Economic Development: Formal Monitoring Approaches Needed to Help
Ensure Compliance with Restrictions on Funding Employer
Relocations (10-SEP-07, GAO-07-1005).
Congress imposed restrictions on some federal programs to prevent
funding of business relocations. Congress expressed concerns
about state and local governments using federal funds to attract
jobs to one community at a loss of jobs to another and about
compliance with relocation restrictions. This report (1)
identifies large federal economic development programs that state
and local governments can use as incentives, (2) identifies which
programs contain statutory prohibitions on funding relocations,
and (3) assesses whether federal agencies had established and
implemented procedures to help ensure compliance with
prohibitions. To address these objectives, GAO searched federal
databases, reviewed relevant statutes and regulations, and
conducted limited testing of agency procedures.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-1005
ACCNO: A75927
TITLE: Economic Development: Formal Monitoring Approaches Needed
to Help Ensure Compliance with Restrictions on Funding Employer
Relocations
DATE: 09/10/2007
SUBJECT: Economic development
Employee incentives
Employee retention
Employment assistance programs
Federal aid to states
Federal funds
Federal/state relations
Local governments
Municipal governments
Relocation allowances
Program implementation
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GAO-07-1005
* [1]Results in Brief
* [2]Background
* [3]State and Local Governments Can Use a Variety of Large Feder
* [4]State and Local Governments Can Use Various Types of Federal
* [5]Use of Federal Funds as Business Incentives Appears to Be Mo
* [6]Nine Large Federal Economic Development Programs Have Nonrel
* [7]Nine Large Federal Economic Development Programs Contain Sta
* [8]Extent to Which Federal Agencies Had Established and Impleme
* [9]Agencies Had Eligibility Screening Procedures, but Focus on
* [10]Review of Applications or Plans
* [11]Requirements for Self-Certification of Compliance
* [12]Pre-Approval Third-Party Verification
* [13]Requirements for Written Statements of Compliance from
Busin
* [14]While Monitoring Is a Key Control for Helping to Ensure Comp
* [15]Conclusions
* [16]Recommendations for Executive Action
* [17]Agency Comments and Our Evaluation
* [18]HUD CDBG Entitlement and State Programs
* [19]HUD and USDA EZ/EC Programs
* [20]Labor WIA Adult, Dislocated Workers, and Youth Programs
* [21]SBA 504 Loan Program
* [22]USDA B&I Program
* [23]GAO Contact
* [24]Staff Acknowledgments
* [25]GAO's Mission
* [26]Obtaining Copies of GAO Reports and Testimony
* [27]Order by Mail or Phone
* [28]To Report Fraud, Waste, and Abuse in Federal Programs
* [29]Congressional Relations
* [30]Public Affairs
Report to the Chairman, Subcommittee on Interstate Commerce, Trade, and
Tourism, Committee on Commerce, Science, and Transportation, U.S. Senate
United States Government Accountability Office
GAO
September 2007
ECONOMIC DEVELOPMENT
Formal Monitoring Approaches Needed to Help Ensure Compliance with
Restrictions on Funding Employer Relocations
GAO-07-1005
Contents
Letter 1
Results in Brief 3
Background 6
State and Local Governments Can Use a Variety of Large Federal Programs to
Attract Businesses 8
Nine Large Federal Economic Development Programs Have Nonrelocation
Provisions, but Requirements Vary 14
Extent to Which Federal Agencies Had Established and Implemented
Procedures to Help Ensure Compliance with Nonrelocation Provisions Was
Limited 19
Conclusions 29
Recommendations for Executive Action 31
Agency Comments and Our Evaluation 32
Appendix I Scope and Methodology 34
Appendix II Description of the Nine Large Federal Economic Development
Programs with Nonrelocation Provisions 37
HUD CDBG Entitlement and State Programs 37
HUD and USDA EZ/EC Programs 40
Labor WIA Adult, Dislocated Workers, and Youth Programs 42
SBA 504 Loan Program 44
USDA B&I Program 44
Appendix III Comments from the Department of Labor 46
Appendix IV GAO Contact and Staff Acknowledgments 48
Tables
Table 1: Description of 17 Large Federal Economic Development Programs
That Offer Financial Assistance or Services That Can Be Used as Business
Incentives 9
Table 2: Job Loss and Other Statutory or Regulatory Requirements for Nine
Large Federal Economic Development Programs with Nonrelocation Provisions
15
Table 3: Timeline Showing Congressional Approval of Nonrelocation
Provisions for Nine Large Federal Programs 18
Table 4: Federal Agency Mechanisms to Screen for Compliance with
Nonrelocation Provisions 20
Table 5: Status of Federal Agency Mechanisms for Monitoring Compliance
with Nonrelocation Provisions, as of July 2007 26
Figures
Figure 1: Overview of CDBG Funding Streams for Economic Development
Projects Involving Businesses 39
Figure 2: Overview of EZ/EC Funding Streams for Economic Development
Projects Involving Businesses 41
Figure 3: Overview of WIA Adult, Dislocated Workers, and Youth Funding
Streams 43
Abbreviations
BLS Bureau of Labor Statistics
B&I Business and Industry Guaranteed Loan program
CBO Congressional Budget Office
CDC certified development company
CDBG Community Development Block Grant
CFDA Catalogue of Federal Domestic Assistance
CRS Congressional Research Service
EDA Economic Development Administration
EC Enterprise Community
EZ Empowerment Zone
EZ/EC Empowerment Zone/Enterprise Community
GSA General Services Administration
HHS Department of Heath and Human Services
HUD Department of Housing and Urban Development
IRS Internal Revenue Service
NETS National Establishment Time Series
SBA Small Business Administration
USDA U.S. Department of Agriculture
WIA Workforce Investment Act
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United States Government Accountability Office
Washington, DC 20548
September 10, 2007
The Honorable Byron L. Dorgan
Chairman
Subcommittee on Interstate Commerce, Trade, and Tourism
Committee on Commerce, Science, and Transportation
United States Senate
Dear Mr. Chairman:
State and local governments are estimated to spend billions of dollars
annually in business incentives--financial assistance, tax concessions,
and other benefits--in an effort to attract and retain jobs. State and
local governments can directly or indirectly use funds and program
services from a variety of federal, state, and local programs to induce
individual businesses to relocate, expand, or maintain their operations in
a state or community's jurisdiction. In response to concerns about state
and local governments using federal funds to attract jobs to one U.S.
community at a loss of jobs to another community, Congress began to impose
restrictions in the 1950s on some federal programs to prevent funds from
being used to relocate businesses.
In 1997, we provided an overview of eight major federal programs that
states and localities used at that time for economic development
purposes.^1 However, relatively little is known about how many other
federal economic development programs state and local governments
currently use as incentives to attract employers or about the extent to
which restrictions exist against using funds to support an employer's
relocation. You noted that in recent years the controversy about the costs
and benefits of using limited government funds to recruit businesses has
been growing and expressed concerns about efforts to help ensure
compliance with restrictions on the use of federal funds. The objectives
of this report are to (1) identify large federal economic development
programs that state and local governments can use as incentives to
businesses for attracting new jobs into their jurisdictions, (2) identify
which of these programs contain statutory prohibitions on using program
funds to relocate businesses, and (3) assess whether federal agencies had
established and implemented procedures to help ensure compliance with
these provisions.
^1GAO, Economic Development Activities: Overview of Eight Federal
Programs, [31]GAO/RCED-97-193 (Washington, D.C.: Aug. 28, 1997). In the
absence of a standard federal definition to describe economic development,
for this 2007 report we used a list of activities from another GAO report,
Rural Economic Development: More Assurance is Needed That Grant Funding
Information Is Accurately Reported, [32]GAO-06-294 (Washington, D.C.: Feb.
24, 2006). Thus, economic development as we define it includes the
construction and repair of infrastructure, such as buildings and roads;
direct financial support and technical assistance to businesses, including
job-training assistance; and tax expenditure programs that support these
activities.
To identify large federal economic development programs that state and
local governments can use in incentive packages for businesses, we
searched the General Services Administration's (GSA) online Catalog of
Federal Domestic Assistance (CFDA) for economic development programs that
CFDA reported as having budget obligations of at least $500 million.^2 We
also searched the Congressional Research Service's (CRS) 2006 Tax
Expenditure Compendium for economic development tax expenditure programs
with reported estimated tax revenue losses of $500 million or more for
fiscal year 2006.^3 We then narrowed the list according to criteria that
enabled us to identify the largest programs most likely to be candidates
as a business incentive. Further, we reviewed the Web sites for each of
the 50 states' economic development agencies to identify federal programs
typically marketed as business incentives. To identify the programs with
nonrelocation provisions, we reviewed relevant statutes and regulations
and focused on those programs that we identified as the largest based on
our review of CFDA and the CRS Tax Expenditure Compendium. To assess the
completeness of our search results, we interviewed representatives of
selected federal agencies, economic development trade associations, and
policy groups. To assess the extent to which federal agencies had
procedures in place to help ensure compliance with nonrelocation
provisions, we obtained documents from federal agencies that described the
procedures for helping to ensure compliance and then conducted limited
testing of these procedures (typically a nongeneralizable sample of 10
cases for each program) to determine their implementation. We did not
conduct an overall evaluation of the programs, evaluate how well the
programs served their intended purposes, or evaluate how nonrelocation
provisions affect the relative success of the programs in achieving their
intended purposes. We also did not address the impact these programs had
on development efforts by state and local governments. We interviewed
representatives of six federal agencies--Department of Labor (Labor),
Department of Housing and Urban Development (HUD), Department of
Agriculture (USDA), Small Business Administration (SBA), the Department of
Commerce's Economic Development Administration (EDA), and the Department
of the Treasury's Internal Revenue Service (IRS). In addition, we
interviewed academics, researchers, representatives of economic
development trade groups, and consultants that businesses hire to identify
and select new business locations (site-selection consultants). We
conducted our work in Washington, D.C., and San Francisco and Fresno,
California, from October 2006 through August 2007 in accordance with
generally accepted government auditing standards. Appendix I provides a
more detailed description of our scope and methodology.
^2The General Services Administration and Office of Management and Budget
maintain the CFDA database, which lists federal programs available to
state and local governments (including the District of Columbia);
federally recognized Indian tribal governments; territories (and
possessions) of the United States; domestic public, quasi public, and
private for-profit and nonprofit organizations and institutions;
specialized groups; and individuals. See appendix I for more information
on CFDA and how we used it in this report.
^3The Tax Expenditure Compendium is a biennial publication that provides
CRS estimates of revenue costs of individual tax provisions for the U.S.
Senate's Committee on the Budget. We used the 2006 Report (CRS, 109th
Congr., 2nd sess.; S. Prt. 109-072).
Results in Brief
We identified 17 large federal economic development programs that state
and local governments can use to attract and retain jobs. The 17
programs--which include grants, direct loans and loan guarantees, and tax
incentives for job training, infrastructure development, and business
financing--are administered by five agencies--HUD, Labor, USDA, SBA, and
IRS. State and local governments could combine federal economic
development funds from various programs with their own resources to
attract businesses. Based on our review of state economic development Web
sites, the programs that appear to be marketed more than others were HUD's
Community Development Block Grant (CDBG), SBA's 7(a) and 504 loan
guarantee programs, and IRS's tax-exempt private activity bond programs
(at least 19 states advertised each of these as incentives). The results
of our state Web site reviews were largely consistent with the comments of
the site-selection consultants with whom we spoke. While academic studies
indicate that differing definitions of incentives and the ability to
interchange funds at the state and local level make it difficult to
quantify the amount of federal, state, and local funds spent on business
incentives, the use of federal funds as incentives appears to be more
limited than the use of state and local funds. However, state and local
governments could use federal economic development funds to attract
additional investment or to free up their own funds for other purposes.
