria are stated in the 
RFP, and again we will make that available for you if you do 
not have it.
    Senator Mikulski. No, I want you to know what your own 
criteria is.
    Dr. Lenkowsky. Oh, they are certainly my criteria, 
absolutely.
    Senator Mikulski. So you see what the intent was, and I 
believe the criteria--I think as a National Service expert, 
would you agree that that is the sound criteria for challenge 
grants?
    Dr. Lenkowsky. Absolutely.

               FINANCIAL MODEL: LARGE CAP, MID CAP, IPOS

    Senator Mikulski. Okay. Now, let us go to something else. 
They were meant to be for large caps.
    Dr. Lenkowsky. That is right.
    Senator Mikulski. Okay. These were--when we looked--to use 
a financial model, the large cap, the mid cap, and the IPOs, 
the large cap were these national groups to be dealt challenge 
grants. The money that goes to States that Governors would be 
mid cap. Then we had what we call the IPO. These were the small 
start-up groups that through, hopefully, a Board exercising due 
diligence in your professional capacity would identify small 
groups that were the Teach for America of a decade ago, the 
City Year of a decade ago. Now, where are we with that $4 
million? Where are you with that, and do you agree that that is 
the criteria that is meant to be identifying small groups that 
are emerging? Will you even want to test it to see, are these 
the groups of the future, so that they can then go to a 
Governor, go to a United Way, et cetera?
    Dr. Lenkowsky. I agree completely. We received a letter 
from you, Senator, and from the chairman a few days ago. I 
immediately convened a meeting of our program staff. We had 
that meeting yesterday and began to work on this. Obviously, 
there is going to be a lot of outreach involved, a lot of 
technical assistance. There are a number of questions we had 
which I believe our Congressional Affairs Office will be 
discussing with committee staff about such things as can we use 
some technical assistance money within that grant amount to 
help nurture some of these start-ups.
    Senator Mikulski. We want to know what you think, though.
    Dr. Lenkowsky. I agree completely with your philosophy.
    Senator Mikulski. Well, what do you think we need to do----
    Dr. Lenkowsky. I think we need to----
    Senator Mikulski [continuing]. And do you think, number 1, 
is it worth the $4 million public shot, and what do you think 
it ought to be?
    Dr. Lenkowsky. Well, as we discussed----
    Senator Mikulski. What does that Board think it ought to 
be?
    Dr. Lenkowsky. The Board has not had an opportunity to 
review this yet, again, because this came in the 2003 
appropriation. We have not had a Board meeting since then.
    Senator Mikulski. Well, what do you think about it?
    Dr. Lenkowsky. We will be reviewing it in May.
    Senator Mikulski. What do you think about it?

       OUTREACH TO ORGANIZATIONS THAT SERVE IMMIGRANT POPULATIONS

    Dr. Lenkowsky. I think that what we need to do is identify 
areas or kinds of organizations where we ought to be reaching 
out and seeing whether--for example, one I mentioned, we have 
got a lot of new immigrants in this country.
    Senator Mikulski. Right.
    Dr. Lenkowsky. And it is not obvious to me--I have met with 
a couple of groups--that the traditions of service, if you 
will, are as well-established in immigrants from countries 
where there was not that tradition, and so what I suggested, as 
our program staff begins to work on this, we identify a couple 
of specific areas, proactively go out, go talk to existing 
organizations, talk to experts in the field, see where the 
needs are, and then see what we can do to help nurture, if it 
needs to be nurtured, a new generation of service.
    Let me give you one example that we already did which is a 
little bit--it is not quite a new organization, but I think it 
is close in concept. Early in my tenure I visited a remarkable 
organization called ACCESS. It is the Arab Community Center for 
Economic and Social Services in Dearborn, Michigan. It is a 
settlement house for Arab Americans and, as you probably know, 
there are more Arab Americans living in the Detroit area than 
in any part of the world except the Middle East and France, and 
it was a wonderful operation.
    Senator Mikulski. What is it doing?
    Dr. Lenkowsky. It is a settlement house, so it does 
everything from teaching English to people seeking jobs, health 
services--one thing the settlement----
    Senator Mikulski. Could I interrupt? First of all, we 
certainly do want to reach out to Arab Americans and to the new 
immigrant populations, but is this, by going to this settlement 
house, the potential for a national movement here?
    Dr. Lenkowsky. Well, that is exactly what we have already 
done. In advance of this grant they came in and successfully 
received a grant to replicate in a few other communities what 
they were doing successfully in Dearborn, and that is precisely 
the philosophy that we will be----

                           BOARD OF DIRECTORS

    Senator Mikulski. Okay. I do not mean to be brusque, but my 
red light has been flashing for some time. I just want to say 
this. I am really frustrated, and what I feel is that Senator 
Bond and I have been the Board. We have come up, working with 
you, with the idea of the challenge grants, we have come up 
with the seed grants, we then have to give guidance and 
criteria--I feel like we have been the Board.
    Now, the people did elect us in many ways to function, but 
I am very frustrated. That is what a professional staff is 
supposed to be doing, that is what a Board of Directors is 
supposed to be doing, and if we are going to be the Board, then 
we will be the Board, and then you do not need a Board, and I 
am pretty hot about this.
    Senator Bond. Thank you very much, Senator Mikulski. I 
would just point out that there should be criteria in a sense 
for the national challenge grants, since it was requested in 
2003, the $6 million was in response, I guess, to a $10 million 
budget request, so it should not come as a surprise to anybody 
that there is a program that needs to have grants, and I would 
also second what Senator Mikulski had to say about what great 
performance we are seeing from Teach for America. We wonder why 
that had to be earmarked, why the Corporation was not taking 
care of it, and I will be quite honest, I have heard nothing 
but questions about America's Promise and what it is actually 
accomplishing, so we are going to be taking a look at those.

                     ADDITIONAL COMMITTEE QUESTIONS

    Well, we do have a number of more questions, obviously that 
we will have to submit for the record. We have another part of 
this hearing. We thank you very much, Dr. Lenkowsky, Ms. 
Guillermin, and Mr. George, and I guess we will be seeing lots 
of you in the weeks and months to come. Thank you.
    Dr. Lenkowsky. Thank you very much, Mr. Chairman.
    Mr. George. Thank you.
    [The following questions were not asked at the hearing, but 
were submitted to the Corporation for response subsequent to 
the hearing:]

           Questions Submitted by Senator Christopher S. Bond

                             ACCOUNTABILITY

    Question. In Mr. George's testimony, he ``found that Trust 
liability projections were not being made by Trust staff, but by a 
senior-level official in the Corporation's Executive Office.''
    Dr. Lenkowsky, it is clear that this ``senior-level official'' 
should not have been making Trust liability projections. How have you 
responded to this finding? Have you taken any disciplinary action? Will 
you take disciplinary action if the IG or GAO investigations identify 
more problems?
    Answer. The ``senior-level official'' held the position of 
Director, Office of Planning and Program Integration. A career 
government employee, he was reassigned in November 2002 to the staff of 
the Department of Research and Policy Development and retired at the 
beginning of May 2003. The Office he headed has been eliminated and 
Trust liability projections are now the responsibility of the Chief 
Financial Officer.
    I have already advised the IG that I intend to take additional 
personnel actions depending upon the outcome of that investigation. I 
will also act upon any findings or recommendations that emerge from the 
GAO investigation.

                           USA FREEDOM CORPS

    Question. The Corporation plays a significant role in supporting 
the USA Freedom Corps' activities. The Corporation's budget 
justifications for fiscal year 2004 indicate that ``collaboration will 
continue with USA Freedom Corps.'' However, there are no details.
    Besides the mainstream AmeriCorps programs, what other activities 
and what amount of funding does the Corporation expect to provide in 
supporting USA Freedom Corps initiatives? For example, do you expect to 
fund the President's Council on Service and Civic Participation? If so, 
how much money do you expect to provide to the Council in fiscal year 
2004?
    Answer. The Corporation participates in activities related to 
National Service jointly with other agencies, which are many times, 
coordinated through the USA Freedom Corps (USAFC). In 2002, the 
Corporation spent approximately $371,000 on such activities, which 
include co-sponsorship of a toll-free number which directs potential 
volunteers to the National Service Programs and publishing of the 
Record of Service Journal, which allows volunteers to record their 
lifetime service experiences. In 2003, the Corporation plans to 
participate in a number of activities coordinated through USAFC as well 
as a number of activities in which USAFC is nominally involved. These 
include continued sponsorship of the toll-free number and websites, the 
White House Task Force on Disadvantaged Youth, the White House Forum on 
Civics, History and Service, as well as the President's Council on 
Service and Civic Participation. While USAFC participates in the 
President's Council, it is important to note that the Council is housed 
at the Corporation pursuant to Executive Order 13285. The direct costs 
of these programs total approximately $740,000.
    In 2004, the Corporation will continue to participate in activities 
in which USAFC is involved. However, these items are included in the 
Innovation, Assistance and Other Activities funding stream (H Funds), 
the level of which has yet to be determined by the fiscal year 2004 
appropriations.

                          PERFORMANCE MEASURES

    Question. The fiscal year 2003 appropriations bill directed the 
Corporation to establish performance measures for each grantee, require 
each grantee to submit a correction plan should the grantee not meet 
the measures, and reduce or terminate any award where the grantee does 
not meet the performance plan.
    Please tell us how you have implemented these directives.
    Answer. In 2002, the Corporation launched a major initiative to 
work with applicants and programs to strengthen the accountability and 
performance of organizations receiving funds under the National Service 
laws. The Corporation restructured its evaluation office, creating a 
new Department of Research and Policy Development (RPD) reporting 
directly to the Chief Executive's Office. RPD is leading an intensive 
effort to measure the performance of federally funded community service 
programs. The performance measurement initiative will take several 
years to fully implement, and will provide an ongoing assessment of the 
short- and long-term effects of community service on volunteers, host 
organizations, individual beneficiaries and communities. This 
initiative is essential to enable the Corporation to fulfill its 
mission of achieving direct and demonstrable results. The Performance 
Measurement Initiative affects all programs under the Corporation's 
umbrella: AmeriCorps (AmeriCorps*State and National, AmeriCorps*VISTA 
and AmeriCorps*National Civilian Community Corps) and Senior Corps 
(Foster Grandparents Program, Senior Companions, and the Retired and 
Senior Volunteer Program); and Learn and Serve America (school- and 
community-based programs for young people).
    The Corporation's Performance Measurement Initiative has six major 
components:
    1. Department of Research and Development (RPD).--In 2002, the 
Corporation's CEO, Leslie Lenkowsky, created a Department of Research 
and Policy Development, which absorbed the old evaluation division and 
assumed a broader mandate to link program evaluation to policy design. 
At the heart of RPD's mission are (1) monitoring and evaluating program 
expansion and developing policy-relevant research to assure 
accountability, quality and continued innovation in policies and 
programs; and (2) documenting compliance with the Government 
Performance and Results Act to encourage a culture of outcome-based 
management.
    2. Comprehensive Review of the Corporation's Performance 
Measurement Systems.--To lay the foundations for this initiative, the 
Urban Institute, a leader in the field of performance measurement, 
completed a review of the Corporation's performance measurement systems 
and provided recommendations for improvement in July 2002. The report 
identified several weaknesses in the Corporation's performance 
measurement system including: few programs had performance indicators 
in their budget estimates or performance plans and many indicators that 
did exist were designed to measure outputs (statistics) rather than 
outcomes and results. The Urban Institute recommended that the 
Corporation revise this performance measurement system to make them 
more results oriented and require grantees to identify specific 
performance indicators to track their performance. The Corporation has 
adopted the report's recommendations and is revising the performance 
indicators and requiring grantees to identify specific indicators on 
which they will collect regular data to report on their performance 
beginning with applications filed in fiscal 2003.
    3. Development of Internal Performance Measures.--RPD is leading 
the effort to implement performance measures within the Corporation, as 
well. Each major program and department, from Congressional Affairs to 
RPD itself, has devised outcome indicators to help department heads 
manage for performance. In developing the Fiscal Year 2004 Budget, the 
Corporation completed the new Program Assessment Rating Tool (PART) for 
the AmeriCorps program, and currently is implementing reforms to 
address finding and recommendations to improve the program's 
effectiveness rating.
    4. Performance Measurement Requirement for Grantees.--Each grantee 
(and sub-grantee) is now required to identify 3-5 performance measures 
and then collect, in a regular and systematic way, the quantitative 
data for those measures. Under the new protocol, short- and long-term 
outcome measures are required. In addition, service programs are 
required to report the data to the Corporation. Under the new 
management system, each of the three principal actors in a service 
setting will assess the others. These three actors are the service-
corps member/volunteer, the non-profit administrator overseeing the 
volunteer, and the beneficiary of the service. Their collective 
feedback will count in funding decisions.
    5. Creation of a Performance Measure Toolkit.--The Corporation 
contracted to develop a Performance Measurement Toolkit to help 
grantees understand performance measurement concepts, provide 
information on how performance measurement can be applied to National 
Service programs, and help potential applicants for funding respond to 
the performance measurement requirements of the application process. 
The toolkit was completed in late 2002 and disseminated to the field in 
early 2003. The toolkit also contains an explanation of how to use a 
logic model to structure National Service programs, identify the key 
program elements that must be tracked to assess the program's 
effectiveness, and improve program planning and performance by 
identifying the ways to measure program results and areas for 
improvement. The Corporation also provides training and technical 
assistance on performance measurement to all Corporation program staff, 
State commissions, organizations receiving funding, and organizations 
interested in submitting an application for funding.
    6. Introduction of Performance-based Grant Making.--Rather than 
spreading service funds around and hoping that the outcome will be 
good, the Corporation will tie future grants to documented performance. 
Low-performing grantees that are unable to improve will not have their 
grants renewed. First-time applicants will have to provide the 
Corporation with a solid, workable performance-measurement plan. 
Equally important, performance data will be shared with the public, 
including beneficiaries and prospective volunteers, to spur 
improvements by programs.
    This year we are devoting approximately $3.8 million in contract 
support to strengthen program measurement at the local level, to 
develop standard instruments that local organizations may use, to 
provide training to local organizations, and to collect certain basic 
data concerning the impact of these programs.
    In addition to these amounts, a significant percentage of staff 
time at the Corporation is devoted to monitoring and assessing the 
impact of local programs, as well as providing support in how to 
implement performance measures. This staff time does not represent 
additional costs, but is a shift in focus. We think this shift is 
justified and is critical to strengthening national and community 
service programs.

