[Senate Report 104-331]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 511
104th Congress                                                   Report
                                 SENATE

 2d Session                                                     104-331
_______________________________________________________________________


 
             LOCAL EMPOWERMENT AND FLEXIBILITY ACT OF 1996

                               __________


                              R E P O R T

                                 of the

                   COMMITTEE ON GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                             together with

                     ADDITIONAL AND MINORITY VIEWS

                              to accompany

                                 S. 88

TO INCREASE THE OVERALL ECONOMY AND EFFICIENCY OF GOVERNMENT OPERATIONS 
  AND ENABLE MORE EFFICIENT USE OF FEDERAL FUNDING, BY ENABLING LOCAL 
    GOVERNMENTS AND PRIVATE, NONPROFIT ORGANIZATIONS TO USE AMOUNTS 
AVAILABLE UNDER CERTAIN FEDERAL ASSISTANCE PROGRAMS IN ACCORDANCE WITH 
                    APPROVED LOCAL FLEXIBILITY PLANS




                 July 23, 1996.--Ordered to be printed


                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                    TED STEVENS, Alaska, Chairman
JOHN GLENN, Ohio                     WILLIAM V. ROTH, Jr., Delaware
SAM NUNN, Georgia                    WILLIAM S. COHEN, Maine
CARL LEVIN, Michigan                 FRED THOMPSON, Tennessee
DAVID PRYOR, Arkansas                PETE V. DOMENICI, New Mexico
JOSEPH I. LIEBERMAN, Connecticut     THAD COCHRAN, Mississippi
DANIEL K. AKAKA, Hawaii              JOHN McCAIN, Arizona
BYRON L. DORGAN, North Dakota        BOB SMITH, New Hampshire
                   Albert L. McDermott, Staff 
                             Director
                    John E. Mercer, Counsel
                 Leonard Weiss, Minority Staff 
                             Director
               Michal Sue Prosser, Chief Clerk


                            C O N T E N T S

                              ----------                              
                                                                   Page

  I. Purpose and Summary..............................................1
 II. Background and Need for Legislation..............................3
        A. Overview..............................................     3
        B. Evolution of Grant Administration.....................     5
        C. Flexibility Experience and Examples...................     7
III. Committee Hearing................................................8
 IV. Legislative History.............................................11
  V. Section-By-Section Analysis.....................................12
 VI. Regulatory Impact of Legislation................................18
VII. Cost Estimate of Legislation....................................18
VIII.Additional Views................................................21

 IX. Minority Views..................................................24


                                                       Calendar No. 511
104th Congress                                                   Report
                                 SENATE

 2d Session                                                     104-331
_______________________________________________________________________


             LOCAL EMPOWERMENT AND FLEXIBILITY ACT OF 1996

                                _______
                                

                 July 23, 1996.--Ordered to be printed

_______________________________________________________________________


Mr. Stevens, from the Committee on Governmental Affairs, submitted the 
                               following

                              R E P O R T

                             together with

                     ADDITIONAL AND MINORITY VIEWS

                          [To accompany S. 88]

    The Committee on Governmental Affairs, to which was 
referred the bill (S. 88) to improve the system of grant 
administration, reports favorably thereon and recommends that 
the bill do pass.

               i. purpose and summary of the legislation

    The current system of intergovernmental Federal grants can 
be characterized as a piecemeal approach to addressing the 
needs of our nation's communities. Each of the various grant 
programs tends to treat the need it aims to address as if most 
communities had the precisely identical problem calling for a 
single, common solution. The standardized set of regulations 
surrounding each program do little to encourage creativity in 
seeking solutions, with their emphasis on following defined 
process, over achieving meaningful results. In reality, though, 
not only do the specific needs of New Haven, Connecticut, 
differ greatly from the needs of Walla Walla, Washington, and 
Kenai, Alaska, but the best approaches to addressing similar 
needs may vary significantly. To date, our Federal grant system 
has not recognized these differences.
    The Local Empowerment and Flexibility Act (S. 88) is 
designed to reflect these differences, by creating a mechanism 
that fosters intergovernmental communication, recognizes the 
efforts of the private sector, facilitates the efficient 
expenditure of taxpayer dollars,
and increases the flexibility and integration of Federal 
categorical grants. In doing so, it will allow Federal 
categorical grants to complement local efforts more 
effectively. Rather than forcing communities to attack problems 
singly, S. 88 recognizes that effective solutions often require 
a comprehensive approach using a blend of tools from several 
programs--something presently discouraged by many grant-
specific regulations.
    The legislation expands upon successful intergovernmental 
partnerships and promotes accountable flexibility in the 
implementation of Federal grants. The General Accounting 
Office, in ``Community Development: Comprehensive Approaches 
Address Multiple Needs but Are Challenging to Implement,'' 
stated that:

          The proliferation of federal programs imposes a 
        burden on local organizations that attempt to piece 
        together programs to serve their communities * * * 
        neighborhood organizations we studied found it 
        burdensome to manage multiple programs with individual 
        funding streams, application requirements, and 
        reporting expectations.

The sole purpose of S. 88 is to ease this burden without 
sacrificing accountability for achieving Federal objectives. It 
aims to do this in several ways:
          1. The legislation encourages local innovation. S. 88 
        allows state, local or tribal governments or private, 
        non-profit organizations and consortiums to examine the 
        sources of financial assistance they receive, develop a 
        plan of grant integration to avoid duplicative and 
        inconsistent requirements, and apply for the waiver of 
        the statutory or regulatory requirements that lead to 
        this duplication, inconsistency, and inefficiency.
          Although state, local, and tribal waivers may be 
        requested concurrently, S. 88 does not preempt non-
        Federal waiver processes. The bill provides for 
        technical assistance in the development and execution 
        of plans and gives special consideration to smaller 
        governments.
          2. The legislation permits variation in how grantees 
        achieve national objectives. The Federal government has 
        a legitimate role to play by establishing broad 
        national objectives that bind our nation together. The 
        bill encourages more efficient ways to achieve these 
        purposes. S. 88 is not intended to permit flexibility 
        for the purpose of deviating from national objectives.
          3. The legislation requires the review of current 
        regulations and performance standards associated with 
        Federal financial assistance programs. S. 88 directs 
        the Executive Branch to review regulations for 
        elimination, revision or better coordination. It also 
        provides for the examination of ways to establish a 
        uniform application for multiple Federal financial 
        assistance programs.
          4. The legislation promotes greater interagency 
        communication at the Federal level. S. 88 establishes a 
        forum for Federal agencies to discuss how multiple 
        programs originating from separate agencies are 
        integrated or otherwise coordinated at the State and 
        local levels.
          Known as the Community Empowerment Board (Board), 
        this forum already exists, through Presidential 
        directive, to oversee the Empowerment Zones/Enterprise 
        Communities program. The Board would also review plans 
        submitted under S. 88 for approval, but any statutory 
        or regulatory waiver requests would have to be finally 
        approved by the appropriate Federal agency.
    5. The legislation promotes greater public and private 
communication. S. 88 requires all plans to be submitted for 
review to all levels of State and local government and the 
general public before being submitted to the Board.
    6. The legislation provides postal equity to Alaska and 
Hawaii, States which are not part of the contiguous forty-
eight. S. 88 changes the date of receipt of a grant application 
from the date received in Washington to the date postmarked, so 
as not to disadvantage remote communities in those States.

              II. BACKGROUND AND NEED FOR THE LEGISLATION

A. Overview

    A June 1995 report published by the Advisory Commission on 
Intergovernmental Relations (ACIR) cites 618 Federal 
categorical grants funded in FY95--the largest number of such 
grants in history. ACIR reports that the 634 total Federal 
grants to state and local governments represent $228 billion in 
FY95 outlays.
    In his December 5, 1995, testimony before the Committee, 
Senator Mark Hatfield, Chairman of the Committee on 
Appropriations, stated that non-defense discretionary spending 
(the source of most of these grants) represents 18% of the 
total Federal budget. He predicted that by the year 2002, this 
same category will represent only 13% of the Federal budget.
    Two conclusions can be drawn from these figures: (1) State 
and local grant recipients continue to be faced with the task 
of managing multiple funding streams, each with its own unique 
requirements; and (2) the amount of money available to address 
the needs for which these grants are targeted is shrinking.
    As a result, communities are, more than ever, seeking 
efficient and effective means to qualify for, receive, and 
implement Federal and other financial assistance programs. As 
they seek to integrate multiple funding streams, conflicting 
requirements can obstruct potentially productive outcomes. In 
its September 7, 1993 report, ``From Red Tape to Results; 
Creating a Government that Works Better and Costs Less,'' the 
National Performance Review states:

          Considered individually, many categorical grant 
        programs make sense. But together, they often work 
        against the very purposes for which they were 
        established * * * Thousands of public employees--at all 
        levels of government--spend millions of hours writing 
        regulations, writing and reviewing grant applications, 
        filling out forms, checking on each other, and avoiding 
        oversight. In this way, professionals and bureaucrats 
        siphon money from the program's intended customers: 
        students, the poor urban residents and others. And 
        states, and local governments find their money 
        fragmented into hundreds of tiny pots, each with 
        different, often contradictory rules, procedures, and 
        program requirements. (p. 35).

The overly-fragmented nature of the Federal categorical grant 
system may not be in the best interests of the individuals it 
purports to assist.
    In testimony before this Committee, the National Academy of 
Public Administration (NAPA) discussed a comprehensive plan of 
one community to move welfare recipients to self-sufficiency. 
Part of this plan relied indirectly on funding authorized by 
the Job Training Partnership Act (JTPA). The JTPA 
administration owned computers in a local community college, 
and the plan involved training welfare recipients (who were not 
JTPA-eligible) on those computers during the evening, when they 
would otherwise not be in use. However, JTPA regulation 
restricts all use of JTPA resources to JTPA-eligible 
individuals. This is but one example among far too many of a 
piecemeal approach to a complex problem being derailed by 
inflexible restrictions.
    As with categorical grants, the characteristics of block 
grants can make it more difficult to attain national policy 
goals. Block grants, for instance, can also be too restrictive. 
They sometimes have too narrow a focus and too many 
prescriptive requirements. An analyst for the Center for Budget 
and Policy Priorities, quoted in a recent issue of the 
periodical ``MBIA Public Policy Issues,'' writes that, 
``[f]lexibility and block grants are not synonyms. You can have 
an entitlement in which a state has enormous flexibility, and a 
block grant program in which a state has very little 
flexibility.''
    A stark example of the potential inflexibility of block 
grants can be seen in the administration of the Community 
Development Block Grant (CDBG). According to the 1995 Catalog 
of Federal Domestic Assistance, the objective of CDBG is to 
``develop viable urban communities, by providing decent housing 
and a suitable living environment * * *'' Although it enjoys a 
fairly broad purpose, the program has a statutory limit on what 
proportion of funds may be spent on public services--no more 
than 15%. A grantee in Albany, Georgia, presented a waiver 
request to the Community Empowerment Board hoping to use 20% of 
its CDBG funds for public services. Albany's request could not 
be honored because the 15% cap is a statutory requirement.
    Tacoma, Washington, requested permission to use CDBG moneys 
to build new housing because existing housing stock was beyond 
rehabilitation. Again, this request was denied because of a 
statutory restriction banning new home construction.
    The Local Empowerment and Flexibility Act would overcome 
obstacles like these by combining the flexibility of more 
expansive block grants with the accountability of categorical 
grants. In the case of the requests in Georgia and Washington 
for waivers of CDBG restrictions, for example, this legislation 
would enable the Community Empowerment Board to approve a plan 
for these waivers and the Secretary of Housing and Urban 
Development to grant them under appropriate conditions.
    The question is, of course, on whose perspective should be 
relied on in adapting Federal financial assistance to the needs 
of our citizens. The Committee believes that the best 
perspective is that of the individuals who are most directly 
affected by the success or failure of programs supported by 
federal grants: the providers and recipients of local services. 
The specific ideas that derive from firsthand knowledge and 
experience at the community level are most likely superior to 
even the best generalized strategies that are abstractly 
conceived at the national level.

B. Evolution of Intergovernmental Grant Administration

    Testimony before this Committee submitted by the Advisory 
Commission on Intergovernmental Relations (ACIR) described two 
earlier reform efforts which shed light on the purpose of S. 
88. The first is the Integrated Grant Administration program of 
1972, and the second is the Joint Funding Simplification Act of 
1974. Both were attempting to address what, at the time, was 
seen as a grave failure in the Federal aid system. However, 
long before the 1970's, the categorical grant system was the 
subject of much debate.
    Nearly 20 years ago, the ACIR issued a report entitled 
``Improving Federal Grants Management; The Intergovernmental 
Grant System: An Assessment and Proposed Policies'' (February 
1977). This was one of several reports which have been released 
calling for improvement in our nation's grant system--including 
a 1949 Hoover Commission report with a section on Federal-State 
relations. While the Local Empowerment and Flexibility Act 
addresses a current issue, the issue has been actively 
considered for decades. Congress has attempted to address grant 
flexibility before, but without success. Legislation in the 
late 1960's and early 70's was intended to bring relief to the 
headache of grant fragmentation.
    In 1968, the Intergovernmental Cooperation Act (P.L. 90-
577) was enacted. It made several improvements to the grant 
administration process including improved Federal-State 
communication and standardization. Other reforms not included 
in the Intergovernmental Cooperation Act were incorporated by 
the Office of Management and Budget into the Integrated Grant 
Administration Program in 1972. Modernizing the grant 
administration process, encouraging greater State involvement 
and cutting stifling requirements were at the center of the 
program. The Joint Funding Simplification Act of 1974 
established in law many of the provisions included in the 
Integrated Grant Administration Program. Three years after 
passage of even this landmark legislation, in ``Improving 
Federal Grants Management,'' ACIR reported that grant 
administration faced the same obstacles:

          Very little has changed over the years. Even the 
        extensive reforms initiated in the past decade have not 
        altered greatly the nature of the complaints. Many of 
        the fundamental difficulties continue. * * *
          Most of the administrative problems associated with 
        categorical aid arise from the large number of narrow, 
        distinct programs of assistance--what critics often 
        call the ``fragmentation'' of Federal aid. Aid 
        programs, of whatever worth singly, become 
        objectionable as they proliferate. There are a variety 
        of complaints: ``red tape,'' ``inflexibility,'' and 
        others. ``Poor coordination'' is probably the most 
        common charge.

