Rural Development: New Approach to Empowering Communities Needs
Refinement (Letter Report, 03/31/97, GAO/RCED-97-75).

Pursuant to a congressional request, GAO reviewed selected aspects of
the Department of Agriculture's (USDA) rural Empowerment Zone/Enterprise
Community (EZ/EC) Program, focusing on: (1) the federal funding levels
of the rural EZ/EC program over the 10-year life of the program; (2) the
status of the implementation of the program; (3) the difficulties that
the communities have encountered in implementing their plans; and (4)
USDA's oversight of the program.

GAO noted that: (1) it estimates that federal funding for the rural
EZ/EC program will total more than $1 billion over the 10-year life of
the program; (2) this amount includes the $208 million in EZ/EC funds
from the Social Services Block Grant (SSBG) program and an estimated
$428 million from tax incentives; (3) estimates for direct funding from
federal, state, and local programs as well as private sources are not
generally available; (4) however, one federal agency, USDA, reports that
it plans to provide about $246 million to the rural EZs and ECs over the
first 4 years alone and that its funding for the 10-year life of the
program could reasonably be expected to reach $600 million; (5) the
status of the communities' implementation of the EZ/EC program varies;
(6) all 33 rural EZs and ECs have established the basic organizational
structures and procedures necessary to implement their strategic plans;
(7) in terms of implementing the projects contained in these plans, such
as day care services, emergency 911 services, and job training, some
communities have made considerable progress and some have made very
little; (8) the rural EZs and ECs have experienced a number of
difficulties that have slowed their initial efforts, continue to impede
their progress, or both; (9) these difficulties include the short time
frames provided for applying to the program and the initial
misinformation provided by officials at USDA headquarters about the
program's basic operations; (10) while some of these difficulties have
been or are in the process of being resolved, two issues continue to be
of concern; (11) these issues are a lack of clarity about which federal
regulations are applicable to the construction projects funded by EZ/EC
Social Services Block Grants, and the conflict between the verbal
guidance and the written guidance that the Department of Health and
Human Services has provided to the states on their responsibilities for
ensuring that funds are reasonably and prudently spent; (12) under the
EZ/EC program, USDA is responsible for overseeing the progress of the
rural EZs and ECs and USDA is to accomplish this oversight through
reviews of the periodic reports submitted by the EZs and ECs and by site
visits conducted by USDA field personnel, known as EZ/EC state
coordinators; (13) however, USDA cannot adequately fulfill its oversight
responsibilities because the EZs, the ECs, and the EZ/EC state coordina*

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

 REPORTNUM:  RCED-97-75
     TITLE:  Rural Development: New Approach to Empowering Communities 
             Needs Refinement
      DATE:  03/31/97
   SUBJECT:  Rural economic development
             Community development programs
             Block grants
             Communication
             Tax credit
             Federal aid to localities
             Strategic planning
             Reporting requirements
             Financial management
IDENTIFIER:  USDA Rural Empowerment Zones and Enterprise Communities 
             Program
             Social Services Block Grant
             Water and Waste Disposal Grant
             RDA Water and Waste Disposal Loan Program
             Rural Business Enterprise Grant
             Community Development Block Grant
             
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Cover
================================================================ COVER


Report to the Committee on Agriculture, Nutrition, and Forestry, U.S. 
Senate

March 1997

RURAL DEVELOPMENT - NEW APPROACH
TO EMPOWERING COMMUNITIES NEEDS
REFINEMENT

GAO/RCED-97-75

Rural Development

(150424)


Abbreviations
=============================================================== ABBREV

  EC - Enterprise Community
  EZ - Empowerment Zone
  HHS - Department of Health and Human Services
  SSBG - Social Services Block Grant
  USDA - U.S.  Department of Agriculture
  EZ/EC -
  SSBG -

Letter
=============================================================== LETTER


B-276194

March 31, 1997

The Honorable Richard G.  Lugar
Chairman
The Honorable Tom Harkin
Ranking Minority Member
Committee on Agriculture,
 Nutrition, and Forestry
United States Senate