                             SUSTAINABILITY

    Question. Last year, I raised the question about sustainability 
because of my concerns about the Corporation funding the same 
organizations every year.
    Dr. Lenkowsky, how have you addressed sustainability, especially in 
terms of reducing grantee reliance on Federal funds?
    Answer. The Senate Appropriations Committee, Subcommittee for VA/
HUD-Independent Agencies, in action on the budget for fiscal year 2003, 
directed the Corporation for National and Community Service to provide 
a report that details its efforts to measure a grantee's reliance on 
Federal funding and to reduce grantee reliance on Federal funds both in 
terms of total Corporation resources provided to grantees, and as a 
percentage of grantee operating costs.
    This report was submitted to the subcommittee in May, 2003. In 
general, the Corporation is committed to supporting programs that are 
sustainable and has made a number of recent policy changes to achieve 
the objective of reducing reliance on funding (other than education 
awards) from the Corporation. These policy changes are described in 
detail in the attached report.

                          ``CHALLENGE'' GRANTS

    Question. The fiscal year 2003 appropriations bill provided $6 
million for a new challenge grants program. We provided funds for this 
new program in response to the huge demand of earmark requests from 
groups like Teach For America, Girl Scouts, and the National Mentoring 
Partnership, to name a few. I am disappointed that the administration 
zeroed out this program and added a new earmark of $3 million for Teach 
for America.
    Can you give me a status of this year's challenge grants program? 
How many applications have you received and how many do you expect to 
fund?
    Answer. The Challenge Grant Notice of Funds Availability (NOFA) was 
printed in the Federal Register on March 25, 2003 with an April 10, 
2003 deadline for applications. We received 53 applications. During the 
first stage of the review process, the compliance review, we determined 
that 38 applications were compliant and these were sent to the first 
round of review. Most of the non-compliant applicants had an 
insufficient match.
    Thirty-eight applications were reviewed in the first round of 
review. Twenty-one were sent to the next round of review which is 
currently in progress. With $6 million in the 2003 appropriation, and a 
minimum request of $500,000, we can make up to 12 grants. The CEO will 
receive the final recommendations of the review committee in early June 
and plans to notify the Senate and House Appropriations Subcommittees 
on VA/HUD and Independent Agencies by the third week of June, prior to 
the notifications going to awardees.
    Question. Regarding Teach for America, I understand that despite 
their great performance, they continue to receive the same level of 
funding year-in, year-out. If an organization like TFA is performing 
well and is experiencing a greater demand for its program, why is it 
not able to receive more funds?
    Answer. Teach for America has done an excellent job of leveraging 
its AmeriCorps funding with significant private and non-Federal 
support. In 2002, about 10 percent of its total operating budget comes 
from the Corporation ($1.6 million). In addition, every member of Teach 
for America is eligible to earn an education award. As demand for the 
program grows and it enrolls more members, the Corporation commits more 
funding for these awards. In fiscal year 2002, Teach for America 
received $19.7 million in private support from corporations, 
foundations and individual giving and events which represents 74 
percent of TFA's total revenue.
    With regard to Corporation support in previous years, Teach for 
America received the following Corporation grants between 1994-2002:

------------------------------------------------------------------------

------------------------------------------------------------------------
1994-1998:
    National Direct Programs.........................         $8,433,000
1999:
    National Direct Programs.........................          1,433,000
2000:
    National Direct Programs.........................          1,632,970
                                                      ==================
2001:
    State Competitive Programs.......................            269,230
    National Direct Programs.........................          1,725,400
                                                      ------------------
      Subtotal.......................................          1,994,630
                                                      ==================
2002:
    State Competitive Programs.......................            268,921
    State Formula Programs...........................            100,000
    National Direct Programs.........................          2,798,201
                                                      ------------------
      Subtotal.......................................          3,167,122
                                                      ==================
      Total..........................................         16,660,722
------------------------------------------------------------------------

                         COST ACCOUNTING SYSTEM

    Question. For several years, I have asked the Corporation to 
develop a cost accounting system so that we can have actual cost data 
on its programs and grants. Last year, PriceWaterhouseCoopers (PWC) 
assessed the Corporation's implementation of its new cost accounting 
system and it recommended that the new system is refined to calculate 
cost per grant or cost per grant dollar.
    What is the status of your new cost accounting system? When do you 
expect to be able to provide us with actual cost data on your programs?
    Answer. During fiscal 2001, the Corporation implemented a cost 
accounting application that enables the Corporation to track and report 
expenses by major program. The Statement of Operations and Changes in 
Net Position contains comparative expense information by program. This 
application is the mechanism by which the Corporation determines the 
total cost to operate each of its three major programs: AmeriCorps, 
Learn & Serve, and National Senior Service Corps. Support and 
administrative costs are allocated to each of the programs based on a 
systematic and rational cost driver. During fiscal 2002, an independent 
contractor, PriceWaterhouseCoopers, determined that the Corporation's 
cost accounting application is in compliance with the Federal 
Accounting Standards Advisory Board's Statement of Federal Financial 
Accounting Standards Number 4, Managerial Cost Accounting Concepts and 
Standards for the Federal Government. This accomplishment places the 
Corporation ahead of many Federal entities in achieving compliance with 
the cost accounting standard.
    In 2002, we implemented recommendations from PWC to add 
functionality to the model to calculate the administrative cost per 
grant or administrative cost per grant dollar so that we can monitor 
and measure improvements in administrative cost management over time. 
These changes, coupled with full implementation of the eGrants system 
(expected in late 2003) will allow the Corporation the first 
opportunity to fully apply the new model to reliable data and perform 
cost accounting on our actual experience.

                       LEVERAGING MORE VOLUNTEERS

    Question. The Corporation added a new criterion in its AmeriCorps 
application process that takes into account the leveraging of 
additional volunteers. I am a big supporter of this because I believe 
the AmeriCorps program can be more effective by focusing more on 
``wholesale'' activities instead of ``retail'' activities.
    Please provide an update on how you have addressed this matter.
    Answer. A fundamental purpose of AmeriCorps is to help recruit, 
support, and manage the networks of volunteers assisting nonprofit 
organizations in meeting community needs. By creating volunteer 
opportunities and helping organizations to effectively engage 
volunteers, AmeriCorps programs multiply their impact, build 
organizational capacity, and support the development of sustainable 
programs. Volunteering also provides an ideal opportunity to bring 
together people of many racial, ethnic, and religious backgrounds 
around a common goal and to foster the active citizenship upon which 
the health of our democratic system depends.
    We have increased our emphasis on supporting programs that engage 
volunteers in their activities. Accordingly, our guidelines for the 
2003 award competition state that successful applicants will be those 
that address how their AmeriCorps program will effectively engage and 
support volunteers in meeting community needs and staff reviewing 
applications have been asked to report on proposed uses of volunteers.
    The Corporation is also developing a process to standardize 
reporting procedures for volunteer leveraging and create uniform 
definitions for counting community volunteers and across programs. We 
will develop these measures in consultation with grantees. For example, 
the Corporation is interested in creating standard definitions or 
categories of community volunteers based on the level of service they 
contribute. We are also exploring a standard approach to assessing 
AmeriCorps members' involvement in or contribution to the recruitment 
of volunteers.
    Although programs will have the flexibility to determine the best 
approach to volunteer recruitment and management based on their program 
design and local characteristics, all programs are expected to include 
volunteer recruitment as one of their 3-5 performance measures. We 
understand that not every program may be able to meet this requirement, 
particularly in the first year. If a program is unable to include 
volunteer recruitment and management, they are required to include an 
explanation in their application. We will consider volunteer 
recruitment (and/or the explanation for not including this element) 
during the grant application review process.

                            REAUTHORIZATION

    Question. Both Senator Mikulski and I sit in a unique position to 
address the policy and programmatic issues of the Corporation since we 
both sit on its authorizing and appropriations committees.
    Do you expect to submit a reauthorization bill this year? Do you 
have any specific legislative proposals that would help strengthen the 
Corporation's management practices?
    Answer. We have had indications of intent, from the House and 
Senate authorizing committees, to introduce reauthorization bills 
during this Congress. We anticipate that both bills would use HR 4854, 
passed by the House Education and the Workforce, Subcommittee on Select 
Education in the 107th Congress, as the basis for their bills this 
year. Among the management-strengthening measures included in HR 4854 
are:
  --Emphasis on establishment of grantee performance measures including 
        corrective action or termination for noncompliance.
  --Requirements to contain costs by capping grant costs per member.
  --Transfer of the Education Award Program from Subtitle H to C to 
        make it an ongoing program of AmeriCorps. Including it in the 
        grants program would provide additional flexibility managing 
        all aspects of the program.
    HR 4854 also included two provisions that would strengthen the 
oversight of the Board of Directors of the Corporation. The first 
provision would allow Board members to serve until a successor is 
appointed and the second would establish a standard 5-year term for 
Board members. The Board has also expressed an interest in having 
authority to direct some staff at the Corporation; however, such direct 
authority would require a change in statute.

                                LITERACY

    Question. I am a big supporter of child literacy mentoring and 
tutoring programs.
    How much funding support currently goes to the Corporation's 
literacy initiatives and what kind of results are we seeing?
    Answer. The Senate Appropriations Committee Report, in action on 
the budget for fiscal year 2003, directed the Corporation to ``continue 
at least the current level of support ($100,000,000) for programs 
designed to help teach children to read by the third grade.'' In fiscal 
year 2002, the Corporation awarded $113,987,656 in grants under its 
AmeriCorps State/National program to programs for which children's 
literacy is a major focus.
    As reflected in the Fiscal Year 2003 Guidelines, programs are 
required to conduct performance evaluations and report to the 
Corporation to ensure that Corporation-funded tutoring programs operate 
in the spirit of the No Child Left Behind Act. These policies are 
described below in ``Guidelines for 2003 Grants'' and ``Training and 
Technical Assistance for Tutoring Programs''.
    These policy changes will significantly enhance the standards by 
which our programs operate. Additionally, as with all grantees, the 
Corporation proposes to track the performance of programs whose 
participants engage in tutoring with the new system of performance 
measurement, which will be initiated for programs starting in fiscal 
year 2003. By doing so, the Corporation will establish not only that 
grantees are operating programs that are consistent with Federal 
guidelines, but also that the children being tutored actually increase 
their reading ability.
    In issuing 2003 guidelines for funding, the Corporation set forth 
new policies related to programs that teach and promote reading skills. 
Beginning with the 2003 grant award process, successful applicants must 
demonstrate that their tutoring programs address the following 
criteria:
  --Curricula;
  --Tutor training;
  --Outcomes; and
  --Standards for tutors.
    After grants are awarded, the Corporation will work with grantees 
to ensure that all funded tutoring programs make suitable progress 
toward the goal of increased child literacy. The following provides the 
sections related to tutoring and child literacy as set forth in the 
2003 grant guidelines (entire guidelines are attached): \1\
---------------------------------------------------------------------------
    \1\ [Clerk's Note.--This document has been retained in Committee 
files.]
---------------------------------------------------------------------------
Overall Statement of Policy
    ``A significant percentage of programs supported by the Corporation 
provide tutoring and other support to assist children in learning to 
read. The No Child Left Behind Act, enacted by the Congress in 2001, 
sets new scientifically-based standards for programs in schools across 
the country. This year with Corporation funding, successful applicants 
will have to demonstrate that their activities incorporate 
scientifically-based approaches to reading. Specifically, programs 
proposing tutoring and other literacy activities should address 
curricula, tutor training, outcomes, and standards for tutors.''
    ``The Corporation recognizes that there are a wide variety of 
literacy activities being conducted by AmeriCorps programs, ranging 
from book drives to one-to-one tutoring programs. The above 
expectations apply only to those applicants engaged in tutoring or 
reading instruction in schools and related institutions such as 
nonprofit organizations running after-school programs.''

Curricula
    ``Your application should describe curricula and tutoring 
strategies that are scientifically-based and include the five 
components of reading and reading instruction identified by the 
National Reading Panel OR demonstrate that the activities you conduct 
are part of a program in a school under the No Child Left Behind Act 
that provides individuals with systematic instruction and practice in 
the five basic reading components.''

Tutor Training
    ``Tutor training should take place both before and during service 
and give tutors the skills and knowledge to support students' learning 
of the specific components of reading addressed in the report of the 
National Reading Panel  .  .  .  Programs may also, where appropriate, 
demonstrate school site participation in training design and 
implementation and/or evidence of linkages between the instructional 
program of the tutee's school district and content of tutoring sessions 
conducted after school.''

Outcomes
    ``Your application should identify student achievement goals and 
show links between program objectives, tutoring activities, tutor 
training, and proposed strategies for achieving these goals. Applicants 
should address the approach they will use to measure outcomes.''

Standards for Tutors
    ``Your program should identify any standards that you propose to 
use to qualify individuals as tutors. For example, some programs may 
screen individuals through a qualifications test; others may require 
enrollment in, or completion of, a reading course. Still others may 
require demonstration of certain academic skills, such as completing at 
least 2 years of college. During the coming year, the Corporation plans 
to work with organizations and programs to set standards for tutors.''

Continued Training and Technical Assistance
    ``The Corporation will work with successful applicants to provide 
training and support to achieve effective tutoring programs and to 
maximize their impact on the individuals being served.''
    In addition to these guidelines, the Corporation commissioned a 
study by Abt Associates in 2001 to determine the impact of AmeriCorps 
literacy program, which is summarized below.
    Well-designed AmeriCorps programs impact early grade reading 
performance in school and in school readiness. A study of children in 
grades 1-3, completed in 2001, found that ``students participating in 
AmeriCorps tutoring programs improved their reading performance from 
pre-test to post-test more than the gain expected for the typical child 
at their grade level.'' \2\ In an assessment report from the Evaluation 
of the Jumpstart Program (2000-2001 National Composite), Shelby Miller, 
Ph.D. stated that the findings from the evaluation show significant 
program effects on the participating preschool-age children's language, 
social, and adaptive skills based on their teachers' assessments. While 
the program participants began the program year behind their non-
participant peers in all areas, their teachers reported that they made 
significantly more substantial gains during the year than their 
counterparts.
---------------------------------------------------------------------------
    \2\ Abt Associates. 2001b. AmeriCorps Tutoring and Student Reading 
Achievement. Final Report. Cambridge, MA. 