Academic researchers with whom we spoke estimated that state and local
governments spend from $20 billion to $50 billion annually on business
incentives, mostly in the form of tax incentives, such as property and
sales tax abatements. But the discretion that state and local governments
have over the use of federal economic development funds varies. For some
programs, such as SBA's 7(a) and 504 programs, third-party lenders and
nonprofit development corporations make funding decisions. Others, such as
Labor's Workforce Investment Act (WIA) and industrial development bond
programs, provide state and local governments with more control over how
to allocate resources to businesses. Finally, academic studies we reviewed
questioned the importance of business incentives in firms' decisions to
relocate, but according to the studies we reviewed and consultants with
whom we spoke, state and local incentives could influence relocation
decisions after businesses already had narrowed their choices.
Nine of the 17 programs that we identified prohibit using program funds to
relocate a business if the move would cause unemployment in the original
location. They are the two HUD CDBG programs, three Labor WIA programs, a
HUD Empowerment Zone (EZ) program, a USDA Empowerment Zone/Enterprise
Community (EZ/EC) program, a USDA Business and Industry (B&I) Guaranteed
Loan program, and SBA's 504 program (see app. II for a more detailed
description of the nine programs). The first seven are grant programs in
which a federal agency provides funds to recipients, such as state or
local governments, that, in turn, may provide funds to other entities,
which we refer to as subrecipients, to facilitate economic development.^4
The remaining two programs guarantee loans that third-party lenders and
nonprofit development corporations make. All prohibit the funding of
relocations that result in unemployment, but the amount of job loss that
triggers the nonrelocation provision differs by program. For example, in
six programs, a single loss would trigger the provision, but in the other
three programs, higher thresholds trigger the provision. The three
programs with higher thresholds also require applicants to exceed other
thresholds before triggering the provision, such as requiring that
relocations occur across defined geographic areas. For example, HUD's CDBG
program, consistent with its statutory requirement, prohibits funding for
a business that relocates to a different labor market. Recently, USDA, for
its B&I program, has requested but not obtained congressional removal of
the nonrelocation provision, saying enforcement of the provision was not
cost-effective given the few complaints received over the course of many
years.
^4For purposes of this report, subrecipients include nonprofit
organizations and businesses.
Federal agencies administering the nine programs with nonrelocation
provisions used various procedures, including screening applicants and
monitoring recipients, to help ensure compliance, but the extent to which
these procedures specifically addressed nonrelocation provisions was
limited. The two loan guarantee programs--USDA's B&I and SBA's 504
programs--emphasized screening procedures to help ensure compliance. For
example, both programs had written guidance and other mechanisms that
specifically addressed nonrelocation provisions. The emphasis on screening
for loan guarantee programs seemed appropriate given the structure of
these programs. While agencies administering the seven grant programs with
nonrelocation provisions also screened applicants, agency officials noted
inherent limitations in using screening mechanisms for grant programs. For
example, under grant programs, applicants (such as state and local
governments) do not always know at the time they apply for funds which
specific businesses later will seek and obtain assistance through the
program. Because of the inherent limitations of screening procedures for
grant programs, agencies administering grant programs primarily relied on
monitoring to help identify instances of potential noncompliance. However,
only one of the seven grant programs we reviewed--HUD's EZ program--had
developed written monitoring guidance specific to the nonrelocation
provision. Officials at all agencies stated that they have received few or
no complaints of noncompliance with nonrelocation provisions, and some
officials said that they do not consider noncompliance to pose a
significant risk to the programs. However, without structured guidance and
procedures in place to monitor compliance, agencies have limited assurance
that grant recipients and subrecipients are complying with statutory and
regulatory requirements and spending funds on allowable activities.
We are making recommendations in this report intended to provide Labor,
USDA, and HUD with greater assurance that fund recipients and, where
applicable, subrecipients are complying with nonrelocation provisions and
spending federal economic development funds on allowable activities. We
provided a draft of this report to Labor, USDA, HUD, SBA, Commerce, and
IRS for review and comment. Labor provided written comments that are
reprinted in appendix III. USDA's Acting Assistant Deputy Administrator
for Cooperative Programs provided oral comments on August 8, 2007. In its
written comments, Labor stated that the department concurred with our
recommendation and described actions to implement it. Specifically, Labor
said that the department is implementing two complementary strategies.
First, Labor said that it is developing a formal policy guidance letter
that will clarify allowable and unallowable uses of WIA funds for
economic-development-related activities. This guidance will specifically
address prohibitions related to the nonrelocation provision. Second, Labor
said that its draft Formula Grant Supplement to its Core Monitoring Guide
includes indicators of compliance along with each governor's
responsibility to determine which costs are allowable or unallowable under
WIA, including prohibitions against using WIA funds to encourage business
relocation and related restrictions. Labor stated that regional office
reviewers have extensively tested the draft Formula Grant Supplement and
that it expects the supplement to enter the final clearance process
shortly and be completed by December 31, 2007. In oral comments on our
report, USDA's Acting Assistant Deputy Administrator for Cooperative
Programs stated that USDA concurred with our recommendation and provided
us with documentation showing that the department is taking initial steps
to implement the recommendation. Labor, USDA, HUD, SBA, and IRS provided
technical comments that we have incorporated in the report where
appropriate. Commerce did not provide comments on the draft report.
Background
In 2000, the Council of State Governments reported that more than 40
states offered tax and financial incentives to businesses for activities
such as relocating, expanding, buying equipment, or creating and
maintaining jobs. The use of incentives to attract and retain businesses
has been an issue of debate for many years. Proponents maintain that
economic development incentives are an effective means by which states and
communities can compete for jobs. Opponents contend that the dollars spent
to provide incentives would be better used to support activities believed
to have more impact on a community's economic development, such as
improvements to infrastructure and investments in education to develop a
competitive labor pool.
While states and localities compete with one another to attract
businesses, some states and localities have attempted to curtail the use
of economic development funds to relocate jobs. According to two policy
groups promoting accountability in economic development, three
cities--Austin, Texas; Gary, Indiana; and Vacaville, California--and nine
states--Alabama, Connecticut, Florida, Iowa, Maryland, New Mexico, New
York, Ohio, and Wisconsin--prohibit using city and state resources,
respectively, to relocate jobs within their boundaries. For example, both
policy groups state that the Gary, Indiana, city ordinance prohibits tax
abatements for the relocation of existing jobs from outside the corporate
limits of the city. One of the groups also said that in Puerto Rico, the
governor may refuse any business application for tax incentives if doing
so would adversely affect the business' employees in any state in the
United States. Regional entities also have established formal and informal
agreements to curtail the competition for businesses and jobs within their
boundaries. These entities include the Metro Denver Economic Development
Corporation; the tri-county region comprising Broward, Miami-Dade and Palm
Beach counties in Florida; and Contra Costa and Alameda counties in
California.
In 2006, the total number of unemployed workers was 6.8 million in the
fourth quarter, compared to 145.6 million employed. According to the
Bureau of Labor Statistics (BLS), employers reported that a total of
894,739 workers lost their jobs because of extended layoffs in 2006 that
resulted from a variety of economic factors, such as bankruptcy and
reorganizations.^5 A BLS survey of employers found that 20,199 of these
losses (about 2 percent) occurred because of business relocations within
the United States, the majority across state lines. Another source--the
National Establishment Time Series (NETS)--uses proprietary Dun &
Bradstreet data on U.S. companies to track business relocations. According
to a representative of the company that maintains the NETS data, more than
2.8 million businesses have relocated since 1990 and about 100,000 of
these (or almost 4 percent) occurred across state lines.
A number of federal programs fund or support economic development
activities. In prior work, we identified activities that are directly
related to economic development--planning economic development activities;
constructing or renovating nonresidential buildings; establishing business
incubators; constructing industrial parks; constructing and repairing
roads and streets; and constructing water and sewer systems.^6 These
programs typically are available to applicants that include individuals;
local, state, territorial, and tribal governments; and nonprofit
organizations through loans, loan guarantees, and project and formula
grants. Appendix II provides a description of the nine federal economic
development programs that we identified as having nonrelocation
provisions, including information about program funding and how the
programs operate.
^5BLS collects these data under its Mass Layoff Statistics program using
each state's unemployment insurance database. Extended mass layoff events
consist of 50 or more initial claims for unemployment insurance from an
establishment during a 5-week period, with at least 50 workers separated
for more than 30 days. According to BLS, establishments with at least 50
workers represented 4.6 percent of all U.S. establishments and 56.5
percent of all U.S. workers in 2006. We consider the BLS data to be
reliable based on our use of the data in prior reports.
^6GAO, Economic Development; Multiple Federal Programs Fund Similar
Economic Development Activities, [33]GAO/RCED/GGD-00-220 (Washington,
D.C.: Sept. 29, 2000).
State and Local Governments Can Use a Variety of Large Federal Programs to
Attract Businesses
We identified 17 large federal programs that state and local governments
can use to attract businesses. These programs offer assistance to
businesses in the form of loans and loan guarantees, grants, job-training
services, and tax benefits as incentives to businesses. Of the 17 economic
development programs, states appear to have marketed 14 as incentives for
businesses. However, according to academic experts who study economic
development incentives and site-selection consultants, the amount of
federal funds used as incentives is likely more limited than the amount of
state and local funds used as incentives. State and local governments have
varying discretion over the use of the federal funds, but can leverage
federal funds to free their own resources for incentives or for other
purposes that support businesses. Finally, academic studies on incentives
and site-selection consultants have questioned whether incentives offered
by state and local governments influence a business' decision to relocate
or expand operations.
State and Local Governments Can Use Various Types of Federal Programs as
Business Incentives
We identified 17 large federal economic development programs that state
and local governments can use as incentives to attract and retain
businesses, based on a search of the CFDA database, Tax Expenditure
Compendium, and state economic development Web sites. As shown in table 1,
five agencies administer the 17 programs, which offer a range of
assistance or services (such as loans, grants, tax benefits, and training
programs) to businesses.
Table 1: Description of 17 Large Federal Economic Development Programs
That Offer Financial Assistance or Services That Can Be Used as Business
Incentives
Agency Program Program Description
HUD CDBG Entitlement Grants to large cities and urban
counties to benefit the community
development needs of low- and
moderate-income people
HUD CDBG State Grants to states to benefit the
community development needs of low-
and moderate-income people living in
non-entitlement areas
HUD EZ (urban) Grants, loans, and tax relief to
federally designated urban areas to
help them overcome economic and
social problems
HUD Renewal Communities Tax incentives and regulatory relief
for federally designated urban and
rural areas to help them overcome
economic and social problems
IRS/Treasury^a New Markets Tax Tax credits for investments in
Credit qualified community development
entities that make investments in
designated low-income communities
IRS Private activity Tax incentives for construction of
bonds public airports, docks, and
mass-commuting facilities
IRS Private activity Tax incentives for the construction
bonds of sewage, water, and hazardous waste
facilities
Labor WIA Adult Employment and training services to
adults ages 18 years and over
Labor WIA Dislocated Employment and training services to
Workers dislocated workers
Labor WIA Youth Employment and training services to
economically disadvantaged youth ages
14 to 21 possessing specific barriers
to employment
SBA Certified Development Loans that development companies make
Company 504 Loans and SBA guarantees, providing small
businesses with proceeds to acquire
or renovate fixed assets, including
land, buildings, machinery, and
equipment. This program does not
cover working capital or refinancing.
