    Trade Adjustment Assistance: Opportunities to Improve the Community
    Adjustment and Investment Program (Letter Report, 09/29/2000,
    GAO/NSIAD-00-229).

    Pursuant to a congressional request, GAO provided information on the
    Community Adjustment and Investment Program (CAIP), focusing on: (1) how
    the program has been structured; (2) how program eligibility criteria
    and outreach efforts have been implemented; and (3) what the results of
    efforts to provide assistance to eligible counties were.

    GAO noted that: (1) the Community Adjustment and Investment Program's
    management structure hinders efficient program management; (2) the
    program is managed in Washington, D.C., by a high-level interagency
    group chaired by the Department of the Treasury, called the Finance
    Committee; (3) Committee membership includes the Departments of
    Agriculture, Commerce, Housing and Urban Development, and Labor, and the
    Small Business Administration; (4) it took the Finance Committee over 3
    years to set up program guidelines and to start disbursing program
    financing to distressed counties; (5) the Finance Committee's retention
    of certain day-to-day managerial functions is inefficient and has added
    more time to the decision-making process, particularly for direct loans
    and grants; (6) Treasury officials recognize that some delays have
    resulted from the program's centralized management structure and told
    GAO that they plan to hire additional full-time staff to expedite future
    decision-making; (7) however, it is not clear that new staff will
    improve program management unless the Finance Committee is prepared to
    delegate decision-making authority; (8) program eligibility procedures
    are complex and rely on a database that is not designed to be used as a
    measure of the impact of the North American Free Trade Agreement on
    communities; (9) GAO found that Treasury's current procedures result in
    the underestimation of dislocated workers, including approximately 3,700
    secondary workers in firms that are suppliers to or assemblers for
    manufacturing firms adversely impacted by trade with Mexico and Canada;
    (10) although this undercounting has not had an impact on counties from
    qualifying for the program; (11) for the 228 counties in 30 states and
    Puerto Rico designated eligible for the program, notification and
    outreach have been limited, as Treasury does not directly notify
    eligible counties about the program, according to program officials; and
    (12) since 1997, about $257 million in loan guarantees, loans, and
    grants have been provided to 83 eligible counties.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  NSIAD-00-229
         TITLE:  Trade Adjustment Assistance: Opportunities to Improve the
    	     Community Adjustment and Investment Program
          DATE:  09/29/2000
       SUBJECT:  Eligibility determinations
    	     Labor surplus areas
    	     Community development
    	     Foreign trade agreements
    	     Economic development
    	     Intergovernmental fiscal relations
    	     Unemployment rates
    	     Economically depressed areas
    IDENTIFIER:  North American Free Trade Agreement
    	     NAFTA
    	     Mexico
    	     Canada
    	     DOL NAFTA Transitional Adjustment Assistance Program
    	     SBA 7(a) General Business Loan Guarantee Program
    	     USDA Business and Industry Loan Program
    	     Treasury Community Adjustment and Investment Program

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    GAO/NSIAD-00-229

    A

    Report to the Chairman and Ranking Minority Member, Committee on Finance, U.
    S. Senate

    September 2000 TRADE ADJUSTMENT ASSISTANCE

    Opportunities to Improve the Community Adjustment and Investment Program

    GAO/ NSIAD- 00- 229

    National Security and International Affairs Division

    Lett er

    B- 286103 September 29, 2000 The Honorable William V. Roth, Jr. Chairman The
    Honorable Daniel Patrick Moynihan Ranking Minority Member Committee on
    Finance United States Senate

    Recognizing that the benefits of the North American Free Trade Agreement
    between the United States, Mexico, and Canada would be widely dispersed
    across the economy but that the costs or worker dislocation effects could be
    more concentrated, Congress created the Community Adjustment and Investment
    Program in December 1993 1 to assist communities suffering job losses due to
    changing trade patterns with Mexico and Canada. Under this program, loan
    guarantees, loans, and grants are provided to eligible counties to help
    stimulate private sector employment and growth. Loan

    guarantees to local businesses have accounted for the preponderance of
    financing commitments to date. The program was established with an initial
    capitalization of $22. 5 million and has received $20 million in additional
    appropriations to support and expand program activities. You expressed
    concern about whether the Community Adjustment and Investment Program is
    providing timely and useful assistance to eligible counties. At your
    request, we assessed (1) how the program has been

    structured, (2) how program eligibility criteria and outreach efforts have
    been implemented, and (3) what the results of efforts to provide assistance
    to eligible counties were.

    1 Public Law 103- 182, Sec. 543, Dec. 8, 1993.

    Background The Community Adjustment and Investment Program was established
    as a result of the North American Free Trade Agreement Implementation Act,

    passed in December 1993. The act provided that 10 percent of the paid- in
    capital ($ 22. 5 million) to the North American Development Bank would be
    set aside for community adjustment and investment purposes. 2 The North
    American Development Bank, while it is the repository for program funds and
    provides funds management services for the program, does not exercise
    financial or programmatic control over the Community Adjustment and
    Investment Program. This authority rests with an

    interagency committee chaired by the Treasury Department. The Community
    Adjustment and Investment Program uses a lending partnership with the
    Department of Agriculture and the Small Business Administration to jointly
    provide federal loan guarantees to eligible communities. The program uses
    the extensive field office infrastructure these agencies already have in
    place across the country. Although the Agriculture Department and Small
    Business Administration loan guarantee

    programs' eligibility and creditworthiness standards remained unchanged,
    additional eligibility standards were instituted for Community Adjustment
    and Investment Program loan guarantees. These loan guarantee eligibility

    standards mainly focus on the creation or retention of jobs. Results in
    Brief The Community Adjustment and Investment Program's management

    structure hinders efficient program management. The program is managed in
    Washington, D. C., by a high- level interagency group chaired by the
    Treasury Department, called the Finance Committee. Committee membership
    includes the Departments of Agriculture; Commerce; Housing and Urban
    Development; and Labor; and the Small Business Administration. It took the
    Finance Committee over 3 years to set up

    program guidelines and to start disbursing program financing to distressed
    counties. The Finance Committee's retention of certain day- to- day
    managerial functions is inefficient and has added more time to the

    decision- making process, particularly for direct loans and grants. Treasury
    2 The North American Development Bank is an international financial
    institution established and capitalized in equal parts by the United States
    and Mexico for the purpose of financing environmental infrastructure
    projects in the U. S.- Mexico border region, as well as for community
    adjustment and investment in support of the purposes of the North American
    Free Trade Agreement.

    officials recognize that some delays have resulted from the program's
    centralized management structure and told us that they plan to hire
    additional full- time staff to expedite future decision- making. However, it
    is not clear that new staff will improve program management unless the
    Finance Committee is prepared to delegate decision- making authority.

    Program eligibility procedures are complex and rely on a database that is
    not designed to be used as a measure of the impact of the North American
    Free Trade Agreement on communities. We found that the Treasury's

    current procedures result in the underestimation of dislocated workers,
    including approximately 3,700 secondary workers in firms that are suppliers
    to or assemblers for manufacturing firms adversely impacted by trade with
    Mexico and Canada. Although this undercounting has not had an impact on
    counties' eligibility to date, it could potentially prevent some

    counties from qualifying for the program. For the 228 counties in 30 states
    and Puerto Rico designated eligible for the program, notification and
    outreach have been limited, as the Treasury does not directly notify
    eligible counties about the program, according to program officials. Since
    1997, about $257 million in loan guarantees, loans, and grants have

    been provided to 83 eligible counties. Loan guarantees made through the
    program's partnership with the Small Business Administration and the
    Department of Agriculture represent 99 percent of the total financing
    provided. The community that received the largest portion (11 percent) of
    this financing is El Paso, Texas. It is not clear to what extent the
    financing

    assistance has resulted in private sector employment and growth, because the
    program does not have a monitoring system in place to measure program
    outcomes. Although program records indicate that participating businesses
    created or retained 9,208 jobs, these data are based on projections made by
    businesses when first applying for program financing and are not verified.
    Moreover, most of the bankers and business owners we interviewed said that
    the loan guarantees provided under the program in partnership with the Small
    Business Administration would still have been made without the program,
    although the lack of the benefit would have increased the risk to the
    borrowers' small business expansion projects. In addition, as we have stated
    in our previous work, 3 federal financing programs that assist specific
    sectors or firms largely shift employment among sectors in the economy
    rather than raise the overall 3 See Export- Import Bank: Key Factors in
    Considering Eximbank Reauthorization (GAO/ T- NSIAD- 97- 215, July 17,
    1997).

    level of employment, so that the program's jobs figure may not represent net
    job gains in a period of full employment.