                           AMERICA'S PROMISE

    Question. I understand that your [IG] office is auditing America's 
Promise.
    Please tell me about the scope of the audit, audit completion date 
and report issuance date, and any preliminary findings. Lastly, please 
tell me how often the Federal Government audits the programs of 
America's Promise and how the Corporation monitors the performance of 
its programs.
    Answer. The Office of Inspector General had originally planned to 
perform a financial-related audit of Corporation funds awarded to 
America's Promise. However, the Office of Management and Budget (OMB) 
requires all Federal grant recipients that qualify as ``major 
programs'' to be independently audited on an annual basis. America's 
Promise qualifies as a ``major program'' under OMB criteria and, 
consequently, must perform an annual A-133 audit. In fiscal year 2001, 
the audit firm Grant Thorton conducted the A-133 audit of America's 
Promise and noted no matters involving noncompliance or internal 
control over financial reporting. Furthermore, no matters were noted 
involving noncompliance or internal control over the major programs 
that were considered to be material weaknesses.
    The Office of Inspector General reviewed the work performed by the 
Grant Thorton auditors and relied on their conclusions to avoid a 
duplication of effort. Therefore, our audit focused on determining 
whether America's Promise appropriately reclassified general costs as 
grant costs for fiscal year 2001. In addition, our audit examined 
fiscal year 2002 grant costs to ensure that they were allowable. Our 
audit was completed on March 17, 2003, and it questioned $23,432 of 
salaries, benefits, and travel costs. This amount is approximately .3 
percent of the $7,483,000 of costs claimed under the grant. The 
questioned costs were incurred prior to the effective date of the 
award. We also questioned $911 of interest earned on Federal funds. A 
copy of our audit of America's Promise is enclosed.
    On March 31, 2002, the Corporation issued its Proposed Management 
Decision and Notice of Final Action on the America's Promise audit. The 
$23,432 of costs incurred outside the grant period were allowed by the 
Corporation because the costs were allowable, related to the project, 
and incurred in accordance with the proposed budget program. The 
Corporation also determined that if America's Promise had requested the 
Corporation's permission prior to incurring these costs, the request 
would have been approved. America's Promise was informed that it must 
receive the Corporation's written consent before incurring costs 
outside the grant period. The $911 of interest earned on Federal funds 
was disallowed and repaid.
    With respect to your question of how often the Federal Government 
audits America's Promise, this organization, as noted above, qualifies 
as a ``major program'' according to OMB criteria and must perform an A-
133 audit on an annual basis. The A-133 audit tests the grantee's 
system of internal controls to ensure that they are adequate to account 
for Federal funds. The A-133 audit also tests compliance with grant 
provisions and the allowability of grant costs.
    With respect to your question of how the Corporation monitors the 
performance of its programs, a Corporation staff member monitors the 
America's Promise grant as well as other earmark grants. This staff 
member receives progress reports from America's Promise and performs 
fiscal and programmatic monitoring.
    If I can be of further assistance, please do not hesitate to 
contact me. I look forward to working with you to achieve our mutual 
goal of making the Corporation a more efficient and effective 
organization.

                    PERFORMANCE OF AMERICA'S PROMISE

    Question. Our committee has appropriated well over $25 million to 
America's Promise to support their efforts in meeting the needs of at-
risk youth.
    To what degree has America's Promise been able to meet its goals? 
What activities does America's Promise support with the appropriated 
funds (administrative expenses, grants to other nonprofit 
organizations, etc.)? What is the difference between America's 
Promise's activities and the Points of Light Foundation? Is there any 
duplication of efforts between these two organizations?
    Answer. The Corporation's grant to America's Promise supports 
operational costs of the organization, including personnel salaries and 
benefits, contracts to develop technical assistance materials, research 
and evaluation, travel, and supplies. It does not include any ``sub-
grants'' to other nonprofit groups and all administrative expenses are 
in areas permissible for Federal grant funds.
    America's Promise recently provided Congress, including the 
subcommittee, with a report that had been requested concerning its 
activities and accomplishments. This provides a comprehensive picture 
of the current status of the effort to achieve the ``Five Goals'' to 
youth. The Corporation for National and Community Service has not 
conducted an evaluation of the effectiveness and accomplishments of 
America's Promise. However, America's Promise has begun to take a more 
focused approach to its work, focusing on a limited number of specific 
communities and building on successful ``Communities of Promise.'' This 
seems realistic and avoids the diffuse approach that may have 
characterized early efforts of the organization.
    A major difference between America's Promise and the Points of 
Light Foundation is that America's Promise focuses, as stated in the 
subcommittee's question, on meeting the needs of children and youth. 
Citizen volunteer service is one important strategy in meeting these 
needs through reaching the ``Five Promises'' to youth identified by 
America's Promise. The Points of Light Foundation promotes and supports 
citizen volunteering directed at the entire spectrum of national and 
community needs including but not limited to those of children and 
youth. The Foundation supports volunteering by youth, and in support of 
youth, but the efforts of the two groups complement rather than 
duplicate one another.

                    MULTIPLE FEDERAL FUNDING SOURCES

    Question. The Corporation funds a number of organizations that also 
receive funds from other Federal agencies. For example, Habitat for 
Humanity and YouthBuild receive funding from both CNCS and the 
Department of Housing and Urban Development.
    How many CNCS grant recipients currently receive funds from other 
Federal agencies? Please provide me a top ten list of organizations 
that receive funds from multiple Federal funding sources. Please rank 
the organizations based on the amount of dollars they receive from the 
Federal Government.
    Answer. The Corporation is committed to supporting programs that 
are sustainable and has made a number of recent policy changes to 
achieve the objective of reducing the reliance on funding from the 
Corporation. Funds from Federal sources other than the Corporation may 
be used as matching funds for the operating costs of AmeriCorps State 
and National programs. Pursuant to OMB Administrative Requirements, the 
Corporation requires that verifiable records on match be retained by 
grantees for audit purposes.
    The 2003 application guidelines include a new requirement that 
nonprofit organizations make available to the Corporation more detailed 
information about the finances of the organization, including their 
sources of funding, either through copies of annual financial 
statements or IRS information returns. However, other than funds 
claimed as match for its grants, the Corporation does not keep records 
on the funds that its grantees receive from other Federal agencies.
    Should the committee instruct the Corporation to report such 
information, the Corporation would be required to seek direction from 
the Office of Management and Budget. However, the Corporation is 
currently examining alternative data sources for gathering this 
information. Options include using IRS Form 990 data (Return of 
Organization Exempt from Income Tax), instituting special surveys, or 
imposing additional reporting requirements upon Corporation grantees.
    We would be glad to discuss this issue further with the committee.

                       DEPARTMENT OF THE TREASURY

           Community Development Financial Institutions Fund

STATEMENT OF TONY T. BROWN, DIRECTOR
ACCOMPANIED BY:
        LINDA DAVENPORT, ACTING DEPUTY DIRECTOR FOR POLICIES AND 
            PROGRAMS
        OWEN JONES, DEPUTY DIRECTOR FOR MANAGEMENT AND CHIEF FINANCIAL 
            OFFICER

    Senator Bond. Mr. Brown, if you will go ahead and take your 
seat, Senator Mikulski will be back in just a few minutes--she 
had to make a call--so we will save the important part, like 
your testimony, for her return. I will get my comments out of 
the way so we can get on with that.
    We welcome Mr. Tony Brown for the second panel. He is the 
Director of the Community Development Financial Institutions 
Fund, who has joined us this morning to testify on the 
President's fiscal year 2004 budget request.
    While the CDFI Fund is one of our smallest agencies within 
VA-HUD, it is responsible for a number of very important 
programs which are designed to make credit and capital 
available in distressed rural and urban neighborhoods through 
financial institutions. In addition, the CDFI Fund is now 
responsible for the New Markets Tax Credit program, which makes 
tax credits available for leveraging private dollars and 
investments in low-income communities.
    I am disappointed in the President's budget that only 
requests $51 million for the CDFI Fund in 2004. This is a 
reduction of some $17 million from the $68 million requested 
for 2003 and a reduction of some $23.5 million from the fiscal 
year 2003 enacted level of $74.5 million, and while I 
understand CDFI's position that this is essentially level 
funding for the CDFI program, as to the amount of funds that 
can actually be used in 2004 by CDFIs, I am not convinced that 
the fund cannot implement reforms that will ensure a more 
effective use of funds by CDFIs.
    I know we have many low-income communities without adequate 
access to credit and capital, especially communities in rural 
America and in Native American areas, and without these CDFI 
resources many of these communities will continue to be 
economically distressed and stagnant.
    I am also concerned about the budget request of only $8 
million for the Bank Enterprise Award Program for 2004. I 
understand that this reduced funding is consistent with 
perceived BEA funding needs as new regulations for the program 
are being implemented. Nevertheless, this has been a very 
successful program. For example, the Central Bank of Kansas 
City has used some $2.4 million in BEA grants over the last 7 
years to leverage $15.3 million for lending activities, and 
that lending has translated into 282 units of affordable 
housing, created or saved 525 jobs, and created or assisted 
some 148 small businesses in the most distressed communities of 
Kansas City.
    The Central Bank has made a tremendous difference in the 
lives of many low-income families. Nevertheless, I understand 
that the 2004 funding request of $8 million for 2004 may mean 
that the Central Bank will get significantly reduced or no 
funding, and that any funding provided will not be consistent 
with its level of commitment to the BEA Program. I do not like 
to think that we may be turning our backs on successful CDFIs 
like the Central Bank, and I need to understand why we should 
underfund these important financial institutions.
    I also have some questions about the New Markets Tax Credit 
program. I know we are asked to appropriate $13 million just 
for administrative costs for the New Markets program, and the 
program itself is responsible for allocating $15 billion worth 
of tax credit investments which will be used to leverage 
private capital to invest in low-income communities.
    I am unhappy, however, that the CDFI Fund is beginning to 
turn its back on funding CDFIs with their mission of making 
capital and credit available in distressed communities. This is 
a vital need that the New Markets program will not meet. 
Instead, the New Markets program is so broadly defined that the 
eligible communities include 32 percent of the U.S. population 
and nearly 40 percent of the land area. I am not sure how the 
CDFI Fund will be able to ensure accountability, exercise 
oversight, or measure success. We are going to need answers for 
all those concerns.
    Finally, I am especially concerned about the fund's effort 
in addressing distressed communities in rural areas. Many 
members of this subcommittee share my concern, and I do have 
many of those communities I have visited throughout Missouri. 
They are economically distressed, and we work hard to help 
distressed areas of large cities, but the economic distress in 
some of the rural areas is even more pronounced and even more 
hopeless than we find in some of the cities. I would like to 
hear how the fund plans to continue to address this issue.
    I look forward to your testimony, and then I will call on 
my distinguished Ranking Member for her comments.
    Senator Mikulski. Mr. Brown, we want to welcome you once 
again to the committee, but Mr. Chairman, in the interests of 
time I am going to submit my written statement into the record, 
but first let me make a few quick points. I am very concerned 
about the fact that the budget request for CDFI is $51 million 
and it is 30 percent below what we funded it at. I am concerned 
that this is an appropriations request from OMB and not CDFI.

                           PREPARED STATEMENT

    Second, we need to make sure we stay focused on the core 
mission of CDFI to provide capital and credit in underserved 
markets and low-income communities. I know we have 16, but the 
New Markets Tax Credit, in implementing it, is not what a CDFI 
Fund is, so we do not want the discouragement of the new 
markets, but I agree--there are a lot of flashing yellow lights 
around here--I would like us to have enough money to do the 
CDFI core mission, which is a pretty good one, and then in an 
accountable, transparent way measure how we are doing in 
implementing the new markets.
    I am looking forward to hearing you, Mr. Brown, but I feel 
like we are getting off the mark and we are getting 
underfunded, so I am happy to hear what you have got to say.
    [The statement follows:]

            Prepared Statment of Senator Barbara A. Mikulski

    Welcome Director Brown. This is the second time Mr. Brown has 
testified before this subcommittee. Unfortunately, each time we see 
you, the CDFI Fund request gets lower.
    For fiscal year 2004, the administration requests $51 million for 
the CDFI Fund. This is a 30 percent cut from the fiscal year 2003 
enacted level. And it would put the CDFI Fund back at its 1997 level. 
When I look at the CDFI budget request, I do not see a CDFI Fund 
request or a Tony Brown request; I see an OMB request. The CDFI Fund 
has a very important mission. It invests in organizations that are 
dedicated to improving low-income neighborhoods, and the lives of low-
income people.
    When I look at the budget for the CDFI Fund, I do not evaluate 
numbers. It is not about numbers; the CDFI budget has to be about 
people. There is one increase in the 2004 budget request for CDFI--and 
it is for administration. I believe that oversight and management is 
important. But, Federal resources should support people, not 
bureaucracy. There are 16 CDFIs in Maryland. They are very important to 
community development in my State. They provide loans for small 
business development, they fix up storefronts, and they build community 
centers. They also provide homeownership loans that are not predatory 
and fraudulent.
    On March 6, I asked the HUD IG to investigate a mortgage service 
agency called Fairbanks. I heard about Fairbanks sending fraudulent 
foreclosure letters to homeowners in Baltimore. I asked Sec. Martinez 
and the IG to conduct thorough criminal investigation, share 
information with other Federal agencies and to act as clearinghouse for 
victims' calls.
    We are waiting for a preliminary report from the HUD IG. What we 
know for sure is that people who are subprime borrowers are targets for 
predatory scams. CDFIs provide a safe haven for low-income borrowers. I 
am very concerned that cuts to the CDFI fund mean cuts to non-predatory 
loans. I have been involved in the issue of predatory lending and 
flipping for a long time now. And we have made some good progress in 
Baltimore, where flipping has gone down by 40 percent. In Baltimore one 
of our partners in the fight against flipping is the Baltimore 
Community Development Financing Corporation--they are a CDFI. The 
Baltimore Community Development Financing Corporation administers the 
Baltimore HELP program. One of the things I did in Baltimore was to get 
$1 million of HUD money for the Baltimore HELP program. That program 
provides counseling on loans, and refinances predatory mortgages so 
that people don't go into default. We need more programs like the 
Baltimore HELP program, not fewer.
    The CDFI fund is shifting its focus away from the Fund to 
administering the New Markets Tax Credit. The Fund recently announced 
the first round of tax credits totaling $2.5 billion. Four Maryland 
groups received awards totaling $161 million. I believe that the New 
Markets Tax credits are an important tool in community development. And 
I am pleased that Maryland will benefit from them. But I do not believe 
that New Markets Tax Credits are a substitute for the CDFI Fund. 
Administration of the tax credit program is very important--now is the 
time to start the data collection, and institute proper program 
oversight.
    I want to hear from the CDFI Fund today about program oversight. 
And about how this proposed budget reduction will affect communities 
and people. I want to hear about people, not programs, about advocacy, 
not accounting. We look forward to your testimony.