SBA 7(a) Loans Loan guarantees providing small
businesses with proceeds to acquire
land, buildings, machinery,
equipment, furniture or fixtures, and
funds to cover building renovation,
leasehold expenses, working capital,
and refinancing
USDA EZ/EC (rural) Grants, loans, tax, and regulatory
relief to federally designated rural
areas to help them overcome economic
and social problems
USDA B&I Guaranteed Loans Guaranteed loans to businesses for
purchasing or improving land,
facilities, equipment, and certain
agricultural production projects
USDA Community Facilities Direct loans, loan guarantees and
Loans and Grants grants to rural communities to
develop public facilities, including
industrial park sites
USDA Farm Ownership Loans Direct and guaranteed loans for
purchase of family-size farms
USDA Farm Operating Loans Direct and guaranteed loans for
operation of family-size farms
Sources: GAO, GSA, and CRS.
^aIRS enforces compliance with relevant portions of the federal tax code
for the New Markets Tax Credit program. The Department of the Treasury's
Community Development Institutions Fund awards New Markets Tax Credit
allocations to qualified community development entities.
Out of the 17 programs we identified,
o five were direct loan or loan guarantee programs: the SBA 7(a)
and 504, USDA B&I, Farm Ownership Loans, and Farm Operating Loans;
o four were tax incentive programs: IRS's New Markets Tax Credit,
its two private activity bond programs, and HUD's Renewal
Communities;
o three were programs that support job training services: WIA
Adult, Dislocated Workers, and Youth programs; and
o five were programs that offer more than one type of financial
assistance (grants, direct or guaranteed loans, or tax
incentives): the two HUD CDBG programs, HUD EZ, USDA EZ/EC, and
USDA Community Facilities.
State and local governments also can use federal economic
development resources to supplement their existing resources to
attract additional investment and potentially use federal economic
development funds to free up money for incentives they otherwise
would have spent on economic development.^7 For example, according
to USDA officials, EZs and ECs often leverage federal program
resources to obtain other funds, thereby attracting businesses.
Similarly, businesses located in EZs and ECs can claim various
state and federal tax credits, including IRS's Work Opportunity
Tax Credit, which provides tax credits to employers hiring
individuals residing in an EZ or EC. According to our January 2007
report on the New Markets Tax Credit program, these credits can be
packaged with other types of incentives, such as EZ/EC incentives
or state and local tax abatements, to make the investments in
economically distressed communities more attractive to investors
such as banks. We previously have reported that more than
one-fourth of New Markets Tax Credit projects were located in
federally designated EZs.^8 State and local governments also can
use federal economic development funds to support economic
development activities, thereby freeing up state and local funds
for business incentives or other uses.^9
^7For additional information on the leveraging of federal economic
development funds, see GAO, Leveraging Federal Funds for Housing,
Community, and Economic Development, [34]GAO-07-768R (Washington, D.C.:
May 25, 2007).
^8GAO, Tax Policy: New Markets Tax Credit Appears to Increase Investment
by Investors in Low-Income Communities, but Opportunities Exist to Better
Monitor Compliance, [35]GAO-07-296 (Washington, D.C.: Jan. 31, 2007).
Based on our review of state economic development Web sites,
states appear to market all but 3 of the 17 programs (Community
Facilities Loans and Grants, Farm Ownership Loans, and Farm
Operating Loans being the exceptions). The programs that appear to
be marketed more than others are the CDBG programs, SBA's 7(a) and
504 loan guarantees, and private activity bonds (at least 19
states appear to advertise each of these as incentives). Benefits
from EZs, ECs, or Renewal Communities, and job-training programs
funded with WIA funds were the next most marketed incentives, with
at least nine states offering them. This appears to be somewhat
consistent with what site-selection consultants told us about the
specific federal incentives they see in business incentive
packages. The consultants told us that they see CDBG loans funded
with Entitlement and State block grants, private activity bonds,
EZ/EC benefits and, increasingly, customized job-training funds in
incentive packages. In contrast to the results of our Web site
reviews, the consultants did not cite SBA loans as being among
federal resources included in business incentive packages.^10
Use of Federal Funds as Business Incentives Appears to Be More
Limited Than Use of State and Local Funds
Although federal programs are marketed as business incentives, the
amount of federal funds used as incentives appears to be more
limited than the amount of state and local funds used. While the
precise amount of federal funds used as incentives is not
available, the Congressional Budget Office (CBO) estimated that
the federal government spent $27.9 billion to support commerce and
business in addition to $2.2 billion on credit programs in
1995.^11 CBO also indicated that the federal government provides
the bulk of its support to businesses through tax provisions. CBO
estimated tax revenue losses of at least $32.2 billion for the
provision of the tax code that yielded the largest amount of
direct support for businesses--depreciation of capital assets in
excess of the alternative deprecation system--but did not provide
total estimates of foregone revenue associated with all tax
provisions.^12 It is not clear from the CBO report whether and to
what extent state and local governments also used these programs
and tax provisions as incentives. We reviewed academic studies on
economic development business incentives offered from 1995 to 2005
and interviewed the authors of these studies. The academic
literature on economic business incentives generally focuses on
state and local government incentives rather than federal
incentives. Academic studies estimate that state and local
governments spent from $20 to $50 billion annually on business
incentives.^13 While the amount of federal funds used as business
incentives has not been measured to any great extent, some
researchers with whom we spoke said that the amount of federal
funds used as business incentives is likely limited compare
^9 [36]GAO-07-768R .
^10At least 7 of the 50 state Web sites that we reviewed marketed SBA
programs in the form of links to federal Web sites rather than as direct
incentives for businesses.
^11Congressional Budget Office, Federal Financial Support of Business
(Washington, D.C: July 1995). CBO has not updated this report since 1995.
One limitation in developing estimates of federal, state, and
local funds spent on incentives is defining what constitutes a
business incentive. For example, a state or local government might
offer indirect benefits, such as infrastructure improvements, to
attract or retain businesses, but these might not be counted in
estimates as business incentives.^15 Moreover, although the amount
of federal economic development funds available as incentives
appears to be limited, money can be fungible, or freely
interchangeable, at the state and local level. Thus, even though
the amount of federal funds used as incentives might be limited,
state and local governments could leverage those funds to free up
their own resources for incentives or for other purposes that
support businesses.
^12CBO indicated that it is difficult to provide a total revenue loss
estimate because the interactions between different provisions of the tax
code do not equal the arithmetic sum of revenue losses from individual tax
provisions.
^13Tim Bartik, "Evaluating the Impacts of Local Economic Development
Policies on Local Economic Outcomes: What Has Been Done and What is
Doable?" Upjohn Institute Staff Working Paper No. 03-89, prepared for the
Organization for Economic Cooperation and Development's (OECD) Conference
on "Evaluating Local Economic and Employment Development" (Kalamazoo,
Mich.: The Upjohn Institute, November 2002); Kenneth Thomas, Competing for
Capital: Europe and North America in a Global Era (Washington, D.C.:
Georgetown University Press, 2000); and Peter Fisher and Alan Peters, "The
Failure of Economic Development Incentives," Journal of the American
Planning Association 70, no. 1 (Chicago, Ill.: Winter, 2004).
^14Bartik.
^15Thomas.
Furthermore, state and local governments have less discretion over
the use of federal resources than they do over their own, but the
degree of discretion varies with the program. For at least four of
the programs (SBA's 7(a) and 504 loan programs, USDA's B&I loan
program, and IRS's New Markets Tax Credit), state and local
governments have no direct role in funding decisions. For these
programs, third-party lenders, development corporations, or the
federal government decide which businesses receive funds. In
contrast, other programs provide states with more discretion over
how they can use funds. For example, under WIA, states and local
areas can use the discretionary and statutory funding from Labor
to develop job training and employer service programs, including
customized job training, which we previously have reported can be
an important factor in a company's decision to locate in a
particular area.^16
Finally, the academic literature we reviewed questioned the
importance of incentives in location or relocation decisions.
These studies, as well as published articles in site selection
industry magazines, indicate that other considerations might
outweigh economic development incentives when companies decide
where to locate. The studies explained that the critical factors
in deciding were more likely to be the size and education of the
labor force; local infrastructure such as telecommunication lines;
transportation options, such as access to ports, roads, and rail;
and access to consumer markets. However, the studies and
consultants acknowledged that the incentives state and local
governments offered could influence a business' decision when the
business already had narrowed its choice to three or four
locations.
^16 [37]GAO-03-884T .
Nine Large Federal Economic Development Programs Have Nonrelocation
Provisions, but Requirements Vary
We determined that 9 of the 17 large federal economic development
programs that state and local governments can use as business
incentives contain statutory prohibitions against using funds to
relocate businesses if the relocation would cause unemployment.^17
Seven of the federal economic development programs with
nonrelocation provisions were grant programs, and the remaining
two were loan guarantee programs. The number of job losses and
other requirements needed to trigger the nonrelocation provision
varied by program. Nonrelocation provisions for the nine programs
were enacted over a 40-year period. Recently, one program has
sought but not obtained congressional removal of its nonrelocation
provision.
Nine Large Federal Economic Development Programs Contain Statutory
Nonrelocation Provisions
Based on our review of laws and regulations for the 17 large
federal economic development programs that state and local
governments can use as business incentives, we determined that
nine contain statutory prohibitions against using program funds to
relocate businesses.^18 (See app. II for a more detailed
description of each of these nine programs.) They are the two HUD
CDBG programs (Entitlement and State programs); the WIA Adult,
Dislocated Workers, and Youth programs; USDA and HUD's respective
EZ/EC programs (for designated rural and urban communities,
respectively); USDA's B&I program; and SBA's 504 program. SBA
voluntarily applies a nonrelocation provision to its 7(a)
program.^19
^17We identified 21 additional federal programs with statutory
nonrelocation provisions. We did not focus on these programs because they
did not meet our minimum funding criteria of $500 million annually or did
not meet our definition of economic development.
^18See appendix I for a more detailed description of our methodology for
identifying the large economic development programs with statutory
prohibitions against using program funds for employer relocation.
^19SBA voluntarily applies a nonrelocation provision to its 7(a) loan
program, which provides assistance to small businesses to purchase land
and buildings. 7(a) loans also assist small businesses with support
operations, such as payroll and inventory. SBA's standard operating
procedures prohibit the approval of a 7(a) loan if it finances a move that
would cause serious unemployment in the present location. However, SBA's
procedures permit financing the relocation of an applicant's business when
the relocation will accomplish a sound business purpose, such as
preventing the business from closing. The remaining seven programs--HUD's
Renewal Communities, IRS's New Market Tax Credit and two private activity
bonds, USDA's Community Facilities Loans and Grants, USDA's Farm Ownership
Loans and USDA's Farm Operating Loans--do not contain statutory
restrictions on using program funds to relocate businesses.
All nine programs that we identified with statutory restrictions
on employer relocations use job loss in a relocating company's
original location as the primary criterion for applying a
nonrelocation provision, but the job loss threshold varies by
program. As shown in table 2, the statutory language for three
programs--HUD and USDA's EZ/EC program and USDA's B&I program--do
not specify a job loss threshold, but these agencies interpret the
job loss threshold as one job lost. The three WIA programs specify
a job loss threshold of one job lost. The remaining three--HUD's
CDBG Entitlement and State programs and SBA's 504 program--have
higher job loss thresholds. In addition to job loss, these three
programs specify other conditions for applying a nonrelocation
provision, such as requiring that the relocations occur across
geographically defined areas.