    According to ACIR testimony at the Committee's December 5, 
1995 hearing, the Integrated Grant Administration program was 
created by the Office of Management and Budget to simplify the 
grant process for grantees of more than one Federal assistance 
program, so as to coordinate the administration of several 
programs as a single project. The ACIR witness stated that when 
assessed by OMB and the General Services Administration (GSA), 
it was determined that, ``(P)roblems of `turf,' as well as 
statutory barriers to program consolidation were seen as 
stumbling blocks to agency cooperation.''
    However, there was enough success for the House 
Subcommittee on Intergovernmental Relations to hold hearings 
discussing grant flexibility and specifically, H.R. 11236, the 
Joint Funding Simplification Act. Enacted into law in 1974, it 
was reauthorized twice before finally being repealed in 1982. 
ACIR testified that the act, ``* * * never really got off the 
ground.'' A lack of Federal commitment is given as the primary 
reason. The Joint Funding Simplification Act authorized Federal 
agencies to identify programs suitable for consolidation, 
modify requirements and create ``joint management funds'' for 
multipurpose projects.
    The Intergovernmental Cooperation Act of 1968, Integrated 
Grant Administration program of 1972 and the Joint Funding 
Simplification Act of 1974 share one thing in common: reliance 
on the creativity, resourcefulness and commitment of the 
Federal agencies.
    Proponents of the Local Empowerment and Flexibility Act 
maintain that the role of determining how to consolidate 
funding streams most effectively is not best left to the wisdom 
of the Federal agencies, the President, or OMB, but to the 
State and local grantees. Empowerment at the State and local 
level, coupled with a renewed intergovernmental commitment at 
the Federal level, is a key ingredient absent in similar reform 
measures of the past.
    One advance in grant simplification and local flexibility 
was actually a management circular (GSA Circular FMC 74-7, 
formerly OMB Circular A-102). As reported in ACIR's 1976 
report, this circular ``standardized and simplified 15 areas of 
grant administration requirements, and placed restraints on 
Federal grantor agencies' imposition of `excessive' 
requirements.'' (p. 138) Emphasizing performance over process 
was one of its major objectives.
    An important lesson is to be learned from the experience 
various groups had with this and other related circulars. Its 
lessons, as stated in the 1976 ACIR report, can be applied 
today:

          * * * a paramount point that must be understood when 
        judging experience under the circulars: parties 
        representing different interests in the grants process 
        have different kinds of complaints. The public interest 
        groups stress enforcement failures, whereas Federal 
        grantor agencies chafe at efforts to standardize or 
        complain about `unrealistic' interpretations of 
        circular provisions. This suggests that in the 
        development of improvements in grant management, the 
        nature of the grantor-grantee relationship is such that 
        it will never be possible to completely satisfy both 
        ends of the grant process. (p. 259)

    While the Committee understands that differing experiences 
shape perspectives toward S. 88, 20 additional years of 
dissatisfaction with the Federal grant process led to a unity 
of purpose between the grantor agency and the grantee which was 
previously missing. For the most part, grantor agencies would 
like the ability to target funds to specialized groups. 
Grantees would like it recognized that the way services are 
targeted and implemented in one part of the country may differ 
from another part of the country.
    A series of hearings on Federal grants management reform 
before this Committee in 1979 led to unanimous Senate approval 
of S. 878, the Federal Assistance Reform Act on December 2, 
1980. Grant consolidation was the paramount goal of S. 878. 
Like its predecessors, although never enacted into law, S. 878 
incorporated consolidation suggestions at the Federal agency 
level in order to reform the fragmented system of categorical 
grants.
    The budget reconciliation in 1993 (P.L. 103-66) created 9 
empowerment zones and 95 enterprise communities. In exchange 
for a strategic revitalization plan, these distressed 
communities could receive tax credits, block grants, and the 
removal of some barriers to efficient implementation of Federal 
assistance. Waiver requests and strategic plans are reviewed by 
the Community Empowerment Board, chaired by the Vice President 
and consisting of cabinet and sub-cabinet agencies.
    However, some have argued that the program should have 
greater waiver authority to afford greater flexibility for 
communities. For example, in a letter of December 6, 1995, to 
Louisville mayor Jerry Abramson, Assistant HUD Secretary Andrew 
Cuomo wrote:

          * * * the City of Louisville has asked for 11 waivers 
        and broad policy changes that the CEB [Community 
        Empowerment Board] does not have the authority to act 
        upon because they require statutory changes--meaning 
        Congress would have to change laws * * * Moreover, the 
        Administration supports the local Empowerment and 
        Flexibility Act of 1995. This pending legislation would 
        permit the CEB to modify statutory requirements which 
        impede creative solutions to local problems.

C. Flexibility experience and examples

    The Clinton Administration has entered into an agreement 
that allows Oregon to be exempted from certain regulatory 
requirements in exchange for Oregon's commitment to focus its 
public resources on a series of planned goals entitled, 
``Oregon Benchmarks.'' This agreement has been titled the 
``Oregon Option.'' By focusing on specific objectives such as 
reducing teen pregnancies or improving immunization rates, 
Oregon has begun to highlight regulatory barriers to efficient 
intergovernmental service delivery.
    Through the establishment of ``The Oregon Option,'' the 
State of Oregon has achieved some flexibility with regard to 
categorical financial assistance. For example, at one point, 
the state was receiving eight different funding streams, each 
of which was for enhancing access to immunizations. Each stream 
had its own reporting requirements. some required reporting 
twice a year, others specified how the money should be spent, 
others specified doses. Oregon estimated that it could save 
$600,000 in a two-year period if the reporting requirements 
could be relaxed. Oregon set a goal to move from a then current 
52% child immunization rate to a rate of at least 90% by 1996. 
Oregon did see immunization rates improve over 20% as a result 
of the added flexibility.
    Issues that Oregon would like to address in the future 
through the Oregon Option include removing various requirements 
that impede comprehensive plans for public assistance. When 
Headstart children and non-Headstart are included in the same 
program, for example, there is a requirement that food for each 
group be stored in separate locations. This is a needlessly 
expensive regulation. Also, Oregon recently developed a one-
page form to be filled out by everyone receiving Ryan White 
AIDS funds. The Federal government requires a two-page form 
with a 17-page set of instructions. Oregon would like to see if 
the Oregon Option could provide enough flexibility to defer to 
the state form.
    The Portland, Oregon, Bureau of Housing and Community 
Development expressed interest in applying Community 
Development Block Grant dollars to new construction. HUD's HOME 
program does allow for new development, but does not begin to 
meet the city's need for affordable housing. The city states 
that if it were able to integrate HOME and a portion of CDBG 
money, a greater number of low and moderate income households 
benefitting from these Federal monies would increase. An 
Empowerment Zone in Kansas City, Missouri pursued a similar 
CDBG waiver but the waiver was denied--because the restriction 
is statutory.
    The National Conference of State Legislatures has 
identified three areas in which it would like to see S. 88 used 
to increase flexibility:
          1. Pooling of portions of the Drug-Free Schools 
        education grant (DoED), the Alcohol and Drug Abuse 
        Block Grant (HHS), and the Office of Juvenile Justice 
        and Delinquency Prevention grants (DoJ) to create a 
        targeted anti-drug education program in the public 
        schools.
          2. Pooling various administrative funds for income 
        support, employment and other social service programs 
        to create one-stop shops or centralized administrative 
        functions to streamline overhead.
          3. States joining with counties in rural areas to use 
        portions of the state part of the Community Development 
        Block Grant program together with DoL job training/
        trade adjustment assistance and agriculture retraining 
        programs to revitalize poor rural communities.

                         III. COMMITTEE HEARING

    At the Committee's hearing on December 5, 1995, Senator 
Mark O. Hatfield testified to the need for Federal requirements 
to take into account differences found at the State and local 
levels:

          First as a former governor of Oregon, I experienced 
        the frustration expressed by many State and local 
        authorities when Federal policies do not make sense for 
        their particular communities. Blanket standards from 
        the Federal government are incapable of taking into 
        consideration the diversities of each locality.

    In expressing concern about the budget deficit, Senator 
Hatfield said that fiscal responsibility is contingent upon 
both spending cuts and maximizing efficiency. He stated that, 
in light of an anticipated reduction in discretionary spending, 
the Local Empowerment and Flexibility Act would be an important 
tool to optimize the expenditure of federal resources.
    Judy A. England-Joseph of the General Accounting Office 
(GAO) based her testimony primarily upon the February 1995 GAO 
report, ``Community Development: Comprehensive Approaches 
Address Multiple Needs but Are Challenging to Implement.'' The 
report highlights coordinated efforts to address community 
problems: efforts that include citizen participation, technical 
support, non-profit involvement and several sources of private, 
local, State and Federal financial assistance.
    Ms. England-Joseph testified that many experts have 
endorsed comprehensive approaches to community needs, but the 
GAO report found that many factors hampered success. Community 
involvement can be difficult to evoke, and funding streams can 
be difficult to manage. Regarding four projects the GAO 
examined, she stated:

          Overall, the organizations relied on public funding--
        for 30-60 percent of their budgets. After obtaining 
        funds, the organizations faced the challenge of 
        concurrently managing multiple programs, each with 
        several separate funding sources; application 
        requirements; and reporting expectations.

    She testified to a traditional lack of coordination among 
Federal departments with regard to administering Federal 
financial assistance programs. A lack of coordination at the 
Federal level has led to increasing burdens on local grantees, 
she said.
    Ms. England-Joseph's concerns with the legislation include 
the need to process waiver requests in a timely manner, monitor 
requests that cut across federal agencies, build strong 
accountability into the programs included in a flexibility 
plan, and determine the resources available to implement S. 88.
    John A. Koskinen, Deputy Director for Management, Office of 
Management and Budget, testified regarding the Clinton 
Administration's support of flexibility in federal funding, 
particularly through the efforts of its National Performance 
Review. Mr. Koskinen stated that:

          While the Administration's efforts to promote 
        flexibility have proven to be a strong beginning to 
        devolving power to the local level, they are not 
        complete answers to the problem. For Federal grant 
        programs to work, we believe strongly that the 
        Executive Branch agencies must have the flexibility to 
        waive statutes and remove barriers that interfere with 
        communities trying to improve their economic and social 
        conditions.

    He added, however, that the Administration could not 
support the bill without changes that include extending review 
periods, allowing States to submit plans, excluding certain 
statutes, utilizing the Community Empowerment Board, and 
ensuring all waiver authority is kept within Federal agencies.
    Subsequent to the hearing, Mr. Koskinen asked the 
President's Council on Integrity and Efficiency to review the 
Administration's redline draft of amendments to S. 88 as 
originally introduced. This critique is included in this report 
at the request of Senator Glenn. While it is not a critique of 
the reported legislation, which is significantly different from 
the redline amendments and the original S. 88, it does address 
concerns regarding financial management issues involve in local 
flexibility.
    Susan A. Cameron of the Tillamook County Health Department 
testified about her county's and Oregon's recent experiments 
with results-driven programs. She stated that in Oregon:

          We talk about results: literacy--not dollars spent 
        for schools or student-teacher ratios; reduced crime--
        not prison beds; reduced teen pregnancy rates--not 
        contraceptives delivered. We talk about accountability 
        for results and the key idea here is that by being 
        accountable for results we should not have to face the 
        red tape and micro-management often imposed by 
        government when results are vague or completely 
        invisible.

    She offered a recent example that was inspired by a State 
program called Oregon Benchmarks. The county had a teen 
pregnancy rate of 24 per thousand and wanted to achieve the 
Oregon Benchmark of 9 per thousand. To do so, the health 
department brought together churches, schools, health clinics 
and other interest groups to develop a comprehensive approach. 
She testified that such collaboration is also needed among the 
variety of federal programs in which the county participates.
    Scott Fosler, President of the National Academy of Public 
Administration, testified that ``[t]he federal categorical 
grants system has grown topsy.'' He cited the 1995 Advisory 
Commission on Intergovernmental Relations report which counted 
618 categorical programs available to state and local 
governments, including 110 education program, over 100 health 
care grant programs, 82 social service grant programs and close 
to 30 grant programs dealing with community and regional 
development. He acknowledged the need for flexibility in the 
grant system, saying:

          To achieve the highest level of performance, we 
        should create systems that are capable of continuous 
        learning and adjustment. Prescriptive systems place too 
        much emphasis on outmoded ``command-and-control'' 
        models and too little emphasis on flexibility with 
        accountability for meeting ambitious performance goals 
        and cross-cutting needs.

    Charles Griffiths, Director of Intergovernmental Liaison 
for the Advisory Commission on Intergovernmental Relations, 
testified on the history of flexibility programs. He enumerated 
four ingredients to successful federal aid reforms: holistic 
rather than partial solutions, sufficient commitment of time to 
allow reform to succeed, flexibility, and avoiding excessive 
complexity. He said the Local Empowerment and Flexibility Act 
was an opportunity to build on past mistakes.
    Among other recommendations, he suggested that S. 88 be 
changed to allow for the integration of State and federal 
funding streams, include regional governments as eligible 
applicants, and allow a flexibility plan to suffice for 
individual program applications.