    Senator Bond. Thank you, Senator Mikulski. I think you 
summed it up pretty well.
    Mr. Brown, as I said, we will make the entire statement 
part of the record and ask you to summarize your remarks in 7 
minutes, and then my colleague and I will have some questions.

                       STATEMENT OF TONY T. BROWN

    Mr. Brown. Thank you, Chairman Bond, and also thank you, 
Ranking Member Mikulski. I appreciate the opportunity to 
testify before you today on behalf of the Department of the 
Treasury's Community Development Financial Institutions Fund 
and in support of the President's budget for the 2004 program. 
Your remarks were quite direct, and I hope that my opening 
statement as well as my response to your questions will address 
many of your concerns.
    Joining me today are Linda Davenport, the Acting Deputy 
Director for Policies and Programs, and Owen Jones, who is the 
Deputy Director for Management and our Chief Financial Officer.
    The President's budget requests a $51 million appropriation 
for the CDFI Fund. The proposed budget supports the CDFI 
program, our Native American CDFI Development Program, the Bank 
Enterprise Award Program, which are all important facets of the 
CDFI Fund's community development financing continuum that also 
now includes the $15 billion 7-year New Markets Tax Credit 
program. The administration of the New Markets Tax Credit 
program is also supported by the proposed appropriation.
    The administration's approach for investing in CDFIs 
revolves around three major and very important strategies. We 
are focusing our program awards on the Nation's most 
economically distressed areas. We have established a growth 
continuum to address our mission of building the capacity of 
CDFIs. We believe that the strategy of our award decisions will 
allow awards to be provided to support CDFIs to the point where 
they can be self-sustaining, thus permitting the CDFI Fund to 
provide assistance to candidates with unmet needs in other 
distressed communities.
    And third, we are taking actions to obtain the information 
necessary to measure and report on the impact of the fund's 
investments. As we talked last year, it is not about the fund's 
output, but about the CDFI's impact in the communities that 
they serve. I characterize my visit before you today as filled 
with a great sense of accomplishment and enthusiasm for the 
potential of the CDFI Fund. This potential is shared by the 
administration.
    Last year, I shared with you the administration's vision 
for the fund and stated that fiscal year 2003 would serve as a 
transition year for the fund where our agency would shift 
primarily from being seen as a grants-making organization to 
one that stimulates the economy of low-income communities 
through target investments for community development finance. 
The $51 million appropriation is expected to leverage $442 
million in other private and public resources, which is a 
leverage ratio of about 12 to 1. The leverage ratio excludes 
funds appropriated for administrative purposes and does not 
include data associated with the New Markets Tax Credit 
program.
    Senator Bond, as you indicated, we feel that this 
appropriation will help support the creation or maintenance of 
24,000 jobs and the rehabilitation of over 26,000 affordable 
housing units. I am pleased to report to you substantial gains 
in the achievement of our goals for the fund. First, we have 
made a significant change to the performance indicators 
included in our budget submission. During fiscal year 2002, the 
fund completely revamped its performance plan by more clearly 
identifying our objectives and by identifying outcomes and 
impacts related to those objectives. It is about people and not 
about accounting.
    The objectives of the CDFI Fund have been simplified to 
three key statements. The fund invests in institutions whose 
loans in equity will increase financing to businesses and 
individuals that we feel have low wealth, have limited 
collateral, and are located in our Nation's underserved 
communities.
    We invest in institutions which expand the supply and 
quality of affordable housing units in underserved communities 
and increase home ownership rates in those markets and among 
targeted populations. The fund invests in institutions that 
expand access to affordable financial services for the 
unbanked, low-income people and others in underserved 
communities.
    Also, in fiscal year 2003 we simplified and substantially 
revised the fund's investment program offerings. The financial 
assistance components you have formally known as Core and SECA 
have been simplified, and it is our primary program of 
investments that allow CDFIs to apply for financial assistance 
and technical assistance awards. The technical assistance 
component of the CDFI Fund Program also includes our Native 
American technical assistance component, and allows CDFIs to 
apply for technical assistance awards where a match is not a 
requirement, and the BEA Program, through which insured 
depository institutions may apply to receive grants, enables 
the fund to provide incentives to regulate institutions to 
support community development lending and investment 
activities.
    As my written testimony notes, in fiscal year 2002 the 
administration initiated extensive and substantive regulatory 
changes to the BEA Program that takes effect this fiscal year. 
We began implementation of these regulatory changes prior to 
OMB's evaluation of the BEA Program. We feel these changes 
address the critical evaluation of the BEA Program by OMB, 
which requested and required that we seek clear program 
objectives that distinguish the BEA activities from the 
mandates of the Community Reinvestment Act. The administration 
fully supports the continuation of the BEA Program.
    Quickly, the major successes this year. The fund, through 
new systems improvements, was able to significantly improve the 
rate at which we approve and disburse funds to our awardees. 
Fiscal year 2002 also marked the fifth consecutive year in 
which we were able to maintain our unqualified audit opinion 
with no material weaknesses, nor reportable conditions, nor 
instances of noncompliance with laws and regulations.
    The CDFI Fund is making great strides in its efforts to 
increase the capacity of CDFIs to respond to credit, 
investment, and financial service needs within our Native 
American, Alaska Native, and Native Hawaiian communities. As 
you requested last year, the CDFI Fund is preparing a Native 
American strategic plan that will address the issues of CDFI 
reach and service to Native American, Alaska Native, and Native 
Hawaiian communities.
    And finally, in fiscal year 2002 and 2003 the CDFI Fund 
evaluated 345 applications to the New Markets Tax Credit 
program. These applications together requested the authority to 
issue nearly $26 billion in equity for which new markets tax 
credits may be claimed. Last month, Secretary Snow announced 
the allocation of new markets tax credit authority to 66 
community development entities at a special event in Ohio.
    The allocatees received a total of $2.5 billion, and they 
represent a broad cross-section of community development 
entities. They are both large and small community development 
entities. They are affiliates of nonprofits, as well as for-
profit entities, and these community development entities will 
focus locally as well as nationally, and they will focus on 
both rural as well as urban locations.
    The majority of allocatees will focus on either business 
investments and loans in real estate, or they will do--I am 
sorry, let me clarify that.
    The majority of allocatees will focus on either business 
investments and loans, or real estate investments and loans, 
and a smaller number will make investments in other community 
development entities as well as purchase loans from other 
community development entities.

                           PREPARED STATEMENT

    The CDFI Fund is now poised to use the Nation's extensive 
network of community development financiers and developers to 
help develop sustaining economies in our underserved 
communities. Our reporting will let you know that this network 
serves people and communities.
    Again, I thank you for the opportunity to present my 
testimony in support of the President's 2004 budget request, 
and look forward to answering any questions.
    [The statement follows:]

                  Prepared Statement of Tony T. Brown

                              INTRODUCTION

    Chairman Bond, Ranking Member Mikulski and Members of the 
subcommittee, I appreciate the opportunity to testify before you today 
on behalf of the Department of Treasury's Community Development 
Financial Institutions (CDFI) Fund and in support of the President's 
fiscal year 2004 budget. Last year was my first visit before this 
honorable body.
    I am Tony Brown, Director of the CDFI Fund. The Secretary of the 
Treasury selected me to serve in this post in August 2001. I bring a 
20-year prior experience in banking and a personal passion for 
community development finance. Joining me today are my Acting Deputy 
Director for Policy and Programs (Linda Davenport) and Deputy Director 
for Management/Chief Financial Officer (Owen Jones).
    I characterize my visit before you today as filled with a great 
sense of accomplishment and enthusiasm for the potential of the CDFI 
Fund. Our goal is to help make America a place where all of its people, 
including those in economically distressed communities, can realize the 
American dream through better access to credit, capital and financial 
services. Fiscal year 2003 has been a transition year where the Fund 
has shifted from primarily a grants-making organization to one aimed at 
measurably improving the economic conditions of the residents of low-
income communities by spurring economic growth and jobs through 
community development finance.
    The CDFI Fund aims to do this primarily through the New Markets Tax 
Credit (NMTC) Program, the Community Development Financial Institutions 
(CDFI) Program, the Bank Enterprise Award (BEA) Program, and the Native 
American CDFI Development (NACD) Program.
    My testimony today will focus on three key areas: the President's 
fiscal year 2004 budget proposal; the CDFI Fund's management and 
operations in fiscal year 2003; and some background on the CDFI Fund 
programs.

                  PRESIDENT'S FISCAL YEAR 2004 BUDGET

    The President's fiscal year 2004 budget requests a $51 million 
appropriation for the CDFI Fund. The proposed budget supports the 
administration of the NMTC Program, the CDFI Program, the NACD Program, 
and the BEA Program. Because the NMTC Program involves an allocation of 
tax credits rather than program funds, all costs associated with the 
development, implementation and monitoring of the NMTC Program are 
administrative. The $51 million appropriation is expected to leverage 
$442 million in other private and public resources, a leverage ratio of 
12:1. The leverage ratio excludes funds appropriated for administrative 
purposes and does not include leverage data associated with the NMTC 
Program. This appropriation will help support the creation or 
maintenance of 24,000 jobs and the rehabilitation of 26,000 affordable 
housing units. The administration's request reflects the following 
factors:
    First, the NMTC Program is aimed at achieving similar economic 
development objectives as the CDFI and BEA Programs.
    Second, the NMTC Program is vastly larger in scope than the other 
CDFI Fund programs. The first year NMTC Program allocation authority of 
$2.5 billion is some 50 times larger than the entire CDFI Fund request.
    Third, the administration currently is considering possible 
legislative changes to the BEA Program. In the near future, I expect 
that we will consult with Congress regarding legislative options that 
would clearly distinguish the program from the mandates of the 
Community Reinvestment Act and ensure that awardees use BEA Program 
awards for community development activities. In fiscal year 2002-2003, 
the CDFI Fund's own internal evaluation of the BEA Program concluded 
that the program needed to be re-formed so that awards would be better 
targeted to wealth-building activities and outcome-based performance 
goals to better track the program's impact would be adopted. The Fund's 
adopted these regulatory modifications for the fiscal year 2003 funding 
round.
    Fourth, this proposed fiscal year 2004 funding level, reflecting a 
division of resources, is adequate to continue an effective baseline 
funding level in each program, particularly in light of the reforms put 
in place in recent months. The recent reforms reflect the 
organizational maturity of the CDFI Fund and the CDFI industry so that 
a better, more targeted effort is now possible, focusing on 
opportunities where real needs can be addressed through sustainable 
economic development.
    The proposed fiscal year 2004 budget includes increased funding for 
administrative expenses to $13 million to support staffing requirements 
of the NMTC Program and technology requirements to enhance our support 
for E-grants and E-government. The E-grant and E-government activities 
support a ``green rating'' received from The Department of the Treasury 
on the Presidential Management Agenda Scorecard.