The Empowerment Zone/Enterprise Community (EZ/EC) program was created
by the Congress in 1993 to help distressed communities develop
comprehensive approaches for dealing with their social and economic
problems.  The program is unique in its reliance upon the
participating communities' own approaches and strategic plans for
improvement.  In addition, the program fosters partnerships between a
variety of social service and economic resources, including those
available through federal and state programs, private and nonprofit
organizations, and others.  Of the 227 rural communities nationwide
that applied to the program, the Secretary of Agriculture, in
December 1994, designated three rural areas as EZs and 30 as ECs,
primarily on the basis of their strategic plans.\1 Over a 10-year
period, both the EZs and the ECs will receive federal assistance
through EZ/EC Social Services Block Grants (SSBG) and special tax
incentives, technical assistance, and special consideration in many
federal competitive grant and loan programs.  Each of the EZs will
receive $40 million over the 10-year life of the program; each of the
ECs will receive about $3 million.  Additionally, the businesses
located in the EZs are eligible for more tax incentives than the
businesses in the ECs.  Several proposals have recently been
introduced into the Congress to expand or revise the EZ/EC program. 

This report responds to your request that we review selected aspects
of the rural EZ/EC program.  Specifically, you asked that we (1)
estimate the federal funding levels of the rural EZ/EC program over
the 10-year life of the program, (2) determine the status of the
implementation of the program, (3) identify the difficulties that the
communities have encountered in implementing their plans, and (4)
examine the U.S.  Department of Agriculture's (USDA) oversight of the
program.  We visited all 3 of the rural EZs and 5 of the 30 rural
ECs.  Additional information about the communities we visited is
provided in appendix I. 


--------------------
\1 This report focuses on rural areas.  We reported on the status of
urban EZs in Community Development:  Status of Urban Empowerment
Zones (GAO/RCED-97-21, Dec.  20, 1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

We estimate that federal funding for the rural EZ/EC program will
total more than $1 billion over the 10-year life of the program. 
This amount includes the $208 million in EZ/EC funds from the Social
Services Block Grant program and an estimated $428 million from tax
incentives.  Estimates for direct funding from federal, state, and
local programs as well as private sources are not generally
available.  However, one federal agency, USDA, reports that it plans
to provide about $246 million to the rural EZs and ECs over the first
4 years alone and that its funding for the 10-year life of the
program could reasonably be expected to reach $600 million. 

The status of the communities' implementation of the EZ/EC program
varies.  All 33 rural EZs and ECs have established the basic
organizational structures and procedures necessary to implement their
strategic plans.  In terms of implementing the projects contained in
these plans (such as day care services, emergency 911 services, and
job training), some communities have made considerable progress and
some have made very little. 

The rural EZs and ECs have experienced a number of difficulties that
have slowed their initial efforts, continue to impede their progress,
or both.  These difficulties include the short time frames provided
for applying to the program and the initial misinformation provided
by officials at USDA headquarters about the program's basic
operations.  While some of these difficulties have been or are in the
process of being resolved, two issues continue to be of concern. 
These issues are (1) a lack of clarity about which federal
regulations are applicable to the construction projects funded by
EZ/EC Social Services Block Grants and (2) the conflict between the
verbal guidance and the written guidance that the Department of
Health and Human Services has provided to the states on their
responsibilities for ensuring that funds are reasonably and prudently
spent. 

Under the EZ/EC program, USDA is responsible for overseeing the
progress of the rural EZs and ECs; the Department is to accomplish
this oversight through reviews of the periodic reports submitted by
the EZs and ECs and by site visits conducted by USDA field personnel,
known as EZ/EC state coordinators.  However, USDA cannot adequately
fulfill its oversight responsibilities because the EZs, the ECs, and
the EZ/EC state coordinators do not provide USDA with complete and
systematic progress reports.  Consequently, USDA lacks the basic
management information for identifying problem areas. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The Congress established the EZ/EC program in the Omnibus Budget
Reconciliation Act of 1993 (P.L.  103-66, Aug.  10, 1993).  Under the
act, the communities that wanted to participate in the program had to
(1) meet specific criteria for characteristics such as geographic
size and poverty rate and (2) prepare a strategic plan for
implementing the program.  The act also specified that the Secretary
of Agriculture could designate up to 3 rural EZs and 30 rural ECs on
the basis of their strategic plans. 