Table 2: Job Loss and Other Statutory or Regulatory Requirements for Nine
Large Federal Economic Development Programs with Nonrelocation Provisions
Exemptions from
application of
Job loss Other nonrelocation
Agency Program threshold requirements provision
HUD CDBG More than 25 o o New operations
Entitlement jobs Relationship of a business
and State between job that are
loss and size unrelated to
of labor existing
market in operations, even
originating if business
employer's decides to reduce
area or eliminate
o Relocation existing
occurs across operations.
different o Nonprofit
labor market entities
areas (as o Indirect
defined by assistance that
BLS) benefits multiple
businesses
o Loss of 25 or
fewer jobs
o
Microenterprises
o Purchase of
business
equipment, etc.
if purchase does
not result in
relocation of
sellers'
operations
HUD EZ (urban) 1 job^a None None
Labor WIA Adult, 1 job None None
Dislocated
Workers, and
Youth
programs
SBA Certified o One third None o Relocation is
Development workforce key to the
Company 504 reduction economic
Loans within a well-being of the
company, or applicant
o substantial o Benefits to
increase in applicant and
unemployment receiving
in any area community
of the outweigh negative
country impact to
original
community.
USDA EZ/EC 1 job^a None None
(rural)
USDA B&I 1 job^a None o Business
Guaranteed applying for $1
Loans million or less
of assistance, or
o Business
applying would
increase direct
employment by
less than 50
employees^b
Source: GAO analysis.
Note: For CDBG programs, see 42 USC 5305(h); for EZ/EC programs, see 26
USC 1391; for WIA programs, see 29 USC 2931(d); for SBA program, see 15
USC 661; and for B&I program, see 7 USC 1932.
^aNeither the statutes nor the regulations for these programs specify a
job loss threshold. However, agency officials stated that the job loss
threshold is one lost job for these programs.
^bBased on language contained in statute, 7 U.S.C. 1932(d)(2). The
regulations for the B&I program differ from the statute in that businesses
are exempt from the nonrelocation provision if they are applying for less
than $1 million in assistance "and" ( as opposed to "or") the business
would increase direct employment by less than 50 jobs. 7 C.F.R.
1980.412(c); 7 C.F.R. 4279.114(b). Loans that are not exempt from the
nonrelocation provision require U.S. Department of Labor involvement in
reviewing certain information about these loans. USDA officials said that
they are currently implementing the B&I program based on the program's
regulations. Thus, USDA sends to Labor only those loans that are for at
least $1 million and would increase direct employment by more than 50
jobs. According to USDA officials, USDA is seeking to have the statutory
language changed to make it more consistent with regulatory language. The
officials stated that when the B&I statute was originally enacted in 1972,
loans of $1 million and above were rare. Currently, according to USDA, if
the agency were to send to Labor for review loans based solely on the
amount ($1 million and above), Labor would have to review most B&I loans.
HUD regulations for the CDBG Entitlement and State programs make business
relocations ineligible for funding if they involve certain job losses. Any
relocation involving the loss of 500 or more jobs is prohibited. In
contrast, relocations involving the loss of 25 or fewer jobs are exempt
from the nonrelocation provision. For relocations involving between 25 and
500 jobs, the nonrelocation provision applies if the number of jobs lost
equals or exceeds one-tenth of one percent of the number of employed
persons in the labor market experiencing the loss.^20 The CDBG program's
statute does not specify a job loss threshold; it only requires that the
agency prohibit funding for business relocations that are likely to result
in a significant loss of employment. According to a HUD official, HUD
chose to exempt any relocation involving 25 or fewer jobs because losses
of this magnitude likely would not significantly affect a labor market of
any size. By exempting these smaller businesses from the nonrelocation
provision, this official said that the CDBG program retains some
flexibility for entitlement and nonentitlement communities to provide
funds to businesses to promote job growth. This official further noted
that HUD also determined that relocations involving 500 or more jobs would
be significant for labor markets of any size.
^20See 24 C.F.R. S 570.210 (Entitlement program); 24 C.F.R. S 570.482(h)
(State program).
SBA's 504 program, which guarantees the portion of a business loan that
nonprofit certified development companies make to businesses, features
potentially higher job loss thresholds.^21 For example, SBA regulations
would require that applications for loans be denied if the relocation
would result in the business's reducing its workforce by at least
one-third, or serious unemployment would result in the original business
location or any area of the country. SBA regulations allow for the waiver
of these job loss limits if the relocations would be key to the economic
well-being of the business or if the benefits to the applicant and the
receiving community would outweigh the negative impact to the community
from which the applicant would move.
As noted previously, three of the programs specify conditions in addition
to job loss for applying the nonrelocation provision, such as relocations
occurring across defined geographic areas and funding thresholds. For
example, HUD's CDBG regulations for both the Entitlement and State
programs prohibit funding for a business that relocates to a different
labor market area.^22 USDA's B&I program, through which USDA guarantees up
to 80 percent of a loan that an approved third-party lender makes to
businesses, statutorily prohibits program funds from supporting business
relocations in cases in which USDA assistance exceeds $1 million. Our
review of congressional reports indicates that this minimum funding
threshold is intended to expedite the processing of small business
applications, based on the reasoning that the relocation of small
businesses would pose no threat to the labor force or other businesses in
the original location.
^21Certified development companies are private, nonprofit corporations
established to promote economic development within a community. 13 C.F.R.
S 120.822 requires each certified development company to have at least 25
members representing the following groups: (1) government organizations
responsible for economic development; (2) financial institutions that
provide commercial long-term fixed-asset financing; (3) community
organizations dedicated to economic development; and (4) businesses.
^22According to BLS, a labor market area is an economically integrated
area within which individuals can readily change jobs without moving.
According to HUD officials, HUD's regulatory approach reflects the
statutory nonrelocation provision for the CDBG program, which specifies
that a "relocation is likely to result in a significant loss of employment
in the market area from which the relocation occurs."
Congressional approval of the nonrelocation provisions for the nine large
programs was spread over a 40-year period (1958 to 1998). Table 3 shows
the date on which the nine programs became subject to nonrelocation
provisions.
Table 3: Timeline Showing Congressional Approval of Nonrelocation
Provisions for Nine Large Federal Programs
Year^a Agency Program
1958^b SBA Certified Development Company 504 Loan program
1972 USDA B&I Guaranteed Loan program
1993 USDA / HUD EZ/EC (2 programs)
1998^c Labor WIA Adult, Dislocated Workers, and Youth (3 programs)
1998 HUD CDBG Entitlement and State (2 programs)
Source: GAO analysis.
^aYears listed are those in which the legislation was enacted, not
necessarily the years in which the provisions took effect.
bThe 504 loan program was enacted in 1986 as part of the Small Business
Investment Act of 1958, as amended. The nonrelocation provision was
established under the original 1958 act. It applied to the predecessors of
the current 504 loan program and to the 504 program itself.
cLabor's WIA was enacted in 1998, but the act's nonrelocation provisions
are based on the Job Training Partnership Act, which was enacted in 1982.
One of the federal agencies has sought but not obtained removal of a
nonrelocation provision from its program. USDA officials said that since
2001 the agency has sought congressional support for the removal of the
nonrelocation provision for the B&I program, citing administrative burden
and other problems involved with ensuring compliance. A USDA official
explained that while Labor has the statutory responsibility to analyze
labor market information related to B&I applications--to help ensure that
funding will not result in the transfer of any employment or business
activity--Labor does not receive separate funding to support analysis of
this information. According to USDA, the agency has sent between 6 and 18
B&I applications to Labor for review in the past few years. Labor
confirmed that it does not receive separate funding to support its
analysis, but said the agency reviews all of the applications Labor
provides.^23
Extent to Which Federal Agencies Had Established and Implemented Procedures to
Help Ensure Compliance with Nonrelocation Provisions Was Limited
Federal agencies administering the nine programs with nonrelocation
provisions used various procedures to help ensure that program recipients
complied with overall program goals and requirements, but the extent to
which these procedures specifically addressed nonrelocation provisions was
limited. The Guide to Opportunities for Improving Grant Accountability
states that organizations awarding grants need effective internal control
systems to provide adequate assurance that funds are properly used and
achieve intended results.^24 The two loan guarantee programs--USDA's B&I
and SBA's 504 programs--relied on screening mechanisms (written review
guidance and eligibility checklists or third-party verification of data)
to help ensure compliance with nonrelocation provisions. In contrast,
officials who administer grant programs we reviewed noted inherent
limitations in using screening mechanisms for grant programs, given that
program recipients (states and local governments) do not always know at
the time of application which businesses later will apply for and obtain
assistance through the program. Because of the inherent limitations of
screening, the agencies administering grant programs primarily relied on
monitoring recipients and subrecipients to help identify instances of
potential noncompliance. However, only one of the grant programs we
reviewed had developed monitoring guidance specifically tailored to the
nonrelocation provision. Without structured guidance and procedures in
place, agencies have limited assurance that recipients and subrecipients
are complying with statutory and regulatory requirements and spending
funds on allowable activities.
^23We identified another agency--EDA for its Public Works and Facilities
Program--that did obtain congressional removal of a nonrelocation
provision. According to EDA officials, the Secretary of Commerce requested
the removal because the agency had detected only one violation more than
30 years ago when the provision was effective and because EDA did not
receive separate funding to monitor compliance with the provision. Senate
and House reports do not specifically address the rationale for removing
this provision, but note that the legislative changes were being made to
reflect different economic conditions and a new emphasis on innovation,
productivity, and entrepreneurship. Despite the statutory removal of the
provision, program officials told us they do not support the use of
program funds to relocate jobs among communities.
^24A guide compiled by members of the Domestic Working Group (a collection
of federal, state, and local audit organizations tasked by the Comptroller
General of the United States) working on a Grant Accountability Project.
They were tasked with offering suggestions for improving grant
accountability. See Domestic Working Group, Guide to Opportunities for
Improving Grant Accountability (Washington, D.C.: October 2005).
Agencies Had Eligibility Screening Procedures, but Focus on Nonrelocation
Provision Was Limited
As stated in the Guide to Opportunities for Improving Grant
Accountability, organizations that award and receive grants need effective
internal control systems to help ensure that grants are awarded to
eligible entities for intended purposes and in accordance with applicable
laws and regulations. As shown in table 4, each of the four federal
agencies we reviewed had screening procedures covering applicants'
eligibility to receive funds. The agencies used at least one of the
following mechanisms: written application or plan review guidance,
eligibility checklists, self-certification forms, third-party verification
of data, or business statements of compliance. However, only four of the
nine programs--including both loan guarantee programs--used screening
mechanisms that specifically addressed a relevant nonrelocation provision.
Table 4: Federal Agency Mechanisms to Screen for Compliance with
Nonrelocation Provisions
Written application or plan
review guidance Self-certification form
Eligibility Third-party
checklist verification
Not specific that Not specific of applicant Business
Specific to to specifically Specific to to data specific statements
nonrelocation nonrelocation addressed nonrelocation nonrelocation to of
Agency Program provision provision nonrelocation provision provision nonrelocation compliance
HUD EZ (urban)
CDBG
(Entitlement)
CDBG (State)
Labor WIA Adult
WIA
Dislocated
Workers
WIA Youth
USDA EZ/EC (rural)
B&I Loans
SBA 504
Source: GAO analysis.
Review of Applications or Plans
All four agencies had procedures for reviewing applications or plans to
help ensure that applicants were eligible to receive funds under the
program.
o The two loan guarantee programs--USDA for its B&I program and
SBA for its 504 program--had formal written guidance that
specifically addressed the screening of applicants for compliance
with the nonrelocation provision. USDA's formal written guidance
listed the nonrelocation provision as one of the ineligible
purposes of a B&I loan guarantee.^25 SBA also incorporated
specific references to its nonrelocation provision into its
standard operating procedures, which are addressed to SBA
personnel and lending partners who review and approve 504 loans.
SBA also required its 504 lending partners to complete an
eligibility checklist for each loan guarantee applicant. One of
the items on the eligibility checklist seeks to determine whether
504 loan proceeds will be used to "relocate any operations of a
small business, which will cause a net reduction of one-third or
more in the workforce of the relocating small business or a
substantial increase in unemployment in any area of the country."