                       MANAGEMENT AND OPERATIONS

    Internal Financial and Management Controls.--The CDFI Fund has 
implemented effective financial and management controls, as verified by 
its independent auditors (KPMG, LLP). These controls have allowed the 
CDFI Fund to receive an unqualified (clean) audit opinion. 
Additionally, this marks the fifth consecutive year that the 
independent auditors have identified no material weaknesses or 
reportable conditions. KPMG's opinion affirms that the CDFI Fund's 
Statements of Financial Position, Operations, and Changes in Net 
Position and Cash Flow are fairly presented. These findings reflect the 
commitment of the CDFI Fund to sustain and improve its internal 
controls, operating policy and procedures, and awards management.
    The CDFI Fund continues to comply with the Federal Managers' 
Financial Integrity Act (FMFIA) and the Federal Financial Management 
Improvement Act (FFMIA). The CDFI Fund's internal management systems, 
accounting and administrative controls are operating effectively.
    Administrative Processes.--During my tenure as Director, I have 
spent a significant amount of time reviewing the CDFI Fund's internal 
operations. We have made successful changes that have streamlined our 
awards process. In fiscal year 2002, we successfully reduced the amount 
of time required for our award processes. In a September 2002 Treasury 
Office of Inspector General audit report titled ``CDFI Fund Post-Award 
Administration Process,'' the OIG concluded ``that the CDFI Fund's 
post-award administration process is effective in ensuring that CDFI 
award recipients are carrying out their activities in accordance with 
their assistance agreements.'' The report further states, ``[T]he Fund 
has taken steps to reduce the length of time that it takes to disburse 
funds. These steps include Program and Compliance staff performing a 
compliance and matching funds analysis, implementation of the Reports 
Monitoring Database, and revising how it processes assistance 
agreements.''
    Integration of New Programs.--We successfully integrated the NMTC 
Program within our existing operations without increasing the number of 
new employees above fiscal year 2001 levels. One of the most 
significant E-government initiatives undertaken by the CDFI Fund in 
fiscal year 2002-03 was the implementation of electronic applications 
for the NMTC Program, facilitating ease of the application scoring 
process and metrics for various management reports by having captured 
data readily available for analysis and reporting. This was an 
overwhelming success and the CDFI Fund is moving forward to introduce 
electronic applications for each of its financial assistance programs 
in fiscal year 2003.
    Compliance and Portfolio Monitoring.--In fiscal year 2004 and 
beyond, we will continue to enhance the CDFI Fund's research capacity, 
implementing market and portfolio analyses to measure the availability 
of financial services in underserved markets and to critique the 
financial and program performance of existing CDFIs. The CDFI Fund has 
an investment portfolio of over 600 awards, totaling over $500 million 
currently under compliance review.
    Measuring Investment Impact.--The CDFI Fund places a high priority 
on measuring impact and is in the forefront of improving performance 
reporting within the CDFI industry. The CDFI Fund is building on its 
experience with the CDFI Data Project, an initiative undertaken by the 
CDFI Fund and CDFI industry representatives, to develop a more 
sophisticated data collection system for CDFIs and CDEs that will allow 
for the collection of transaction-level data to provide the specific 
location and characteristics of each loan in a CDFI/CDE's portfolio, 
thus allowing the CDFI Fund to measure impact at the census tract 
level. The CDFI Fund plans to use this data to compare CDFI/CDEs' 
lending behavior and community development impact to that of 
traditional financial institutions and thus demonstrate that CDFI/CDEs 
lend in areas where traditional banks have less of a presence.
    You will notice a significant difference in the format of the 
fiscal year 2004 budget submission. In the past, the CDFI Fund reported 
nearly 20 measures, mostly measuring activity outputs. The introduction 
of our fiscal year 2004 budget complies with the President's mandate 
for integrated budget performance measures. The CDFI Fund received a 
``green rating'' from the Department of the Treasury in its latest 
scorecard reporting for this Presidential Management Agenda initiative.
    The stated objectives of the CDFI Fund have been simplified to 
three key statements: (i) increase financing to businesses (including 
non-profit businesses) and individuals that have low wealth, have 
limited collateral, are located in underserved communities, or have 
other characteristics that inhibit them from obtaining financing from 
traditional financial sources, but who present good opportunities for 
assistance promoting sustainable economic development in the community; 
(ii) expand the supply and quality of housing units in underserved 
communities and increase homeownership in these markets by increasing 
the availability of housing financing that leverages conforming 
mortgages or non-traditional sources of housing finance; and (iii) 
expand access to affordable financial services for the ``unbanked,'' 
low-income people and others in underserved communities.
    New baseline performance measures have been established and set 
into motion this year, through the CDFI Fund's fiscal year 2003 
programs, and include better tools for tracking investment results and 
the use of the CDFI Fund's awards. We will continue the process of 
improving the CDFI Fund's programs by evaluating for measurable 
results, targeting resources through sustainable financial 
institutions, with an emphasis on supporting financial services that 
impact our Nation's most distressed areas.
    Interagency Cooperation.--The CDFI Fund has worked very closely 
with the Internal Revenue Service to develop the guidance and 
regulations necessary to implement the NMTC Program; engaged in 
extensive discussions with the Small Business Administration on how to 
best match the NMTC Program requirements with the SBA's New Markets 
Venture Capital Program; and conducted numerous meetings with the 
General Accounting Office to determine appropriate compliance and 
performance measurement requirements for NMTC Program allocatees.
    Investment Underwriting.--The CDFI Fund will use the new data 
collection system to implement PLUM, a new CDFI performance rating 
system. PLUM stands for Performance/community development impact; 
Liquidity and overall financial condition; Underwriting/portfolio 
quality; and Management capacity. Based on these four broad components, 
the CDFI Fund will use PLUM to rate each certified CDFI's financial 
strength and level of community development impact. The CDFI Fund's 
plan is to use this rating system to better manage its investment 
portfolio by creating a compliance ``watch list'' of under-performing 
entities, and to identify and promote best practices in the industry. 
Eventually, we plan to incorporate PLUM in the Fund's award 
underwriting process.
    E-Gov Enhancements.--The CDFI Fund will soon announce a new 
electronic web-based customer relationship tool called ``myCDFI.'' This 
new tool will assist interested parties with a variety of services from 
a single location. The initial services to be offered through myCDFI 
include: access to all program electronic applications; access to 
historical electronic applications (read-only mode); self service 
address and organizational information updates; ability to create and 
maintain additional user accounts with various access levels; ability 
to access target service area information created while using the CDFI 
Fund Help Desk (including Hot Zones); and access to a message box for 
communication with CDFI Fund staff. Additional features will be added 
in the near future, including the ability to submit electronically 
reports required by the CDFI Fund per award agreement terms.

                      CDFI FUND PROGRAMS OVERVIEW

    The strategic goal of the CDFI Fund is to improve the conditions of 
economically distressed communities by enhancing greater access to 
capital and other financial services through CDFIs (which generally are 
small business and housing loan funds, as well as regulated, community-
oriented depository institutions), CDEs (which include for-profit and 
nonprofit corporations and partnerships), and insured depository 
institutions (banks, thrifts and credit unions).
    The approach for investing in CDFIs includes three major 
strategies: (1) focusing CDFI Program awards on the Nation's most 
economically distressed areas; (2) establishing a ``growth continuum'' 
strategy in award decisions, through which awards are provided to 
support CDFIs to the point where they can be self-sustaining, thus 
permitting the CDFI Fund to provide assistance to CDFIs with unmet 
capital needs in other distressed communities; and (3) taking actions 
to obtain the information necessary to measure and report on the impact 
of the CDFI Fund's programs.
    Targeting CDFI Fund Resources.--The authorizing statute allows the 
CDFI Fund to provide incentives for the purposes of facilitating 
increased lending and provision of financial and other services in 
economically distressed communities. The economic distress definitions 
vary among the CDFI Fund's programs.
    The CDFI Fund views its partnership with CDFIs, CDEs, and insured 
depository institutions as a catalyst for vigorous community and 
economic development financing activity. In fiscal year 2003, the CDFI 
Fund introduced ``Hot Zones'' to the CDFI Program to help prioritize 
and direct the CDFI Fund's limited investments. By managing CDFI Fund 
resources to entities that serve Hot Zones, our dollars will be 
prioritized for investments into areas with the greatest needs and 
among CDFIs that can produce strong measurable impact.

                                       TARGETING RESOURCES GEOGRAPHICALLY
----------------------------------------------------------------------------------------------------------------
                                                           CDFI Program
---------------------------------------------------------------------------------   BEA Program    NMTC Program
                                                     Eligible                        Eligible     Eligible  Low-
                                  National Total    Investment       Hot Zones      Distressed        Income
                                                       Areas                        Communities     Communities
----------------------------------------------------------------------------------------------------------------
Total Metro Census Tracts.......          52,241          20,093          10,851           1,670          19,732
Percent of National Metro Tracts             100              38              21               3              38
Non-Metro Census Tracts.........          14,063           4,966         ( \1\ )             656           6,605
Percent of Non-Metro............             100              35         ( \1\ )               5              47
Total Tracts....................          66,304          25,059         ( \1\ )           2,326          26,337
Percent of National.............             100              38         ( \1\ )               4              40
Non-Metro Counties..............           2,319             743             285         ( \1\ )         ( \1\ )
Percent of National.............             100              32              12         ( \1\ )         ( \1\ )
----------------------------------------------------------------------------------------------------------------
\1\ Not Applicable.

Sources: 2000 Census data, U.S. Dept. of Housing and Urban Development 2002 Difficult Development Areas.

Figures do not include outlying territories other than Puerto Rico.

    Hot Zones are a subset of CDFI Program Investment Areas designated 
by the CDFI Fund as having greater economic distress and community 
development needs. They are the ``most distressed'' of the Nation's 
distressed markets. Hot Zones have been identified based on census data 
and include, among other factors, areas with a poverty rate of at least 
20 percent, income levels at or below 80 percent of the area median 
income, unemployment rates that are at least 1.5 times the national 
average, and housing costs that exceed 30 percent of the gross monthly 
income of a low-income household.
    States that have the highest percentage of non-metropolitan Hot 
Zones--such as Mississippi, Kentucky, Montana, and Arizona--also have 
significant non-metropolitan persistent poverty populations (see 
Figures 1 and 2, below).





    In the fiscal year 2003 round of the Financial Assistance Component 
of the CDFI Program, the CDFI Fund will target its resources to CDFIs 
that will use the award proceeds to serve Hot Zones and/or achieve the 
programmatic priorities of increased homeownership opportunities that 
are affordable to low-income households and homeownership opportunities 
for other targeted populations lacking access to loans, investments and 
financial services.
    In its evaluation of applications, the CDFI Fund will give the most 
points to those applicants that show that at least 75 percent of their 
activities will be directed toward Hot Zones. Applicants that are not 
principally serving Hot Zones may be scored to receive the most 
evaluation points if they demonstrate an effective track record and 
plan for promoting homeownership opportunities among low-income, very-
low income and other targeted populations.
    Eligible geographic areas under the BEA Program are called 
Distressed Communities and include communities that meet certain 
criteria of economic distress, including Indian Reservations. 
Specifically, a Distressed Community must have (1) a poverty rate of at 
least 30 percent, provided no individual census tracts has a poverty 
rate of less than 20 percent (according to the most recent census); and 
(2) an unemployment rate that is at least 1.5 times the national 
average (according to the most recent Bureau of Labor Statistics 
data).\1\
---------------------------------------------------------------------------
    \1\ Census tracts meeting these distress criteria are some of the 
most distressed in the Nation. Using 2000 Census and BLS data, there 
are some 2,326 census tracts that qualify for the BEA Program. These 
tracts represent 4 percent of all U.S. census tracts and less than 12 
percent of the 20,433 tracts that are considered ``Low and Moderate 
Income.''
---------------------------------------------------------------------------
    The NMTC Program requires that substantially all of the investments 
made by a CDE using NMTC-related investment proceeds be invested in 
low-income communities, geographic areas meeting certain economic 
distress criteria. Investments must be made in census tracts where the 
area median income is 80 percent or less than the statewide area median 
income (or, in the case of metropolitan areas, metropolitan area median 
family income, if greater), or where the poverty rate is 20 percent or 
greater. Applicants to the first round of the NMTC Program were 
reviewed on a competitive basis. Applicants that indicated that they 
intend to target their activities to communities with higher levels of 
economic distress than required by statute generally scored more 
favorably.
    Certified CDFIs and CDEs.--CDFIs are building a financial services 
network that is focused on our most economically deprived communities 
and citizenry. CDFI Fund estimates show that certified CDFIs' Target 
Markets cover 100 percent of non-metropolitan Hot Zones and 77 percent 
of metropolitan Hot Zones.\2\ There is at least one CDFI headquartered 
in each State, the District of Columbia, Puerto Rico and the U.S. 
Virgin Islands.
---------------------------------------------------------------------------
    \2\ Please note that CDFI Target Markets were originally geocoded 
using 1990 Census tracts and county boundaries and that CDFI Target 
Markets are subject to change due to post-award amendments. 
Consequently, the total estimates are subject to adjustment, due both 
to changes in tract and county boundaries between the 1990 and 2000 
Census (which the CDFI Fund's Hot Zones are based on) and to amendments 
to individual CDFI Target Markets.
---------------------------------------------------------------------------
    CDFIs are specialized financial institutions that operate in 
markets, increasingly in partnership with traditional lenders. The 
organizations we support are often able to lend in ways that are more 
flexible or not available to traditionally regulated financial 
institutions. As of February 1, 2003, we have certified 633 financial 
institutions as CDFIs:

                                                 CERTIFIED CDFIs
----------------------------------------------------------------------------------------------------------------
                                        Fiscal Year 2002  (As    Fiscal Year 2003  (As       Fiscal Year 2004
                                              of 2/1/02)            of Date 2/1/03)            (Projected)
----------------------------------------------------------------------------------------------------------------
Total CDFIs..........................  513....................  633....................  706.
Banks, Thrifts, Holding Cos..........  58 (11 percent)........  72 (11 percent)........  85 (12 percent).
Credit Unions........................  94 (18 percent)........  117 (18 percent).......  120 (17 percent).
Loan Funds...........................  344 (67 percent).......  424 (67 percent).......  475 (67 percent).
Venture Funds........................  17 (3 percent).........  20 (4 percent).........  26 (4 percent).
----------------------------------------------------------------------------------------------------------------

    Through the NMTC Program, the CDFI Fund designates entities as 
community development entities (CDEs). To qualify for CDE designation 
by the CDFI Fund, an entity must be a domestic corporation or 
partnership that: (1) has the primary mission of serving, or providing 
investment capital for low-income communities or low-income persons; 
and (2) maintains accountability to residents of low-income communities 
through representation on a governing or an advisory board. Entities 
may apply to become CDEs even if they do not plan to seek a NMTC 
allocation. Such entities presumably have a strategy of selling loans 
to a CDE with an allocation, or seeking an investment or loan from a 
CDE with an allocation. As of February 11, 2003, the CDFI Fund has 
certified 821 organizations as CDEs.