    This report makes several recommendations to the Secretary of the Treasury
    to improve program management by delegating authority from the Finance
    Committee, amending eligibility data procedures, improving notification to
    eligible counties, and establishing a monitoring system to measure program
    outcomes. In written comments on a draft of this report, the Treasury agreed
    with our recommendations to amend the eligibility data procedures and
    improve notification to eligible counties. However, it did not agree that
    delegating additional authority from the Finance

    Committee would improve program management. Based on clarifications provided
    by the agencies on the role of the Finance Committee in the loan guarantee
    approval process, we modified the report and our recommendation to focus on
    delegating additional decision- making authority to program staff for loans
    and grants in order to promote a more efficient and timely decision- making
    process. Finally, while Treasury agreed in principle with our recommendation
    to establish a monitoring system to measure program outcomes, it expressed
    concern about the

    nature of the monitoring to be established. We disagree that follow- up
    reporting will make the program less competitive or desirable to loan
    guarantee recipients, especially since the program's lending partners (the

    Small Business Administration and the Department of Agriculture) already
    conduct such follow- up reporting for their other loan guarantees.
    Management Structure

    The Community Adjustment and Investment Program (CAIP) is managed Hinders
    Efficient

    under a high- level interagency committee structure that seeks to leverage
    available program funds by focusing on partnerships with existing federal
    Program Delivery loan guarantee programs. However, the Finance Committee's
    retention of certain day- to- day managerial functions is inefficient and
    adds time to the decision- making process.

    How CAIP Is Structured The Finance Committee, chaired by the Department of
    the Treasury, is comprised of members from participating federal agencies,
    including the

    Departments of Agriculture (USDA); Commerce; Housing and Urban Development;
    and Labor; and the Small Business Administration (SBA). Committee members
    are often at the deputy assistant secretary or deputy

    assistant administrator level. 4 Figure 1 shows the organizational structure
    of CAIP.

    Figure 1: CAIP's Organizational Structure

    Finance Finance Committee Committee

    Ombudsman Ombudsman

    Treasury Treasury (Chair), (Chair), USDA, USDA, SBA, SBA,

    (vacant) (vacant)

    Labor, Labor, Commerce, Commerce, Housing Housing and and

    Advisory Advisory Committee Committee Urban Urban Development Development

    Funding Funding Subcommittee Subcommittee

    Loan Subcommittee

    Treasury, Treasury, USDA, USDA, SBA, SBA,

    Loan Subcommittee

    Labor, Labor, Commerce, Commerce, Housing Housing and and

    Treasury Treasury (Chair), (Chair), USDA, USDA, SBA SBA

    Urban Development Urban Development

    (for (for grant grant solicitation solicitation evaluation evaluation only)
    only)

    USDA USDA Business Business

    and and Industry Industry

    SBA7( SBA7( a) a) Program Program

    Direct Direct Loan Loan Program Program

    Grant Grant Program Program

    Program Program

    field field office office

    (Los (Los Angeles) Angeles)

    (San (San Antonio) Antonio)

    field field offices offices

    Lenders Lenders Lenders Lenders Borrowers in

    Grant Grant participants participants

    Borrowers in in in eligible eligible communities

    communities eligible eligible communities

    communities

    (generally nonprofits and (generally (generally business)

    business) (generally nonprofits and

    local local governments) governments)

    Source: Treasury Department.

    4 Current Finance Committee members include the Treasury's Deputy Assistant
    Secretary, Office of Government Financial Policy (chair); Agriculture's
    Deputy Under Secretary for Policy & Planning, Office of Rural Development;
    SBA's Deputy Associate Deputy Administrator, Office of Capital Access;
    Housing and Urban Development's Director, Office of Economic Development and
    Empowerment Zones; Labor's Director, Women's Bureau;

    and Commerce's Special Assistant to the Deputy Assistant Secretary, Economic
    Development Administration.

    The Finance Committee's course of action in structuring CAIP was predicated
    on its desire to maximize the potential impact of a relatively small level
    of funding, its onetime capitalization of $22.5 million. At a time of
    extensive federal government budget cutbacks in the mid- 1990s, the
    committee wanted to minimize the funding that would be needed for
    administrative overhead and decided to partner with existing federal loan
    guarantee programs at USDA and SBA, which already had extensive field office
    infrastructures in place across the country. In May 1998, about 9 months
    after CAIP became operational, the committee established a Loan

    Subcommittee with responsibility for reviewing the loan guarantee
    applications forwarded by the USDA and SBA field offices. The Loan
    Subcommittee was authorized to approve loan guarantees where the vote for
    approval was unanimous and the loan amount was under $5 million (for

    USDA loan guarantees), which has been the preponderance of cases. Otherwise,
    the loan guarantee application is forwarded to the Finance Committee for its
    approval. In addition, two new staff were hired to run the direct loan
    component in the Los Angeles office. Direct loan applications go directly to
    the full Finance Committee for consideration. When the program later
    received additional appropriated funds in fiscal years 1999 and 2000, it
    then proceeded with the grants component in San Antonio and hired three
    staff to carry out that function. A second Funding Subcommittee was created
    with responsibility for reviewing the grant

    applications forwarded by the Grant Program office. The Funding
    Subcommittee's role is limited to evaluating grant applications; it does not
    get involved in program management. An Advisory Committee was established to
    provide advice to the Finance Committee on the implementation of the
    program. The Advisory Committee's primary role was to participate in the
    development of the

    program guidelines. It is also directed to review on a regular basis the
    operations of the program. 5 The Advisory Committee was convened for the
    first time on October 11, 1995, and since the program became operational
    meets once a year to review CAIP operations. Advisory Committee meetings are
    open to the public, and the minutes of meetings are made

    available to the public. 5 By statute, the Advisory Committee is comprised
    of nine members of the public, appointed by the President, who collectively
    represent community groups whose constituencies include low- income
    families; scientific, professional, business, nonprofit, or public interest
    organizations or associations, which are neither affiliated with nor under
    the direction of a government; for- profit business interests; and other
    appropriate entities with relevant

    experience.

    In addition to the Advisory Committee, the statute also provided that an
    ombudsman be appointed. The ombudsman's function was to establish procedures
    for receiving comments from the general public on the operation of CAIP and
    to perform an independent inspection and programmatic audit of the operation
    of CAIP. As of August 25, 2000, an ombudsman had not been appointed.
    Treasury officials told us that the

    ombudsman position had not been filled because funds were never appropriated
    for this purpose, and they did not want to deplete CAIP's capital (the 10
    percent of the paid- in capital of the North American Development Bank set
    aside for CAIP). However, there is a precedent for using CAIP's capital to
    pay program staff salaries, since the staff of the Los Angeles and San
    Antonio offices are paid from this source.

    Management Structure Is It took the Finance Committee more than 3 years to
    establish the program Inefficient

    and provide financing to eligible counties. Much of the first 3 years of the
    program was spent by the Finance Committee in defining the program to be
    delivered and developing program eligibility criteria and guidelines. The
    Committee also signed memorandums of understanding with the North American
    Development Bank on CAIP funding and with USDA and SBA to establish loan
    guarantee partnerships. The program did not become operational until
    September 1997. Figure 2 provides a chronology of management actions taken
    in developing the program.

    Figure 2: Time Line of CAIP Implementation

    September 1997: June 1997:

    CAIP implemented CAIP guidelines issued

    June 18, 1997: November 1993:

    Memorandum of Understanding US and Mexico agree to establish

    between Treasury and

    October 21, 1998:

    North American Development Bank SBA for loan guarantees signed

    Congress appropriates $10 million for CAIP

    June 23, 1997: December 8, 1993:

    Memorandum of Understanding NAFTA Implementation

    between Treasury and USDA Act creates CAIP

    for loan guarantees signed

    September 1, 1997:

    CAIP becomes operational, first financing applications reviewed

    1993 1994 1995 1996 1997 1998 1999 May 13, 1994

    August 21, 1995: October 15, 1999:

    Executive Order 12916 Charter for Advisory

    Grant program establishes CAIP Finance

    Committee approved announced with

    Committee, chaired by Treasury solicitation letter

    August 31, 1995: November 29, 1999:

    Memorandum of Understanding Congress appropriates between North American

    $10 million for CAIP Development Bank and Treasury

    on CAIP administration signed

    October 11, 1995:

    First Advisory Committee meeting held

    Legend: NAFTA North American Free Trade Agreement

    Source: Treasury Department.