In reviewing the supporting documentation for 10 approved loans,
we found that certified development companies were using the
eligibility checklist SBA had developed to screen 504 loan
applicants for these loans.^26
o Each of the seven grant programs had formal written guidance
covering the review of required plans but with the exception of
USDA's EZ/EC program, the guidance did not specifically address
the nonrelocation provisions for each program. Under the CDBG
programs, recipients (entitlement communities and states) must
submit an action plan to HUD each year that broadly identifies the
activities that they will undertake to meet the objectives of
previously submitted consolidated plans.^27 Labor requires states
to submit strategic plans for WIA describing how a state intends
to use WIA funds. Both agencies use written checklists as guidance
to determine whether the submitted plans are complete and both
agencies' guidance includes an item to determine whether
applicants have assured their compliance with applicable laws and
regulations. HUD officials noted that its written guidance on
review of action plans does not require analysis of the
nonrelocation provision, in part because CDBG recipients generally
do not know which businesses will apply for CDBG funding at the
time the plans are developed and submitted to HUD. HUD officials
explained that most CDBG recipients engaged in economic
development activities have an "open window" approach, in that
assistance is available to businesses on an "as needed" basis
during the program year.
^25USDA RD Instruction 4279-B, section 4279.114(b).
^26Under the 504 program, certified development companies underwrite up to
40 percent of project financing. Thus, they are involved in screening 504
program applicants and monitoring their use of loan proceeds.
^27CDBG recipients submit a consolidated plan at least once every 3 to 5
years that addresses the housing, homeless, and community development
needs in the recipient's jurisdiction.
o For the EZ/EC programs, USDA had formal written guidance for
reviewing required application plans that referred to the
program's nonrelocation provision, while HUD's written guidance
did not specifically address the provision. Under the EZ/EC
program, communities seeking EZ or EC designation submit (1) a
strategic plan outlining the community's vision for revitalizing
its distressed area; (2) a tax incentive utilization plan
specifying how the community plans to use the tax benefits
available under the program; and (3) an implementation plan
providing detailed information on the activities and projects the
community is undertaking to implement its strategic plan. HUD
officials said that while the agency does not currently have
review guidance specific to the nonrelocation provision, the
agency has been revising a review manual to incorporate language
specific to the provision and has been taking other steps, such as
communicating directly with EZs regarding compliance and providing
training to staff, to raise awareness of the provision and the
need to comply with it. USDA officials said that EZ/EC review
staff were told to reject any application for EZ/EC designation in
which an applicant's strategic plan included evidence that the
community intended to lure businesses from other communities. The
officials said that review staff eliminated several applications
for potential program designation because intent to relocate jobs
was evident in the submitted plans. However, we were not able to
verify this statement because USDA officials said that the
strategic plans eliminated from contention were discarded and are
no longer available for review.
Some officials, particularly those who administer grant programs,
noted the limitations of reviewing applications and plans to
identify instances of potential noncompliance with a nonrelocation
provision. As noted above, HUD CDBG officials said that action
plans for its Entitlement program were unlikely to identify
specific businesses receiving funds because the communities do not
always know which businesses would apply for assistance when they
submitted the action plans. Similarly, the officials noted that
action plans for the State CDBG program do not contain a list of
proposed activities, but rather a description of the methods used
to distribute funds to local governments. HUD officials noted that
under the CDBG State program, individual states implement a method
of distributing funds that may or may not include economic
development activities and that in most cases the states evaluate
applications from local governments to determine which activities
to fund.
Requirements for Self-Certification of Compliance
As part of the application review process, USDA's EZ/EC and B&I
programs require applicants to sign self-certification forms that
included a specific reference to the nonrelocation provision for
each program. For example, USDA's application for the EZ/EC
program contained a form in which an applicant self-certifies that
"no action will be taken to relocate any business establishment to
the nominated area." According to USDA EZ/EC officials, this
required certification sends a clear message to the EZ/EC
community that relocation is not permitted under the program.
Similarly, USDA's B&I program requires loan applicants applying
for loans of more than $1 million that will increase employment by
more than 50 employees to self-certify that "it is not the
intention of the applicant or any related company to relocate any
present operation as a result of the proposed project."^28
Other agencies, such as HUD for both its CDBG and EZ programs and
Labor for its WIA programs, require more general statements of
compliance. For example, HUD's application for Round II of the EZ
program contained a form in which an applicant self-certified that
"the nominating entities shall comply with state, local, and
federal requirements, and have agreed in writing to carry out the
Strategic Plan if designated." Similarly, HUD's CDBG program
requires applicants to self-certify their compliance with
"applicable laws," which HUD officials said includes the Housing
and Community Development Act of 1974, as amended, which contains
the nonrelocation provision. According to the officials, HUD saw
no need or statutory basis to add a special certification for the
nonrelocation provision, particularly since not all states or
entitlement communities use CDBG funding for economic development
purposes. Labor's statement of compliance, included in WIA state
strategic plans, requires the governor of each state to assure
that WIA funds "will be spent in accordance with the Workforce
Investment Act and the Wagner-Peyser Act and their regulations,
written Department of Labor guidance implementing these laws, and
all other applicable federal and state laws and regulations."
Labor officials noted that this general statement of compliance
covers compliance with the nonrelocation provision. During our
review of 30 USDA EZ/EC, HUD EZ, and Labor WIA approved grant
applications (10 applications for each program), we found that
recipients had completed the required self-certifications for each
of the applications we reviewed.
^28USDA only requires an applicant to make this self-certification if the
applicant or related company has a business facility at another location.
Pre-Approval Third-Party Verification
As part of the pre-approval process for the B&I program, USDA
turns over information that certain loan applicants provide to
Labor for independent, third-party verification. For guaranteed
loans in excess of $1 million that will increase employment by
more than 50 jobs, USDA will send an applicant's certification of
nonrelocation and the market and capacity information form to
Labor for clearance. In-turn, Labor sends the form to state-level
workforce agencies, where the business' competitors are located,
for analysis and direct solicitation of the competitor's comments.
According to USDA officials, Labor must complete this third-party
verification before USDA can approve a B&I loan guarantee request.
Our review of loan documentation for 10 approved B&I loan
applications indicated that both USDA and Labor carried out these
procedures for the applications we reviewed. As discussed earlier
in this report, USDA officials have been asking Congress to remove
the nonrelocation provision from the B&I program, citing an
administrative burden and costs incurred in helping to ensure
compliance.
Requirements for Written Statements of Compliance from Businesses
Regulations for HUD's Entitlement and State CDBG programs and
Labor's three WIA programs require grant recipients (such as a
state or local government) to obtain a signed written statement of
compliance with the nonrelocation provision from businesses before
providing direct assistance to them. For example, under the CDBG
programs, there is a two-step process. First, businesses receiving
CDBG assistance must submit a written statement to the recipient
(entitlement community or state), subrecipient, community-based
development organization, or nonprofit providing the assistance
whether the activity will result in the relocation of jobs from
one labor market area to another. Second, if the assistance will
not result in the relocation of jobs covered by the statutory
prohibition, the business must provide a certification that it has
no plans to relocate jobs (in a manner that would violate the
nonrelocation provision). However, these statements are not
included in a recipient's application for funding (action plan),
and thus HUD does not review them during the action plan review
process. HUD officials noted that it would not be possible for an
entitlement community to provide these statements to HUD with an
action plan because, as previously noted, most entitlement
communities do not know at that time which businesses will apply
for CDBG assistance. Similar to HUD, Labor's regulations for WIA
require that local workforce investment boards conduct a pre-award
review of businesses seeking job training funds, which includes
obtaining a written certification from the business indicating
whether WIA assistance is being sought in connection with past or
impending job losses at other facilities.
Our review of 10 approved WIA grants indicated that businesses had
completed the required statements of compliance for each of those
grants. With respect to HUD's CDBG program, we did find one case
in which a HUD CDBG entitlement community recipient we contacted
told us that its subrecipient (a nonprofit development
corporation) was not obtaining the required written statements of
compliance. An official from the entitlement community said that
neither the entitlement community nor the subrecipient had
developed formal procedures to help ensure compliance with the
regulatory requirement. In addition, neither HUD nor Labor require
that recipients provide copies of completed written statements to
HUD or Labor, although a HUD official noted that the written
statements would be available to on-site reviewers during
monitoring visits. HUD officials also said that HUD is revising a
monitoring handbook to include a question addressing the business'
written statements of compliance. We discuss agency monitoring
procedures and guidance in greater detail in the next section.
While Monitoring Is a Key Control for Helping to Ensure Compliance
with Nonrelocation Provisions, Only One Grant Program Had Written
Guidance Specific to the Provision
The Guide to Opportunities for Improving Grant Accountability
states that once grants are awarded, agencies need to ensure that
grant funds are used for intended purposes and in accordance with
applicable laws and regulations. The guide also states that it is
critical to identify, prioritize, and manage potential at-risk
subrecipients to ensure that grant goals are reached and resources
are properly used. Due to inherent limitations in using the
screening process to help ensure compliance with nonrelocation
provisions, other procedures, such as monitoring activities,
become key controls. Having established, written procedures in
place helps to ensure that agencies achieve their monitoring
objectives and that staff are consistently implementing monitoring
procedures.
Officials at some of the agencies we reviewed told us that they
rely on complaints as a mechanism to monitor compliance with the
employer nonrelocation provision. A HUD official said that an
employer relocation that resulted in significant job loss and
involved the use of federal funds likely would result in the
affected community or state raising a complaint to the federal
agency or to their congressional representatives. HUD, Labor, SBA,
and USDA officials all reported receiving few if any of these
complaints, in some cases over the course of many years. For this
reason, some officials did not consider the risk of noncompliance
to pose a significant risk to the programs. However, this
complaint-based approach is reactive and does not necessarily
provide reasonable assurance of compliance. Standards for Internal
Control in the Federal Government states that an agency's
monitoring activities should be performed continually and be
ingrained in agency operations.^29 As shown in table 5, the four
agencies administering programs with nonrelocation provisions used
various other mechanisms, including on-site review, to monitor
fund recipients. All of the agencies had formal written guidance
covering the monitoring of program participants. However, only one
program--HUD for its EZ program--had a monitoring procedure that
specifically addressed the nonrelocation provision.
Table 5: Status of Federal Agency Mechanisms for Monitoring Compliance
with Nonrelocation Provisions, as of July 2007
Written Specific
monitoring monitoring
On-site guiduance guidance has
monitoring Written specific to been used in a
of monitoring nonrelocation monitoring
Agency Program recipients guidance provision review
HUD EZ (urban)
CDBG Draft
(Entitlement)
CDBG (State) Draft
Labor WIA Adult Draft
WIA Dislocated Draft
Workers
WIA Youth Draft
USDA EZ/EC (rural)
B&I Loan N/A^a
Guarantee
SBA 504 Loan N/A^a
Guarantee
Source: GAO analysis.
aGiven program structure and legal requirements, USDA and SBA procedures
are implemented up-front, on a pre-approval rather than a post-approval
basis.
To effectively leverage limited staff resources, HUD and Labor told us
that their respective agencies conduct on-site monitoring reviews in
accordance with risk-based procedures intended to focus monitoring
resources on areas requiring the most attention.^30 For example, HUD's
procedures for the EZ program specify factors for reviewers to consider
when determining the scope of a review. These factors include funding
amount, outstanding complaints related to noncompliance with a legal
requirement, and unresolved monitoring or assessment issues. Similarly,
for the CDBG program, reviewers consider factors such as the complexity of
a state or entitlement community's activities and use of subrecipients to
carry out funded activities. According to HUD CDBG officials, on-site
monitoring is the most effective way to identify potential violations of
the nonrelocation provision for the CDBG program. Labor also conducts
on-site monitoring of states and a sample of local workforce investment
agencies. As part of Labor's risk-based procedures, reviewers may consider
factors such as the number of federal grants a state administers, a
history of disallowed costs or administrative findings in previous
reviews, and percentage of grant funds subcontracted.