                        IV. Legislative History

103d Congress

    On August 4, 1993, Congressman John Conyers (D-MI) 
introduced the Local Flexibility Act of 1993, contain 
provisions similar to S. 88. Funding in the areas of health, 
nutrition, education, housing, job training and social services 
would have been eligible to receive waivers from Federal 
statutory and regulatory requirements applicable to these 
particular grants. A hearing was held on October 13, 1993, by 
the Human Resources and Intergovernmental Affairs Subcommittee 
of the House Committee on Government Operations. No further 
action occurred on the bill.
    On March 16, 1993, the Senate included as part of the S. 4, 
the ``National Competitiveness Act of 1993'', and amendment 
offered by Senator Hatfield that was similar to Congressman 
Conyers's bill. It would have given certain local governments 
the opportunity to submit plans requesting flexibility for the 
purpose of integrating Federal funds. The amendment passed by a 
vote of 100-0, but the underlying legislation was not reported 
out of conference.
    Congress did allow a great deal of flexibility in the use 
of Federal education funds by enacting ``Ed-Flex'', legislation 
sponsored by Senator Hatfield. Reauthorization of the 
Elementary and Secondary Education Act (P.L. 103-227) permits a 
limited number of States, school districts and schools to seek 
and obtain the waiver of statutory and regulatory requirements 
of certain Federal educational programs, if the waiver is 
expected to help improve school effectiveness and academic 
achievement. This legislation passed 97-0.

104th Congress

    On January 4, 1995, ``The Local Empowerment and Flexibility 
Act of 1995'' (S. 88) was introduced by Senator Hatfield, and 
cosponsored by Senator Inhofe. It was referred to the Committee 
on Governmental Affairs.
    On December 5, 1995, the Committee held a hearing on the 
bill. The witnesses at the hearing were:
          The Honorable Mark O. Hatfield, U.S. Senate;
          Ms. Judy A. England-Joseph, Director, Housing and 
        Community Development, General Accounting Office;
          The Honorable John A. Koskinen, Deputy Director for 
        Management, Office of Management and Budget;
          Ms. Susan A. Cameron, Administrator, Tillamook County 
        Health Department, Tillamook, Oregon;
          The Honorable Gail Phillips, Speaker, Alaska House of 
        Representatives;
          Mr. Scott Fosler, President, National Academy of 
        Public Administration; and
          Mr. Charles Griffiths, Director, Intergovernmental 
        Liaison, Advisory Commission on Intergovernmental 
        Relations.
    On May 16, 1996, the Committee marked up S. 88. Chairman 
Stevens offered an amendment in the nature of a substitute, on 
behalf of Senator Hatfield, which was adopted by voice vote. 
The Committee also adopted by voice vote an amendment by 
Senator Akaka, providing that applications for Federal grants 
and contracts shall be deemed filed as of the date of postmark. 
An Amendment by Senator Levin prohibiting the waiver of 
statutory requirements that protect public health, safety and 
the environment was tabled by a vote of 5-4, upon a motion by 
Chairman Stevens. An amendment by Senator Levin limiting the 
commingling of funds among categorical grant programs was also 
tabled, by a vote of 6-5, upon a motion by Chairman Stevens. 
The Committee then voted to report S. 88 as amended by a vote 
of 8-1, with Senators Stevens, Roth, Thompson, Smith, Brown, 
Levin, Lieberman, and Akaka voting ``aye'', and Senator Glenn 
voting ``no''.

                     V. SECTION-BY-SECTION ANALYSIS

Section 1. Short title

    This section provides that the Act be cited as the ``Local 
Empowerment and Flexibility Act of 1996.''

Section 2. Findings

    The current Federal Categorical grant system is focused on 
providing financial assistance for targeted needs with numerous 
restrictions on how such assistance may be used. These 
restrictions ignore the different needs of different 
communities and often impede innovative programs for addressing 
these needs at the local level. It is ever more critical, 
however, that Federal funds promote cooperation, flexibility, 
and innovation among all levels of government as well as among 
private and public organizations in order to optimize the 
attainment of national policy goals.

Section 3. Purposes

    The purposes of the Act include (1) enabling the more 
efficient and effective use of government resources, (2) de-
emphasizing compliance with federal procedural requirements and 
instead emphasizing the successful achievement of policy goals, 
(3) enabling State and local governments to adapt Federal 
programs to their particular needs, and (4) facilitating 
cooperation between government entities and private, non-profit 
organizations.

Section 4. Definitions

    This section defines terms used throughout the bill.
    Subsection (1) defines an ``approved flexibility plan'' as 
a plan or part thereof that has been approved by the Community 
Empowerment Board under Section 8.
    Subsection (2) defines ``Board'' as the Community 
Empowerment Board established under Section 5.
    Subsection (3) defines ``Director'' as the Director of the 
Office of Management and Budget.
    Subsection (4) defines an ``eligible applicant'' as a 
State, local or tribal government, qualified organization, or 
qualified consortium eligible to receive financial assistance 
under at least one eligible Federal financial assistance 
program (as defined under subsection (5)).
    Subsection (5) defines an ``eligible Federal financial 
assistance program'' as a domestic assistance program defined 
under section 6101(4) of title 31 U.S.C. under which financial 
assistance is available either directly or indirectly to an 
eligible applicant.
    This does not include Federal programs of direct financial 
assistance to an individual or to a State in order to provide 
financial assistance directly to an individual, as in 
entitlement spending.
    Subsection (6) defines an ``Empowerment Zone-Eligible 
Area'' as any area nominated for designation in 1994 under the 
Empowerment Zones and Enterprise Communities Act ruled as 
meeting the technical eligibility standards established for 
that Federal policy.
    Subsection (7) defines a ``flexibility plan'' as a 
comprehensive plan or part thereof for the integration and 
administration by an eligible applicant of financial assistance 
under two or more eligible Federal financial assistance 
programs.
    Subsection (8) defines ``local government'' as a political 
subdivision of a State that is a unit of general local 
government as defined under section 6501 of title 31, U.S.C., 
or any combination of such political subdivisions. This term 
includes local education agencies.
    Subsection (9) defines a ``qualified consortium'' as a 
group comprising two or more qualified organizations or State, 
local or tribal agencies that receive Federally appropriated 
funds.
    Subsection (10) defines a `'qualified organization'' as a 
private, nonprofit organization described in Section 501(c)(3) 
of the Internal Revenue Code of 1986 that is exempt from 
taxation under section 501(a) of the Internal Revenue Code of 
1986.
    Subsection (11) defines ``small government'' as any small 
governmental jurisdiction defined in section 601(5) of Title 5, 
U.S.C., and tribal governments.
    Subsection (12) defines ``State'' as any of the 50 states 
or the District of Columbia, Puerto Rico, American Samoa, Guam 
or the Virgin Islands.
    Subsection (13) defines a ``State legislative official'' as 
the majority or minority leader of a chamber of a State 
legislature.
    Subsection (14) defines ``tribal government'' as the 
governing entity of an Indian tribe as defined in the Federally 
Recognized Tribe List Act of 1994.

Section 5. Establishment of Community Empowerment Board

    The Community Empowerment Board is a council of Cabinet 
secretaries and agency heads with a Chair chosen by the 
President from among its members. The Board is a forum for 
receiving, reviewing, evaluating, and approving flexibility 
plans.
    Subsection 5(c) describes the functions of the Board. It is 
responsible for receiving, reviewing and approving or 
disapproving flexibility plans. The Board is the point of 
contact for flexibility plan applicants and may direct agencies 
to provide, when necessary, technical assistance to applicants. 
Along with the Director of OMB, the Board shall monitor the 
progress of flexibility plans. This section also provides for 
certain regulations to be reviewed and, if needed, revised.
    The Board shall evaluate the performance standards and 
evaluation criteria of Federal financial assistance programs in 
order to establish specific performance and outcome measures to 
compare and evaluate the success of the programs and the 
success of flexibility plans.
    Section 5(d) directs the Director of OMB, working with the 
Board, to assist Federal agencies in simplifying the grant 
application progress.

Section 6. Application for approval of flexibility plan

    Section 6(a) states that an eligible applicant that crafted 
a flexibility plan may submit the plan to the Board for review.
    In Section 6(b), the contents of an application for 
approval of a flexibility plan are described. It must include 
written certification from the chief executive of the applicant 
that the applicant has the ability, authority, and resources to 
implement the proposed flexibility plan. The Board may request 
any additional assurances, beyond written certification, that 
the applicant possesses such ability, authority and resources. 
Written certification is required to help ensure that an entity 
does not use S. 88 to supersede another entity's jurisdiction 
over eligible Federal financial assistance programs.
    The Governor, affected State agencies, State legislature 
and other chief executives of affected local or tribal 
governments shall have been given opportunities to comment on 
the plan and these comments are to be included for the Board to 
review. If the applicant responds to these comments, the 
responses shall be included in the application.
    Written documentation of significant public input must be 
included in the plan. Public input shall include comments by 
those directly affected by the plan, such as its intended 
beneficiaries.
    The Board may require any other information necessary.
    Section 6(c) describes the contents of the flexibility 
plan. Whom the plan will serve, for how long and where must all 
be included in the plan. Since the goal a S. 88 is to improve 
service delivery, the applicant must lay out the goals and 
criteria it will use to measure the flexibility plan's ultimate 
performance. If the State has already documented a set of 
goals, these must be included in the plan as well as how the 
plan can achieve the State goals. Methods to measure 
performance and collect and maintain data are to be included.
    The plan must explain who is eligible for benefits and 
what, exactly, those benefits are. The Board may require any 
other descriptive information it needs to approve a plan. The 
plan shall also describe the statutory goals and purposes of 
each Federal financial assistance program included in the plan.
    If, in order to implement a plan, a statutory or regulatory 
requirement must be waived, the applicant must list what 
waivers are necessary and why. S. 88 provides no authority for 
the waiver of State or local requirements. However, if a State 
or local waiver is needed to implement a plan, that waiver 
shall be included along with a commitment to grant the waiver 
from the appropriate State or local entity.
    Fiscal control and accountability provisions must be 
included to the satisfaction of the Board along with a 
description of all non-federal funds needed to carry out the 
eligible Federal financial assistance programs included in the 
plan.
    Section 6(d) spells out the application procedures. The 
application (which includes the plan) must be sent to each 
State and local government directly affected by the plan at 
least 60 days before submitting the plan to the Board. After 
the Governor, affected State agency head, State legislature and 
local chief executive have a chance to review the plan, they 
may within 60 days of receipt, prepare comments, grant or make 
commitments to grant State or local waiver requests, and submit 
these comments and commitments back to the applicant. The 
applicant may then submit the plan to the Board with any 
changes it deems necessary based on this response.
    Section 6(e) ensures maintenance of the current tribal-
Federal relationship.
    Section 6(f) ensures that disapproval of a plan by the 
Board does not affect the eligibility of an applicant to 
receive federal grants.
    Section 6(g) explains that S. 88 may not, in any way, 
preempt or supersede State or local law. Current programs 
established to administer Federal financial assistance at the 
State or local level may not be altered using S. 88 unless 
authorized by the entity with jurisdiction over those programs. 
If a local school district applies for approval of a 
flexibility plan to alter that district's fiscal relationship 
with the State education agency, that plan cannot be approved 
unless the State education agency approves. If a Governor 
submits a flexibility plan which alters the manner in which a 
city implements Federal financial assistance of which the city 
is a grantee, that plan is not eligible for approval unless the 
city agrees.

Section 7. Review and approval of flexibility plans and waiver requests

    Section 7(a) states that regardless of how many plans the 
Board receives each year, it is required to review only the 
first fifty. This allows the possibility that at least one plan 
from each State may be reviewed.
    Priority is given to Empowerment zone eligible areas 
because they have some experience in addressing complex 
community needs with comprehensive assistance. The Board shall 
also give priority consideration to plans that exhibit 
significant State and local support, as indicated by State or 
local waivers already included in the plan. The Board may 
establish any additional criteria to use to review 
applications.
    Section 7(b) ensures that an applicant be notified, in 
writing, of the Board's receipt of an application for approval. 
The Board then has 120 days to approve and disapprove of a plan 
unless either the Board requires more information or the 
applicant requests additional time to modify its application. 
The Board must notify an applicant in writing of its decision 
within 15 days of approving or disapproving an application and 
must include any reasons for disapproving the application 
therein.
    Section 7(c) describes the conditions for approval of a 
flexibility plan. The Board may approve an application if the 
plan improves ``* * * the effectiveness and efficiency of 
providing benefits under eligible Federal financial assistance 
programs included in the plan * * *'' This provision requires 
that the benefits a Federal financial assistance plan provides 
prior to a flexibility plan continue to be provided.
    Similarly, the Board shall approve a plan if it determines 
that the services provided by the eligible Federal financial 
assistance programs of the plan, prior to the plan's approval, 
would be improved by implementation of the flexibility plan. 
Before approval, the applicant shall have considered the effect 
implementation of the plan will have on programs not included 
in the plan.
    To secure Board approval, eligible applicants also must 
have developed or be developing data bases, planning, and 
evaluation processes for determining whether the implementation 
of the plan has been successful. If a plan does not describe 
how performance is to be measured, the plan will not be 
approved. The goals and purposes of each Federal financial 
assistance program included in the plan must be retained as a 
condition of plan approval.
    The Board may not approve plans that increase spending or 
provide assistance to a qualified organization without its 
express consent. The Board shall determine how long a plan is 
effective, but in no case can such a determination be for a 
period exceeding five years.
    Finally, if the Board has received at least a commitment to 
grant all necessary State or local waivers, and if grant funds 
are not used to supplant non-Federal funds or to meet 
maintenance-of-effort requirements, a plan may be approved.
    Section 7(d) describes the Memoranda of Understanding that 
must be reached before final approval of a plan. The applicant 
and Board must reach agreement as to the contents of the plan, 
the waivers being granted (if any) by the agency head, the 
State, local or tribal requirements (if any) being waived, the 
total amount of funds provided in the grants the plan includes, 
and the criteria upon which the plan will be evaluated.
    Section 7(e) discusses the limits on confidentiality 
requirements required by the plan. The Board may not impede the 
exchange of information needed for the design of or provision 
of benefits provided under the plan.
    Section 7(f) explains the waiver requirement process. For 
purposes of this Act, only statutes that establish Federal 
financial assistance programs may be considered for waivers. 
Non-grant, or cross-cutting statutes that, by their very nature 
affect every Federal financial assistance program, are exempt 
from being waived under this Act. The scope of S. 88 is limited 
to allow only for the waiver of Federal statutory and 
regulatory requirements that are solely part of Federal 
financial assistance programs.
    If the waiver is necessary for implementation of the plan 
and the Board has not disapproved the waiver, the waiver may be 
granted by the Federal agency head with jurisdiction over the 
program. The duration of the waiver may be established by the 
affected agency head.
    Waivers may never be granted for requirements that enforce 
any Constitutionally, or certain statutorily, secured rights.