    Because the Finance Committee is comprised of high- level officials from six
    federal agencies, getting a quorum convened and reaching consensus decisions
    can take time. For instance, the new grants component was announced in
    October 1999; grant applications were due January 17, 2000;

    and program officials planned to finalize the grant awards by the end of
    March 2000. A second round was tentatively planned to start in July 2000.
    However, the first- round grant decisions were not approved by the Finance
    Committee until August 1, 2000, in part because of caution related to
    establishing a new grant program and learning as they went along, and

    because of delays in convening meetings. 6 In another example, the Finance
    Committee received a direct loan application in October 1999. It approved
    the loan in January 2000 but did not authorize release of the funds until
    August 11, 2000, an unusually long lag in closing the loan. The prior two

    loans had been closed within 1- 2 months after approval. The time lag
    appeared to reflect the amount of time it took the Finance Committee to
    modify some of the terms of the proposed loan application and reach

    agreement with the borrower. The Finance Committee Chair said that it has
    been difficult for the Finance Committee to oversee the development of new
    CAIP programs and to review the disbursement of all program financing in a
    timely manner. He

    said that maintaining the current management decision- making structure may
    be even more difficult in the future with the expected growth of the new
    grant program. He told us that he plans to hire a full- time national
    director and an attorney for CAIP, which may expedite future

    decision- making and program implementation. However, it is still not clear
    the degree to which the Finance Committee will actually delegate decision-
    making authority to this new program director, so it is uncertain whether
    the decision- making process will be improved.

    Eligibility Procedures CAIP's eligibility procedures are complex and rely on
    a database that, while Underestimate

    the best available data, is not designed as a measure of the impact of the
    North American Free Trade Agreement (NAFTA) on communities. The Dislocated
    Workers, program's current procedures for utilizing these data result in and
    Outreach Efforts

    underestimating dislocated workers and could eliminate some affected Have
    Been Limited

    counties from consideration. Once eligibility is determined, we found that 6
    The Finance Committee had not publicly announced the first- round grant
    results as of September 14, 2000.

    efforts to notify counties of their program eligibility and to conduct
    outreach to eligible and potentially eligible counties have been limited.
    Counties Receiving CAIP

    We found that CAIP had designated 228 counties in 30 states and Puerto
    Financing Rico as eligible for its assistance, while 83 counties in 24
    states had actually participated in the program, as of June 8, 2000. The
    eligibility and

    participation of counties are illustrated in figure 3.

    Figure 3: Map of CAIP- eligible and -participating Counties

    Eligible counties Participating counties

    Note: Map does not show Alaska, Hawaii, or Puerto Rico. Alaska has one
    eligible county, which has participated in CAIP. Hawaii does not have any
    eligible counties. Puerto Rico has four eligible counties, none of which
    have participated in CAIP.

    Source: Based on information provided by CAIP, USDA, and SBA.

    Eligibility Criteria Eligibility for CAIP assistance is based on two
    criteria: whether a county (1) has experienced significant job losses
    attributable to NAFTA and (2) needs transition assistance to adjust
    economically to these job losses. The measure of job losses attributable to
    NAFTA is generally based on the Labor Department's certifications of workers
    who have lost their jobs or are threatened with separation due to trade with
    Canada or Mexico. To demonstrate significant job losses, the county must
    have more than 500

    Department of Labor- certified workers in an urban county or more than 300
    in a rural county during a 36- month period. The measure of need for
    transition assistance is whether the county's unemployment rate is

    1 percent or more above the national average unemployment rate during the
    past 12 months. 7 Eligibility for the program was originally for 36 months;
    however, this was adjusted to 12 months on March 10, 1999, 8 and eligibility
    can be renewed for periods of 12 months based upon

    continued evidence of need, as shown by an unemployment rate at least 1
    percent over the national average. CAIP also has two special provisions
    related to eligibility. The first provision designated all border counties,
    defined as U. S. counties that have any part located within 62 miles (100
    kilometers) of the U. S.- Mexico border, as eligible beginning October 1,
    1999. The border counties' eligibility does not have an expiration date. The
    second provision is for

    special cases, in which counties that do not qualify under the regular
    process can demonstrate adverse impact from NAFTA and become eligible.
    Adverse impact is demonstrated by evidence of job losses due to a firm's
    relocation of production to Canada or Mexico or due to increased imports
    from Canada or Mexico.

    7 County unemployment rates are measured using the Local Area Unemployment
    Statistics of the Labor Department's Bureau of Labor Statistics. The
    national unemployment rate is measured using the National Unemployment
    Statistics of the Bureau of Labor Statistics. 8 Counties designated eligible
    before March 10, 1999, were “grandfathered” for the full
    remainder of the 36- month designation period.

    Eligibility Data and The measure of job losses attributable to NAFTA is
    based on the Labor Procedures

    Department's certifications under the NAFTA- Transitional Adjustment
    Assistance Program. 9 These certification data estimate the number of job
    losses due to firm relocation to or increased imports from Mexico and/ or
    Canada. Labor Department officials who administer the program stress that
    the certification data are only a gross proxy for job losses due to

    NAFTA for a number of reasons. First, they point out that it is very
    difficult to tie job losses directly to a trade agreement like NAFTA.
    Second, the number of workers reported as certified under the NAFTA-
    Transitional Adjustment Assistance Program is based in part on an estimation
    of potential layoffs at the time a petition is filed with the Department of
    Labor, and this may understate or overstate eventual job losses. The
    Department

    of Labor rarely makes adjustments to these estimations after the final job
    reductions are made by the firm, according to Department of Labor officials.
    While CAIP administrators are aware of the limitations in the certification
    data for measuring the impact of NAFTA at the county level, they point out
    that there is no other source of information relating job losses to trade
    with Mexico and Canada; these are the best available data. 10

    In examining the procedures the Treasury Department uses to process NAFTA-
    Transitional Adjustment Assistance certification data to determine CAIP
    eligibility, we found that incomplete information transmitted to the
    Treasury by Labor has resulted in underestimation of affected workers in
    some areas. Under a discretionary component of the NAFTA- Transitional
    Adjustment Assistance Program, workers in secondary firms (firms that supply
    or assemble products produced by firms directly affected by

    NAFTA) can also receive program benefits. However, this data field is not
    transmitted to the Treasury, so that it is not included in CAIP eligibility
    calculations. Since 1995, 57 petitions for secondary firms, accounting for
    an estimated 3, 700 workers, have made workers eligible for benefits under
    the NAFTA- Transitional Adjustment Assistance Program. None of these 9 The
    Labor Department's NAFTA- Transitional Adjustment Assistance Program
    provides extended unemployment compensation and retraining benefits to
    workers whose jobs are eliminated due to trade with Mexico and Canada and
    who are certified eligible for program assistance.

    10 Legislative proposals are pending to consolidate the NAFTA- Transitional
    Adjustment Assistance Program with the larger Trade Adjustment Assistance
    Program. If such a consolidation is made, CAIP's use of Labor Department
    data could be compromised if Labor does not continue to distinguish which
    workers are certified due to trade with Canada and

    Mexico. CAIP's eligibility procedures depend upon continued identification
    of job losses attributable to NAFTA.

    workers were counted when determining CAIP eligibility. This undercounting
    did not impact counties' eligibility when CAIP eligibility was recalculated
    including these workers. However, neglecting to include secondary workers in
    the future could result in failure to identify eligible counties.

