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 [email protected]. 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][email protected]
			  
			  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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(250315)

www.gao.gov/cgi-bin/getrpt?GAO-07-1005.

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact William B. Shear at (202) 512-8678 or
[email protected].

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:[email protected]
  47. http://www.gao.gov/
  48. http://www.gao.gov/
  49. http://www.gao.gov/fraudnet/fraudnet.htm
  50. mailto:[email protected]
  51. mailto:[email protected]
  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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