Section 8. Implementation of approved flexibility plans

    Section 8(a) states that benefits provided by eligible 
financial assistance programs in approved plans must be 
implemented in accordance with the plan.
    Section 8(b) allows the head of Federal agencies to provide 
special assistance to support the implementation of a 
flexibility plan.
    Section 8(c) requires that applicants submit reports and 
cooperate in audits of the approved flexibility plan. Approved 
applicants must periodically evaluate the plan and its effects 
on individuals who receive benefits under the plan, communities 
in which those individuals live, and the costs of administering 
the Federal financial assistance programs included in the plan. 
A report is required shortly after the end of the plan's first 
effective year to evaluate the plan and compare its 
implementation with criteria included in the contents of the 
plan.
    The Board shall terminate the plan if its goals are not or 
likely will not be met, the approved applicant cannot meet the 
necessary commitments, or fraud and/or abuse has been detected. 
Similarly, waivers may be revoked if the necessary waiver 
criteria are not met or the plan is terminated. In either case, 
written notice of revocation must occur.
    Section 8(d) requires that a final report be prepared by 
the approved applicant to evaluate the successes and 
shortcomings of the plan and describe its effect on the 
individuals who received benefits under the plan.
    Section 8(e) ties the waiver of provisions of grant 
agreements to the availability of funds.

Section 9. Technical and other assistance

    Section 9(a) authorizes the Board to provide or direct the 
provision of technical assistance for the development, design 
or implementation of a flexibility plan. Applicants must 
describe the flexibility plan being developed and make several 
additional assurances to the Board.
    Section 9(b) allows special assistance to be provided to 
small governments which may lack the resources of larger 
communities to create a flexibility plan.
    Section 9 (c) and (d) allow Federal agencies to detail or 
assign staff to the Board as well as utilize interagency 
financing for the purposes of this Act.

Section 10. Reports by Board; Director

    Section 10(a) requires the Board to submit to the President 
and Congress a list of all statutory and regulatory 
requirements which are most frequently waived.
    Section 10(b) requires that after repeal of this act, the 
Director report on the progress of the responsibilities it was 
given in section 5(d) regarding reporting simplification.
    Section 10(c) directs the Board, in consultation with the 
Director and Federal agencies to report on the effectiveness of 
flexibility plans.

Section 11. Repeal

    Section 11(a) repeals this bill on September 30, 2001.
    Section 11(b) states that after this Act is repealed, its 
provisions shall still apply to any plan in effect at that 
time.

Section 12. Delivery date of Federal contract, grant, and assistance 
        applications

    Section 12 provides that the Director of OMB shall direct 
all Federal agencies to develop policies that deem the postmark 
date of applications for Federal contracts, grants, and other 
assistance to be the date of application.

                  vi. regulatory impact of legislation

    Pursuant to the requirements of paragraph 11(b) of rule 
XXVI of the Standing Rules of the Senate, the Committee has 
considered the regulatory impact of S. 88. The legislation is 
designed to reduce the effect of certain types of Federal 
regulations on State and local governments and will have no 
adverse impact on the public:
          (1) Regulatory Impact--The legislation will impose no 
        regulations on individuals or businesses;
          (2) Economic Impact--The legislation will have no 
        economic impact on individuals or businesses;
          (3) Privacy Impact--The legislation will have no 
        privacy impact on individuals; and
          (4) Paperwork Impact--The legislation does not 
        require the creation of any additional paperwork from 
        regulations promulgated pursuant to its provisions.

                   vii. cost estimate of legislation

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, May 30, 1996.
Hon. Ted Stevens,
Chairman, Committee on Governmental Affairs, U.S. Senate, Washington, 
        DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
reviewed S. 88, the Local Empowerment and Flexibility Act of 
1996, as ordered reported by the Senate Committee on 
Governmental Affairs on May 16, 1996. We estimate the enacting 
S. 88 would increase the cost to the federal government to 
review state and local plans for integrating federal and 
nonfederal programs and funding. Depending on the number and 
complexity of these plans, the additional cost could be 
significant; however, we are unable to estimate the extent of 
the increase. Any increase in federal spending would be subject 
to the availability of appropriated funds. Because the bill 
would not affect direct spending or receipts, pay-as-you-go 
procedures would not apply.
    Bill purpose. S. 88 would statutorily establish the 
Community Empowerment Board; it would be comprised of the heads 
of 19 departments and agencies. (The Board has already been 
created by the President; S. 88 would require its existence by 
statute, and would broaden its role.) The Board would approve 
or disapprove state and local plans to integrate and administer 
federal and nonfederal programs for a period of up to five 
years. S. 88 would prohibit the Board from approving any plan 
that would result in an increase in federal spending. The bill 
and its provisions would terminate on September 30, 2001.
    As part of its plan, a state or locality could request that 
an agency waive the requirements of a federal statute or 
regulation, thus potentially reducing a regulatory burden while 
enhancing its flexibility in administering the consolidated 
programs. Agencies would have the authority under S. 88 to 
waive any requirement that does not serve to enforce a 
constitutional or civil right.
    Federal budgetary impact. The President established the 
Community Empowerment Board to assist with the implementation 
of the Empowerment Zone and Enterprise Communities program 
included in the 1993 Omnibus Budget Reconciliation Act (OBRA). 
S. 88 would broaden the Board's role and authority to include 
proposals to integrate programs in areas other than community 
development and allow for the waiver of certain statutory 
requirements.
    Because the Board could not approve a plan that would 
increase federal spending, S. 88 would not affect direct 
spending. However, by significantly expanding both the Board's 
authority and the number of potential petitioners--the Office 
of Management and Budget estimates that about 19,000 local 
communities would be eligible--the bill would increase the 
costs to the federal government of reviewing plans submitted by 
state and local governments. In the budget submitted for fiscal 
year 1997, the President requested $1 million for the Board; 
that amount would provide the funding for a staff of eight 
full-time employees.
    Because CBO cannot predict the number of additional plans 
that would be submitted for review, or the amount of additional 
time needed to review requests for waivers from existing 
statutes, we are unable to estimate the extent that costs would 
increase under S. 88. Based on the prior experience of the 
Community Empowerment Board, we expect that for some agencies, 
such as the Departments of Housing and Urban Development and 
Health and Human Services, the additional costs could be 
significant.
    S. 88 also could result in some savings in administrative 
costs to the federal government. Enacting the bill encourage 
communities to consolidate their efforts related to multiple 
federal programs. As a result, having the state or local 
government primarily responsible for monitoring and 
administering the consolidated program could reduce the need 
for some federal administrative activities. But because we do 
not know the type or number of plans that would be approved 
under S. 88, we cannot estimate the extent of such potential 
savings.
    Finally, S. 88 also would require that agencies accept 
applications for federal contracts, grants, and other 
assistance that are postmarked by the application deadline. 
Currently, some agencies refuse to accept applications received 
beyond this date. Because the provision would only affect the 
procedure by which some agencies allocate these funds and not 
the amount spent, CBO estimates that it would result in no 
significant cost to the federal government.
    In sum, we expect that costs would increase under S. 88, 
but at this time, CBO cannot estimate the likely level of the 
net increase. Funds for any increase would be subject to the 
availability of appropriations.
    Mandates statement. S. 88 contains no intergovernmental or 
private-sector mandates as defined in Public Law 104-4, and 
would impose no direct costs on state, local, or tribal 
governments. The bill would provide these governments with 
additional flexibility in using and consolidating federal 
financial assistance. Such flexibility could lead to 
significant savings in the administration of some federal grant 
programs.
    Previous CBO estimate. On May 17, 1996, CBO prepared a cost 
estimate for H.R. 2086, the Local Empowerment and Flexibility 
Act of 1996, as ordered reported by the House Committee on 
Government Reform and Oversight on April 24, 1996. The bills 
are very similar, and this estimate is nearly identical to the 
estimate provided for H.R. 2086.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are John R. 
Righter, for the federal costs, and Theresa Gullo, for the 
state and local costs.
            Sincerely,
                                         June E. O'Neill, Director.
         VIII. ADDITIONAL VIEWS OF SENATOR CARL LEVIN ON S. 88

    The purpose of S. 88 is a sound one--to make the hundreds 
of federal categorical grant programs which we now have more 
responsive to the needs and unique characteristics of the 
communities they are intended to serve. We know that from 
Washington, we cannot address or anticipate all the 
peculiarities found in the various regions of this great 
country or even the differences between towns just 15 miles 
apart. We create federal programs to meet real needs, but we 
know those needs are not the same across-the-board. Lansing, 
Michigan, may have a problem with teens in junior high school; 
Grand Rapids, Michigan, may be having a more serious problem 
with high school students. A federal program for at-risk youth 
may be structured in a way to prevent either city from 
targeting their grant funds in the way that makes the most 
sense. The restrictions we set in our federal programs can 
defeat the very purpose of the programs when faced with the 
unique features of a local community.
    This bill is intended to get around some of those problems 
without destroying the important controls we've placed on the 
use of federal taxpayer monies. As trustees of the federal 
taxpayer dollar, we simply can't give away federal funds 
without controls. So we establish programs that have specific 
purposes, strict limits on how federal funds can be used, 
federal standards that must be met, and auditing and oversight 
requirements to avoid waste or fraud. The restrictions are not 
imposed to make the work of local communities harder, though 
they may have that effect; they're required because we are 
trying to be responsible with the taxpayer money we are 
spending.
    Although the motive for these requirements is a good one, 
the outcome can often be frustrating and self-defeating. This 
is particularly true, now that there are over 600 categorical 
grant programs and any one local community may be administering 
several such programs, with similar goals but different 
requirements. That's where this bill comes in. It is an attempt 
to allow local communities participating in several federal 
categorical grant programs to make the best use of federal 
taxpayer dollars by consolidating administration and 
coordinating service delivery where appropriate.
    S. 88, if appropriately amended, would not turn categorical 
grant programs into block grants or strip away important 
restrictions in categorical grant programs in a wholesale 
manner. Rather it is an attempt to allow communities to develop 
a plan for the more effective administration of the relevant 
categorical grant programs they want to coordinate, identify 
the specific problems they have with specific categorical grant 
programs in implementing that plan, and then seek from the 
appropriate federal agencies waivers of specific regulatory or 
statutory provisions that would obstruct the implementation of 
the plan.
    Because I support the goal of this legislation, and because 
as reported by the committee, the waiver authority is limited 
to the statutory and regulatory requirements of just the 
categorical grant programs themselves, I voted to report S. 88 
to the full Senate. However, I also stated at the time that I 
could not support its passage in the Senate if several issues 
were not addressed. I offered amendments on two of these issues 
in Committee but those amendments were tabled.
    There are eight outstanding issues that the bill as 
reported fails to address and which I believe are essential 
before I can support the bill's passage on the floor. I hope 
the sponsors of this bill will incorporate these amendments 
before the bill is presented to the full Senate. They are as 
follows:
          1. Clarification that environmental, labor, public 
        health or safety standards within a categorical grant 
        program are not subject to waiver.--While the scope of 
        the statutory waiver in the bill as reported is limited 
        to just the provisions of the categorical grant 
        programs themselves, many of the categorical grant 
        statutes also have important environmental, labor and 
        public health or safety protections in them that 
        shouldn't be waived. For example, there are numerous 
        categorical grant programs embodied in the Clean Air 
        Act, and under the bill as reported, any provision of 
        the Clean Air Act could possibly be waived. We need to 
        be clear that the standards applicable to grant 
        programs, either because they are in the grant statute 
        or incorporated by reference, are not waivable.
          2. Clarification of the role of the Board and the 
        agency heads.--Statutory and regulatory waivers should 
        be approvable only by the head of the agency with 
        jurisdiction over the relevant categorical grant 
        program. Similarly, the relevant agency head should be 
        able to revoke any waivers and should be the party to 
        enter into the Memorandum of Understanding with the 
        plan participants. These responsibilities should not 
        lie with the Community Empowerment Board.
          3. No judicial review of any action by the Board.--
        The Community Empowerment Board is an interagency body 
        that serves largely in a coordinating capacity. It 
        would be inappropriate to have the work of the Board 
        subject to judicial review. Any judicial review 
        provisions under the categorical grant programs, 
        themselves, should remain unaffected.
          4. No plan approval if it would result in the use of 
        funds of a categorical grant program in a manner 
        inconsistent with the goals or purposes of that 
        program.--This is a very important requirement. Limited 
        use of funds between or among categorical grant 
        programs with similar goals and purposes should be 
        permitted, but the bill should clearly prohibit the use 
        of funds for a purpose not in accordance with the 
        purposes of the categorical grant program. For example, 
        grant money for an immunization program should not be 
        able to be used for job training. Local flexibility 
        should not be an excuse for ignoring or defecting the 
        federal purpose of these categorical grant programs. In 
        addition, the bill as reported suggests that the 
        commingling of funds between or among categorical grant 
        programs is a precondition or requirement for plan 
        approval. Not every plan may require such a combination 
        of funds, and it shouldn't, therefore, be suggested 
        that it is a necessary element of a flexibility plan.
          5. Improving the process for the approval of plans 
        and resolving the number of plans subject to 
        approval.--The bill as reported would require a minimum 
        of 50 plans to be reviewed by the Board each of the 5 
        years of the statute. A plan could be approved in the 
        5th year and allowed to continue for an additional 5 
        years although the statute itself, including the 
        provisions for evaluation of the plans, would have 
        expired. A better approach would be to use the first 
        two years of the five year life of the statute for the 
        purpose of preparing, reviewing and approving and 
        unlimited number of flexibility plans, and having a 
        deadline by which the approved plans are put in effect 
        for three to five years and then evaluated at the end 
        of that period.
          6. Identify current beneficiaries of categorical 
        grant programs included in the flexibility plan and the 
        future beneficiaries if the plan were implemented.--
        Each plan should be required to identify the current 
        beneficiaries of the categorical grant programs 
        included in the plan, how they will be affected by the 
        plan, and any new beneficiaries anticipated because of 
        the plan.
          7. A requirement that the plan meet the goals and 
        purposes of the categorical grant programs contained in 
        the plan.--Similar to the concern in number 5, above, 
        an applicant for a flexibility plan should be required 
        to show that the plan will continue to meet the goals 
        and purposes of the categorical grant programs 
        addressed in the plan in a more efficient and effective 
        way.
          8. Some guarantee that the state and local entities 
        currently involved in each of the categorical grant 
        program in the plan will continue to serve in the same 
        capacity under the plan, unless each such entity agrees 
        to the change proposed in the plan.--States should not 
        be able to use a plan to usurp a previous funding 
        source for local community, and a local community 
        should not be able to change the role of the State, 
        unless the parties agree to that.
    The goal of flexibility in the administration of federal 
categorical grant programs is a worthy one. S. 88 is on the 
right track to create a demonstration program that could make 
that goal a reality. With a number of important changes, I 
could support this legislation on the floor of the Senate.