    Notification and Outreach Efforts to notify counties of their eligibility
    for the program or to provide

    to Eligible Counties counties with information about program financing
    assistance have been

    limited. Counties are not directly notified by CAIP when they receive CAIP
    eligibility. While letters are sent to Members of Congress representing the
    newly designated communities, notifications are not sent directly to
    eligible counties. This can be a problem because counties generally do not
    apply directly for CAIP eligibility, rather eligibility designations result
    from quarterly computer runs of Labor Department certification and

    unemployment data. Therefore, counties that become eligible for CAIP may not
    even be aware of the program unless notified by program officials. For
    example, when the new CAIP grants component was established, the

    grants staff created an extensive outreach database and conducted a large,
    targeted mailing to 6, 200 addressees in eligible counties. In response to
    the solicitation letter, a number of counties stated that they had been
    unaware of the existence of CAIP, much less their eligibility for the
    program. CAIP has also done limited outreach and marketing of the program in
    eligible counties. Most of the outreach that has been done to inform

    counties about CAIP was undertaken through SBA and USDA field offices and
    their network of bankers and contacts with chambers of commerce. The CAIP
    Los Angeles office has conducted outreach conferences in newly designated
    counties when possible in conjunction with USDA or SBA field staff but has
    been hampered by limited staff and funding for outreach activities,
    according to a program official. The Los Angeles office has also sent
    articles about the program to industry or trade journals and has created a
    Web site in conjunction with the University of California at Los

    Angeles' North American Integration and Development Center. The Web site is
    a useful information source for those counties that are already aware of the
    program. 11 In addition, the CAIP grants mailing appears to have generated
    interest in CAIP direct loans and loan guarantees as well, according to
    program officials.

    11 The Web site address is www. nadbank- caip. org.

    In order to gain a better understanding of CAIP outreach efforts, we visited
    two communities with high levels of CAIP activity- El Paso, Texas, and Coeur
    d'Alene, Idaho. We met with agency officials, bankers, and participating
    small business owners, as well as with community/ economic development
    officials. We supplemented our field work with telephone interviews with
    agency officials in USDA and SBA field offices in Louisiana,

    South Carolina, New York, and California. While it appeared that substantial
    outreach efforts had been undertaken in El Paso and Coeur d'Alene, we found
    limited knowledge of the program among businesses. Most of the bankers were
    aware of the program; however, many of the community/ economic development
    officials, bankers, and business owners that we talked to believed that
    greater outreach was needed. In addition, in our interviews with agency
    officials in SBA and

    USDA field offices, the assessment of most of the agency officials we talked
    to was that most in their business community were not aware of the program.

    Results of Efforts to The program's efforts to stimulate private sector
    employment and growth

    Stimulate Private in eligible counties have been channeled through three
    types of financing: loan guarantees, loans, and grants. A total of about
    $257 million in Sector Employment financing has been provided, with loan
    guarantees predominating.

    and Growth However, it is not clear what the impact of the financing
    assistance is,

    because CAIP does not have a monitoring system in place to measure program
    outcomes.

    Three Types of Financing CAIP is designed to assist the business community
    through loan

    Provided- Loan guarantees, loans, and grants. Figure 4 shows the amount of
    financing

    Guarantees, Loans, and provided to eligible counties since September 1997.
    To date, loan Grants

    guarantees have been the primary financing mechanism used and represent 99
    percent of total financing. Two direct loans have been approved, and the new
    grant program is finalizing its first round of grant awards.

    Figure 4: CAIP Financing to Assist Distressed Counties Since Start of
    Program, as of June 8, 2000

    120 Dollars in millions

    110 100

    25.9 90 80 70

    1 60

    0.5 31.9 50

    18.6 40

    86.6 30 20

    0.5 38.2

    39.6 10

    6.8 0

    6.5 1994

    1995 1996

    1997 1998

    1999 2000 Total=

    Total= Total=

    Total= Total=

    Total= Total= $0

    $0 $0

    $13.8 $111.1

    $70 $58.7 USDA loan guarantees SBA loan guarantees CAIP direct loans

    Notes: 1. The CAIP Grant Program awarded $600,000 to a pilot grant project
    in 1999. This number is not shown in figure 4 because it could not be
    adequately represented on the graph.

    2. Data are based on calendar year calculations. 3. Data for 2000 are for
    January- June 8. Source: SBA, USDA, and CAIP Los Angeles office.

    Loan Guarantees Loan guarantees are provided through existing federal loan
    guarantee programs at USDA and the SBA. Specifically, CAIP established a
    lending partnership with the USDA Business and Industry Guaranteed Loan
    Program and the SBA 7( a) Loan Guarantee Program. 12 CAIP benefits from
    their field infrastructure and underwriting capabilities and, in return,
    pays for the guarantee fee (usually passed on by the lender to the borrower)
    and

    the subsidy cost to the government for the agencies (which, otherwise, would
    be covered by the USDA and SBA budgets), as well as several administrative
    costs. All eligibility criteria established by USDA and SBA for financing
    under these programs remain the same. In addition, the following CAIP
    criteria have been added:

    The borrower must devote a majority of the loan principal made available
    under CAIP to opening a new facility, expanding operations at an existing
    facility, or improving a firm's competitive position.

    The project must demonstrate a capacity to create new jobs, or preserve jobs
    at risk of being lost, over a 24- month period. The project must demonstrate
    a capacity to create or preserve at least one job for every $70,000 of the
    guaranteed portion of the loan principal made available under the program.

    Loans CAIP also offers a direct loan program designed to assist borrowers
    that do not meet the criteria for conventional financing or for USDA or SBA
    loan guarantees. Since the direct loan program's inception in September
    1997, two loans totaling $2 million have been made- one in California and
    one in Texas. One loan was made to the California Coastal Rural Development
    Corporation for $1 million. Cal Coastal, a community- based, nonprofit
    lender, is using the loan as a line of credit to provide up to 10 percent of
    the

    total loan amount for USDA Business and Industry loans in distressed
    communities that otherwise could not have qualified for these loans. The
    other loan, also for $1 million, was made to the Greater El Paso Chamber of
    Commerce, which is renovating a former Levi- Strauss factory for use as a

    workforce development center and a business resource center. Grants Formally
    launched on October 15, 1999, the Grant Program is the third and

    newest of the CAIP financing programs. It is designed to assist in the
    creation or preservation of jobs for impacted counties through specific
    project and technical assistance grants. Up to $6 million will be available
    to

    12 For more information about these loan guarantee programs, see appendix I.

    fund the first round of grant awards. In March 1999, before the new grant
    program was announced, the Finance Committee approved a pilot grant project
    for $600,000 to the New Mexico Border Authority in Dona Ana County, New
    Mexico. The grant was seed money for a retraining project for a projected
    1,200 workers in this highly NAFTA- impacted area. (For more information on
    CAIP direct loans and grants, see app. I.)

    Amount of Loan About $257 million in financing has been provided to eligible
    counties-

    Guarantees, Loans, and $254 million in loan guarantees, $2 million in loans,
    and $600,000 in grants.

    Grants Provided by CAIP A summary of CAIP financing activity showing the
    number of loan guarantees, loans, or grants and their value, is provided in
    table 1.

    Table 1: CAIP Financing Activity, September 1997- June 8, 2000 Financing
    component Number Value

    Loan guarantees a 366 $254, 137, 345 USDA Business & Industry Loan

    89 170,955, 290 Guarantee Program SBA 7( a) Loan Guarantee Program 277 83,
    182, 055

    Direct loans 2 2, 000, 000 Grants b 1 600, 000

    Total 369 $256,737, 345

    a Table excludes loan guarantees approved but withdrawn by the borrowers
    before closing and cancelled by the agencies. b This is for a pilot grant
    project, approved in March 1999. The first round of grants, representing a
    total

    of $6 million, has been decided, but as of September 14, 2000, they had not
    been publicly announced. Source: USDA, SBA, and the Treasury.

    Not all of the eligible counties have actually participated in CAIP. As
    previously mentioned, of the 228 counties in 30 states and Puerto Rico
    designated eligible for program financing, we found that 83 counties in 24
    states had actually participated in the program, as of June 8, 2000. The
    community with the highest level of loan guarantee activity was El Paso,

    Texas, which had 114 SBA 7( a) loans totaling $28 million in value and SBA
    projections of about 927 jobs created or retained. El Paso also received a
    direct loan for $1 million. The largest state recipients of program
    financing are shown in figure 5. Loan guarantees represent the majority of
    the assistance provided to each state. Louisiana, with $50.8 million in loan
    guarantees, and Texas, with $48.8 million in loan guarantees and a direct
    loan, had by far the highest level of activity in terms of value of
    financing, together accounting for 39 percent of the total. When the next
    three highest- ranking states- Georgia, California, and Idaho- are also
    included, the top five states accounted for 66 percent of the total value of
    the

    financing. At the other end of the spectrum, eligible counties in Arizona,
    Illinois, Indiana, New Jersey, Oregon, Puerto Rico, and Wisconsin had not
    participated in the program. 13 13 In some cases, lack of participation may
    be due to recent designation of eligibility, or a relatively low level of
    participation may be due to a limited number of eligible counties in that
    state, according to program officials.