^29GAO's Standards for Internal Control in the Federal Government,
[38]GAO/AIMD-00-21 .3.1 (Washington, D.C.: November 1999) provides an
overall framework for establishing and maintaining internal control,
identifying and addressing major performance and management challenges,
and identifying and addressing areas at the greatest risk of fraud, waste,
and mismanagement.
USDA's monitoring for the EZ/EC program involves two staff members--one in
a state office and the other in the national office--reviewing requests
for drawdown that EZ/ECs make several times during the year. Drawdown
requests include a specification of how an EZ or EC will use its funds.
Prior to disbursing requested funds, USDA staff members review the request
to ensure that the funds will be used to carry out the community's
strategic plan (which includes a certification form that specifically
refers to the nonrelocation provision and which USDA reviews at the time
of initial application). In addition to reviewing drawdown requests, USDA
staff in both the state and national offices review mandatory annual
reports describing a community's progress in implementing its strategic
plan. According to USDA officials, the review of annual reports also
includes a review of any updates to the strategic plan to ensure that no
relocation support has crept into the plan since the initial review. A
USDA official added that USDA staff have made on-site monitoring visits to
all of the rural EZ/ECs.
Officials of SBA's 504 and USDA's B&I program told us that they do not
monitor for compliance with the nonrelocation provision because, unlike
federal grant programs, in loan guarantee programs, a federal agency can
determine which specific businesses will receive assistance and for what
purpose (relocation, equipment purchase, etc.) before an agency guarantees
a loan. SBA officials explained that SBA and certified development
companies (CDC) approve a project for 504 financing before construction
begins, but SBA does not disburse loan funds or issue a debenture
guarantee until after the project is completed.^31 According to SBA
officials, CDC staff review the completed project before closing on a
loan, at which time loan funds are disbursed and a debenture guarantee
issued. Similarly, USDA officials told us that their field staff verify
uses for loan proceeds when they review a loan closing package,
specifically the settlement statement, before guaranteeing a loan. USDA
officials explained that once a loan is fully disbursed, subsequent
monitoring of the use of loan proceeds for compliance focuses on other
issues, such as the number of jobs created, rather than compliance with
the nonrelocation provision, because the loan proceeds already have been
used for their intended purposes. The emphasis on screening rather
monitoring seemed appropriate for the two loan guarantee programs since
the federal agencies know which specific businesses are requesting funds
and the purposes for which the funds will be used.
^30HUD CDBG program officials noted that HUD also can perform off-site
monitoring of recipients if necessary. This off-site monitoring involves a
remote review of files and documents in a HUD office.
HUD's EZ program was the only program we reviewed that had written
monitoring guidance specific to the nonrelocation provision at the time of
our review. As of July 2007, HUD had used this monitoring guidance in four
on-site reviews. HUD's guide for the review of Round II EZ strategic plan
compliance calls for review staff to determine whether there is "any
evidence to indicate that the EZ is complying with the prohibition against
assisting a business to relocate." The guide did not provide specific
procedures or steps that staff should follow to make the assessment of
compliance, but rather referred to the program's implementing regulation
for the nonrelocation provision. HUD officials said that under current
procedures, on-site reviewers rely on receiving complaints of
noncompliance or on information obtained by asking open-ended questions
about compliance to determine whether communities are complying. For the
four reviews in which HUD had used the guidance at the time of our review,
the narrative supporting the reviewer's assessment of compliance indicated
that approved implementation plans, discussions with EZ staff regarding
standard operating procedures, and a review of loan file documents were
among the bases on which HUD reviewers determined that EZs were complying
with the program's nonrelocation provision. HUD officials said that for
additional on-site reviews planned for fiscal year 2007, the agency is
considering reviewing implementation plans to specifically check for
compliance with the nonrelocation provision. HUD officials said that they
would focus on plans involving sites with potential for commercial
development to determine whether HUD-approved activities or projects
involving marketing or promotional efforts encouraged relocations to an
EZ.
^31A debenture is a certificate acknowledging a debt.
HUD and Labor officials told us that their agencies were developing
monitoring guidance specific to the nonrelocation provision for the CDBG
and WIA programs, respectively, but that such guidance is in draft
form.^32 As of July 2007, HUD and Labor had not finalized this guidance or
used it in a monitoring review. HUD officials said that HUD expects to
finalize the monitoring guidance tailored to the nonrelocation provision
by December 31, 2007. The officials explained that HUD was developing
monitoring guidance for inclusion in a forthcoming revision to a
monitoring handbook that HUD uses for all of its major Office of Community
Planning and Development grant programs, including the CDBG and EZ
programs. HUD undertook the revisions because the current version of the
handbook was issued prior to the promulgation of the CDBG program's
nonrelocation provision in December 2005. HUD CDBG officials stated that
including a question on compliance with the nonrelocation provision is
intended to ensure that compliance reviews by HUD staff in this area would
be consistent. Labor officials explained that their monitoring handbook
for employment and training grant programs, including WIA programs, is
generic and limited to examining core activities found in all of Labor's
employment and training programs. In contrast, Labor's formula grant
supplement to the monitoring handbook, currently under development and in
draft form, will provide a more detailed examination of statutes, rules,
and regulations specific to the formula-based programs once finalized.
Labor officials said that the formula grant supplement has been tested in
field offices and will address the nonrelocation provision. The officials
said that they expect to publish the formula grant supplement in the
latter half of calendar year 2007.
Conclusions
State and local governments use incentives, including funds from federal
economic development programs, to attract business investment and create
jobs in their communities. Although it is difficult to determine the
extent to which state and local governments use federal funds as business
incentives, 9 of 17 large federal economic development programs contain
statutory restrictions against using program funds to relocate jobs if the
use of such funds creates unemployment. Thus, for these nine federal
programs, the agencies charged with their administration are responsible
for helping to ensure that program funds are used for intended purposes
and in accordance with applicable laws and regulations, including
compliance with nonrelocation provisions.
^32According to HUD officials, the monitoring guidance for the CDBG
program, once finalized, will include a check for business statements of
compliance, required under the CDBG program's nonrelocation provision. As
noted previously, businesses are to complete these statements as a
condition of receiving CDBG funds.
Each of the four agencies that administer the programs with nonrelocation
provisions used screening and monitoring mechanisms to help ensure that
fund recipients were eligible to participate in the programs, meeting
program goals, and complying with legal requirements. The two agencies
administering the loan guarantee programs we reviewed--SBA for the 504
program and USDA for the B&I program--relied primarily upon screening
mechanisms to help ensure that applicants would not use loan proceeds to
relocate businesses and jobs. For these two programs, screening mechanisms
may be sufficient since the agencies can determine which specific
businesses will receive assistance and how the loan proceeds will be used.
In such cases, a screening process can determine if loan funds will be
used to support a business relocation. In contrast, officials from the
other programs we reviewed, particularly those that administer grant
programs, noted limitations in using screening mechanisms for such
programs. For example, with grant programs, fund recipients (e.g., states
and local communities) do not always know which businesses will apply for
or receive funding at the time the recipient submits an initial plan or
application for funding.
Acknowledging the limitations of screening for helping to ensure
compliance with nonrelocation provisions, agency officials regarded
on-site monitoring as the most effective way to detect an instance of
potential noncompliance in their grant programs. However, officials also
noted that they targeted their limited monitoring resources on recipients
that posed the greatest risk. Furthermore, they maintained that
noncompliance with nonrelocation provisions did not present a significant
risk to the programs they administered because they received few or no
complaints over the years and regarded complaints as a barometer for
undertaking monitoring activities.
We recognize that there are costs associated with monitoring program
recipients for compliance with nonrelocation provisions. Nevertheless, a
reactive approach in which agencies assume there are no problems because
outside parties do not report them, by itself, is an insufficient means to
help ensure that problems do not exist and federal internal control
standards state that monitoring should be performed continually and be
ingrained in agency operations. Further, USDA EZ/EC program officials said
that they have rejected applications for zone designation because intent
to relocate jobs was evident in the applications, providing evidence that
applicants do sometimes seek to use program funds to lure businesses away
from one community to another.
Given the relatively large size of some federal grant programs and their
complicated funding structure (including the number of recipients and
subrecipients involved in the process), it is important that agencies
develop and use cost-effective approaches to identify, prioritize, and
manage potential at-risk recipients. Specific monitoring guidance and
procedures would provide staff impetus and direction in their monitoring
roles and help ensure consistent monitoring efforts across locations.
Moreover, written guidance would provide recipients and subrecipients with
specific information on the types of business support activities allowed
under each program. For example, we learned that there are HUD CDBG
subrecipients who may be unaware of the requirement that businesses
receiving assistance under the program must provide written statements of
compliance with the nonrelocation provision. Absent such guidance and
related controls, agencies have limited assurance that recipients and
subrecipients--which include state and local governments as well as
individual business--are meeting statutory and regulatory responsibilities
that restrict the use of program funds to support employer relocations.
Recommendations for Executive Action
To provide greater assurance that grant recipients and subrecipients of
federal economic development programs are complying with statutory
restrictions against the use of program funds to support employer
relocations, we recommend that the Secretaries of Labor (for the WIA
Adult, Dislocated Workers, and Youth programs); Agriculture (for the EZ/EC
program); and Housing and Urban Development (for the CDBG Entitlement and
State programs) direct their respective offices to develop (or finalize
the development of) and implement formal and structured approaches for
federal reviewers to follow when monitoring for compliance with
nonrelocation provisions.
Agency Comments and Our Evaluation
We provided a draft of this report to the Secretaries of the Departments
of Labor, Agriculture, Housing and Urban Development, and Commerce; the
Acting Commissioner of the Internal Revenue Service; and the Administrator
of the Small Business Administration. We received written comments from
Labor that are summarized below and are reprinted in appendix III. USDA's
Acting Assistant Deputy Administrator for Cooperative Programs provided
oral comments on August 8, 2007, which are summarized below.
In its written comments, Labor stated that the department concurred with
our recommendation that it develop and implement formal and structured
approaches for federal reviewers to follow when monitoring compliance with
nonrelocation provisions. In addition, Labor stated that it agreed that
such guidance and approaches will assist states in monitoring local
subrecipient compliance with these provisions. Labor stated that to
support efforts to monitor and ensure compliance with nonrelocation
provisions, it is implementing two complementary strategies. First, Labor
is developing a formal policy guidance letter that clarifies allowable and
unallowable uses of WIA funds for economic-development-related activities
and that will specifically address prohibitions related to the
nonrelocation provision. Second, Labor said that its Core Monitoring Guide
and draft Formula Grant Supplement to the guide provide federal reviewers
with tools for monitoring compliance with the nonrelocation provision.
Labor said the draft Formula Grant Supplement includes indicators of
compliance along with each governor's responsibility to determine which
costs are allowable or unallowable under WIA, including prohibitions
against using WIA Title I funds to encourage business relocation and
related restrictions. Labor stated that its regional office reviewers have
extensively tested the draft Formula Grant Supplement since the fall of
2006, and the supplement will enter the formal clearance process shortly.
Labor said that when completed in final form, which the department expects
to occur by December 31, 2007, the supplement will provide federal
reviewers, as well as state review staff, with a valuable resource for
assessing recipients' compliance with the nonrelocation provision under
the WIA Adult, Dislocated Worker, and Youth programs.
In oral comments, USDA's Acting Assistant Deputy Administrator for
Cooperative Programs stated that USDA concurred with the report's
recommendation. The Acting Assistant Deputy Administrator also provided us
with documentation showing that USDA is taking initial steps to implement
the recommendation.