                                                        Carl Levin.
   IX. MINORITY VIEWS OF SENATOR GLENN ON STEVENS SUBSTITUTE TO S. 88

    I cannot support the legislation in its current form. While 
the bill incorporates a number of changes that have been 
negotiated in a bi-partisan fashion prior to markup, its scope 
remains too broad and its ultimate impact largely unknown. 
Furthermore, it contradicts the notion of legislative 
accountability in our system of government by delegating 
authority to the Executive Branch to waive many of our laws 
without Congressional approval. This broad shift of authority 
to the Executive disrupts the delicate balance of power 
intended by our Founding Fathers between the three branches of 
government. There are other problems with the legislation, but 
this one is the most serious.
    I would like to support a bill providing greater State and 
local flexibility in the administration of intergovernmental 
grant programs. We clearly have too many categorical grant 
programs carrying too much redtape. This redtape combined with 
the ``stovepipe'' approach by which many of these programs 
operate makes it difficult to coordinate the delivery of 
services at all levels of government. An accountable, well-
implemented waiver process could improve the administration of 
many grant programs as well as encourage innovation in the 
delivery of essential public services. However, the waiver 
process envisioned by this legislation should be tested first 
before being implemented on a more widespread basis.
    This is sweeping legislation. It covers hundreds of grant 
programs; dozens of laws; and billions of taxpayer dollars. In 
an effort to reduce ``one-size-fits-all'' Federal program and 
grant requirements, it establishes a generic, ``one-size-fits-
all'' Federal waiver process for all these different programs 
and laws without adequate understanding of how they will be 
affected by such a process. It is not surprising that we have 
such a limited understanding of the bill; we had only one 
hearing and we did not hear from a broad range of views at that 
hearing. Given its broad scope, I don't think we have truly 
explored what the impact of the bill might be, even with the 
changes that we have negotiated and incorporated in the 
substitute.
    My preference would be to enact this legislation on a pilot 
basis. We have over 600 different Federal grant programs to 
State and local governments, many of which have similar 
purposes but also contain conflicting and overlapping 
requirements that make program implementation in an integrated 
or coordinated way difficult. So the bill's goal of providing 
flexibility in order to improve performance in the delivery of 
services at the State and local level is a salutary one. 
However, rather than tackle the entire intergovernmental grant 
system at once, we should focus the scope of the bill on 
specific programmatic areas where grant flexibility is most 
needed. For example, housing and job training are two areas 
most frequently cited by State and local officials as being too 
numerous in number of grant programs and overly riddled with 
redtape. Bi-partisan proposals to consolidate and streamline 
grant programs in these areas have made significant progress 
toward enactment in this Congress. The Clinton Administration 
has also pushed for greater grant flexibility and 
consolidation, approving over 500 regulatory waivers in its 
Empowerment Zone/Empowerment Community program and proposing to 
consolidate 271 grant programs into 27 performance 
partnerships. Therefore, it seems logical that we focus the 
bill on these programmatic areas where there is strong 
consensus in the Administration, the Congress, and at the State 
and local level for greater flexibility, rather than trying to 
bite the whole apple all at once. We might also explore ways to 
make this bill more of a pilot by narrowing the window of 
opportunity during which plans may be submitted and sunsetting 
both the plans and the legislation by 2002. Currently, this 
bill operates on a 10 year horizon since 5 year plans can still 
be approved in the 5th year of the bill.
    Section 7(f)(3) is the only section in the bill that 
attempts to limit the scope of the bill. It is does this by 
prohibiting Federal agencies from approving flexibility plans 
that would waive civil rights or disabled rights laws. However, 
the bill does not exempt laws protecting the environment, 
public health and safety, and labor standards as has been 
proposed by the Administration, Senator Levin and myself. 
Advocates of the Hatfield bill have suggested that these laws 
are cross-cutting in nature and therefore not affected by the 
bill since the bill only applies to grant requirements. But I'm 
not confident that this is the case, especially since an 
amendment to make those exemptions explicit was rejected by the 
Majority in Committee markup in a 5 to 4 vote. Such exemptions 
are needed and important. For example, in environmental 
programs we provide grants to States and localities for 
wastewater treatment, for solid waste disposal, and for 
underground storage tank cleanup. It is my understanding that 
there are certain minimum public health and environmental 
standards that the grant recipients are required to follow in 
order to receive funding. Those standards could potentially be 
waived under flexibility plans authorized by this bill. In the 
area of public safety, we have certain requirements for States 
and localities to implement seat belt laws or drunk driving 
laws as a condition of receiving Federal highway dollars. While 
greater flexibility for State and local use of Federal 
transportation funds may be desirable in order to better meet 
local transportation needs, do we want to set up a process, for 
example, whereby structural safety requirements for bridge or 
airport construction can be waived? I think not.
    Furthermore, the bill is unclear as to whether it would 
allow agencies to approve the use of vouchers in existing grant 
programs when approving any flexibility plan that requested 
such a conversion. Clearly, the purposes of the bill emphasize 
flexibility in the administration of Federal grant programs, 
but that flexibility is so broadly construed as to provide 
substantial leeway to Federal agencies and the Board in 
reconfiguring those programs. For example, it is conceivable, 
under the authorities of this legislation, that the Department 
of Education could approve a flexibility plan that utilizes 
Federal education monies for private school vouchers, even 
though Federal law currently prohibits such use. This is an 
issue of considerable debate and controversy and should be kept 
separate from this legislation.
    I do not think that Senator Hatfield intends for the kind 
of waivers I just described to go through, nor do I think that 
most state and local governments would propose these kind of 
waivers. Still, when we write legislation, we always have to 
look out for the law of unintended consequences and to examine 
how to preclude worst-case scenarios from occurring. That 
brings me to my other area of major concern: accountability.
    In our system of government, the Congress is responsible 
for enacting our laws and the Executive Branch is responsible 
for implementing them. Those decisions are accountable, either 
indirectly through public election of the officials responsible 
for making them, or more directly through oversight by the 
judiciary. Accountability is shared by each of the three 
branches of government through a system of checks and balances. 
Under this bill, accountability is transferred from the 
Congress to the Executive Branch through a substantial shift in 
the delegation of power. The Executive Branch would be granted 
the authority to waive numerous Federal laws without any 
opportunity for Congress to review those decisions. I had 
proposed that any statutory waivers approved by the Executive 
Branch must be ratified by the Congress through a ``fast-
track'' legislative process. Unfortunately, this proposal was 
rejected, although I maintain that it is still relevant, 
particularly if the bill retains its broad scope.
    The bill is silent on the issue of accountability through 
judicial review and the bill advocates have yet to address this 
matter in any form at this point in the debate. In general, 
judicial review is used to ensure that Federal agencies 
faithfully implement our laws. However, judicial review must be 
carefully written and balanced when proposed in legislation. 
Otherwise, one may end up with costly and excessive litigation. 
It seems to me that an appropriate course of action might be to 
prohibit judicial review of the actions of the Community 
Empowerment Board (CEB) while allowing judicial review of the 
agencies' actions as provided or under existing law. In that 
way, we can avoid potentially entangling an entity in the 
Executive Office of the President in needless litigation while 
ensuring that agency decisions are judicially reviewable, but 
only as permitted under existing law so as not to open up any 
new causes of action to take agencies to court.
    In this bill, accountability issues not only need to be 
addressed through ensuring the proper roles of Congress and the 
judiciary, but also must be encompassed in the submittal, 
review, approval, and evaluation process that flexibility plans 
must go through. The legislation does place an emphasis on 
performance measurement in the flexibility plan process. 
Applicants must demonstrate through specific goals and 
performance measures how greater flexibility will allow them to 
improve the existing performance of the eligible Federal 
financial assistance programs proposed under the flexibility 
plan. These provisions are among the strong points of the bill 
and have been strengthened at the suggestion of my staff, 
although some of these provisions still need further refinement 
(See later comments).
    Allowing greater public input and comment into the plan 
development process is another way to increase accountability 
under this legislation. Section 6(b)(4) stipulates that 
applicants must include in their applications written 
documentation showing that there was significant public input 
into the development of the plan, including input from those 
who are beneficiaries under the plan as well as from those 
directly affected by its implementation. This provision was 
inserted at the suggestion of my staff and ensures that plans 
go through a thorough public vetting at the State and local 
level before coming to the Federal government for review. 
However, I also believe that plans should be judged by the 
Board and agencies on the level of public input into and 
consensus behind a plan. Therefore, similar language should be 
adopted under Section 7; otherwise, the Section 6(b)(4) 
requirement is meaningless. Furthermore, the plan development 
and approval process must also be a public process at the 
Federal level as well. Federal agencies should place an 
announcement in the Federal Register once a plan has been 
received for review, and then make that plan available to any 
member of the public at their written request. Unfortunately, 
this suggestion was not included in the substitute.
    Competition is a third means to ensure accountability. My 
staff proposed that applications be submitted to the CEB 
between January 1 and March 31 of the calendar year, with the 
CEB making final decisions on plan approval by no later than 
July 31. The logic behind this concept is that plans would be 
reviewed at around the same time, making it easier for the CEB 
and agencies to evaluate, compare, and rank similar proposals 
against each other and then approve those proposals that are 
the best within the pool of applications. Currently, the bill 
establishes a ``rolling'' process whereby proposals are 
submitted at any time during the calendar year, with the SEB 
and agencies then having 120 days to make a decision on plan 
approval or denial. This process is more ad hoc than a process 
that works on a calendar basis; thus, proposals are less likely 
to be evaluated in a competitive fashion.
    The final issue concerning accountability deals with how 
Federal funds are best protected from possible waste, fraud, 
and abuse in the implementation of flexibility plans. 
Unfortunately, even with enhanced safeguards and measures we 
have initiated through actions of this Committee in the past, 
the potential always exists for the mismanagement of taxpayer 
dollars. This is true not only on the federal level--and the 
Committee held numerous hearings under my Chairmanship exposing 
such problems--but at the State and local level as well.
    At the one Committee hearing on this bill, I referred to an 
investigation that has just been completed in my own home State 
of Ohio. In that case, officials of a local community action 
agency spent federal anti-poverty funds to lease and purchase 
new vehicles, among them a Corvette, for primarily their own 
personal use. Another recent audit found that a local entity 
was receiving federal money for programs which existed only on 
paper. Although both of these schemes were ultimately detected, 
it took several years. There was a breakdown at all levels of 
government. Audits and inspections that were supposed to be 
made on a periodic basis were not. And when they were, they 
were insufficient to prevent or detect the ongoing waste and 
mismanagement.
    It has been my concern that increased flexibility could 
potentially result in less accountability. I doubt any of us 
want this legislation to fail because of inadequate protections 
to guard the public purse. In order to succeed, a truly 
intergovernmental framework of cooperation in financial 
management and accountability must be realized. This would 
entail proper internal fiscal and accounting controls and 
objective performance measurements and evaluations. Compliance 
with the Single Audit Act and other grant management 
requirements is essential. While I do not want to impose 
unnecessarily rigid or duplicative requirements on States and 
localities--indeed, I would support alternatives that meet 
current standards but without the administrative burdens--
neither do I want to totally dispense with them in the name of 
flexibility.
    At my suggestion, the Deputy Director for Management of the 
Office of Management and Budget (OMB) asked the President's 
Council on Integrity and Efficiency (PCIE) to review the 
Administration's ``redlined'' version of S. 88. This was a 
revised draft of Senator Hatfield's original legislation, 
reflecting comments and input from other federal agencies, 
which OMB presented to the Committee for our consideration as 
we moved towards mark-up. The PCIE was tasked specifically to 
identify concerns regarding financial management and 
accountability issues affecting the use of federal funds and 
the achievement of national and local program goals. This 
review, which I found most helpful, along with OMB's response, 
are attached. It is a good general ``primer'' for anyone 
concerned with how to best preserve sound financial management 
controls as we proceed to offer State and local interests more 
flexibility in administering federal grants.
    The bill we have reported out is a different version of S. 
88 than the PCIE was asked to examine, and I am glad that it 
does incorporate some of the concerns they raised to the 
earlier ``redlined'' draft. Nonetheless, the legislation still 
falls short of all the protections I feel are necessary to 
ensure we will have sufficient financial management and 
accountability safeguards. We will need to do more work in this 
area. Indeed, I am pleased to note that OMB has pledged its 
commitment to address these remaining concerns, both in terms 
of supporting specific amendments to strengthen the bill or 
through subsequent implementing guidance or instructions.
    While scope and accountability are the two major concerns 
with this bill, there are other significant issues that are not 
resolved or only partly resolved.
    At the suggestion of my staff, a number of protections for 
State and local governments have been added to the legislation. 
The Board is now prohibited from pre-empting or waiving any 
State, local, or tribal law or regulation in the approval of 
any flexibility plan. In addition, the Board can not override 
any existing State or local administrative plan for the 
distribution of Federal funds, although this language still 
needs further clarification. Finally, the prescriptive 
Community Advisory Committee mandate has been removed, leaving 
State and local governments the flexibility to design their own 
mechanisms for receiving public input in the development of 
flexibility plans. However, the bill still contains overly 
burdensome reporting requirements for State and local 
governments and other applicants. They must submit a report 
annually to the Board for each of the 5 years a plan is in 
effect. My preference would be to scale this requirement back 
to submittal of just an interim report and a final report.
    In addition to the concerns that I have raised, both the 
Clinton Administration and others have commented about other 
problems in the bill that should be corrected. They included 
the following:
          Strengthen language that ensures Federal funds can 
        not be made fungible across unrelated grant programs.
          Establish agency primacy, rather than the Board, over 
        entering in MOUs as well as over the revocation of 
        waivers. Further clarify agency authority over the 
        granting of waivers.
          Provide the President flexibility to appoint other 
        Executive Branch officials to the CEB.
          In the Definitions section, clarify that the 
        legislation covers only discretionary grant programs 
        and does not apply to taxation or loan guarantees.
          Reconcile the roles of the CEB and OMB in 
        streamlining grant application paperwork and reporting 
        requirements.
          Clarify that cross-cutting requirements incorporated 
        by reference in grant programs cannot be waived.
          Require applicants to stipulate who may lose benefits 
        or services under a flexibility plan.
          Allow regional or metropolitan planning organizations 
        to submit plans.
          Establish a funding mechanism and/or specific 
        authorization for the CEB.
          Give preference for agency and Board review of plans 
        submitted under the EZ/EC program.
          Prohibit the waiver of matching fund requirements.
          Ensure that flexibility plans include performance 
        measures that are tied to Federal goals as well as 
        State, local, and tribal goals.
          Provide for the development of baseline data so 
        performance can be properly tracked as plans are being 
        implemented.
          Make plan performance measures consistent with 
        performance measures established under the Government 
        Performance Results Act.
          Reconcile whether a flexibility plan (or part) can 
        still go forward even if a waiver request is denied.
          Decide whether or not a Federal waiver can be granted 
        even if State and local waivers are pending or have 
        been denied.
          Set up a process whereby approved flexibility plans 
        can be amended in the out years as circumstances 
        dictate (reforms in existing Federal grant programs, 
        reduction or elimination of funds in those programs, 
        etc.).
          Clarify Board and agency roles in the evaluation 
        process of approved plans.
          Alter the maintenance of effort provisions so as not 
        discourage applicants from including related State and 
        local funds as part of any plan.
    This long list along with my earlier comments shows that 
the bill was marked up prematurely and without adequate 
hearings involving affected parties.
    The Administration, in a 5/16/96 letter from OMB Deputy 
Director for Management John Koskinen to Chairman Stevens (see 
attached), asked that the legislation be considered by the 
Committee at a later date so that the Administration would have 
time to review the substitute for changes it suggested as part 
of its ``redline.'' The letter was particularly critical of the 
House counterpart to S. 88 for making Federal civil rights, 
labor, health, safety, environmental, and educational 
protections subject to waiver.
    As I stated earlier, I believe that many of these problems 
could have been worked out had we had more hearings and greater 
time to deliberate within the Committee. While I cannot support 
the bill in its current form, it is my intent to work with 
Senator Hatfield, the Administration, and others to correct 
many of these problems so we can develop bi-partisan 
legislation that can overwhelmingly pass the Senate.