    Figure 5: Financing Provided to States Through CAIP, as of June 8, 2000

    Louisiana 50.8

    Texas 48.8

    Georgia 27.6

    California 24.8

    Idaho 18

    S. Carolina 13.4

    Alaska 10.6

    Michigan 8.7

    Mississippi 6.7

    Ohio 6

    Connecticut 4.6

    New York 4.5

    Tennessee 4.5

    N. Carolina 4.1

    Arkansas 3.9

    Missouri 3.1

    Alabama 2.8

    Florida 2.7

    New Mexico 2.7

    Kansas 2.6

    Kentucky 2.4

    Pennsylvania 2.1

    Washington 0.8

    Virginia 0.6

    0 10 20 30 40 50 60 Dollars in millions

    Source: USDA and SBA.

    We visited two communities with high levels of CAIP activity- El Paso,
    Texas, and Coeur d'Alene, Idaho- in order to gain a better understanding of
    the effect of CAIP financing. We supplemented our field work with telephone
    interviews with the USDA and SBA offices responsible for CAIP loan
    guarantees in eligible counties in Louisiana, South Carolina, and New York,
    as well as the areas of Los Angeles in southern California and Watsonville
    in central California. Most USDA and SBA officials we talked to said that
    CAIP had been valuable in increasing the volume of loans that

    they could generate in these distressed counties.

    Most USDA officials we talked to said that CAIP was valuable in increasing
    the availability of funds for its business and industry loan guarantees. The
    Business and Industry Guaranteed Loan Program usually uses up its state

    allocations early in the fiscal year, and additional funds are generally not
    available until the end of the fiscal year when any unused funds are
    returned to the National Reserve Office and can be tapped. While CAIP funds
    are used to make loan guarantees throughout the year, according to USDA
    officials they play a critical role in enabling loans that USDA would not
    otherwise be able to make during this time. USDA officials said that they
    did not pay the 2- percent guarantee fee with CAIP funds, rather they used
    all available CAIP funds to increase the pool of funds for loan

    guarantees. The average size of CAIP- supported USDA Business and Industry
    loan guarantees was about $1.9 million, according to CAIP.

    Most SBA officials we talked to said that CAIP was valuable in paying the 7(
    a) guarantee fee, which was a burden for most small business borrowers. The
    average size of CAIP- supported SBA 7( a) loan guarantees was about
    $300,000, according to CAIP, with guarantee fees ranging from 2 percent to
    3.875 percent of the guaranteed portion of the loan, depending on the size

    of the loan. Most of the participating lenders and borrowers we talked to
    agreed, saying that not having to pay the guarantee fee had been a benefit
    for the borrowers and had freed up needed operating capital during their
    business expansion. Most lenders and borrowers said that they probably would
    have completed the SBA 7( a) loan without the CAIP benefit; however, lack of
    the benefit would have increased the risk to their small business expansion
    projects. Having the extra capital helped to make the business stronger and
    allowed them to hire more workers. CAIP Does Not Monitor

    CAIP has no requirements for monitoring the outcomes of its financial Loan
    Outcomes

    assistance to eligible counties, which would allow it to measure the degree
    to which the program has actually assisted distressed counties. Program
    officials monitor program outputs, such as the number of loans, loan
    amounts, and CAIP expenses. As such, these are measures only of what CAIP is
    providing counties, not what has resulted in the counties due to the loans.
    Program officials do track the number of jobs created or retained due to
    CAIP loan guarantees, which program records indicate was 9,208 jobs, as of
    June 8, 2000. However, these data are based solely on the projections made
    by businesses when they apply for the loan guarantee. There is no follow- up
    to monitor the actual number of jobs that the borrowing businesses had
    realized in the 24 months following the loan,

    although this estimate is a primary condition for qualifying for the CAIP
    loan guarantee. The issue of creation of jobs is a complex one. As we have
    stated in prior

    work, economists and policymakers recognize that employment levels are
    substantially influenced by macroeconomic policies, including actions of the
    Federal Reserve. At the national level, under conditions of full employment,
    government finance assistance programs may largely shift

    production among sectors within the economy rather than raise the overall
    level of employment in the economy. Therefore, it should be kept in mind
    that the jobs figure that CAIP reports may not represent net job gains in a
    period of full employment.

    Another consideration in CAIP's jobs numbers is the question of the
    “additionality”- that is, would these jobs have been created or
    retained anyway in the absence of the program. For instance, most of the SBA
    7( a) lenders and borrowers we interviewed said that the SBA 7( a) loan
    guarantees provided under CAIP would still likely have been made without
    CAIP participation. While CAIP financing may have helped stimulate economic
    growth in distressed counties, unless CAIP develops appropriate performance
    measures and a monitoring system to track them, it will not

    be able to establish the degree to which the program has actually assisted
    these counties.

    Conclusions The additional contribution that CAIP makes to distressed
    counties appears limited, as most of the assistance provided to date-$ 254
    million in loan guarantees, or 99 percent of the total program support- is
    channeled

    through existing USDA and SBA loan guarantee delivery mechanisms. Although
    agency officials, bankers, and participating businesses that we interviewed
    said they valued this financing, they acknowledged that a significant amount
    of these loan guarantees would have been provided without the program.
    Answering this fundamental question requires a monitoring system that
    measures program outcomes and demonstrates the value of the program.

    We identified several additional areas where program management could be
    improved. First, the Finance Committee's retention of certain day- to- day
    managerial functions has resulted in a highly centralized and inefficient
    management decision- making structure. Second, eligibility determinations
    are very complex and rely upon a Department of Labor database that was not
    designed for this purpose. Furthermore, eligibility determination

    procedures do not ensure the completeness and accuracy of the data, which
    could potentially result in eliminating some counties from qualifying for
    program assistance. Finally, adequate notification has not been provided to
    eligible counties.

    Recommendations for In order to improve the management and administration of
    the Community Executive Action

    Adjustment and Investment Program, we recommend that the Secretary of the
    Treasury direct the Chair of CAIP's Finance Committee to take the following
    steps.

    1. Consider delegating additional decision- making authority from the
    Finance Committee to program staff for loans and grants.

    2. Establish procedures to ensure that the data used in determining
    eligibility for program assistance are complete and accurate.

    3. Improve notification of eligible counties by directly informing them when
    they are found to be eligible for the program.

    4. Establish outcome measures and a monitoring system to track the degree to
    which the program has actually assisted distressed counties. Agency Comments
    and

    We received written comments on a draft of this report from the Our
    Evaluation Department of the Treasury, the SBA, and USDA (see apps. III to
    V). The Treasury agreed with our recommendations to establish procedures for

    complete and accurate eligibility data and to improve eligibility
    notification and said it was already taking steps to implement an improved
    eligibility notification process. The SBA and USDA did not comment on these
    two recommendations. In addition, the Treasury, the SBA, and USDA also
    provided technical comments, which we incorporated in the report as

    appropriate. The Treasury, the SBA, and USDA did not agree with our
    recommendation that the Finance Committee consider delegating additional
    decision- making authority, particularly for loan guarantees. In addition,
    the

    Treasury said that it wanted to retain the current process for direct loans
    and grant awards because this type of assistance occurs infrequently. The
    three agencies provided information clarifying the role of the Finance
    Committee in the loan guarantee approval process, and as a result we have

    revised our report and focused our recommendation on delegating decision-
    making authority for grants and loans. Just as agency officials indicated
    that the loan guarantee process became more efficient once the