The act also amended title XX of the Social Security Act to authorize
the use of the EZ/EC SSBG funds for the program and placed increased
authority for funding decision-making with the local EZ/EC governance
structures.  Historically, the funds from the SSBG program that were
allocated to the states could be used only for social service
activities, such as programs to assist and feed children.  However,
under the EZ/EC program, the act expanded the permissible uses of the
SSBG's funds by allowing their use for such activities as purchasing
or improving land and facilities or for providing cash payments to
individuals for medical care. 

In addition to the EZ/EC SSBG funds, all of the designated
communities are expected to receive several types of federal
assistance.  The businesses located in the EZs and the ECs are
eligible for low-interest loans, resulting from the tax-exempt bonds
issued by the state or local governmental unit, to be used to provide
facilities and land for the businesses in the communities.  In
addition, the businesses located within EZs (1) are eligible to
receive tax credits on the wages paid to the employees who live and
work in the EZ and (2) may deduct higher levels of depreciation
expenses.  A number of federal departments and agencies also made a
commitment to give all EZs and ECs special consideration in the
competitions for funds from many other federal programs and to work
cooperatively with them in overcoming regulatory impediments. 

The federal assistance received by the EZs and ECs must be spent in
accordance with the communities' strategic plans.  These plans
outline how the communities would achieve their goals, including
ensuring the active participation of the members of the community,
the local private and nonprofit entities, and the federal, state, and
local governments.  The EZs' and ECs' progress in achieving their
goals is to be based on the performance benchmarks established by the
communities, not on the amount of federal money spent.  These
benchmarks explain in some detail how the locality intends to achieve
its goals.  The benchmark document, which becomes a part of the
overall plan, includes the specific projects that the EZ or EC will
undertake and timelines showing when the projects will be instituted
or completed.  The benchmark document, which generally looks ahead 2
years, requires continuous review and modifications to accommodate
the changes in the community's needs as well as scheduling problems. 
These benchmark projects are to serve the EZs and ECs, as well as
USDA, as an important management tool and provide the primary basis
for evaluating the progress being made. 

The Department of Health and Human Services (HHS), USDA, and the
states play key roles in administering the program.\2 HHS makes
grants to the states, and the designated state agency obligates the
funds to the EZs and ECs as it receives, reviews, and approves
requests from them to draw down funds for a particular benchmark
project.  In addition, the state must ensure that the requested
expenditure is allowable under the state's standards.  USDA, as the
lead federal agency for the rural EZ/EC program, is responsible for
helping the rural EZs and ECs achieve their goals by evaluating their
progress and providing technical assistance. 


--------------------
\2 In addition to HHS and USDA, at least 13 other agencies have
agreed to support the program.  The federal agencies involved in the
program meet periodically through a Community Empowerment Board,
chaired by the Vice President, to exchange information on the
program's operations. 


   FEDERAL FUNDING FOR THE RURAL
   EZ/EC PROGRAM IS LIKELY TO
   TOTAL OVER $1 BILLION
------------------------------------------------------------ Letter :3

The federal funds invested in the rural EZ/EC program, including
loans, grants, and forgone tax revenues, will far exceed the $208
million in EZ/EC SSBG funds allocated to the program.  In fact, we
estimate that federal funds exceeding $1 billion will be invested in
the program over its 10-year life.  This estimate includes the EZ/EC
SSBG funds,\3 plus an estimated $428 million from tax incentives and
about $600 million from USDA's loan and grant programs.  This $1
billion estimate does not include the other significant sources of
investments in the program that will be provided by other federal
agencies.  Estimates from these sources were not available.  If the
program is successful, some offsetting benefits, such as loan
repayments, increased tax revenue, and reduced welfare costs, should
occur in the communities. 


--------------------
\3 By December 1996, the entire $208 million was obligated by the
participating states.  As of that date, the 33 EZs and ECs had drawn
down $36 million of the $208 million. 


      FEDERAL TAX INCENTIVES WILL
      BE ABOUT $428 MILLION
---------------------------------------------------------- Letter :3.1

The EZ/EC program has made three tax incentives available to the
communities for economic development.  The first two, available only
to EZs, are (1) the Empowerment Zone Employment Credit, which
provides qualified employers with a tax credit of up to $3,000 for
each employee who lives and works in the EZ, and (2) the Empowerment
Zone Expensing Allowance, which allows a qualified business to take a
special depreciation deduction of up to $20,000 (for an annual total
of up to $37,500) for equipment purchases each year.  The third
incentive, available to both the EZs and the ECs, is the Enterprise
Zone Facility Bond, which provides up to $3 million in tax-exempt
bond financing to qualified businesses for buildings or equipment. 

