Status of Two Authorities Granted to the Department of Commerce's
Economic Development Administration (21-DEC-05, GAO-06-308R).	 
                                                                 
The Department of Commerce's (Commerce) Economic Development	 
Administration (EDA) Reauthorization Act of 2004 directed us to  
regularly review the implementation of two authorities granted to
the Secretary of Commerce: (1) allowing excess funds from	 
projects constructed under projected cost to be reinvested in new
or existing projects and (2) establishing a performance award	 
process for grant recipients that meet or exceed performance	 
measures established in connection with the grant. This report	 
(1) discusses EDA's authority to reinvest excess funds and	 
provides information on the portion of these funds EDA has had to
return to the U.S. Treasury and (2) describes the status of the  
performance award system and identifies some steps EDA could take
to develop a useful performance award system.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-308R					        
    ACCNO:   A43778						        
  TITLE:     Status of Two Authorities Granted to the Department of   
Commerce's Economic Development Administration			 
     DATE:   12/21/2005 
  SUBJECT:   Appropriated funds 				 
	     Awards						 
	     Cost analysis					 
	     Employee incentives				 
	     Evaluation criteria				 
	     Federal agencies					 
	     Federal funds					 
	     Funds management					 
	     Grant administration				 
	     Performance management				 
	     Program evaluation 				 
	     Policies and procedures				 
	     Cost underruns					 
	     No-year funding					 

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GAO-06-308R

December 21, 2005

The Honorable James M. Inhofe

Chairman

The Honorable Jim Jeffords

Ranking Minority Member

Committee on Environment and Public Works

United States Senate

The Honorable Don Young

Chairman

The Honorable James L. Oberstar

Ranking Democratic Member

Committee on Transportation and Infrastructure

House of Representatives

Subject: Status of Two Authorities Granted to the Department of Commerce's
Economic Development Administration

The Department of Commerce's (Commerce) Economic Development
Administration (EDA) Reauthorization Act of 20041 directed us to regularly
review the implementation of two authorities granted to the Secretary of
Commerce: (1) allowing excess funds from projects constructed under
projected cost to be reinvested in new or existing projects and (2)
establishing a performance award process for grant recipients that meet or
exceed performance measures established in connection with the grant. This
report transmits briefing slides we provided to committee staff on October
27, 2005.

As agreed with the committees of jurisdiction, because the authorities
came into effect on October 1, 2005-too recently to allow for a full
assessment-we limited our initial analysis to interviews with agency
officials and a review of the legislative history, appropriate budget
documents, and proposed regulations. We conducted our review from June
2005 through November 2005 in Washington, D.C., in accordance with
generally accepted government auditing standards.

This report (1) discusses EDA's authority to reinvest excess funds and
provides information on the portion of these funds EDA has had to return
to the U.S. Treasury and (2) describes the status of the performance award
system and identifies some steps EDA could take to develop a useful
performance award system.

United States Government Accountability Office

Washington, DC 20548

1Pub. L. No. 1808-373 (2004). The act directed us to report no later than
1 year after the date that this subsection was enacted, or no later than
October 27, 2005. As agreed, we fulfilled this requirement by providing
the enclosed briefing slides to you by that date.

Background

EDA provides two types of funding for construction projects: public works
and economic adjustment grants. Public works grants are designed to help
distressed communities attract new industry; encourage business expansion;
diversify their economies; and generate long-term, private sector jobs.
Economic adjustment grants help areas develop and implement strategies to
address structural economic problems resulting from sudden and severe
economic dislocation, natural disasters, and spending reductions related
to the closure of defense installations and military bases. In addition to
providing direct assistance, both types of grants are intended to leverage
local and private sector matching funds, sometimes as much as 50 percent
of the total project costs. Of EDA's $292 million in budget obligations
for 2005, just under three-fourths ($212 million) were for construction
grants funded under the public works and economic adjustment assistance
programs.

EDA published an interim final rule in the Federal Register on August 11,
2005, that included the two authorities. The rule, which went into effect
on October 1, 2005, gives Commerce's Assistant Secretary for Economic
Development the discretion to use excess funds and performance awards to
increase EDA's investment rate for projects to up to 100 percent of cost,
in some cases eliminating the need for matching funds. EDA has not yet
published a final rule and is in the process of incorporating revisions
from Congress on certain provisions of the interim final rule. According
to EDA officials, these revisions to the provisions are not applicable to
the two authorities. All changes to the provisions will be reflected in
the final rule.