    Finance Committee delegated approval authority to the Loan Subcommittee,
    other areas of program activity, such as determinations of community
    eligibility and the administration of direct loans and grants, would also
    benefit from such a delegation of decision- making authority to program
    staff. The Finance Committee's retention of decision- making authority in
    these areas is inefficient and has added substantial time- in some cases,
    months- to the decision- making process. Greater efficiency will be even
    more important in the near future, since agency officials have indicated
    that the Grant Program is expected to grow substantially over the

    upcoming year. Finally, the Treasury agreed in principle with our
    recommendation that the Community Adjustment and Investment Program
    establish outcome measures and a monitoring system to track the degree to
    which the program has actually assisted distressed counties. However, the
    Treasury expressed concern that imposing a reporting requirement on lenders
    and/ or borrowers involved with the program's loan guarantees would make

    the program less competitive than the SBA's and USDA's other loan
    guarantees. The Treasury indicated it would explore monitoring through
    informal surveys or through site visits or interviews by the SBA and USDA
    field offices. The SBA and USDA both noted that the program's Los Angeles
    office had conducted a follow- up survey of jobs realized by borrowing
    businesses. We do not believe that follow- up monitoring of the Community
    Adjustment and Investment Program's loan guarantees, loans, or grants will
    make them

    less competitive or desirable to recipients. In fact, the SBA and USDA
    already conduct their own follow- up activities for their loan guarantees,
    and in two of the three partner programs are already collecting some degree
    of job results information. As such, the program's loan guarantees would
    clearly not be put at a competitive disadvantage if the program

    instituted a monitoring system, as recommended in our report. In terms of
    the survey mentioned by the Treasury, the SBA, and USDA, the program's Los
    Angeles office did conduct a preliminary survey from October 1998 to
    February 1999 of jobs created or retained as a result of the program's loan
    guarantee partnership with USDA during the program's first year of

    operation. However, this was a onetime snapshot of one of the program's loan
    guarantee partnerships and does not constitute a consistent or

    effective monitoring system that would provide program outcome measures, as
    called for in our report. We are sending copies of this report to
    appropriate congressional committees. We are also sending copies of this
    report to the Honorable Lawrence H. Summers, Secretary of the Treasury; the
    Honorable Dan Glickman, Secretary of Agriculture; and the Honorable Aida
    Alvarez, Administrator of the Small Business Administration. Copies will
    also be

    made available to others upon request. If you or your staff have any
    questions about this report, please contact me on (202) 512- 4128.
    Additional GAO contacts and staff acknowledgments are listed in appendix VI.

    Susan S. Westin, Associate Director International Relations and Trade Issues

    Appendi xes Community Adjustment and Investment Program Financing for
    Distressed Communities Through Loan Guarantees,

    Appendi x I

    Loans, and Grants The Community Adjustment and Investment Program (CAIP) was
    established in December 1993 to assist communities that have suffered job
    losses due to changing trade patterns with Mexico and Canada as a result of
    the 1993 North American Free Trade Agreement (NAFTA). It provides

    financing assistance to these distressed communities through loan
    guarantees, loans, and grants in order to stimulate private sector
    employment and growth.

    Loan Guarantees CAIP has formed a lending partnership with the Department of
    Agriculture (USDA) and the Small Business Administration (SBA) in order to
    provide loan guarantees. This component, called the CAIP Federal Agency
    Program, has partnered with the USDA Business and Industry Guaranteed

    Loan Program and the SBA 7( a) Loan Guarantee Program. Further, the Finance
    Committee that manages CAIP approved the addition of the SBA's 504 Program
    to the Federal Agency Program in April 2000. It was initiated on August 10,
    2000.

    USDA's Business and Industry Guaranteed Loan Program is administered by the
    Rural Business- Cooperative Service of USDA Rural Development. The primary
    purpose of the program is to create and maintain employment and improve the
    economic and environmental climate in rural communities. Loan guarantees are
    limited to a maximum of $10 million per

    borrower, although the Rural Business- Cooperative Service Administrator may
    approve loans up to $25 million. The guarantee will cover from 60 to 80
    percent of the loan, depending on the size of the loan. Repayment must be
    made within 7 years for working capital, 15 years for machinery and

    equipment (or its useful life), and 30 years for real estate. The guarantee
    fee is generally 2 percent of the guaranteed principal amount. 1 1 More
    detailed information on the Business and Industry Guaranteed Loan Program is
    available at its Web site: www. rurdev. usda. gov.

    The SBA's 7( a) Loan Guarantee Program is its primary business loan program,
    generally used for business start- ups and to meet the varied short- and
    long- term needs of existing small businesses. A 7( a) guaranteed loan may
    be used for most business purposes, including start- up, expansion,
    equipment purchases, working capital, inventory, or real estate acquisition.
    Participating lenders- small business lenders that have

    entered into lending agreements with the SBA- provide loans in conjunction
    with SBA guarantees. By reducing risk, guarantees expand the lenders'
    ability to make small business loans. Generally, the SBA can guarantee up to
    $750,000 of a private sector loan. The guarantee rate is 80 percent on loans
    of $100,000 or less and 75 percent on loans greater than $100,000. The loan
    can extend to 10 years for working capital and 25 years for fixed assets.
    The guarantee fee ranges from 2 to 3. 875 percent, depending on the size of
    the loan. 2 CAIP recently decided to add the SBA's 504 Loan Program to the
    CAIP

    Federal Agency Program. The 504 Loan Program provides long- term, fixed-
    rate financing for businesses needing to acquire industrial or commercial
    buildings or heavy machinery and equipment. Loans under the 504 Program are
    developed through certified development companies (nonprofit corporations
    sponsored by private- sector organizations or by

    state and local governments to contribute to economic development), working
    in partnership with private lenders and the SBA. The certified development
    company finances its part of the loan through the sale of a debenture 3 to
    private institutional investors with the SBA fully guaranteeing the
    repayment of the debenture. The SBA can guarantee debentures covering as
    much as 40 percent of a 504 project. The maximum SBA debenture generally is
    $750,000 (up to $1 million, if the project meets a public policy goal). For
    every $35,000 of debenture financing in the certified development
    corporation's portfolio, the SBA requires that an average of one job be
    created or retained within 2 years of the project's funding.

    2 More detailed information on SBA 7( a) loans is available at its Web site:
    www. sba. gov/ financing. 3 A debenture is a bond backed by the general
    credit of a corporation rather than a specific lien on particular assets.

    Direct Loans The CAIP Direct Loan Program is administered by CAIP's Los
    Angeles office. While direct loans must generally meet the same criteria
    CAIP has set for its loan guarantee programs, the application process is
    much more involved. Both the application process and the evaluation and
    selection process for direct loans are delineated in the CAIP guidelines.
    For example, to be eligible for a direct loan, the director of the program
    conducts an initial evaluation of the project using specified criteria and a
    scoring system

    that includes elements such as county job losses and the need for transition
    assistance, as well as the anticipated benefits of the project to that
    county. The director submits to the Finance Committee only those projects
    receiving a score of 60 points or greater out of a potential 100 points.

    Although the Los Angeles office has reviewed a number of loan requests, it
    has made only two direct loans. The first direct loan was made to California
    Coastal Rural Development Corporation for $500, 000 and was approved by the
    Finance Committee on September 5, 1997. The loan to Cal Coastal is being
    used as a line of credit that has allowed this community- based,

    nonprofit lender to provide up to 10 percent of the total loan amount of the
    loans guaranteed by USDA's Business and Industry/ CAIP loan guarantee
    program. 4 Since the direct loan to Cal Coastal closed in October 1997, Cal
    Coastal has made three Business and Industry/ CAIP loans totaling over $2. 2
    million, and it has projected the loans will help create or retain 135 jobs,
    as of April 25, 2000. According to the CAIP Direct Loan Program

    Director, Cal Coastal would likely not have been able to make these loans
    without the direct loan because it lacks the capital to fund the required 10
    percent that is not guaranteed. The Finance Committee approved a second
    tranche, or installment, of $500,000 to Cal Coastal on January 4, 2000. Cal
    Coastal had originally requested $1 million, and the loan had been approved
    in two installments of

    $500,000. However, the Finance Committee did not close the loan, that is,
    transfer the funds, until August 11, 2000, according to the CAIP Direct Loan
    Program Director. Cal Coastal has requested the second installment