Using the data and assumptions from the Internal Revenue Service, we
estimate that the cost of the EZ/EC tax incentives in rural areas
will be about $428 million over the 10-year period.  The EZs'
employment credit will account for $406.5 million of that total; the
facility bonds and the expensing allowances will make up the
remainder at $4.3 million and $17.2 million, respectively. 


      INCOMPLETE INFORMATION IS
      AVAILABLE ON THE EXTENT OF
      PREFERENTIAL TREATMENT
---------------------------------------------------------- Letter :3.2

USDA, HHS, and 13 other federal agencies have agreed to give special
consideration to eligible EZ/EC applicants by giving them
preferential treatment for funds from the agencies' existing funding
sources over the life of the program.  Most federal agencies had not
estimated the amount of support they expect to invest in the rural
EZs and ECs over the 10-year life of the program.  USDA, however,
indicated that it alone intends to provide about $246 million to
rural EZs and ECs over the first 4 years through existing funding
sources such as its Rural Business Enterprise Grant program and the
Water and Waste Disposal Loan and Grant programs.  If this funding
level is maintained over the 10-year life of the program, an
assumption that USDA officials consider a reasonable expectation,
USDA will provide about $600 million to EZ/EC communities.  USDA
officials noted that these funds, as well as those from the other
agencies that have pledged to provide special consideration to
EZ/ECs, represent existing appropriations that would be expended--not
new moneys. 

In addition to the funds provided by federal agencies, the rural EZs
and ECs are expected to obtain assistance from state, local, and
private sources.  Some EZs and ECs are using the EZ/EC SSBG funds as
seed money to attract even larger amounts from nonfederal sources,
such as foundations.  USDA provided data showing that for the 3 EZs
and 25 of the ECs, the communities were receiving more than one
dollar from their state and local governments and from private and
nonprofit organizations for every dollar of EZ/EC SSBG funds
received.  To the extent that the loans are repaid and that new jobs
result in increased tax revenues and reduced welfare payments, the
federal investment in the rural EZ/EC program will be offset. 


   EZS AND ECS VARY IN THEIR
   PROGRESS TOWARD IMPLEMENTING
   THE PROGRAM
------------------------------------------------------------ Letter :4

The 33 EZs and ECs have established the structures and procedures
needed to implement their strategic plans.  Nevertheless, the boards
of directors for two of the ECs we visited were experiencing problems
that could hinder their progress toward completing their benchmark
projects.  Overall, progress on these projects has varied widely. 


      MOST EZS AND ECS HAVE
      CREATED THE BASIC FOUNDATION
      FOR MANAGING DEVELOPMENT
---------------------------------------------------------- Letter :4.1

According to USDA officials, all communities have taken the initial
necessary actions to manage and begin implementing their strategic
plans, such as establishing a board structure and basic operating
principles.  These actions had to be formally agreed upon by the
community, the state, and USDA in a memorandum of agreement.  In
order to complete a memorandum of agreement, the communities had to,
among other things, establish their benchmarks and develop a budget
for the first 2 years of implementation; create the bylaws and/or
articles of incorporation for the group, known as the lead entity,
that will manage the EZ or EC program; and establish the EZ's or EC's
board structure.  In addition, USDA reviewed the documents prepared
by the lead entities to ensure that they had a policy to prevent
conflicts of interest and strategies for ensuring broad participation
within the community.\4

We visited all three EZs and found that they were generally
well-organized to manage the implementation of their strategic plans. 
For example, while the geographical boundaries of all of the EZs cut
across several local government boundaries, such as county lines,
they had all developed mechanisms for overcoming the potential
problems in having the EZ work with more than one political entity. 
One EZ that spanned parts of four counties created four subzone
boards to overcome the political divisions inherent in its
organization.  These subzones consider the communities' proposals for
implementing the benchmark projects that originate in their area. 
The proposals approved at the subzone level are then considered by
the EZ's full board.  As of June 1996, nearly 1 year after the
memorandum of agreement, the EZ reported some progress toward 45 of
the 49 projects serving the subzones.  Some of these projects served
several subzones, while others served only one. 