We also received technical comments from Labor, USDA, HUD, IRS, and SBA
that were incorporated into the report as appropriate. Commerce did not
provide comments on the draft report.
As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the date of the report. At that time, we will provide copies of this
report to the Ranking Member, Subcommittee on Interstate Commerce, Trade,
and Tourism, Senate Committee on Commerce, Science, and Transportation,
and interested congressional committees. We will also provide copies of
this report to Secretaries of Labor, Agriculture, Housing and Urban
Development, and Commerce; the Acting Commissioner of the Internal Revenue
Service; and the Administrator of the Small Business Administration. We
will provide copies to others upon request. In addition, this report will
be available at no charge on our home page at http://www.gao.gov.
If you or your staff have any questions concerning this report, please
contact me at (202) 512-8678 or shearw@gao.gov. Contact points for our
Office of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff who made key contributions to this
report are listed in appendix IV.
Sincerely yours,
William B. Shear
Director, Financial Markets and Community Investment
Appendix I: Scope and Methodology
To identify large federal economic development programs, we conducted a
search of the Catalog of Federal Domestic Assistance (CFDA) database
(using key word searches of "jobs" and "economic development") and focused
on those programs that can be used to provide assistance to businesses and
that CFDA reported as having obligations of at least $500 million for
fiscal year 2006. In a prior report, we found inconsistencies in how
agencies reported budget data for CFDA, resulting in potential
over-reporting of data.^1 However, for purposes of this report, because we
are using CFDA to identify large federal economic development programs,
the risk is acceptably low of CFDA not covering large programs we would
have otherwise selected. We, therefore, consider CFDA to be a sufficiently
reliable source of data for use in this report. Because CFDA does not
include tax expenditure programs, we searched the Congressional Research
Service's (CRS) Tax Expenditure Compendium (using key word searches of
"community development" and "private activity bonds") for economic
development tax expenditure programs that support businesses for which CRS
reported as having estimated tax revenue losses of at least $500 million
in fiscal year 2006. We also confirmed these budget figures with agency
officials. We excluded programs that are only available under specific
circumstances or are not available nationwide, such as regional economic
development programs or those that are only available under disaster
assistance designations.
In addition to these database searches, we reviewed each of the 50 states'
economic development Web sites to identify the federal programs that
states marketed as incentives or financial assistance for businesses.
While this search did not provide us with a comprehensive list of federal
programs used as business incentives, it provided us with additional
information on how the programs we identified through CFDA and the CRS
compendium might be used as incentives.
To identify large federal programs currently or formerly subject to
restrictions against use for relocating jobs among U.S. communities, we
reviewed laws and regulations. Our review included the use of electronic
databases. We identified relevant nonrelocation provisions for four
federal agencies--the Departments of Housing and Urban Development (HUD),
Agriculture (USDA), Labor, and the Small Business Administration
(SBA)--and a former provision for one federal agency--the Department of
Commerce's Economic Development Administration (EDA). To assess the
completeness of our search results, we interviewed representatives of
select federal agencies as well as representatives of economic development
trade associations and policy groups. To identify congressional purpose in
adopting or rescinding restrictions, we reviewed implementing laws and
their legislative histories, including congressional reports and the
Congressional Record.
^1GAO, Rural Economic Development: More Assurance is Needed that Grant
Funding Information is Accurately Reported, [39]GAO-06-294 (Washington,
D.C.: Feb. 24, 2006), 32.
To assess federal agency procedures to help ensure compliance with
nonrelocation provisions, we requested, obtained, and analyzed the
following information from HUD, Labor, USDA, and SBA
o policies and procedures designed to ensure compliance with
nonrelocation provisions;
o data on the number of complaints received regarding the
provisions;
o data on the number of violations identified; and
o information about any enforcement actions taken, as well as the
status of those actions.
We also conducted a limited test of agency procedures by reviewing
a small and random, but not generalizable sample of case file
documentation for each of the programs (generally 10 files for
each program). These documents included the mechanisms agencies
have developed to screen for compliance with nonrelocation
provisions, including
o an eligibility checklist (SBA's 504 program);
o self-certification forms (USDA and HUD's Empowerment
Zone/Enterprise Community program);
o business statements of compliance as a condition of receiving
assistance (Labor's Adult, Dislocated Workers, and Youth programs
under the Workforce Investment Act); and
o third-party verification of data that applicants self report
(USDA's Business and Industry Guaranteed Loan program).
Further, we reviewed monitoring guidance and exhibits for each
program having such guidance; completed monitoring reports;
publications on effective internal control and grant management
practices; and recently issued reports we completed on the
programs.^2 To supplement our document reviews and testing
procedures, we conducted interviews with officials at each agency.
The scope of our work in this area was focused mainly on whether
the agencies had screening and monitoring procedures. We did not
test the effectiveness of the implementation of these procedures.
Furthermore, we did not conduct an overall evaluation of the
programs, evaluate how well the programs served their intended
purposes, or evaluate how nonrelocation provisions affect the
relative success of the programs in achieving their intended
purposes. We also did not address the impact these programs had on
development efforts by state and local governments.
We conducted our work from October 2006 through August 2007 in
Washington, D.C., and San Francisco and Fresno, California, in
accordance with generally accepted government auditing standards.
^2For example, GAO, Workforce Investment Act: Labor and States Have Taken
Actions to Improve Data Quality, but Additional Steps Are Needed,
[52]GAO-06-82 (Washington, D.C.: Nov. 14, 2005); Community Development
Block Grants: Program Offers Recipients Flexibility but Oversight Can Be
Improved, [53]GAO-06-732 (Washington, D.C.: July 28, 2006); and
Empowerment Zone and Enterprise Community Program: Improvements Occurred
in Communities, but the Effect of the Program Is Unclear, [54]GAO-06-727
(Washington, D.C.: Sept. 22, 2006).
Appendix II: Description of the Nine Large Federal Economic
Development Programs with Nonrelocation Provisions
The following is a description of the nine large federal economic
development programs that we identified as having statutory
restrictions against using program funds to relocate businesses
and jobs. Seven are grant programs in which a federal agency
provides funds to recipients (generally a state or local
government) that, in turn, may provide funds to a subrecipient
(such as a nonprofit entity or for-profit business) to facilitate
economic development activities. They are
o the Department of Housing and Urban Development's (HUD)
Community Development Block Grant (CDBG) Entitlement and State
programs;
o HUD and U.S. Department of Agriculture's (USDA) Empowerment
Zone/Enterprise Community (EZ/EC) programs (urban and rural
respectively); and
o the Department of Labor's (Labor) three Workforce Investment Act
(WIA) programs--Adult, Dislocated Workers, and Youth.
The two remaining programs--USDA's Business and Industry (B&I)
program and SBA's 504 program--are loan guarantee programs in
which federal agencies guarantee loans that third-party lenders
and nonprofit development corporations make.
HUD CDBG Entitlement and State Programs
HUD's CDBG program provides communities with grants for activities
that will benefit low- and moderate-income people, prevent or
eliminate slums or blight, or meet urgent community development
needs. The Entitlement program provides grants to qualifying local
governments. The State program provides states with grants for
distribution to the smaller, nonentitlement communities. Both
programs fund a wide range of activities--including those that
support housing, public improvements, public services, and
economic development--which involve the use of funds to assist,
recruit, and retain individual businesses. According to the
Catalog of Federal Domestic Assistance (CFDA), fiscal year 2006
estimated budget authority for the CDBG Entitlement program was
$2.6 billion and $1.1 billion for the State program.
HUD's Office of Community Planning and Development (CPD)
administers the CDBG program. A headquarters office sets program
policy while 43 HUD field offices monitor recipients. HUD
distributes funds to entitlement communities and states based on
the higher yield of two formulas.^1 See figure 1 for an overview
of the funding process for economic development projects involving
businesses. Entitlement communities may carry out activities under
CDBG directly, or they may award funds to subrecipients, which
include, as HUD defines them for the purposes of the CDBG program,
governmental agencies such as housing authorities as well as
private nonprofit and a limited number of private for-profit
entities. Under HUD regulations, subrecipients must enter into a
signed, written agreement with entitlement communities regarding
compliance with laws and regulations. States distribute their
funds to nonentitlement communities for activities such as
business financing. The distribution mechanisms vary by state;
some states set aside a certain percentage of funds for economic
development while others do not take into account the category of
activity. Neither HUD nor the states distribute funds directly to
citizens or private organizations. Moreover, HUD does not select
the business entities that receive CDBG assistance; recipients and
subrecipients make these decisions.
^1The Entitlement and State programs each have their own set of formulas
that take into account population, poverty, overcrowding, growth lag, and
age of housing. The two formulas are similar.
Figure 1: Overview of CDBG Funding Streams for Economic
Development Projects Involving Businesses
Businesses receive assistance through the CDBG program either from
a recipient (such as an entitlement community) or from
subrecipients (such as designated public agencies or nonprofit
development corporations). For example, once an entitlement
community or a state receives its allocation, businesses may apply
for economic development funding, assuming that the recipient has
elected to operate an economic development program. This
assistance may take the form of loans, grants, technical
assistance, or infrastructure improvements. This approach assumes
that the recipient's consolidated and action plans include and
authorize these types of economic development activities.
For a related GAO product on the CDBG program, see Community
Development Block Grants: Program Offers Recipients Flexibility
but Oversight Can Be Improved. [40]GAO-06-732 . Washington, D.C.:
July 28, 2006.
HUD and USDA EZ/EC Programs
HUD and USDA's EZ/EC program targets federal grants and provides
tax relief to distressed communities in urban and rural areas,
respectively, to help those communities overcome economic and
social problems. EZs and ECs can use grant funds for a range of
activities identified in strategic plans, which are developed in
conjunction with community stakeholders. Strategic plans outline
the urban or rural community's vision for revitalizing its
distressed areas and the activities and projects planned to
accomplish this task. These activities can include education,
infrastructure development, workforce development, and assistance
to for-profit businesses. According to CRS's Tax Compendium,
estimated revenue losses for USDA's and HUD's EZ/EC program were
$1 billion combined for fiscal year 2006.^2
Congress authorized three rounds of EZ designations and two rounds
of EC designations. HUD and USDA have primary oversight over the
program, which involves reviewing strategic plans, designating
communities as EZs or ECs, and evaluating the progress EZs and ECs
make in implementing their strategic plans. However, two other
agencies, the U.S. Department of Health and Human Services (HHS)
and the Internal Revenue Service (IRS), also have had
responsibility for administering the program. For the first round
of the program which began in 1993, HHS had fiscal oversight over
the program, in which HHS issued grants to states, which served as
pass-through entities that in turn distributed funds to individual
EZs and ECs. For the second round of the program, which began in
1998, Congress appropriated grant funds through USDA and HUD, but
not through HHS. For the third round, which began in 2001,
Congress appropriated grant funds for rural EZs but not for urban
EZs. In addition to grants, businesses that locate in an EZ or EC
can claim tax benefits, such as the Work Opportunity Tax Credit,
which IRS administers. Tax benefits have been available in all
three rounds of the EZ/EC program, but not the EC program.
As shown in figure 2, businesses can receive funds directly from
the designated EZ/EC cities or from nonprofit corporations the
city establishes to administer the program. For example, EZs/ECs
issue requests for proposals and review applications for EZ/EC
funding, including those that businesses submit. The EZs/ECs that
a corporation oversees generally have a board of directors
consisting of community members who review and have final approval
for funded activities (with input from advisory committees).
Businesses then receive funding in the form of grants, loans, and
other assistance. Businesses eligible for federal, state, and
local tax benefits claim these benefits directly on tax filing
forms.