    4 The USDA Business and Industry/ CAIP loan guarantee program provides a 90-
    percent loan guarantee, leaving 10 percent that is not guaranteed and that
    must be carried by the lending institution. For example, for a $1 million
    loan, USDA would guarantee 90 percent, or $900, 000, and the lender would
    hold the unguaranteed portion (10 percent, or $100, 000). In this example,
    the CAIP line of credit would be used to fund the unguaranteed amount. The
    guaranteed portion of the loan is salable in the secondary market, which the
    lender would immediately sell off in order to recoup the majority of the
    total loaned.

    because its existing line of credit with CAIP has been depleted by about
    half. In addition, Cal Coastal has more Business and Industry/ CAIP loans
    that it is working to complete but that call for about $100, 000 more than
    is available under the first installment. The second direct loan was made to
    the El Paso Workforce Collaborative, a

    wholly owned subsidiary of the Greater El Paso Chamber of Commerce, for $1
    million and was approved by the Finance Committee on May 13, 1999. This
    direct loan has enabled the El Paso Chamber of Commerce to make renovations
    to a former Levi- Strauss factory. The renovated facility will be used as
    both a workforce development center and a business resource center. As long
    as the Chamber uses the building as a workforce

    development center, interest charges accrued on the loan will be waived.
    Although the facility was not fully finished when we visited El Paso in June
    2000, the Chamber had submitted plans and specifications for its completion.
    The Chamber also recently reported that about 98 percent of

    the renovated building was leased. Besides managing the direct loan program,
    the CAIP Los Angeles office has provided some technical assistance,
    outreach, and monitoring. For example, the Los Angeles office provides
    technical assistance to businesses interested in receiving benefits under
    the CAIP Direct Loan or Federal Agency programs. The office has been
    involved in providing

    technical assistance to several applicants that resulted in loans made
    through the Federal Agency Program in conjunction with commercial lenders.
    In addition, outreach activities include working with communities applying
    for CAIP eligibility to help them identify actual NAFTA impacts, as well as
    attending various conferences to help market CAIP and efforts to maintain
    the CAIP Web site. Finally, in an effort to help monitor CAIP eligibility
    and activity, the Los Angeles office prepares an annual CAIP

    status report that captures eligibility and activity data by state.

    Grants The CAIP Grant Program is administered by the CAIP Grant Program
    office, located in the San Antonio, Texas, headquarters of the North

    American Development Bank. Among other responsibilities, the Grant Program
    office has core activities that include designing the national selection
    process and, when grants are awarded, monitoring project implementation. Up
    to $6 million has been committed to fund the first round of grant awards. A
    project may be funded under the Grant Program if it meets applicant 5 and
    area eligibility requirements laid out in the

    solicitation for grant applications. In addition, it must meet broad
    eligibility criteria for projects and programs established by the Finance
    Committee. Two types of grants may be funded: specific project grants or
    technical assistance grants. For example, a specific project grant may be
    awarded to a project that provides assistance to retain an existing business
    that has threatened to leave the United States. A technical assistance grant
    may be

    obtained to support the development of specific projects or programs
    designed to create or preserve jobs (for example, providing preparation
    assistance to applicants under the CAIP Direct Loan Program or similar
    assistance programs).

    In addition to the eligibility requirements, a formal application that
    includes a work plan statement must be completed and submitted to the Grant
    Program office. The application is then screened for eligibility and
    completeness, and a competitive scoring system is employed to determine
    which projects will be funded. A Funding Subcommittee with grants experience
    implements the scoring system, which includes a recommended slate of
    applicants for endorsement to the Finance

    Committee. Once an applicant is selected to receive a grant award, the
    awardee will be required to enter into a grant agreement that includes
    requirements to complete the project and report on the project's progress.
    The Grant Program received 81 specific project applications and 55 technical
    assistance applications, with a total amount requested of about $46.4
    million. After the grant solicitation closed in January 2000, the Grant
    Program office staff and the Funding Subcommittee developed specific review
    procedures and implemented the final procedures approved by the Finance
    Committee. The Finance Committee received and approved the

    5 An eligible applicant is any nonprofit (501 (c) (3) or 501 (c) (4))
    organization, public or private institution of higher education, state or
    local political subdivision or agency, or Indian tribal government.

    recommended slate of applicants from the Funding Subcommittee in June. Then
    the Grant Program office performed its due diligence requirements to ensure
    the integrity of the Grant Program. Although an announcement on the grant
    awards had been anticipated for March 2000, the awards were not approved by
    the Finance Committee until August 1, 2000, and still had not been publicly
    announced as of September 14, 2000.

    A pilot project to fund the New Mexico Border Authority in Dona Ana County,
    New Mexico, was approved by the Finance Committee on March 10, 1999. The
    grant request for $600,000 was planned as seed money for providing
    retraining to approximately 1,200 workers in the Dona Ana region of New
    Mexico, a highly NAFTA- impacted area. The pilot grant project was initiated
    in part to help the Grant Program office gain some

    experience in the development of a grant program and in part to encourage
    support for the new Grant Program.

    Administratively, the Grant Program has also benefited from its affiliation
    with the North American Development Bank office in San Antonio, Texas,
    according to the Grant Program Director. The Bank provides additional
    resources to CAIP through specific services supplied to the Grant Program.
    For example, Grant Program staff have benefited from access to the expertise
    of Bank procurement and disbursement specialists, as well as from
    administrative support, such as the Bank's receptionist. Having these types
    of resources available to the CAIP Grant Program has proved

    beneficial and provided it with important efficiencies, according to the
    Grant Program Director.

    Appendi x II

    Objectives, Scope, and Methodology Concerned about whether the Community
    Adjustment and Investment Program is providing timely and useful assistance
    to communities suffering job losses due to changing trade patterns with
    Mexico and Canada, the Chairman and Ranking Minority Member of the Senate
    Finance Committee asked us to assess (1) how the program has been
    structured, (2) how

    program eligibility criteria and outreach efforts have been implemented, and
    (3) what the results of efforts to provide assistance to eligible
    communities were.

    To obtain information on how the program has been structured, we interviewed
    agency officials from the Departments of the Treasury and Agriculture and
    the Small Business Administration and reviewed program documents, including
    minutes of CAIP Finance Committee meetings. We reviewed the minutes and
    briefing packages for all of CAIP's Advisory Committee meetings that have
    been held. We also attended the Advisory Committee's annual meeting on April
    25, 2000, in Washington, D. C.

    To obtain information on how program eligibility criteria have been
    implemented, we looked at documentation and interviewed officials at the
    Departments of Labor and the Treasury, as well as the CAIP Los Angeles
    office. We reviewed the Finance and Advisory Committee records of
    deliberations on establishing eligibility criteria. We also interviewed an
    official of the North American Integration and Development Center at the

    University of California in Los Angeles, which is under contract to the
    Department of the Treasury to conduct the actual computer runs that
    determine program eligibility. Further, we reviewed the procedural manual
    for eligibility determinations that the Treasury's Office of Economic Policy
    provided to the Center. In addition, we obtained and analyzed the NAFTA-
    Transitional Adjustment Assistance Program database that the Department of
    Labor provides to the Treasury for the eligibility determination. To obtain
    information on how program outreach efforts have been implemented, we
    interviewed agency officials and reviewed program

    documents at the Departments of the Treasury and Agriculture, the Small
    Business Administration, and the CAIP Los Angeles and San Antonio offices.
    In order to gain the perspective of how participating eligible communities
    viewed CAIP's outreach efforts, we visited two communities with high usage
    of the program- El Paso, Texas, and Coeur d'Alene, Idaho.

    We selected El Paso because it was the community with the highest amount of
    CAIP financing, including loan guarantees and a direct loan; it was in the
    U. S.- Mexico border region; and it was highly impacted by NAFTA. We

    selected Coeur d'Alene because it had the highest number of both USDA and
    SBA loan guarantees in the same area, and it was close to the U. S.- Canada
    border. We interviewed SBA field office officials in El Paso and in Spokane,
    Washington, because SBA's Spokane District Office was responsible for
    northern Idaho, including the Coeur d'Alene area. We interviewed USDA
    officials in Coeur d'Alene. In these communities, we

    also met with lenders, borrowers, chamber of commerce officials, economic
    development officials, and academics. To gain the perspective of USDA and
    SBA field officials in different parts of the country where there was both
    high and low participation in CAIP financing, we conducted telephone
    interviews with agency officials in California, Louisiana, New York, South
    Carolina, and Texas.