Although the EZs appear to be well organized, two of the ECs that we
visited were experiencing problems.  For example, at one EC we
visited, the board members were in such disagreement with the lead
entity over the control of the EC funds that little business has been
conducted, and the program has not been moving forward.  At another
EC, the state agency found that the board members were, among other
things, submitting applications for projects that would benefit them
financially. 


--------------------
\4 As of January 3, 1997, USDA was able to document that these
actions had been completed for 23 out of the 33 communities. 
However, USDA could not locate the files for all of these actions for
the remaining 10 ECs.  As a result of our review, USDA officials told
us that they will take steps to create a central filing system for
the reports submitted by the EZs and ECs. 


      EZS AND ECS VARY IN
      IMPLEMENTING THEIR BENCHMARK
      PROJECTS
---------------------------------------------------------- Letter :4.2

USDA requires EZs and ECs to report periodically on the progress they
are making toward implementing the benchmark projects.  These
projects include such things as constructing child care facilities,
initiating job training programs, beginning 911 emergency response
services, and improving wastewater systems.  While USDA has not
received complete progress reports from all communities, the progress
made by those that have reported varied widely. 

USDA had sufficient centralized information on 14 communities for us
to determine whether (1) progress had been made toward implementing
the benchmark projects scheduled to start before December 1996 and
(2) the projects that were scheduled to be completed prior to
December 1996 had in fact been completed.\5 Progress, by these
measures, varied widely among the 14 communities we examined.  For
example, one community reported that it had made at least some
progress toward implementing all of the benchmark projects scheduled
to start prior to December 1996 and that one project had been
completed.  On the other hand, two communities reported that either
no progress had been made on projects or that they had not finished
any of the projects scheduled for completion prior to December 1996. 
Overall, 8 of the 14 communities reported that they had not started
or completed at least 50 percent of their benchmark projects on time. 

Appendix I presents information on selected benchmark projects at the
eight communities we visited. 


--------------------
\5 We found that 21 communities had at least partially reported on
their progress as of January 1, 1997.  We did not include 7 of the 21
communities in our analysis because they had reported on their
progress for less than 60 percent of their projects or had met less
than 60 percent of their planned start and end dates. 


   EZS AND ECS HAVE FACED A NUMBER
   OF DIFFICULTIES IN IMPLEMENTING
   THEIR PLANS
------------------------------------------------------------ Letter :5

The rural EZs and ECs have experienced difficulties that have slowed
their initial efforts, continue to impede their progress, or both. 
The difficulties were the short time frame allowed for applying to
the program and the misinformation provided by officials at USDA
headquarters about the program's basic operations.  While these
difficulties have been or are in the process of being resolved, two
other issues continue to be of concern.  These issues are a lack of
clarity about which standards the communities should follow for
construction projects when using EZ/EC SSBG funds and the disparity
between HHS' verbal guidance and written guidance to the states on
their responsibilities for releasing the EZ/EC SSBG funds to the
communities for the EZ/EC program. 


      SHORT TIME FRAMES CAUSED
      ORGANIZATIONAL AND PLANNING
      CONCERNS FOR COMMUNITIES
---------------------------------------------------------- Letter :5.1

Officials at each of the rural EZs and ECs we visited commented that
the period for preparing an application for the EZ or EC designation
was too short for the amount of work required.  The communities
applying for the program had 5-1/2 months after the President
announced the program to submit an application.  During that time,
they had to achieve grass-roots involvement, gain consensus on the
needs and vision of the community, elect a board of directors,
produce a strategic plan, and prepare to begin operating.  These
tasks were particularly difficult to carry out in rural areas that
often (1) did not have organized coalitions or the expertise
available to articulate a vision and develop a complex strategic plan
and (2) are spread out over a large geographical area, which makes
putting together all parts of the application more difficult. 

While the communities met their application deadlines, some officials
believe that a longer period to organize would have allowed them to
better galvanize the public's support and involvement and that, in
some instances, they would have been better able to identify their
needs and establish appropriate goals. 

USDA and HHS officials acknowledged that the communities faced short
time frames.  Some USDA officials stated that the short time frames
required that the rural communities act quickly both to generate
local involvement and to create the vision and strategic plan
required to meet the application deadline.  They noted that the
federal agencies involved faced organizational pressures as well. 
The EZ/EC program's timetable required the federal agencies to
develop their coordination strategy, perform detailed planning, hire
and train staff, and begin operating the program within the 16 months
between the passage of the legislation and the designation of the EZs
and the ECs. 