                             CERTIFIED CDEs
------------------------------------------------------------------------
                                   Fiscal Year 2003    Fiscal Year 2004
                                    (As of 2/11/03)       (Projected)
------------------------------------------------------------------------
Total CDEs......................  821...............  1,200.
CDFIs...........................  335 (41 percent)..  400 (33 percent).
SBA Designated SSBICs...........  9 (1 percent).....  15 (1 percent).
Other Entities..................  477 (58 percent)..  785 (66 percent).
------------------------------------------------------------------------

    New Markets Tax Credit (NMTC) Program Overview.--The intent of the 
Community Renewal Tax Relief Act of 2000 is to attract private sector 
investment in businesses located in low-income communities. Through the 
NMTC Program, taxpayers will be provided a credit against Federal 
income taxes for qualified equity investments made to acquire stock or 
other equity interests in designated CDEs. In turn, substantially all 
of the proceeds of qualified equity investments must be used by the CDE 
to make qualified investments in low-income communities. These 
qualified low-income community investments include loans to or equity 
investments in, businesses or CDEs operating in low-income communities.
    The NMTC Program creates a capitalization mechanism that many of 
the larger, more established CDFIs could advantage. In addition, other 
non-CDFIs may participate as well--thereby widening the pool of 
entities and capital sources involved in building the economies of our 
low-income communities. In this regard, the NMTC Program helps to 
supplement the CDFI Program; however, the NMTC Program is limited to 
areas that qualify as low-income communities and, to attract investors, 
the underlying business activity of the CDE must be able to deliver a 
return on investor's capital at risk. Those CDFI activities that are 
outside of the NMTC Program's eligible low-income communities and are 
of such risk that investment motivated capital is inappropriate will 
not be able to generally benefit from the NMTC Program.
    By offering a tax credit, the NMTC Program encourages private 
investment in low-income communities. If investors embrace the program, 
it will be a significant source of new capital that could help to 
stimulate new industries and entrepreneurs, diversify the local 
economy, and generate new jobs in low-income communities.
    The tax credit provided to the investor will cover a 7-year period. 
In each of the first 3 years, the investor will receive a credit 
totaling 5 percent of the total value of the stock or equity interest 
at the time of purchase. For the final 4 years, the value of the credit 
is 6 percent annually.
    The $15 billion of equity investments for which tax credits can be 
claimed through the NMTC Program may be allocated between 2001-2007. 
Because the CDFI Fund was launching the program in 2001, the first 2 
years' allocations were combined, and $2.5 billion was available for 
allocation in the just completed first round.
    In fiscal year 2003, the CDFI Fund evaluated 345 applications to 
the NMTC Program; these applications together requested the authority 
to issue $25.8 billion in equity for which NMTCs may be claimed.
    On March 14, 2003, the Treasury Department, through the CDFI Fund, 
announced the allocation of NMTC authority to certain community 
development entities (CDEs), thus supporting $2.5 billion in private 
sector equity investments that will result in economic stimulus in low-
income communities throughout the country.
    The allocatees represent a broad cross section of community 
development entities. There are both large and small CDEs, affiliates 
of nonprofits as well as for-profit entities, CDEs that will focus 
locally as well as nationally, and CDEs that will focus on both rural 
and urban locations. The majority of allocatees will focus on business 
investments and loans and real estate investments and loans, with a 
lesser number making investments in other CDEs or purchasing loans from 
CDEs.
    The allocatees in the first round of the NMTC Program show a broad 
geographical mix and focus for investment activity:
  --Twenty-nine (43 percent) of the allocatees report a local focus 
        within 15 States and will be allocated the authority to issue 
        an aggregate of $732 million in equity for which NMTCs may be 
        claimed.
  --Twelve (18 percent) of the allocatees will focus investment 
        activities within an entire State. These CDEs will be allocated 
        the authority to issue an aggregate of $311 million in equity 
        for which NMTCs may be claimed.
  --Twenty-five allocatees (39 percent) will invest nationally or 
        target multiple States. These CDEs will be allocated the 
        authority to issue an aggregate of $1.5 billion in equity for 
        which NMTCs may be claimed.
  --The allocatees in the calendar year 2002 round anticipate investing 
        $1.7 billion in urban areas, over $508 million in rural 
        communities, and $231 million in suburban areas.
  --The primary service areas of the 2002 allocatees (and the national 
        market allocatees who were required to list seven States they 
        intend to serve) will encompass 40 States and the District of 
        Columbia. There are only ten States and all U.S. territories 
        not served primarily by the inaugural round of the 2002 NMTCs 
        (Iowa, Idaho, Kansas, Montana, North Dakota, Nebraska, New 
        Mexico, Rhode Island, South Dakota and Wyoming).
    To achieve the administration's goals of demonstrably improving the 
life of residents in impacted low-income communities, Treasury 
attempted to set a high bar for applicants and strove to make the 
selections based on a rigorous merit-based selection process. This 
review was conducted in the following manner:
Step One
  --All policy decisions regarding the selection process were made by 
        officials separate and apart from those who reviewed and rated 
        applications. No identifying information for any application 
        was provided to policy officials until after the selection 
        process was concluded.
  --In scoring each application, the reviewers rated each of four 
        evaluation sections: Business Strategy, Capitalization 
        Strategy, Management Capacity and Community Impact, awarding up 
        to 25 points per section. In addition, reviewers rated 
        applicants with respect to two statutory priorities: (i) up to 
        five points for a track record of serving disadvantaged 
        businesses or communities, and (ii) five points for committing 
        to invest substantially all of the proceeds from its qualified 
        equity investments in unrelated entities.
  --For consistency, the process required three reviewers to 
        independently review and evaluate each application. The 
        reviewers included CDFI Fund staff, other Federal agency staff 
        working in other community development finance programs, and 
        independent private sector members of the community development 
        finance community.
  --In addition to evaluating and scoring each application, reviewers 
        recommended an allocation amount that was supported by the 
        information in the application.
Step Two
  --Advancing applications were deemed to be those with an aggregate 
        base score (without including priority points) that was in the 
        ``good'' range based on a scoring scale of weak, limited, 
        average, good and excellent. In addition, each advancing 
        application had to achieve an aggregate base score in the 
        ``good'' range in each of the four application evaluation 
        criteria.
  --For each application, panelists reviewed the scores, comments and 
        recommended allocation amounts provided by each of the first 
        phase reviewers. A statistical review was conducted to identify 
        anomalous scores. In cases where there was an anomalous first 
        phase reviewer score, the comments and recommendations of a 
        fourth independent reviewer were used to determine whether the 
        anomalous score should be replaced.
  --The review panel also reviewed a variety of compliance, 
        eligibility, due diligence and regulatory matters. Included in 
        this review were (i) checks to determine whether any applicants 
        that have been awarded funds through other Fund programs were 
        compliant with the award requirements, (ii) verification that 
        the applicants' investor letters were consistent with the 
        capitalization information provided in their applications, and 
        (iii) consultation with the IRS regarding whether proposed 
        business strategies of applicants comply with the NMTC Program 
        regulations.
Step Three
  --After the second stage of the review process, the rank order list 
        of applicants and the recommended allocation amounts were 
        forwarded to the Selecting Official (the NMTC Program Manager). 
        The Selecting Official reviewed the rank order list and the 
        recommendations, and decided whether to accept or modify the 
        panel's recommendations. In the event the Selecting Official's 
        decision varied from the panel's recommendation by more than a 
        prescribed amount, then concurrence is required by the 
        Reviewing Official (Deputy Director). This process ensures that 
        adequate documentation and oversight is maintained to protect 
        the integrity of the allocation decisions.
  --Per the Fund's allocation application evaluation policies and 
        procedures, the Selecting Official's (and, as the case may be, 
        the Reviewing Official's) allocation decisions are final.
    The CDFI Fund's objectives for 2003 and 2004 are to evaluate the 
first round of the NMTC Program, make changes as necessary to enhance 
the program, publish the NMTC allocation application for the next round 
of allocations, and complete the awards allocation process for a 
combined 2003/2004 allocation round of up to $3.5 billion in NMTC 
allocation authority. The CDFI Fund will review applications from CDEs 
under a competitive review process, with the goal of finalizing award 
decisions in early 2004. In this manner, investors making equity 
investments into eligible CDEs will be able to claim tax credits early 
in calendar year 2004.
    The CDFI Fund is developing, with the Internal Revenue Service, a 
compliance system for the NMTC Program to ensure that each entity that 
receives a NMTC allocation will continue to fulfill its CDE 
certification requirements and the terms of its allocation agreements 
with the CDFI Fund, and that the IRS has appropriate information to 
determine that allocatees are operating within the legislation and 
regulations promulgated by the IRS. The compliance system will be based 
in part on input provided at a meeting co-sponsored by the CDFI Fund 
and the General Accounting Office in March of 2002. At that meeting, 
academics and other community development financing experts discussed 
the advantages and disadvantages to various approaches to both 
compliance issues as well as approaches to evaluating the impact of the 
investments made under the NMTC Program on low-income communities.
    CDFI Program Overview.--Through the CDFI Program, the CDFI Fund 
promotes access to capital and local economic growth in distressed 
communities by directly investing in and supporting CDFIs. The CDFI 
Program provides financial assistance in the form of grants, loans, 
equity investments or deposits to CDFIs. Since its inception, the CDFI 
Fund has made over 900 CDFI Program awards, totaling $405 million.
    For fiscal year 2003, the CDFI Fund has refocused the CDFI Program 
to meet more effectively the Fund's objectives in three key ways: 
promoting a ``continuum of growth'' that encourages the largest and 
most established CDFIs to leverage non-governmental sources of capital; 
giving highest priority on investments that serve the most distressed 
geographic areas; and giving priority to initiatives that promote 
homeownership among low-income and other underserved populations.
    The Financial Assistance Component.--Replaces the Core, 
Intermediary, and part of the Small and Emerging CDFI Assistance 
Components offered in past years. The Financial Assistance Component 
consolidates the CDFI Program's components that provide financial 
assistance (requiring matching funds) into one competitive funding 
round. The following table depicts asset-size of CDFI Program awardees 
and illustrates the continuum of growth strategies:

----------------------------------------------------------------------------------------------------------------
                                               Financial Assistance Awards        Technical Assistance Awards
                                 All CDFI         (Formerly Core & SECA)      ----------------------------------
                                  Program  -----------------------------------
                                Applicants                 2003        2004       2002        2003        2004
                                 2000-2002     2002    (Projected)   (Budget)             (Projected)   (Budget)
----------------------------------------------------------------------------------------------------------------
Total CDFIs/Awardees..........         842         91          40          30         61          40          30
Asset-Size CDFIs/Awardees: \1\
    :$5 million...............          71         65          63          60         82          85          85
    >$5-:25 million...........          19         18          27          30         14          15          15
    >$25-:50 million..........           6         14           8           9          0           0           0
    >$50-:500 million.........           4          3           2           1          4           0           0
    >$500 million.............           0          0           0           0          0           0           0
----------------------------------------------------------------------------------------------------------------
\1\ Amounts in percent.