^2CRS's Tax Compendium lists one combined estimated revenue-loss figure
for the EZ tax incentive program (both HUD and USDA), District of Columbia
tax incentive program, and Indian Reservation tax incentive program.
Figure 2: Overview of EZ/EC Funding Streams for Economic
Development Projects Involving Businesses
For related GAO products on the EZ/EC program, see
o Empowerment Zone and Enterprise Community Program: Improvements
Occurred in Communities, but the Effect of the Program Is Unclear.
[41]GAO-06-727 . (Washington, D.C.: Sept. 22, 2006), and
o Community Development: Federal Revitalization Programs Being
Implemented, but Data on the Use of Tax Benefits Are Limited.
[42]GAO-04-306 . (Washington, D.C.: March 5, 2004).
Labor WIA Adult, Dislocated Workers, and Youth Programs
The WIA Adult and Dislocated Workers programs provide a variety of
services to individuals, including help with job searches, skills
assessment, and occupational training. The Adult and Dislocated
Workers programs provide similar services, but differ in their
eligibility requirements.^3 The Youth program is designed to
prepare high school students for employment or postsecondary
education. All three programs require that states and local areas
use a one-stop center approach, which consolidates 16 categories
of programs under four agencies (Labor, Education, HHS, and HUD)
to provide services for several employment and training programs.
In addition to employee services, state and local workforce
investment boards may use WIA funds from the three programs to
provide services to employers, including helping employers
identify and recruit job candidates.^4 States and local boards can
also offer various job training programs, such as classroom-based,
on-the-job, or customized training to meet employer needs.^5
According to CFDA, fiscal year 2006 estimated obligations for the
WIA Adult, Dislocated Workers, and Youth programs were $857
million, $1.181 billion, and $926 million, respectively.
Labor oversees all three WIA programs, but states and local boards
have flexibility over how they use WIA funds. WIA specifies a
different funding source for each of the Act's main
clients--youth, adults, and dislocated workers. Labor distributes
WIA funds to states and states distribute funds to local areas
based on specific formulas that account for unemployment (see fig.
3 below for an overview of the three WIA program funding streams).
Labor allots 100 percent of the adult and youth funds and 80
percent of the dislocated worker funds to states (the Secretary of
Labor sets aside 20 percent of the dislocated worker funds
primarily for national emergency grants, but these funds can be
used for other job training purposes).^6 The states can then set
aside up to 15 percent of the funds as discretionary funds to
support state employment activities. (For the dislocated worker
program, the state can set aside no more than 25 percent of the
funds for rapid response activities, such as notifying workers on
how to access unemployment and one-stop center benefits in the
event of mass layoffs.)
^3The Adult program serves all adults over the age of 18, while the
Dislocated Workers program targets adults who have been laid off from a
job or are displaced homemakers.
^4Each of approximately 600 local workforce areas throughout the country
has a local workforce investment board that administers WIA activities
within that area.
^5For customized job training, an employer must pay at least 50 percent of
the training costs.
^6This money also can be used for demonstrations and technical assistance,
but at least 85 percent of the 20 percent set-aside must be used for
national emergency grants.
Figure 3: Overview of WIA Adult, Dislocated Workers, and Youth
Funding Streams
The remainder of the funds are distributed to local areas based on
a formula. Local workforce investment boards, in turn, may provide
services to businesses. Businesses are generally connected to
these services through one-stop career centers.
For related GAO products on the Workforce Investment Act, see
o Workforce Investment Act: Labor and States Have Taken Actions to
Improve Data Quality, but Additional Steps Are Needed.
[43]GAO-06-82 . Washington, D.C.: November 14, 2005;
o Workforce Investment Act: Substantial Funds Are Used for
Training, but Little is Known Nationally About Training Outcomes.
[44]GAO-05-650 . Washington, D.C.: June 29, 2005; and
o Workforce Investment Act: Exemplary One-Stops Devised Strategies
to Strengthen Services, but Challenges Remain for Reauthorization.
[45]GAO-03-884T . Washington, D.C.: June 18, 2003.
SBA 504 Loan Program
SBA's 504 loan program provides businesses with long-term,
fixed-rate financing for major fixed assets, such as land,
buildings, and machinery and equipment. To qualify for an SBA loan
guarantee, a project must meet job creation or other community
development goals, such as increasing the number of minority-owned
businesses in an area. For the job creation requirement, a
business must generally create or maintain one job for every
$50,000 in SBA assistance.
While SBA administers the 504 loan guarantee program, it relies on
development companies to originate 504 loans. SBA participates in
the 504 loan program by guaranteeing loans that certified
development companies (CDC) make. CDCs generally are private
nonprofit corporations established to contribute to the economic
development of their communities. For a typical 504 loan project,
the borrower (a business) must cover at least 10 percent of a
project's costs, a private third-party lender provides at least 50
percent of project costs, and a CDC provides up to 40 percent of
project costs. SBA guarantees 100 percent of the CDC's portion of
the loan. According to SBA, in fiscal year 2006, the agency
provided 504 program guarantees totaling $5.7 billion.
USDA B&I Program
USDA's B&I program seeks to improve the economic and environmental
climate in rural communities by providing guarantees on loans
private lenders make to borrowers that meet certain economic
development criteria, such as creating employment or encouraging
the development and construction of renewable energy systems. The
program finances business and industry acquisition, construction,
conversion, expansion, and repair in rural areas. Loan proceeds
can be used to finance the purchase and development of land,
supplies and materials, and start-up costs for rural businesses.
USDA administers the B&I program through field offices located in
each of the states. A borrower first secures a loan from a
USDA-approved private third-party lender. The borrower then
applies to USDA for a B&I loan guarantee. USDA will evaluate the
application and make a determination on whether the borrower is
eligible and the proposed loan is for an eligible purpose, there
is reasonable assurance of repayment ability, there is sufficient
collateral and equity, and the proposed loan complies with all
applicable statutes and regulations. USDA will notify the lender
in writing if it is unable to guarantee a loan. USDA also works
with the lender to negotiate the percentage of guarantees, but
USDA can guarantee up to 80 percent of loans for $5 million or
less, 70 percent of loans between $5 and $10 million, and 60
percent of loans exceeding $10 million. According to USDA, in
fiscal year 2006, the B&I program guaranteed 350 loans with a
face-value of $766.3 million.
Appendix III: Comments from the Department of Labor
Appendix IV: GAO Contact and Staff Acknowledgments
GAO Contact
William B. Shear at (202) 512-8678 or [46]shearw@gao.gov
Staff Acknowledgments
In addition to the above contact, Harry Medina, Assistant
Director; Meghana Acharya; Dianne Blank; Bonnie Derby; Ronald Ito;
Terence Lam; John McGrail; Carl Ramirez; Barbara Roesmann; Paul
Schmidt; Michael Springer; and Kathryn Supinski made key
contributions to this report.
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Highlights of GAO-07-1005, a report to the Chairman, Subcommittee on
Interstate Commerce, Trade, and Tourism, Committee on Commerce, Science,
and Transportation, U.S. Senate
September 2007
ECONOMIC DEVELOPMENT
Formal Monitoring Approaches Needed to Help Ensure Compliance with
Restrictions on Funding Employer Relocations
Congress imposed restrictions on some federal programs to prevent funding
of business relocations. You expressed concerns about state and local
governments using federal funds to attract jobs to one community at a loss
of jobs to another and about compliance with relocation restrictions. This
report (1) identifies large federal economic development programs that
state and local governments can use as incentives, (2) identifies which
programs contain statutory prohibitions on funding relocations, and (3)
assesses whether federal agencies had established and implemented
procedures to help ensure compliance with prohibitions. To address these
objectives, GAO searched federal databases, reviewed relevant statutes and
regulations, and conducted limited testing of agency procedures.
[55]What GAO Recommends
To improve the management of federal economic development grant programs,
GAO recommends that the Departments of Labor, Agriculture, and Housing and
Urban Development develop (or finalize the development of) and implement
formal and structured approaches to monitor compliance. The Departments of
Labor and Agriculture concurred with the recommendation and reported
taking steps to implement it. Each of the three agencies provided
technical comments that were incorporated into the report as appropriate.
GAO identified 17 large federal economic development programs that offer
financial assistance and services that state and local governments can use
as incentives to attract and retain jobs. While academic studies indicate
that it is difficult to quantify the funds used as incentives,
particularly given differing definitions of incentives, the use of federal
funds for such purposes appears to be more limited than the use of state
and local funds. Although academic studies question the overall role and
significance of incentives in firms' decisions to (re)locate, researchers
with whom GAO spoke noted that incentives could influence firms that
already had narrowed their choices.
Nine of the 17 large federal economic development programs restrict the
use of program funds to support employer relocation. Seven are grant
programs, and two are loan guarantee programs. In many grant programs,
initial recipients of funds (states and local governments) provide funds
to others (e.g., businesses) to facilitate economic development; in loan
guarantee programs, third-party lenders approve businesses for eligibility
to receive funds. All nine programs prohibit using federal funds to
support a business relocation that causes unemployment, but the thresholds
for job loss differ. For example, a single lost job would trigger the
provision for six programs, but for the other three programs, the job loss
threshold is higher.
Federal agencies administering the nine programs with a nonrelocation
provision used various procedures, including screening applicants and
monitoring recipients, to help ensure compliance, but the extent to which
these procedures specifically addressed nonrelocation provisions was
limited. The two loan guarantee programs emphasized screening procedures
to help ensure compliance, and both programs had written guidance and
other mechanisms that specifically addressed nonrelocation provisions.
Screening may be effective for helping to ensure compliance in loan
guarantee programs because federal agencies know at the time of initial
application which businesses are requesting funds and how they plan to use
them. In contrast, because of the way grant programs are structured, at
the time of initial application, grant applicants do not always know which
businesses later will apply for or receive assistance. As a result,
officials administering grant programs relied more extensively on
monitoring than screening to help identify instances of potential
noncompliance. Despite this greater reliance on monitoring, only one of
the grant programs GAO reviewed had written monitoring guidance that
specifically addressed business relocation restrictions. Without formal
policies and procedures, federal agencies have limited assurance that
grant recipients and subrecipients are complying with statutory
requirements that restrict the use of program funds to support employer
relocations.
References
Visible links
31. http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-97-193
32. http://www.gao.gov/cgi-bin/getrpt?GAO-06-294
33. http://www.gao.gov/cgi-bin/getrpt?GAO/RCED/GGD-00-220
34. http://www.gao.gov/cgi-bin/getrpt?GAO-07-768R
35. http://www.gao.gov/cgi-bin/getrpt?GAO-07-296
36. http://www.gao.gov/cgi-bin/getrpt?GAO-07-768R
37. http://www.gao.gov/cgi-bin/getrpt?GAO-03-884T
38. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-00-21
39. http://www.gao.gov/cgi-bin/getrpt?GAO-06-294
40. http://www.gao.gov/cgi-bin/getrpt?GAO-06-732
41. http://www.gao.gov/cgi-bin/getrpt?GAO-06-727
42. http://www.gao.gov/cgi-bin/getrpt?GAO-04-306
43. http://www.gao.gov/cgi-bin/getrpt?GAO-06-82
44. http://www.gao.gov/cgi-bin/getrpt?GAO-05-650
45. http://www.gao.gov/cgi-bin/getrpt?GAO-03-884T
46. mailto:shearw@gao.gov
47. http://www.gao.gov/
48. http://www.gao.gov/
49. http://www.gao.gov/fraudnet/fraudnet.htm
50. mailto:fraudnet@gao.gov
51. mailto:JarmonG@gao.gov
52. http://www.gao.gov/cgi-bin/getrpt?GAO-06-82
53. http://www.gao.gov/cgi-bin/getrpt?GAO-06-732
54. http://www.gao.gov/cgi-bin/getrpt?GAO-06-727
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