HHS and USDA officials generally agreed that, should a second round
of EZs and ECs be authorized, it may be beneficial to allow the
communities a somewhat longer time to apply in order to facilitate
broader public involvement and a fuller consideration of the vision
and the steps needed to accomplish it.  Furthermore, some officials
said that, if a second round is authorized, the federal government
may need to provide more guidance on how to prepare the application
documents to ensure a somewhat greater uniformity than they had
experienced in the current program. 


      EARLY MISSTATEMENTS BY USDA
      OFFICIALS CONTRIBUTED TO
      IMPLEMENTATION PROBLEMS
---------------------------------------------------------- Letter :5.2

At seven of the eight rural EZs and ECs we visited, officials noted
that erroneous information, provided primarily by officials from USDA
headquarters at meetings around the nation, caused misunderstandings
about the operations of the EZ/EC program.  At some of the meetings,
the federal headquarters officials said that the EZs and ECs would
receive the EZ/EC SSBG funds directly.  Two of the EZs expected to
receive the total amount of the EZ/EC SSBG funds--$40 million--in two
consecutive annual payments, while some ECs believed that they would
receive their total payment of about $2.9 million shortly after they
were selected.  In fact, as we discussed earlier, the communities are
receiving their funding incrementally through the state agency as
needed to pay for benchmark activities.  Furthermore, some
communities were told, incorrectly, that they did not have to get
approval from any federal or state entity to use the funds for
projects that were consistent with the strategic plan. 

The incorrect information provided by USDA officials caused
difficulties for several state agencies and rural communities.  For
example, one EC had to revise its plan when it learned how the funds
were actually to be distributed.  The community had planned to obtain
the lump-sum payment, put it into an interest-bearing account, and
use the interest, which would have been considerable, to fund some
part of certain projects.  Since no lump sum was made available, the
EC revamped its plan to obtain alternative sources of funding for
some of its projects. 


      HHS HAS NOT PROVIDED CLEAR
      GUIDANCE ON THE
      APPLICABILITY OF FEDERAL
      STANDARDS
---------------------------------------------------------- Letter :5.3

Several of the EZs and ECs that we visited have encountered some
difficulty in sorting out which federal standards apply to certain
types of projects financed with EZ/EC SSBG funds.  Those funds can be
used for construction projects, such as water and sewer proposals, if
the projects are related to one of the program's goals, such as
providing training to disadvantaged youth.  However, the act did not
specify any standards for these new allowable uses.  As a result, the
communities have been deciding for themselves which construction
standards they will follow. 

The communities have taken different approaches to address this
difficulty.  For example, officials at one EZ seeking to build a
water system told us that they were unable to get guidance from HHS
and decided to follow the environmental regulations that they
considered most appropriate--those governing the use of the
Department of Housing and Urban Development's Community Development
Block Grant program--for that project and for any other project that
might involve environmental issues.  Faced with a similar dilemma,
another EZ took a different approach, deciding to follow the
environmental regulations associated with the primary funding source
for a given project. 

Some rural EZ officials seeking clarification on this issue contacted
HHS, which oversees the EZ/EC SSBG funds.  According to these
officials, HHS did not indicate what construction standards should be
used.  Consequently, the community officials have used their best
judgment on how to proceed with specific projects and activities. 
Some EZ officials added that they are concerned that they may be
legally liable if they choose to follow an incorrect standard and may
have to replace such things as improperly sized water or sewer pipes,
thereby incurring considerable costs and causing disruption. 


      HHS' VERBAL INSTRUCTIONS TO
      THE STATES ON ADMINISTERING
      EZ/EC SSBG FUNDS APPEAR TO
      CONFLICT WITH HHS'
      REGULATIONS
---------------------------------------------------------- Letter :5.4

According to the HHS regulations and the Terms and Conditions of the
EZ/EC program, the financial standards that the states are to apply
in administering the EZ/EC SSBG funds are the standards that they use
for expending their own state funds.  However, officials in three of
the states we visited told us that HHS program officials had verbally
appealed to them to be flexible in applying their standards. 