EDA Has Been Able to Reinvest Excess Funds since Fiscal Year 2000

Before the EDA Reform Act of 1998, EDA, which was funded with annual
funds, was required to return to the U.S. Treasury all funds from
construction projects that were constructed for less than the projected
cost (cost underruns). The EDA Reform Act of 1998 modified EDA's
authorizing legislation (the Public Works and Economic Development Act of
1965, as amended) to permit EDA to retain funds recovered from projects
constructed under cost to improve the project, and not return those
particular funds, even though they were annual funds, to the U.S.
Treasury. Cost underrun funds that could not be used to improve the
project had to be returned.

Beginning in fiscal year 2000, appropriations language permitted EDA to
retain all program funds until the money was expended-that is, no-year
funding. However, according to EDA officials, after the agency started
receiving no-year funding, the agency's 1998 authorization legislation had
the unintended consequence of requiring EDA to return to the U.S. Treasury
cost underrun funds that could not be used to improve the specific
construction project, even though the funds were no-year funds. The 2004
authorizing legislation corrected this unintended consequence, and EDA may
now retain all cost underrun funding and use the funds for other projects.

EDA officials stated that between fiscal years 2000 and 2004 about $127.2
million of excess funds was reinvested. Of this amount, about $79.3
million (62 percent) was used to improve existing projects and about $47.9
million (38 percent) was reinvested in new projects. EDA officials also
said that between fiscal years 2000 and 2005, the agency returned about
$5.7 million of excess funds to the U.S. Treasury-$3.8 million in fiscal
year 2004 and $1.9 million in fiscal year 2005. In addition, EDA returned
about $6.7 million to the U.S. Treasury that was rescinded in fiscal year
2004 as part of an across-the-board cut in nondefense spending.

EDA Does Not Plan to Implement the Performance Award System in the Near
Future

EDA officials told us that the agency has not yet issued any performance
awards but was developing policy and procedures that would allow the
agency to offer such incentives. But the officials added that they did not
foresee the agency issuing any awards in the near future. They said that
the agency needed more time to refine the general criteria set out in the
interim final rule and noted that any changes would be reflected in the
final rule.

Under the new interim final rule, as amended, to qualify for a performance
award a grant recipient must be rated as meeting or exceeding certain
standards. 2 That is, recipients' projects must generate at least the
number of jobs and the amount of private investment that was initially
estimated and must meet the initial target dates that were set for
starting and completing the projects. The new rule gives Commerce's
Assistant Secretary for Economic Development discretion in determining
other performance characteristics. Performance awards would be issued
after the projects were closed out, which is a process that takes, on
average, about 3 years, and the amounts awarded could not exceed 10
percent of the original project costs. As part of previous analyses, we
found difficulties in estimating jobs and private investments both before
and after the projects were closed out. Some of these difficulties had to
do with limited data being available to measure the impact of construction
projects and inconsistencies on the part of some EDA officials in
verifying and reconciling initial estimates of projected jobs and private
investments with reported results.3 Clearly defined and supportable
criteria could improve the basis for granting performance awards, as well
as utilizing independent sources to verify estimates.

Agency Comments

We provided a draft of our briefing slides to EDA for review and comment.
They generally agreed with the briefing slides and provided technical
comments. We have incorporated their comments in this report where
appropriate.

                                   - - - - -

Copies of this report are being sent to the Assistant Secretary of
Commerce for Economic Development; the Director, Office of Management and
Budget; and other interested parties. We will also make copies available
upon request. In addition, the report will be available at no charge in
GAO's Web site at http://www.gao.gov.

2On December 15, 2005, EDA published certain amendments to the interim
final rule in the Federal Register.

3GAO, Economic Development Administration: Remediation Activities Account
for a Small Percentage of Total Brownfield Grant Funding, GAO-06-7
(Washington, D.C.: Oct. 27, 2005); Economic Development: Limited
Information Exists on the Impact of Assistance Provided by Three Agencies,
GAO/RCED-96-103 (Washington D.C.: Apr. 3, 1996); and Economic Development:
Observations Regarding the Economic Development Administration's May 1998
Final Report on Its Public Works Program, GAO/RCED-99-11R: Mar. 23, 1999).

If you or your staffs have any questions about this report, please contact
me at (202) 512-4325 or at [email protected]. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. Andy Finkel, Assistance Director; Roberto Pinero;
Emily Chalmers; and Tania Calhoun made key contributions to this report.

William B. Shear

Director, Financial Markets and

Community Investment

Enclosure

(250246)

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