    The CDFI Fund recognizes that there are two broad categories of 
CDFIs: larger CDFIs that have greater ability to leverage private-
sector resources, have greater self-sufficiency and generate higher 
volume of activity and corresponding community development impact, and 
smaller CDFIs that serve smaller, more underserved markets, are less 
efficient and produce lower volumes of activity, but serve critical 
market needs.
    The Technical Assistance/Native American Technical Assistance (TA/
NATA) Component.--Allows applicants to apply for limited technical 
assistance funds on a rolling first-in, first-reviewed basis. This 
program replaces the Small and Emerging CDFI Assistance (SECA) 
Component and part of the Native American CDFI Technical Assistance 
(NACTA) Program offered in fiscal year 2002. The main purpose of the 
new TA/NATA Component is to allow new and growing CDFIs to access 
needed technical assistance when they need it, in order to help them 
enhance their capacity to serve their target markets.
    Entities applying to this program are on the beginning end of the 
``growth continuum,'' either as start-up or small entities. The purpose 
of the technical assistance provided (including staff training, 
technology, and outside expertise), is to push entities more quickly 
and effectively up the growth continuum than they would without the 
technical assistance. Some typical uses of TA grants include: computer 
system upgrades and software acquisition; developing loan underwriting 
policies and procedures; evaluating current loan products and 
developing new ones; and training staff.
    Native American Strategic Plan; the NACD Program; the Native 
American CDFI Training Program.--The CDFI Fund is preparing a Native 
American Strategic Plan. It will address the issues of CDFI reach and 
service to Native American, Alaska Native and Native Hawaiian 
communities; increasing capacity within these communities to respond to 
credit, investment and financial services needs; and attracting other 
existing resources to these underserved communities.
    The CDFI Fund is making great strides in its efforts to increase 
the capacity of CDFIs to respond to credit, investment and financial 
services needs within Native American, Alaska Native and Native 
Hawaiian communities.
    In fiscal year 2002, the CDFI Fund made its first set of awards 
under the NACTA Program. A total of 38 organizations were selected to 
receive a total of $2.7 million in technical assistance grants. Eleven 
awards were made to CDFIs or entities planning to become CDFIs, and 27 
awards were made to entities, such as Tribes and Tribal housing 
authorities, proposing to create separate CDFIs. NACTA-funded 
organizations are based in 18 States. The successful outcome of the 
launch of the NACTA Program has greatly increased the CDFI Fund's reach 
in support of Native American, Alaska Native, and Native Hawaiian 
communities, and is building an emerging network of CDFIs focused on 
these communities. The CDFI Fund also has presented information on its 
programs to existing CDFIs and those interested in starting CDFIs at 
several premier Native American, Alaska Native, or Native Hawaiian 
conferences. Senior staff also has met with Federal agencies and other 
key organizations to explore partnership possibilities.
    Already in fiscal year 2003, the CDFI Fund:
  --Modified the fiscal year 2002 NACTA Program by separating it into 
        two parts: (i) the NATA Component (of the CDFI Program's 
        Technical Assistance Component) and (ii) the NACD Program. 
        Entities such as Tribes or non-profit organizations serving 
        Native American, Alaska Native, and Native Hawaiian communities 
        that want to create CDFIs can apply for technical assistance 
        funds to develop plans to create CDFIs over a 3-year period. 
        Applications for both programs are currently available. The 
        CDFI Fund anticipates making funding decisions by the end of 
        July 2003; and
  --Awarded a contract to the National Community Capital Association 
        and its sub-contractor, First Nations Oweesta Corporation, to 
        provide technical support services to design, develop, conduct, 
        and administer an action-oriented training curriculum to 
        facilitate the development of CDFIs for the purpose of 
        providing access to debt or equity capital in Native American, 
        Alaska Native, or Native Hawaiian communities.
    Through the end of fiscal year 2003, the Fund will solicit 
contractors to:
  --Conduct financial literacy training in Native American, Alaska 
        Native, or Native Hawaiian communities through out the country; 
        and
  --Provide direct, on-site technical assistance to Tribes or non-
        profit organizations serving Native American, Alaska Native, 
        and Native Hawaiian communities. Such technical assistance 
        would include help in creating or strengthening a CDFI or 
        addressing specific barriers to small business or home 
        financing (including those identified in the CDFI Fund's 2002 
        Native American Lending Study), on reservations.
    In fiscal year 2004, the CDFI Fund will:
  --Using fiscal year 2003 appropriated dollars, the CDFI Fund will 
        implement a program targeted to Native American, Alaska Native, 
        and Native Hawaiian organizations that will provide financial 
        assistance for use as loans or investment capital. Recognizing 
        that not all Tribes will have the capacity to create a CDFI, 
        eligibility for this program would include partnerships between 
        Native American, Alaska Native, or Native Hawaiian 
        organizations partnered with traditional depository 
        institutions as well as Native-focused CDFIs.
  --Design a demonstration program to support the development of 
        partnerships, innovative products, and delivery mechanisms to 
        meet the financing needs of Native American, Alaska Native, and 
        Native Hawaiian communities. The CDFI Fund will work with other 
        Federal agencies to develop and implement this pilot to enhance 
        rather than duplicate their activities.
    Training Program.--The Training Program is aimed at supporting the 
CDFI Fund's strategic goal of strengthening the organizational capacity 
and expertise of CDFIs and other Financial Service Organizations. The 
Training Program, which was started in fiscal year 1999, provides funds 
that support the development and delivery of training products to CDFIs 
and other entities engaged in community development finance. Training 
is addressed via classroom instruction, web-based distance learning, 
and other electronic formats. The CDFI Fund is particularly excited 
about providing the support to help build the electronic teaching 
capacity of the CDFI industry. Through distance learning, the cost of 
accessing training is reduced for the CDFIs (elimination of the time 
and cost of travel) and the ability of CDFIs that are either of limited 
resources or of remote locations to access training is enhanced.
    By the end of calendar 2002, two of the training providers 
completed their efforts under the training contract with the CDFI Fund. 
The remaining two will continue to provide training through this fiscal 
year. Training provided in fiscal year 2003 is largely through distance 
learning technology.
    Bank Enterprise Award (BEA) Program Overview.--The BEA Program is 
aimed at expanding financial service organizations' community 
development lending and investments through regulated institutions.
    The BEA Program provides monetary incentives for banks and thrifts 
to expand investments in CDFIs and/or to increase lending, investment 
and service activities in distressed communities. BEA Program awards 
have varied in size from less than $1,000 to almost $3 million, 
depending upon the type and amount of assistance provided by the bank 
and the activities being funded through the bank's investments. In 
general, banks that provide equity investments to CDFIs are likely to 
receive the largest awards relative to the size of their investments.
    The administration recently completed a comprehensive evaluation of 
the BEA Program to ensure that it is as effective and efficient as 
possible.
    The CDFI Fund concluded that the BEA Program regulations should be 
revised to target awards to ``personal wealth'' and ``community asset'' 
building activities, and to those CDFIs with a greater need for the 
incentive provided by the award to facilitate their bank partnerships. 
Thus, the CDFI Fund initiated regulatory changes to the BEA Program to 
take effect with the fiscal year 2003 funding round.
    The CDFI Fund is currently considering how to better distinguish 
the BEA Program from the mandates of the Community Reinvestment Act, 
and to ensure that awardees use BEA Program awards for community 
development activities.
    The administration supports continuation of a reconstituted BEA 
Program. An effective BEA Program provides the Treasury Department with 
an effective strategy to engage traditional banks and thrifts in 
helping us achieve our goal of improving the economic conditions of 
underserved areas through insured depository institutions. The role 
that banks and thrifts play is critical to capital access. We need to 
encourage them to target these underserved communities in ways that do 
not impede safe and sound banking practices in a sustainable manner.
    Rural Community Assistance.--The fiscal year 2002 appropriations 
for the CDFI Fund contained report language requesting an update on 
rural lending practices as part of the fiscal year 2003 budget 
submission. CDFI Program and BEA Program awardees are indeed reaching 
rural areas. In 2002, 60 percent of awardees receiving financial 
assistance, and 50 percent of technical assistance awardees, indicated 
that they served rural areas as all or part of their markets.
    Of 156 surveyed awardee CDFIs, 20 (13 percent) estimated that 100 
percent of their activities served rural areas and an additional 23 (15 
percent) estimated that 51 to 99 percent of their activities served 
rural areas. Considering that 20 percent of U.S. households reside in 
non-metropolitan areas (Census 2000), the percentage of CDFI Fund 
awardees that target more than half their activities to rural areas (28 
percent) compares favorably.
    Secondary Market Study.--The CDFI Fund is conducting a study to 
explore the possibility of expanding the secondary market for CDFI 
loans. Selling loans on the secondary market while common among 
traditional lenders is not a general practice among CDFIs. In fact, 
very few CDFIs have engaged in loan sales to date. If CDFI loans can be 
made attractive to potential investors and investors are willing to pay 
a reasonable price, the CDFI industry will gain a major source of 
private sector capital that is likely to grow with the industry's needs 
and will limit the CDFIs need for additional capitalization.
    The CDFI Fund's study will examine the current and future capital 
needs of CDFIs, and will make recommendations. The study will involve 
consultations with CDFIs, potential loan purchasers and others with an 
interest in the secondary market. A draft report is expected in the 
summer of 2003.
    As you can see, the CDFI Fund has made substantial progress over 
the last year. The CDFI Fund's programs represent a continuum of 
capital, investment and incentive opportunities aimed at developing 
affordable housing, promoting homeownership, starting and expanding 
businesses, meeting unmet market needs, and stimulating economic growth 
in our Nation's low-income and distressed areas. In short, the goal of 
the CDFI Fund is to help bring mainstream capital to those people and 
communities that have been overlooked. The CDFI Fund has made 
significant strides in the integration of its performance measures in 
the budget process.
    Again, I thank you for the opportunity to present my testimony in 
support of the President's fiscal year 2004 budget request and look 
forward to answering any questions you may have for me.

    Senator Bond. Thank you very much, Mr. Brown.
    You know, back when I was Governor I used to give two 
messages to the General Assembly. I would give the State of the 
State, and I would have all these great, lofty concepts. That 
was my first one, and everybody said, well, what do you really 
want to get done? I said, forget the State of the State 
message. Look at my budget message. That is coming a week 
later.
    You find out what you want to do in government by where you 
put the money, and as I look at this it appears that the 
administration is saying that the New Markets is really going 
to replace CDFI, and the emphasis seems to be going away from 
CDFI with the cuts. Are you saying that New Markets can do the 
job that CDFI is doing? Are we seeing through the budget 
numbers a change in the administration's view with respect to 
CDFI versus New Markets?
    Mr. Brown. No, sir. We are saying that the New Markets Tax 
Credit program is an important complement to the CDFI Fund 
Program. It will allow us to attract billions of dollars into 
low-income communities through private sector funding. It is an 
important new program to the fund, and the administration 
supports the BEA Program as well as the traditional programs of 
the CDFI Fund.
    As we shared when we submitted our budget to you in 2002, 
the concern of the administration regarding the CDFI Fund was 
not what community development financial institutions do, it 
was how the fund reported its impact, its performance measures 
related to its support of CDFIs.
    The administration supported a baseline budget until we 
were able to work out the operational efficiencies for the CDFI 
Fund as well as to integrate our program regulations and 
reforms to meet the President's expectation for how we managed 
the taxpayers' money.
    Senator Bond. It would seem to me that the skills for the 
New Market program might be different from the skills needed 
for the staff of the CDFI program. Are there different skills, 
and what kind of skills are needed, and what are the 
differences between staffing the two programs?
    Mr. Brown. Again, for the New Markets Tax Credit program, 
and the skill set that the fund has developed over the years of 
managing the CDFI Fund Program are essentially the same and 
complementary. The CDFI Fund staff did a marvelous job in 
introducing and administering the New Markets Tax Credit 
program. We were able to introduce this year's program with no 
addition to staff to the 2001 levels.
    Many of the regulatory changes we made to our CDFI program 
allowed us to work through the programmatic efficiencies so 
that we could effectively administer the New Markets Tax Credit 
program, so sir, I would share with you that we have a very 
talented staff, a committed staff, and one that is very capable 
of administering----
    Senator Bond. So you are saying they are essentially doing 
the same things. Are you using the same measures of success? 
Will you be able to give us a comparison of how effective the 
two programs are in achieving their goals based on the amount 
of Federal resources available?
    Mr. Brown. Yes, sir.
    Senator Bond. Will you have measurements that show that?
    Mr. Brown. The measurements are essentially the same, as I 
mentioned, loans and investments to businesses, loans and 
investments in real estate, and the measures that we have put 
forth for the CDFI Fund Program are essentially the same for 
the New Markets Tax Credit program.
    Senator Bond. Okay. How do you think that the CDFI needs 
will be funded under this budget? Is there carryover funding? 
Have you got a problem with the lag, that previously 
appropriated funds are not being used? I am concerned that 
there is going to be a tremendous shortfall in the ability to 
fund the CDFI program. Can you justify the cuts?
    Mr. Brown. Yes, sir, I can. As I said, the enhancements 
that we have made to the CDFI Fund Program dealt with the whole 
continuum of financing activities. The fund in its years has 
done a wonderful job of building the program and obligating 
previous years' appropriations.
    What the OIG noted in its post-award administration is that 
the disbursement of those dollars took nearly 30 months. 
Largely a reason for that, a big reason for that is that as we 
were building the program we obligated funds contingent upon 
the CDFI and the local market getting matched. We have made 
program changes because the statute does require that before we 
disburse, that the organization must match dollar for dollar, 
so many--so a number of the changes we have made will more 
efficiently allow us to operate and obligate and disburse our 
funding within the same year's appropriation and allow us to be 
better stewards of taxpayers' dollars.
    The other significant change that you see in the budget 
does affect the BEA Program and, as I said in my opening 
remarks and the concern that was shared there was that as a 
result of the OMB's evaluation through their PART was a timing 
difference. They looked at the previous program and not the 
significant changes we made in the 2003 round, and the 
administration feels very strongly that the BEA Program that we 
are putting forth for 2003 focuses on community and personal 
wealth-building activities in a way that provides the right and 
proper incentives for financial institutions to be engaged in 
community development lending.
    Senator Bond. Thank you, Mr. Brown. I will have more 
questions on BEA after Senator Mikulski.
    Senator Mikulski. Well, Mr. Chairman, I just want to 
validate and echo your questions related to management and the 
utility of the program, so I am not going to repeat them. Just 
know Mr. Brown, that the chairman's questions are my questions.
    I would like to go, though, to the issue of predatory 
lending, and this chairman has been a great friend and a 
wonderful ally in dealing with the scurrilous practice of 
predatory lending. What appears is that a lot of the predatory 
lending, the gouging of the poor, has occurred at the so-called 
subprimes. As I understand it, the CDFI has been a welcome and 
refreshing alternative for poor people who wanted to get that 
first rung on the American Dream, home ownership, without being 
gouged.
    Could you tell me how many CDFIs that you fund for home 
ownership loans, and of that, what is your percentage that end 
up in default?
    Mr. Brown. Okay. Those are very good questions, and that 
represents many of the new performance measures that we have 
put in place for 2003. We do share your optimism and your 
enthusiasm for the role that CDFIs play in providing mortgage 
loans to low-income people and in low-income communities.
    Many of our CDFIs provide credit repair loans. Several of 
our CDFIs provide loans that specifically refinance borrowers 
out of predatory credits. Self-Help Credit Union we consider to 
be one of the leading CDFIs in the Nation in providing 
alternatives to high-cost mortgage lending, and its founder led 
the charge in North Carolina to having caps on both rates and 
fees in subprime lending.
    Senator Mikulski. But you have data in addition to 
anecdotal stories----
    Mr. Brown. We have retooled our application and coding 
process so that in coming years I will be able to 
specifically----
    Senator Mikulski. But you cannot tell me that now?
    Mr. Brown. I cannot tell you that now.
    Senator Mikulski. I appreciate that.
    Mr. Brown. Okay.
    Senator Mikulski. But I appreciate your at least putting in 
the data and tracking and monitoring mechanisms for that, 
because we want to be able to show that it can be done. When 
there is such a high rate of default in subprime the poor are 
blamed, but sometimes the scurrilous hidden fees and balloon 
payments and all of that are of scurrilous subprimes.
    Now, let us go to the issue of education on predatory 
lending. We know that one of the major agendas in the 
communities of color is about wealth, wealth-building, asset 
accumulation, et cetera, but often there, for a variety of 
reasons, has been not a lot of education, and they are 
therefore vulnerable to scum and scheme.
    What does CDFI do in working with your local--I will call 
them affiliates, but your local institutions, to make sure that 
people know what they are getting into, or also know how to get 
out of what they are in without getting into it worse? You 
know, the whole thing about buy a blouse and lose a house 
through the home equity schemes and so on. What are you doing 
in the area of vigor in education?
    Mr. Brown. Senator, my response to that is really a very 
short one and a very important one. You cannot be certified by 
the fund as a CDFI without providing community development 
services. One of the unique elements of being a certified 
community development financial institution is that you must 
provide to your borrowers development services.
    That comes in the way of technical assistance, homebuyer 
counseling, et cetera, so depending on the unique product 
offering that a CDFI provides, it must provide--it must 
provide--development services, so CDFIs play a very important 
role. They are able to offer credit in a flexible and 
innovative way largely because they are committed to homebuyer 
education, technical assistance providers. They either do it 
directly, or they work with local universities and other third 
party providers to make sure that our borrowers are properly 
educated on the role and the responsibility of credit.
    Senator Mikulski. You know, that is a really big job, and 
first of all I think it is very laudatory. It is exactly what 
we hoped would go on through CDFIs. This is why I am puzzled by 
the big cut that you have, because this is big, and what you 
are asking your local affiliates to do is very labor-intensive, 
and it is a lot of handholding and reviewing, and it should be. 
This is prevention for future financial problems, and it is 
like being immunized against being taken advantage of.
    If I could, Mr. Chairman, let us go to this New Market Tax 
Credit. Again, I share the same concerns. Have you established 
a system for data collection on this, and how will you monitor 
the results of these tax credits?
    Mr. Brown. Yes. We will establish and have established some 
very extensive data collection, and just by way of background 
and to bring you current, last year we had a joint conference 
with GAO that talked about the performance measures for the New 
Markets Tax Credit program, and we are going to take a couple 
of approaches, that the primary purpose of the New Markets Tax 
Credit program is to see an increased flow of capital into low-
income communities.
    So one of the first performance measures that we think we 
will be able to report at least next year is how effectively 
were community development entities able to take the tax 
credits and use that to attract private capital investments 
into their community development entities.
    The other measures, probably beginning in 2004 or 2005, 
will allow us to look at how the proceeds from those 
investments were used in a community, to what extent were jobs 
created, what types of services, commercial real estate 
services, were provided in low-income communities, things like 
charter schools, medical centers, loans to small businesses.
    The New Markets Tax Credit program allows for a variety of 
activities. The only activity that is excluded under the New 
Markets Tax Credit program is rental housing and, as you know, 
we have a separate tax credit for that, the low-income tax 
credit.
    Senator Mikulski. Well, thank you very much, Mr. Brown, and 
we look forward to working with you.
    Thank you, Mr. Chairman.
    Senator Bond. Thank you, Senator Mikulski.
    I am going to go back to the BEA and the unfunded awards. 
In 2002, the Bank Enterprise Award Program received 35 funding 
applications totaling $24 million from banks who had 
successfully carried out $167 million in increased lending and 
financial services activities in very distressed neighborhoods, 
yet the CDFI Fund only funded five applicants before it ran out 
of money. As a result, 30 banks that successfully completed 
nearly $140 million in increased activities received nothing 
for their hard work and effort.
    Now, one of these banks was the Central Bank of Kansas 
City, as I have mentioned, serving the needy areas in Kansas 
City. The BEA appears to be working as an incentive to get 
banks to do more in very low-income communities, and demand is 
higher than resources available, as last year's $20.9 million 
funding fell short, so would you please explain to us why the 
administration proposes to cut this successful program until 
Congress makes statutory changes to it?
    Mr. Brown. Sir, as I said in my opening remarks, the 
changes that we made to the BEA Program, which were quite 
substantial, occurred after OMB did its evaluation of the BEA 
Program, and we concurred with OMB's evaluation that the 
previous administration of the BEA Program did not effectively 
allow us to target our awards for distressed community 
activities. The popularity of the BEA Program for--let me also 
give you a little bit more background.
    The statutory requirements of the BEA Program requires that 
the first two priorities, or the primary priority, allow us to 
provide an incentive to financial institutions for its support 
and investments in other CDFIs. The third priority allowed us 
to provide an incentive to banks for increasing their lending 
in targeted low-income areas.
    In the past year, we exhausted our budget as we provided 
incentive awards in response to the first two priorities in the 
statute. In looking at the program formula, in looking at the 
types of awards that banks were receiving under the first two 
programs, we felt that there needed to be substantial 
revisions.
    The revisions we have made to the BEA Program now allow us 
to achieve more increased targeted funding. We have put caps on 
the amount of a BEA award to our largest CDFI partners. For 
instance, we had provided an award to a major financial 
institution that provided a $10 million credit facility to one 
of our largest CDFIs. That credit facility was typically priced 
at prime, and that $10 million credit facility required us to 
pay that bank a $1 million BEA award.
    When we looked at that, we felt that the program was 
successful, that we had grown that CDFI to a size and scale 
that that strategic partnership was in place, and that we did 
not necessarily need the BEA award to incent that type of 
activity, so the changes we have made allow us to target awards 
to CDFI partners that are small and emerging and allow us to 
target BEA awards not for all lending that a bank does, but for 
lending, for mortgage lending, small business lending, not 
automobile lending and credit card lending, which was part of 
the previous award.
    The other problem we had is that when we looked at the 
network of regulated institutions that were receiving a BEA 
award, it was possible that a regulated institution could make 
a million dollar deposit or ten $100,000 deposits in the 
network of other regulated CDFI banks and for that receive a 
$330,000 BEA award. We felt that was not the intent of the 
program, and so in the 2003 round we have prohibited that 
activity.
    I share those with you to say that in fixing what we think 
is the proper incentive for providing support and investments 
into other CDFIs, that it now gives us greater budget latitude 
to provide a financial award to our network of CDFI banks who 
are committed to providing loans, mortgage loans, small 
business loans in low-income communities so that now, with the 
appropriate budget appropriation, we will have sufficient 
dollars to not leave meritorious applications on the table as a 
result of a lack of funding.
    Senator Bond. The bottom line is, will the 30 banks that 
came up sucking wind last time be able to be funded?
    Mr. Brown. That will depend on the level of applications 
and the demand we get in the first two priorities.
    Senator Bond. Native American technical assistance. We 
clearly saw a need for capital access and financial lending on 
Native American lands. The Treasury Department's 2001 study 
recommends creating more financial institutions, including 
CDFIs, on Indian lands and opening branches there. One of the 
greatest needs, of course, is access to credit and capital and, 
as you know, we included some $5 million for financial and 
technical assistance for Native Americans in 2003, whereas the 
fiscal year 2004 budget calls for $3 million. Why the reduction 
in funding?
    Mr. Brown. We see that as an integral part of our technical 
assistance program, in that we feel that if we are successful 
in the appropriations that you have given us in the 2002 and 
2003 round of taking nearly $10 million to help create and 
support the capacity of CDFIs in Native American communities, 
that we think that we will have positioned them to more 
effectively--to more effectively--compete for other financial 
assistance funding.
    We are extremely committed to our Native American program. 
Our strategic plan offers a great deal of innovation. We have 
talked with members of the Fund's, other Government agencies 
that serve on the Fund's Community Development Advisory Board, 
and we feel that our Native American strategic plan will not 
only include the resources of the Fund but we will work in 
close partnership with HUD, USDA, and others to put forth what 
we think will be a very quality demonstration program to help 
overcome the perception that lending in reservations is risky, 
so we are quite excited about the potential of our Native 
American program.
    Senator Bond. The New Markets Tax Credit program, as I 
said, covers 32 percent of the U.S. population. It is supposed 
to help economically distressed communities. What is to keep a 
community development entity from deciding a particular project 
in a very risky area was not as good an investment as one in an 
eligible but substantially less risky neighborhood, and what 
oversight and accountability protections does the Fund have to 
ensure that the CDE meets the requirements of the approved 
application?
    Mr. Brown. A very good question, Senator. Our allocation 
agreement is our enforcement tool that will hold a community 
development entity accountable to its application.
    Our review of the application and the highly rigorous 
process that we establish in the application will help us to 
ensure that the allocatees that receive a new markets tax 
credit allocation are committed to providing business 
strategies that we consider to be unique, flexible, and 
innovative, and that the other sections of the application 
review process will look at the impact that the organization 
has committed to make, and the market areas that they are 
committed to serve, that those elements are key components and 
conditions in the allocation agreement.
    So we are extremely committed to ensure that what the 
organization said in its application will be measured in its 
actual results and performance, and our allocation agreement is 
the tool that we will have to ensure enforcement.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Bond. Well, Mr. Brown, thank you. You may find it 
hard to believe, but I still have a number of questions that I 
will submit for the record, things about accountability, and 
one of the things that continues to come up is how we know the 
programs are effective, and again, I am very much concerned 
about making sure that needy rural areas are served, because I 
see the action going in the needy areas of our larger 
metropolitan areas, but there are a lot of the small, very 
small isolated rural communities with disadvantaged minority 
populations who just seem to be out there by themselves, so I 
will submit those questions for the record.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]