                                                        John Glenn.
                                ------                                

                 Executive Office of the President,
                           Office of Management and Budget,
                                      Washington, DC, May 16, 1996.
Hon. Ted Stevens
Chairman, Committee on Governmental Affairs, U.S. Senate, Washington, 
        DC.
    Dear Mr. Chairman: As you know, the Administration supports 
efforts to encourage innovation and entrepreneurship at the 
State and local levels. In a time of declining Federal 
resources, the granting of waivers and the providing of 
flexible funding streams are two ways to increase the impact of 
Federal programs. ``Local Flexibility'' legislation could 
become a useful tool to promote greater efficiency and 
innovation in intergovernmental service delivery programs.
    In Alice Rivlin's April 17, 1996 letter to Chairman Shays 
and you, she identified our major concerns with H.R. 2086, the 
version of local flexibility approved by the House Subcommittee 
on Human Resources and Intergovernmental Relations. The 
Administration was deeply troubled by the shift of focus in the 
House bill from affording flexibility in Federal assistance 
programs to making fundamental statutes, including important 
health, safety, labor, educational, financial, environmental, 
and civil rights protections subject to waiver.
    The amendment in the nature of a substitute, we understand 
will be offered by Senator Hatfield at the markup this morning, 
is a substantial improvement over the House bill. 
Unfortunately, since we only received the draft yesterday 
afternoon, neither the Federal agencies responsible for 
administering the over six hundred domestic assistance 
programs, nor affected States and communities, have had a 
chance to review the amendment. Therefore, we cannot support 
the substantially revised bill until these parties have an 
opportunity to assess whether the legislation as redrafted will 
work as intended.
    Some of the particular issues the agencies need to review 
are the impact of:
          The newly defined waiver authority, and in 
        particular, whether it is sufficiently bounded to 
        prohibit waiving fundamental cross-cutting statutes;
          The elimination of the list of ``exemptions,'' and 
        whether the bill opens-up to waiver important standards 
        specified in any of the numerous grant program 
        statutes;
          The new authorities and reporting requirements for 
        the Director of OMB;
        Tthe revised sequence and timing of events 
        (application, review, approval of plans, development of 
        the memorandum of understanding, approval of waivers, 
        etc);
        Tthe execution of the MOU by the CEB rather than the 
        agencies responsible for the grant programs; and
          Deletion of the authorization for a revolving fund to 
        enable agencies to underwrite the cost of the CEB's 
        coordination, outreach, review of plans, and technical 
        assistance.
    While we appreciate the substantial progress made within 
the last several days, we are concerned, that, without more 
thoughtful consideration by the responsible agencies and those 
affected by their programs, we will act in such haste that we 
may create problems that are not intended, but are nonetheless 
real. Therefore, we urge the Committee to delay markup to give 
those affected by the bill an opportunity to advise whether 
this statute will work effectively.
    We look forward to working with you to address these 
concerns and to develop a bipartisan bill that we can all 
support.
            Sincerely,
                                                  John A. Koskinen.
                                ------                                

                 Executive Office of the President,
                           Office of Management and Budget,
                                     Washington, DC, April 8, 1996.
Hon. June Gibbs Brown,
Vice Chair, President's Council on Integrity and Efficiency, Office of 
        the Inspector General, Department of Health and Human Services, 
        Washington, DC.
    Dear June: Thank you for the very timely and helpful report 
on S. 88, ``The Local Empowerment and Flexibility Act of 
1995.'' The report responds to my request that the President's 
Council on Integrity and Efficiency (PCIE) review the bill to 
identify any concerns regarding financial management and other 
accountability issues affecting the use of Federal funds and 
the achievement of national and local program goals.
    As you know, the Administration believes that such ``Local 
Flex'' legislation could help promote greater efficiency and 
innovation in intergovernmental service delivery programs. 
``Local Flex'' would provide an opportunity for State and local 
governments to propose plans to improve coordination of 
Federal, State, local, and non-profit funds and services, and 
to request waivers from Federal laws and regulations that 
hinder the implementation of those plans.
    To assist the Congressional Committees considering this 
legislation, OMB and the agencies developed a ``redlined'' 
redraft of the bill, indicating the changes necessary to 
accommodate our concerns with the bill as drafted. Your report 
concludes that our proposed ``redline'' revisions do indeed 
address many concerns that the PCIE had with S. 88 and 
recommends that we consider a number of further actions to 
clarify the importance of financial management and 
accountability. We agree with your suggestions and will address 
them as follows:
          1. Grants management common rule. Rules implementing 
        the legislation will require grantees to adhere to the 
        uniform administrative requirement for grants and 
        cooperative agreements, know as the grants management 
        ``common rule.''
          2. Tribal governments. In recognition of the wide 
        program consolidation authority already available to 
        tribes and possible conflicts with the Indian Self-
        Determination Act, we will not propose extending S. 88 
        to tribes.
          3. Local flexibility plan goals. We will propose that 
        the goals in local flexibility plans should be 
        ``specific'' rather than ``general.''
          4. Ceasing or reducing services or benefits. We will 
        suggest that the legislation be modified to require 
        applicants to ``explain'' the rationale for ceasing or 
        reducing services or benefits.
          5. Role of State governments. We will support changes 
        in the legislation to clarify that States will have the 
        opportunity to review, as appropriate, all plans 
        proposed by local governments.
          6. Monitoring and evaluation responsibilities. 
        Implementing procedures will explore using a 
        ``cognizant Federal agency'' concept to monitor and 
        evaluate local flexibility plans.
          7. Termination of a local flexibility plan. We will 
        urge that the legislation provide for terminating a 
        plan for fraud or abuse.
    In conclusion, I want to express my appreciation for the 
fine work done on this project by Jack Ferris and Tom 
Robertson. Their discussions with OMB staff, along with the 
observations and suggestions in the PCIE report, will be very 
useful when we develop implementing procedures and 
instructions.
    This has been another in a series of excellent PCIE 
projects and we look forward to continuing to work with the 
PCIE on similar matters in the future.
    Best wishes.
            Sincerely,
                                                  John A. Koskinen.
                                ------                                


        [From the President's Council on Integrity & Efficiency]

Memorandum for the Honorable John A. Koskinen, Deputy Director for 
        Management, Office of Management and Budget.
Subject: President's Council on Integrity and Efficiency--Review of 
        Office of Management and Budget's Draft Amendments to S. 88 
        ``The Local Empowerment and Flexibility Act of 1995.''
    This report is in response to your request that the 
President's Council on Integrity and Efficiency (PCIE) review 
the Office of Management and Budget's (OMB) draft amendments 
(hereafter referred to as the redline draft) to S. 88 ``The 
Local Empowerment and Flexibility Act of 1995.'' The objective 
of the PCIE review of the redline draft dated February 12, 
1996, was to identify any concerns that the PCIE had regarding 
financial management and other accountability issues affecting 
the use of Federal funds and the achievement of national and 
local program goals.
    The redline draft to S. 88 included several proposed 
amendments to the bill. Some of the most significant 
amendments:
          Revise the review and approval processes. The redline 
        draft establishes the Community Empowerment Board (CEB) 
        to approve and monitor local flexibility plans \1\ 
        submitted by State, local and tribal governments. It 
        also authorizes the CEB to develop criteria to select 
        proposed plans for detailed review, and extends the 
        time frames for review to 60 days for State Governors 
        and 120 days for the CEB.
---------------------------------------------------------------------------
    \1\ A local flexibility plan combines funds from Federal, State, 
local or tribal governments or private sources to address the service 
needs of a community.
---------------------------------------------------------------------------
          Increase the role of Federal agencies. The redline 
        draft requires that all requests for waivers of Federal 
        requirements be approved by the Federal agencies 
        responsible for administering the Federal programs 
        included in a local flexibility plan. It also requires, 
        as a condition of CEB approval, that each State, local 
        or tribal government and each qualified organization 
        that would receive financial assistance under a plan 
        enter into a memorandum of understanding with the 
        Federal agencies.
          Strengthen audit requirements. The redline draft 
        requires State, local and tribal governments to submit 
        audits required under the Single Audit Act of 1984 to 
        the CEB, a requirement not subject to waiver.
    While the redline draft of S. 88 addresses numerous 
concerns that the PCIE had with the bill, we have identified 
additional revisions that would further ensure accountability 
over the use of Federal funds and the achievement of national 
and local goals. As summarized below, the PCIE has concerns 
about financial management and accountability issues dealing 
with the need to: (1) require applicant governments to meet 
uniform financial management and accountability standards such 
as those found in the grants management common rule; (2) 
clarify procedures relative to the application, review and 
approval of proposed local flexibility plans; and (3) clarify 
procedures for the monitoring and evaluation of operating local 
flexibility plans.