    To obtain information on the results of efforts to provide assistance to
    eligible communities, we interviewed agency officials and obtained
    documentation at the Departments of the Treasury and Agriculture and the
    Small Business Administration and the CAIP Los Angeles office. In addition,
    for loan guarantees, we reviewed the USDA and SBA CAIP loan

    guarantee databases. We visited the CAIP Grant Program office in San Antonio
    and reviewed Grant Program procedures and a selection of applications. We
    also met with officials of the North American

    Development Bank who have been assisting the Grant Program office. Our field
    visits to El Paso and Coeur d'Alene were also focused on gaining the
    perspective of these NAFTA- impacted communities on CAIP financing. As
    previously stated, we met with agency officials implementing the program in
    these communities and with lenders, borrowers, community officials, chamber
    of commerce officials, and economic development officials. In El Paso, we
    met with a Greater El Paso Chamber of Commerce official to gain

    his views on both CAIP loan guarantees and the direct loan the Chamber
    obtained. We also met with the Director of the New Mexico Border Authority,
    which undertook the grant pilot project. We supplemented this

    information with our telephone interviews with agency officials in
    California, Louisiana, New York, South Carolina, and Texas. We performed our
    work from February through August 2000 in accordance with generally accepted
    government auditing standards.

    Comments From the Department of the

    Appendi x II I Treasury Note: GAO comment supplementing those in the report
    text appear at the end of this appendix.

    See comment 1.

    The following is GAO's comment on the Department of the Treasury's letter
    dated September 14, 2000.

    GAO Comment 1. We revised the report to clarify the role of the Finance
    Committee in approving loan guarantees. We also modified our recommendation
    to focus on the need for greater delegation of decision- making authority
    for loans and grants.

    Comments From the Small Business

    Appendi x V I Administration Note: GAO comments supplementing those in the
    report text appear at the end of this appendix.

    See comment 1.

    See comment 2.

    See comment 3.

    See comment 1.

    The following are GAO's comments on the Small Business Administration's
    letter dated September 13, 2000. GAO Comments 1. Our point was not to
    question whether these loan guarantees could

    have been made without CAIP. All borrowers clearly have to qualify for the
    7( a) loan guarantee before they are considered for CAIP eligibility. Our
    point was to raise the question of what additional benefits or outcomes CAIP
    was bringing to the program. Outcome measures and a monitoring system are
    needed to demonstrate the benefits CAIP has

    brought to communities. In addition, it was not our intent and nowhere does
    the report indicate that CAIP loan guarantees should be targeted to higher-
    risk lenders. 2. As we stated in the text, the issue of job creation is a
    complex one. Our

    point was to note that in the larger economic context, a government
    financial assistance program such as CAIP is not likely to create net new
    jobs in the economy. Rather, programs such as CAIP can shift resources from
    one region or industry to another. This issue has been recognized by the
    Office of Management and Budget in its OMB Circular A- 94, Guidelines and
    Discount Rates for Benefit- Cost Analysis of Federal Programs (Oct. 1992),
    which instructs agencies to assume

    that resources in the economy are likely to be fully employed. 3. We revised
    the report to clarify the role of the Finance Committee in approving loan
    guarantees. We also modified our recommendation to focus on the need for
    greater delegation of decision- making authority

    for loans and grants.

    Comments From the Department of

    Appendi x V

    Agriculture Note: GAO comments supplementing those in the report text appear
    at the end of this appendix.

    See comment 1.

    See comment 2.

    See comment 3. See comment 4.

    See comment 5.

    See comment 6.

    The following are GAO's comments on the Department of Agriculture's letter
    dated September 12, 2000.

    GAO Comments 1. We revised the report to clarify the role of the Finance
    Committee in approving loan guarantees. We also modified our recommendation
    to focus on the need for greater delegation of decision- making authority
    for loans and grants. 2. Our point was not to question whether these loan
    guarantees would have been made without CAIP, but rather to raise the
    question of what additional benefits or outcomes CAIP was bringing to the
    program.

    Outcome measures and a monitoring system are needed to demonstrate the
    benefits CAIP has brought to communities.

    3. As we stated in the text, the issue of job creation is a complex one. Our
    point was to note that in the larger economic context, a government
    financial assistance program such as CAIP is not likely to create net

    new jobs in the economy. Rather, programs such as CAIP can shift resources
    from one region or industry to another. This issue has been recognized by
    the Office of Management and Budget in its OMB Circular A- 94, Guidelines
    and Discount Rates for Benefit- Cost Analysis of Federal Programs (Oct.
    1992), which instructs agencies to assume

    that resources in the economy are likely to be fully employed. 4. We revised
    the name of the program in the text as suggested. 5. The data in figure 4,
    and throughout the report, are based on the

    calendar year and not the fiscal year. We have added a note to figure 4
    indicating its basis in calendar year data.

    6. These points are largely covered in both the letter and in greater detail
    in appendix I.

    Appendi x VI

    GAO Contacts and Staff Acknowledgments GAO Contacts Steve Lord (202) 512-
    4379 Leyla Kazaz (202) 512- 9638 Acknowledgments In addition to those listed
    above, Patricia Cazares- Chao, Phil Herr, Samantha Roberts, Rona Mendelsohn,
    Frederick J. Barrett, Matt Helm, and Franz Traxler made key contributions to
    this report. (711495) Lett er

    GAO United States General Accounting Office

    Page 1 GAO/ NSIAD- 00- 229 Trade Adjustment Assistance for Communities

    Contents Letter 3 Appendixes Appendix I: Community Adjustment and Investment
    Program

    Financing for Distressed Communities Through Loan Guarantees, Loans, and
    Grants 28

    Appendix II: Objectives, Scope, and Methodology 34 Appendix III: Comments
    From the Department of the Treasury 36 Appendix IV: Comments From the Small
    Business Administration 39 Appendix V: Comments From the Department of
    Agriculture 45 Appendix VI: GAO Contacts and Staff Acknowledgments 54

    Tables Table 1: CAIP Financing Activity, September 1997- June 8, 2000 19
    Figures Figure 1: CAIP's Organizational Structure 7

    Figure 2: Time Line of CAIP Implementation 10 Figure 3: Map of CAIP-
    eligible and -participating Counties 12 Figure 4: CAIP Financing to Assist
    Distressed Counties Since

    Start of Program, as of June 8, 2000 17 Figure 5: Financing Provided to
    States Through CAIP, as of

    June 8, 2000 21

    Abbreviations

    CAIP Community Adjustment and Investment Program NAFTA North American Free
    Trade Agreement SBA Small Business Administration USDA U. S. Department of
    Agriculture

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    Appendix I

    Appendix I Community Adjustment and Investment Program Financing for
    Distressed Communities Through Loan Guarantees, Loans, and Grants

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    Appendix I Community Adjustment and Investment Program Financing for
    Distressed Communities Through Loan Guarantees, Loans, and Grants

    Page 30 GAO/ NSIAD- 00- 229 Trade Adjustment Assistance for Communities

    Appendix I Community Adjustment and Investment Program Financing for
    Distressed Communities Through Loan Guarantees, Loans, and Grants

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    Appendix I Community Adjustment and Investment Program Financing for
    Distressed Communities Through Loan Guarantees, Loans, and Grants

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    Appendix I Community Adjustment and Investment Program Financing for
    Distressed Communities Through Loan Guarantees, Loans, and Grants

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    Appendix II

    Appendix II Objectives, Scope, and Methodology

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    Appendix III

    Appendix III Comments From the Department of the Treasury

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    Appendix III Comments From the Department of the Treasury

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    Appendix IV

    Appendix IV Comments From the Small Business Administration

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    Appendix IV Comments From the Small Business Administration

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    Appendix IV Comments From the Small Business Administration

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    Appendix IV Comments From the Small Business Administration

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    Appendix IV Comments From the Small Business Administration

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    Appendix V

    Appendix V Comments From the Department of Agriculture

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    Appendix V Comments From the Department of Agriculture

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    Appendix V Comments From the Department of Agriculture

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    Appendix V Comments From the Department of Agriculture

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    Appendix V Comments From the Department of Agriculture

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    Appendix V Comments From the Department of Agriculture

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    Appendix V Comments From the Department of Agriculture

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    Appendix V Comments From the Department of Agriculture

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    Appendix VI

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