                Question Submitted by Senator Tom Harkin

    Question. In the fiscal year 2002 appropriations, the committee 
urged CDFI to increase its activities in rural areas, especially in 
light of the abundance of Federal programs already dedicated to urban 
areas. I was pleased to see a number of awards made to rural entities 
since then. Unfortunately, it has come to my attention that a housing 
agency in Iowa was supposed to receive a grant and a zero-interest loan 
from CDFI but has been having considerable difficulty getting those 
funds released due to what I see as excessive administrative 
difficulties. A meeting occurred in my office on March 12 with your 
staff on this matter and still, little movement has occurred. I am told 
that this is not an isolated case for smaller entities trying to 
participate in CDFI programs.
    What are you doing to assure that rural and smaller community 
entities that have been certified are receiving reasonable treatment 
that will allow the purposes of CDFI to be fulfilled?
    Answer. The CDFI Fund's programs are equally accessible to 
organizations operating in both rural and urban settings. Community 
Development Financial Institutions Program and Bank Enterprise Award 
Program awardees are indeed reaching rural areas. In 2002, 60 percent 
of awardees receiving financial assistance and 50 percent of technical 
assistance awardees indicated that they served rural areas as all or 
part of their markets. On March 14, 2003, the Department of Treasury, 
through the CDFI Fund, announced the allocation of New Markets Tax 
Credit (NMTC) authority to 66 ``community development entities'', thus 
supporting $2.5 billion in private sector equity investments that will 
result in economic stimulus in low-income communities throughout the 
country. More than 30 percent of the NMTC allocation recipients will 
target investments predominantly to rural communities.
    The CDFI Fund had been working with Homeward, Inc. of Iowa to 
resolve a number of issues related to receiving its funding. At the 
March 2003 meeting with the Senator's office, Homeward, Inc. requested 
a ``severe constraints waiver'' to reduce its matching funds 
requirement. Because the CDFI Fund had never received such a request 
subsequent to an award decision, it is in the process of developing a 
policy regarding what information will be needed in order to evaluate 
such a request. The CDFI Fund will promulgate this policy as soon as it 
is finalized.
                                 ______
                                 
               Questions Submitted by Senator Tim Johnson

    Question. What specific initiatives are being pursued at CDFI to 
enhance the Fund's effectiveness in Rural Areas?
    Answer. The CDFI Fund has focused its outreach resources in fiscal 
year 2003 on those organizations that have small and rural entities as 
their memberships, including credit unions and microloan funds. The 
CDFI Fund is exploring a partnership with the Department of Agriculture 
so that we can better communicate information about the CDFI Fund's 
programs more broadly, using that agency's network of offices around 
the country. This will enable the CDFI Fund to reach a much larger 
audience. The CDFI Fund seeks similar partnerships with other agencies 
and with foundations serving rural communities, so that information 
about the CDFI Fund's programs can be better disseminated to rural 
communities.
    Further, for fiscal year 2004, the CDFI Fund expects to modify its 
highly distressed market criteria called Hot Zones to increase the 
number of rural areas that can qualify. CDFIs serving Hot Zones are 
given highest priority for funding.
    In addition, the CDFI Fund's Native American Lending Study (the 
``Lending Study'') released in November 2001, noted that the often-
rural nature of Indian Lands presented barriers to economic development 
and access to credit, capital, and affordable financial services. In 
response, the CDFI Fund is implementing a comprehensive Native American 
strategy that will: (1) increase the capacity of CDFIs to respond to 
credit, investment and financial services needs within often rural and 
remote Native American, Alaska Native, and Native Hawaiian communities; 
(2) attract other existing resources to these underserved communities; 
and (3) address market barriers to effective demand for credit, 
capital, and financial services.
    Question. The CDFI Fund was established to provide flexible capital 
that strengthened CDFIs. By setting strategic goals that state that the 
Fund will achieve outcomes not related to assisting CDFIs, the Fund is 
seeking to diminish CDFIs to mere pass-through instruments for current 
Federal Government priorities. Specifically Congress intended the Fund 
to provide hard-to-raise equity capital that would allow CDFIs to 
leverage additional capital, reach deeper into communities and make 
capital available in areas not served by traditional lenders.
    How does the CDFI Fund factor in data regarding out-migration and 
population loss when evaluating CDFI applications?
    Answer. For Financial Assistance funding through the CDFI Program, 
the CDFI Fund considers five primary criteria (each of which have a 
number of sub-criteria). These are:
  --Demonstrated need for capital for particular financial products;
  --Market Need and Community Development Performance;
  --Management and Underwriting Quality;
  --Financial Health; and
  --Financial Sustainability and Matching Funds.
    Among these criteria, the Market Need and Community Development 
Performance criterion accounts for 40 percent of an applicant's total 
score. Thus, an applicant serving a highly distressed market that 
effectively describes the demand of that market for financial products 
and services and shows that it provides the services needed by that 
market, would receive the highest score.
    The CDFI Fund's strategy of targeting Hot Zones--meaning, 
investment areas that are the most economically distressed based on 
several quantifiable measures--has been further refined by identifying 
particular types of Hot Zones. ``Housing Hot Zones'' are areas that 
have low median family incomes, high homeowner or rental cost burdens 
for low-income families, and high poverty, and are the areas that are 
the hardest hit by out-migration and population loss. In the fiscal 
year 2003 funding round, CDFIs serving Hot Zones, including these 
Housing Hot Zones, will be given funding priority for awards.
    Question. What efforts have been undertaken to ensure that outcome-
based measurements do not constrain CDFIs from pursing their intended 
mission?
    Answer. The CDFI Fund's outcome-based measures (jobs, affordable 
housing units, commercial real estate, and financial service provision) 
should not constrain CDFIs from pursuing their intended mission because 
the outcomes were designed to capture the vast majority of activities 
CDFIs engage in.
    The CDFI Fund does not specify the types of activities that CDFIs 
must engage in; rather, the CDFI Fund's rigorous underwriting criteria 
place heavy emphasis on leverage, targeting, and market need, all of 
which are consistent with CDFIs' missions of reaching underserved 
markets and achieving long-term sustainability. CDFIs that score well 
must be able to leverage the CDFI Fund's award dollars, target the most 
economically distressed areas of the country (Hot Zones), and provide 
products and services that meet the needs of those not served by 
traditional lenders.
    Finally, the CDFI Fund's strategic goal is to ``improve the 
economic conditions of underserved communities by providing capital and 
technical assistance to community development financial institutions 
(CDFIs), capital to insured depository institutions, and tax credit 
allocations to community development entities (CDEs), which provide 
credit, capital, financial services, and development services to these 
markets [emphasis added].'' One of the CDFI Fund's four objectives is 
to ``Build the self-sufficiency and capacity of CDFI Fund awardees and 
certified CDFIs.'' The performance measures for this objective include 
dollars leveraged and number of CDFIs receiving technical assistance 
awards and CDFI Fund-sponsored training. These outcomes measure the 
institutional growth of CDFIs and directly relate to the statutory 
purpose of the CDFI Fund.

                          SUBCOMMITTEE RECESS

    Senator Bond. Thank you for the testimony, and the 
subcommittee stands in recess.
    Mr. Brown. Thank you.
    [Whereupon, at 11:55 a.m., Thursday, April 10, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]
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