The applicant governments should be required to meet uniform financial 
        management and accountability standards such as those found in 
        the grants management common rule

    The ``Uniform Administrative Requirements for Grants and 
Cooperative Agreements to State and Local Governments,'' 
generally referred to as the grants management common rule, 
provides sound financial management and accountability 
standards for State, local and tribal governments. Compliance 
with the common rule, which sets minimum standards without 
being overly prescriptive, should be specifically required of 
applicant governments either in the redline draft or in 
implementing instructions. (Page 6)

Procedures should be clarified for the application, review and approval 
        of proposed local flexibility plans

    Tribal governments already have wide program consolidation 
authority under the ``Indian Self Determination and Education 
Assistance Act.'' If OMB intends to propose including tribal 
governments under S. 88, the redline draft should: provide 
instructions as to how tribal governments are to apply for an 
approved local flexibility plan; clarify that S. 88 applies 
only to Federal programs not already covered by the Act; and 
exempt this Act from waiver in S. 88. (Page 7)
    The goals included in proposed local flexibility plans 
should be ``specific'' rather than ``general,'' and the CEB 
should be required to determine the reasonableness of the goals 
during the application review process. (Page 7)
    State, local and tribal governments proposing to cease or 
reduce services or benefits to groups of individuals under a 
local flexibility plan should explain the rationale for this 
action, similar to the explanation required in the redline 
draft for waivers of Federal requirements. (Page 8)
    The role of State governments in the application review 
process should be clarified to ensure they have the opportunity 
to review, as appropriate, all local flexibility plans proposed 
by local governments. (Page 9)

Procedures should be clarified for the monitoring and evaluation of 
        operating local flexibility plans

    The monitoring and evaluation responsibilities of Federal 
agencies and State governments should be clarified. Use of the 
``cognizant Federal agency'' concept may be particularly 
applicable in this situation. (Page 9)
    The conditions under which an approved local flexibility 
plan can be terminated by the CEB should be expanded to include 
fraud and abuse related issues. (Page 10)

OIG recommendations and OMB response

    In a draft report to OMB dated March 8, 1996, we made 
recommendations (page 11) that addressed the PCIE concerns with 
the redline draft. The recommendations were for OMB's 
consideration prior to submission of the redline draft to 
Congress. We also discussed another issue--the scope of S. 88--
which was also a concern of the PCIE (See Other Matters section 
of this report on page 12). While the broad scope of the bill 
may not be directly related to financial management and 
accountability issues, it may have an impact on the 
implementation of the bill and is, therefore, relevant to this 
review.
    On March 14, 1996, representatives of the Department of 
Health and Human Services' Office of Inspector General (HHS/
OIG) and OMB discussed the draft report. The OMB representative 
generally agreed with the recommendations, stating that the 
issues raised in the draft report point to a need to clarify 
the language in the redline draft or in the implementing 
instructions which are to be issued after enactment of S. 88.

                               background

    The ``Local Empowerment and Flexibility Act of 1995'' was 
introduced on January 4, 1995 by Senator Mark Hatfield as 
Senate Bill S. 88. An identical companion bill, H.R. 2086, was 
introduced on July 21, 1995 by Congressman Christopher Shays. 
The preamble of S. 88 states that it was intended ``to increase 
the overall economy and efficiency of government operations and 
enable more efficient use of Federal funding, by enabling local 
governments and private, nonprofit organizations to use amounts 
available under certain Federal assistance programs in 
accordance with approved local flexibility plans.''
    The S. 88 is substantially similar to a bill introduced in 
the 103rd Congress by Congressman John Conyers, H.R. 2856, 
``Local Flexibility Act of 1993.'' The bill was then 
reintroduced as the ``Local Empowerment and Flexibility Act of 
1994,'' and passed the Senate as ``Title XI of H.R. 820, 
National Competitiveness Act of 1994.'' The 1994 legislation, 
ultimately eliminated in conference, contained most of the 
features of the 1993 and 1995 bills, but was a demonstration 
program limited to no more than 30 local governments from no 
more than 6 States.
    The S. 88 and its earlier versions are consistent with the 
Administration's goal of increasing State and local flexibility 
in administering federally-funded programs. According to the 
September 1994 report of the Vice President's National 
Performance Review, this goal includes two efforts: the ``top-
down effort'' to ``consolidate a slew of separate Federal 
programs so they can provide funds for States and localities in 
broader categories,'' and the ``bottom-up effort'' to 
``increase State and local authority to spend Federal funds in 
the most effective way.''
    The current Administration has also made increasing use of 
statutory waivers that are available to the States. Under Aid 
to Families with Dependent Children (AFDC) and Medicaid, States 
may apply to the Secretary of HHS for waivers of statutory and 
regulatory requirements to implement approved ``demonstration 
projects.'' At present, 37 States are operating their AFDC 
programs under statutory waivers and 10 States are operating 
their Medicaid programs under statewide waivers. Moreover, the 
Administration has substantially shortened the time frame for 
considering waiver applications, by completing its review 
within 90 days after receipt.
    The S. 88 would greatly expand the use of waivers by 
allowing localities to design individually tailored ``local 
flexibility plans'' to consolidate Federal, State, local and 
private, nonprofit grant funds, and to waive statutory 
requirements that would impede implementation of such plans. In 
formulating the plans, no restriction is placed upon the 
particular funding source or program area that was initially 
intended for the funds. No restriction is placed upon the 
number of localities that may participate. Plans must be 
approved by a Federal Governmentwide ``Flexibility Council'' 
and implementation would be assisted locally by a ``Community 
Advisory Committee.'' The bill appears designed to exempt 
Medicaid, AFDC, and other ``entitlement'' programs. The Act is 
repealed on the date that is 5 years after enactment.
    Legislation similar in concept to S. 88, but more limited 
in scope, include the ``Goals 2000: Educate America Act,'' 
Public Law 103-227 (March 31, 1994), and the Empowerment Zone/
Enterprise Community (EZ/EC) program, enacted as Subchapter C 
of Title XIII of the ``Omnibus Budget Reconciliation Act (OBRA) 
of 1993,'' Public Law 103-66 (August 10, 1993).
    Section 311(e) of Goals 2000, creating ``educational 
flexibility demonstration programs,'' authorized the Secretary 
of Education to select six States for the purpose of delegating 
to the States themselves authority to grant waivers of both 
State and Federal education statutes and requirements. States 
are selected on the basis of applications that must demonstrate 
the quality and scope of ``educational flexibility plans,'' 
designed to foster comprehensive educational reform in the 
State.
    The EZ/EC program authorizes the Secretaries of Housing and 
Urban Development (HUD) and Agriculture to designate 95 
``enterprise communities'' and 9 ``empowerment zones,'' each of 
which must satisfy rules regarding size and population and be 
characterized by ``pervasive poverty, unemployment, and general 
distress.'' The law extends significant tax advantages to the 
designated areas and provides funding from HHS.
    You testified in support of S. 88, with reservations about 
certain aspects of the legislation, on December 5, 1995. In 
accordance with OMB Circular A-19, OMB has sought and received 
Executive agency comments on the bill, and has incorporated 
many of the comments in its redline draft to S. 88 dated 
February 12, 1996.

                       objectives of pcie review

    This report responds to your request that the PCIE review 
accountability issues raised by S. 88 and its implementation. 
The objective of the PCIE review of the OMB redline draft of S. 
88 was to identify any concerns that the PCIE has regarding 
financial management and other accountability issues affecting 
the use of Federal funds and the achievement of national and 
local program goals.
    The HHS/OIG was designated as lead agency for this PCIE 
assignment. By memorandum dated February 13, 1996, OMB provided 
the HHS/OIG with a copy of its redline draft dated February 12, 
1996. The HHS/OIG provided copies to OIGs from the following 
Departments: Agriculture, Commerce, Education, HUD, and 
Transportation. A copy was also provided the OIG of the 
Environmental Protection Agency. The OIGs were asked to comment 
on S. 88 and the redline draft.
    Comments received from the OIGs were incorporated into a 
draft report, which was then provided to the OIGs who had 
submitted comments. The information contained in this report 
represents a general consensus on the major concerns expressed 
by the OIGs.

                         result of PCIE review

    The PCIE believes that the redline draft addresses many of 
the PCIE concerns with S. 88. We have identified, however, 
additional actions that can be taken to further ensure 
accountability over the use of Federal funds and the 
achievement of national and local goals. The recommended 
actions deal with the need to: (1) require applicant 
governments to meet uniform financial management and 
accountability standards included in the grants management 
common rule; (2) clarify procedures for the application, review 
and approval of proposed local flexibility plans; and (3) 
clarify procedures for the monitoring and evaluation of 
operating local flexibility plans.

       uniform financial management and accountability standards

    The applicant governments should be required to meet 
uniform financial management and accountability standards 
included in the ``Uniform Administrative Requirements for 
Grants and Cooperative Agreements to State and Local 
Governments,'' which is generally referred to as the grants 
management common rule. The common rule imposes an acceptable 
degree of accountability on governments applying for the plans 
without being overly prescriptive.
    The grants management common rule was originally issued in 
March 1988, and subsequently codified in regulations by Federal 
agencies. For example, in HHS the common rule is found in 45 
CFR Part 92, while in the Department of Defense, it is found in 
32 CFR Part 33. The common rule provides uniform fiscal and 
administrative requirements applicable to all types of grants 
and cooperative agreements to State, local, and tribal 
governments. Uniform minimum requirements for financial 
management systems cover financial reporting, accounting 
records, internal controls, allowable costs, matching or cost 
sharing, source documentation and cash management. The grants 
management common rule also incorporates applicable cost 
principles (OMB Circular A-87 for State, local, and tribal 
governments, and OMB Circular A-122 for private nonprofit 
organizations), and includes reports, record retention and 
enforcement requirements.
    The redline draft (Section 7(c)(8) page 15 line 2) requires 
the applicant governments to include in a proposed local 
flexibility plan the fiscal control and related accountability 
procedures applicable under the plan. However, there is no 
mention of any minimum standards for these fiscal controls and 
accountability procedures. In discussing this issue, OMB 
representatives stated that they have every intention of having 
applicant governments comply with the grants management common 
rule, and that the rule is covered under Title II, Section 
503(b)(2)(c) of the Chief Financial Officers Act of 1990. The 
section cited deals with functions of the Deputy Director for 
Management (OMB) relating to grant, cooperative agreement, and 
assistance management. It does not refer directly to the grants 
management common rule.
    The PCIE believes that a requirement for applicant 
governments to comply with the grants management common rule 
needs to be further emphasized. This could be accomplished by 
either adding language in the redline draft (Section 7(c)(8) 
appears to be a suitable location for such language) or by 
emphasizing compliance in the implementing instructions to be 
issued after enactment of S. 88.

  THE APPLICATION, REVIEW AND APPROVAL OF PROPOSED LOCAL FLEXIBILITY 
                                 PLANS

    The redline draft revises provisions in S. 88 relative to 
the application, review and approval of local flexibility plans 
proposed by State, local and tribal governments. The PCIE has 
identified additional revisions that would further clarify the 
procedures dealing with: (1) tribal governments; (2) goals 
included in a local flexibility plan; (3) ceasing or reducing 
of services and benefits; and (4) the role of State governments 
in the application review process.

Tribal governments

    Tribal governments already have wide program consolidation 
authority under the ``Indian Self Determination and Education 
Assistance Act'' (hereafter referred to as the Act). If OMB 
intends to propose including tribal governments under S. 88, 
the redline draft needs to be revised.
    Although the S. 88 does not include tribal governments, the 
redline draft extends eligibility to them. If OMB believes that 
tribal governments should be covered under S. 88, the redline 
draft should be revised to: (1) provide instructions as to how 
tribal governments are to apply for an approval local 
flexibility plan as instructions in the redline draft (Section 
7(d) page 15 line 15) apply only to proposed local flexibility 
plans developed by one or more local governments; (2) clarify 
that S. 88 applies only to Federal programs not already covered 
by the Act; and (3) exempt the Act from waiver in S. 88.

Local flexibility plan goals

    The goals included in local flexibility plans should be 
``specific'' rather than ``general,'' and the CEB should be 
required to determine the reasonableness of the goals during 
the application review process.
    The S. 88 requires that the contents of a proposed local 
flexibility plan include ``specific'' goals, measurable 
performance criteria, and a description of how the plan is 
expected to attain the goals. The redline draft makes some 
language changes to the bill's provisions regarding goals. One 
change is that the plan would no longer be required to contain 
``specific'' goals but only ``general'' goals (Section 
7(c)(4)(A) page 13 line 17).
    The PCIE believes that OMB needs to revisit this issue. It 
appears as if this proposed change may not reflect an OMB 
intent to eliminate the need for ``specific'' goals in a local 
flexibility plan since the redline draft refers to ``specific'' 
goals in another section (Section 8 (c)(1)(C) page 19 line 21). 
In any event, it is our opinion that eliminating the 
requirement that applicants include ``specific'' goals in their 
local flexibility plans is a mistake. The less specific the 
goals are, the harder it will be to meaningfully evaluate the 
success of the plans.
    As part of the plan approval process, the redline draft 
(Section 8(c) page 18 line 20) requires the CEB to determine 
that the applicant government has or is developing data bases 
for measuring performance. The CEB must also determine that the 
plan will more effectively achieve the general goals of each 
Federal program included in it. There is no specific 
requirement that the CEB determine the reasonableness of the 
goals or performance criteria in the plan. The redline draft 
requires such a determination only when the CEB is considering 
terminating a local flexibility plan (Section 9(c)(3)(A) page 
32 lines 15 and 19).
    The reasonableness or soundness of goals and performance 
criteria should be an important factor in determining whether a 
proposed local flexibility plan should be approved, and this 
determination should be made part of the approval process. For 
the CEB to make a determination of reasonableness, however, 
local governments would have to provide some type of baseline 
data so that the CEB could compare past achievements under the 
Federal programs to anticipated achievements under the local 
flexibility plan.

Ceasing or reducing services or benefits

    State, local and tribal governments proposing to cease or 
reduce services or benefits to groups of individuals under a 
local flexibility plan should explain the rationale for this 
action, similar to the explanation required in the redline 
draft for waivers of Federal requirements.
    The S. 88 includes a provision which requires, as a 
condition of approval of a plan, a determination that the plan 
adequately ensures that individuals and families who receive 
benefits under covered Federal financial assistance programs 
included in the plan shall continue to receive benefits that 
meet the needs intended to be met under the program.
    The redline draft deletes this provision of S. 88 (Section 
8(c)(1)(G) page 20 line 13), and adds a new provision (Section 
7(c)(3)(B) page 13 line 12) which requires that the local 
flexibility plan shall identify the group of individuals, by 
service needs, economic circumstance, or other defining 
factors, who would cease to receive services or benefits under 
the plan, or receive fewer services or benefits.
    The PCIE recognizes that Federal financial assistance 
programs that provide benefits directly to a beneficiary or to 
a State as a direct payment to an individual are not eligible 
for inclusion in a local flexibility plan. It nevertheless 
appears that OMB envisions instances where State, local or 
tribal governments can make a conscious decision to cease or 
reduce services or benefits to groups of individuals. If this 
is OMB's intent, it should consider having applicant 
governments explain the rationale behind their decision. We 
noted that the redline draft adds a requirements (Section 
7(c)(6) page 14 line 20). We believe something similar should 
be required when services or benefits are to be halted or 
reduced.

Role of State governments

    The role of State governments in the application review 
process should be clarified to ensure they have the opportunity 
to review, as appropriate, all plans proposed by local 
governments.
    The S. 88 makes it very clear that local governments are 
required to submit proposed local flexibility plans to the 
State Governor for review. The Governor has 30 days to prepare 
comments on the plan, describe any State laws which must be 
waived, and forward the application for Federal review. If the 
Governor chooses not to comment, the local government can send 
the application directly to the Flexibility Council (replaced 
in the redline draft by the CEB). The redline draft is not 
quite so clear.
    The redline draft states that ``proposed local flexibility 
plans developed by one or more local government shall be 
submitted to directly affected state or local governments for 
approval or disapproval at least 60 days prior to submission to 
the Board'' (Section 7(d)(1) page 15 line 19). Using the word 
``or'' could lead some to interpret that local governments 
could opt to bypass the Governor's Office.
    The language in the redline draft should be clarified to: 
(1) indicate that local governments will, in every case, send 
proposed local flexibility plans to their State government or 
(2) describe the circumstances under which local governments 
are not required to submit proposed plans to their State 
government. The redline draft retains the S. 88 provision 
allowing local governments to send the applications directly to 
the CEB should the Governor fail to comment within a specified 
time frame. With this protection, the PCIE envisions that 
virtually all proposed plans from local governments should be 
first submitted to the State government for review and comment.

     monitoring and evaluation of operating local flexibility plans

    The monitoring and evaluation responsibilities of the 
Federal agencies and State governments should be clarified to 
ensure that governments at all levels realize that operating 
local flexibility plans are subject to review by Federal 
agencies and State governments that have programs in the plans. 
Also, the redline draft should be revised to permit the CEB to 
terminate local flexibility plans on the basis of fraud and 
abuse related issues.

Monitoring and evaluation responsibilities

    The monitoring and evaluation responsibilities of Federal 
agencies and State governments should be clarified. Use of the 
``cognizant Federal agency'' concept may be particularly 
applicable in this situation.
    The redline draft assigns monitoring responsibility to the 
CEB and requires State, local and tribal governments to adhere 
to the audit requirements of the Single Audit Act of 1984. The 
single audit requirement included in the redline draft, 
although a major addition to S. 88, is not a substitute for 
management oversight and program reviews by Federal agencies. 
Since the bill primarily focuses on approved performance goals 
as a measure of program effectiveness, there is a need for a 
review of the local government's system to account for 
performance measures and program achievement.
    The redline draft does not directly address the monitoring 
and evaluation roles of the Federal agencies and State 
governments. We note, however, that one section of the redline 
draft (Section 9(c)(3)(B) page 33, line 8) states that Federal 
agencies and State governments shall have a reasonable period 
of time to resume administration of Federal programs included 
in a local flexibility plan which is terminated by the CEB. The 
use of the word resume could be interpreted by some as meaning 
that Federal agencies and State governments relinquish 
administration of programs while the local flexibility plan is 
in effect.
    In discussing this issue with an OMB representative, we 
were assured that Federal agencies and State governments will 
retain their monitoring and evaluation responsibilities. We 
believe this needs to be further emphasized. As is the case 
with the grants management common rule, this emphasis can be 
accomplished by either adding language in the redline draft 
(the section dealing with memoranda of understanding seems a 
suitable location for such language) or by emphasizing the 
roles of the Federal agencies and State governments in 
implementing instructions.
    Included in the implementing instructions should be details 
on how monitoring and evaluation will be conducted at the 
Federal level. Several options are available. Since local 
flexibility plans may involve several Federal agencies, and may 
also move outside of the programmatic safeguards of each 
agency, the CEB could assume full responsibility for the 
monitoring and evaluation function. Another option would be to 
have the CEB request the Federal agency responsible for a 
particular program included in the plan to conduct the required 
review.
    A third option would be for the CEB to adopt the 
``cognizant Federal agency approach'' similar to the one now 
being used by the Federal Government at colleges, universities 
and State and local governments throughout the country. Under 
this approach, the CEB would designate a cognizant Federal 
agency based on the predominant amount of Federal funds in a 
local flexibility plan. That cognizant agency would assume the 
Federal role in monitoring and evaluating operating local 
flexibility plans in coordination with the CEB.
    This option seems ideal for S. 88 since many Federal 
programs could be included in a single local flexibility plan. 
Adoption of a cognizant agency concept could preclude 
duplicative reviews being made by numerous Federal agencies, 
and would facilitate the settlement of audits conducted under 
the Single Audit Act of 1984. The cognizant agency could ensure 
that the government audited has implemented the recommendations 
in the audit, and has corrected reported deficiencies.

Termination of a local flexibility plan

    The conditions under which an approved local flexibility 
plan can be terminated by the CEB should be expanded to include 
fraud and abuse related issues.
    The redline draft permits the CEB to terminate an approved 
local flexibility plan if, after consulting with the Federal 
agencies, the CEB determines that: (1) the goals and 
performance criteria included in the plan have not been met; 
(2) the goals and performance criteria are not sound and that 
the program also would not meet goals and criteria that are 
sound; and (3) the State, local or tribal government is unable 
to meet its commitments. These conditions under which 
termination is possible are specific, but not all inclusive. We 
believe that the CEB should be specifically authorized to 
terminate a local flexibility plan because of fraud or abuse 
related issues. This is consistent with a provision in the 
March 13, 1996 amendments to H.R. 2086 ``Local Empowerment and 
Flexibility Act of 1995.'' The H.R. 2086 was the identical 
companion bill to S. 88.

                    conclusions and recommendations

    The OMB redline draft addresses many of the concerns that 
the PCIE has with provisions in S. 88 over accountability for 
the use of Federal funds and the achievement of national and 
local goals. We continue to have concerns about financial 
management and accountability issues regarding: compliance with 
uniform financial management and accountability standards; 
certain procedures dealing with the application, review and 
approval of local flexibility plans; and the role of Federal 
agencies and State governments in the monitoring and evaluation 
of operating local flexibility plans.
    We, therefore, recommend that OMB consider the following 
actions:
          1. Further emphasize the requirement that applicant 
        governments must comply with the grants management 
        common rule. This can be accomplished either in the 
        redline draft or in the implementing instructions.
          2. If OMB intends to propose the inclusion of tribal 
        governments, the redline draft should be revised to: 
        provide instructions on how tribal governments are to 
        apply for a local flexibility plan; clarify that S. 88 
        applies only to those programs not covered by the 
        ``Indian Self Determination and Education Assistance 
        Act''; and exempt this Act from waiver.
          3. Clarify the language in the redline draft to show 
        that local flexibility plans must include ``specific'' 
        goals, and propose that the CEB specifically review the 
        reasonableness of the goals included in a plan prior to 
        approving the plan.
          4. Revise the redline draft to require that an 
        applicant government explain in the local flexibility 
        plan the rationale for ceasing or reducing services or 
        benefits to groups of individuals.
          5. Clarify the language in the redline draft to: (1) 
        indicate that local governments will, in every case, 
        send proposed local flexibility plans to their State 
        government; or (2) describe the circumstances under 
        which local governments are not required to submit 
        proposed plans to their State government.
          6. Emphasize that Federal agencies and State 
        governments retain their monitoring and evaluation 
        responsibilities for programs included in an operating 
        local flexibility plan. This can be accomplished either 
        in the redline draft or in the implementing 
        instructions.
          7. Revise the redline draft to permit the CEB to 
        terminate a local flexibility plan on the basis of 
        fraud and abuse related issues.

OMB response to recommendations

    On March 14, 1996, representatives of the HHS/OIG and OMB 
discussed the draft report. The OMB representative generally 
agreed with the recommendations, stating that the issues raised 
in the draft report point to a need to clarify the language in 
the redline draft or in the implementing instructions which are 
to be issued after enactment of S. 88.

                             other matters

    During our review of S. 88 and the redline draft, we became 
aware of an issue that, although not directly related to 
financial management or accountability, could impact on the 
implementation of the bill. The issue relates to the scope of 
S. 88, which is very broad, encompassing as it does thousands 
of local governments and hundreds of Federal programs with 
different goals and objectives. A single local flexibility plan 
consist of any number of Federal programs involving any number 
of Federal agencies, and there appears to be no limit on the 
number of local flexibility plans that can be submitted to the 
Flexibility Council (similar in purposes to the CEB established 
in the redline draft) for review and approval.
    The PCIE believes that effective reviews, particularly at 
the Federal level, of proposed local flexibility plans are 
essential since the intermingling of Federal funds within a 
plan poses an inherent risk that funds could be spent for 
purposes other than those intended by individual Federal 
program statutes. The PCIE noted, however, that the Flexibility 
Council responsible for the reviews at the Federal level was 
not funded under S. 88, and was dependent on Federal agencies 
for staff to carry out its functions. We were concerned that 
the flow of paperwork generated by local governments could 
potentially overburden the Federal and State review process, 
and could ultimately impact on the success of the bill's 
implementation.
    We noted that the redline draft made several revisions 
which affect the implementation of S. 88. On one hand, the 
redline draft broadens the bill's scope by extending 
eligibility to State and tribal governments (S. 88 applies only 
to local governments), and by redefining the term ``local 
government'' to include any combination of political 
subdivisions and local education agencies. On the other hand, 
the redline draft attempts to facilitate the implementation of 
the bill by not only extending the time frames for the 
completion of the Federal and State reviews but, more 
importantly, by allowing the CEB to be selective in what it 
reviews. According to the redline draft (Section 8.(a) page 18 
line 1) the CEB shall to the extent practicable accept for 
review no fewer than 50 local flexibility plans each year, and 
shall develop criteria to govern the factors it will consider 
in determining which plans it reviews. The redline draft also 
provides $1 million of funding for the CEB in Fiscal Year 1997 
and allows for additional funds to be obtained from Federal 
agencies for the remaining years of the bill.
    The PCIE believes the redline draft strengthens the 
implementation provisions of S. 88. We still have two concerns, 
however. One concern deals with the effect that the selection 
for review process could have on governments that submit 
proposed local flexibility plans only to find that their plans 
were not subject to a detailed review by the CEB. The other 
concern deals with the unlimited number of Federal programs 
that could be included in a single local flexibility plan. We 
believe that limiting Federal programs in a plan to those with 
a common purpose would facilitate the development of the plan, 
as the governments could focus on some of the 1,390 Federal 
assistance programs included in OMB's ``Catalog of Federal 
Domestic Assistance.'' It would also facilitate the evaluation 
of the plan. Without a central concept based on the similarity 
or program purposes, local governments could combine programs 
of very general scope, intermixing highway funds and safe 
drinking water programs, for example, thereby making it 
extremely difficult to determine whether Federal funds were 
used for the purposes intended.
    We discussed this matter with an OMB representative and 
raised the possibility of initially implementing S. 88 on a 
demonstration basis, restricting implementation to a limited 
number of governments and Federal programs with a similar 
purpose. We pointed out that the Senate took a somewhat similar 
approach in 1994 when it passed H.R. 820, ``National 
Competitiveness Act of 1994.'' Title XI of this Act (ultimately 
eliminated in conference) was a demonstration program limited 
to no more than 30 local governments from no more than 6 
States.
    The OMB representative believed that the redline draft, in 
effect, established a demonstration program in that: (1) the 
intent is to have the CEB review approximately 50 proposed 
local flexibility plans annually (OMB anticipates far fewer 
being received in the early years of the bill's 
implementation); (2) the bill would expire after 5 years; and 
(3) S. 88 requires the U.S. General Accounting Office to 
evaluate the bill's implementation. The OMB representative also 
indicated that implementing instructions would further narrow 
the focus of the bill, and the general objectives of the local 
flexibility plans approved under it.
    In our opinion, the instructions to be issued after 
enactment of S. 88 will be a key factor in the successful 
implementation of the bill. Not only should the instructions 
further focus the bill and the objectives of the plans, they 
should also make it very clear that the intent is to review 50 
proposed local flexibility plans annually. Once aware of this, 
applicant governments can further coordinate with the CEB and 
decide whether they want to spend resources to develop a 
proposed local flexibility plan.
    Any questions or comments on this final report are welcome. 
Please call me or have your staff contact Mr. Thomas D. 
Roslewicz, Deputy Inspector General for Audit Services, 
Department of Health and Human Services.

                                      June Gibbs Brown, Vice Chair.

                                
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