This conflicting guidance has led to disagreements between some of
the state agencies and the EZs and ECs over who has oversight
responsibility.  For example, when one EC requested a drawdown of
funds for expenses that included liquor, the state agency disallowed
payment for the liquor.  The state agency argued that Office of
Management and Budget Circular A-87, the standard adopted by the
state, did not allow expenditures of federal funds for liquor.  State
agency officials told us that HHS verbally asked the state agency to
be flexible and allow the expenditure and advised them not to worry
about having to repay the expenditure at a later date.  The state
agency officials told us that they wanted to cooperate with HHS in
the EZ/EC program, but they also wanted the state to comply with its
own regulations, including Circular A-87.  The state ultimately
disallowed the expenditure. 

In another state, the EZ submitted 22 project proposals to the state
agency for its review prior to a formal request to draw down funds. 
According to state agency officials, the proposals did not meet the
state's fiscal standards in that most of the proposals had budgets
that were inconsistent with reasonable and prudent business
practices.  These budgets reportedly included such items as salaries
and fringe benefits that were above the industry's average.  State
officials told us that HHS had appealed to them on numerous occasions
to be more flexible in their reviews of the EZ's proposals.  As of
February 3, 1997, the state had approved no funds for these 22
proposals. 


   USDA CANNOT ADEQUATELY OVERSEE
   THE IMPLEMENTATION OF THE EZ/EC
   PROGRAM
------------------------------------------------------------ Letter :6

Under the EZ/EC program, USDA's Office of Community Development is
responsible for overseeing the participating rural EZs and ECs.  It
is to carry out its responsibilities through site visits by USDA
state coordinators\6 and USDA headquarters' reviews of the progress
reports periodically submitted by the EZs and ECs.  However, USDA
cannot adequately fulfill its oversight responsibilities because it
has not received complete progress reports from all of the USDA state
coordinators or the EZs and ECs. 

USDA's EZ/EC state coordinators do not provide systematic reporting
on the progress of rural EZs and ECs.  Among other things, the state
coordinators are responsible for reviewing all benchmark changes to
ensure the communities' participation and conformance with the
strategic plan.  They are also involved with the initial approval of
these changes.  Most of these coordinators, who were chosen from the
existing staff at the USDA state offices, have had little experience
in overseeing the broad range of a community's economic and social
development projects and have not received training in how to monitor
and report on the communities' progress.  USDA officials agreed that
their EZ/EC state coordinators needed training but told us that
funding constraints prevented them from developing and offering
oversight training. 

Oversight is further hampered because the EZs and ECs are not
consistently reporting their progress to USDA.  USDA's regulations
require the EZs and ECs to report their progress at least annually. 
However, as noted earlier, the information provided is inadequate. 
Only 14 of the 33 communities had provided systematic information on
their progress as of January 1, 1997. 


--------------------
\6 Although the state coordinators have the primary responsibility
for site visits, USDA headquarters staff also perform site visits for
community review and intervention purposes. 


   CONCLUSIONS
------------------------------------------------------------ Letter :7

As a new approach to providing development assistance to rural areas,
the EZ/EC program has faced a number of problems, several of which
were associated with the program's start-up and are no longer of
immediate concern.  However, some issues related to the guidance for
the program continue to cause confusion among the program's
participants and could hamper the program's progress.  These issues
include (1) the absence of written guidance defining the standards to
be followed when using EZ/EC SSBG funds for construction-related
projects and (2) conflicting guidance about the fiduciary
responsibilities that the participating states should exercise for
ensuring that the EZ/EC SSBG funds are spent in accordance with the
appropriate financial standards. 

Additionally, in view of the significant level of federal funds
supporting rural EZs and ECs, it is important that USDA have a
sufficient capability to oversee the progress that these communities
are making in implementing the program.  USDA's current oversight
system, however, provides only piecemeal information on the EZs' and
ECs' progress.  As a result, USDA lacks the systematic information
necessary for overseeing the program, including identifying problems
and helping the communities to develop solutions. 


   RECOMMENDATIONS TO THE
   SECRETARY OF HEALTH AND HUMAN
   SERVICES
------------------------------------------------------------ Letter :8

To reduce confusion about the program's guidance on the uses of and
financial controls over the EZ/EC SSBG funds, the Secretary of Health
and Human Services should direct the Assistant Secretary for Planning
and Evaluation to (1) clarify which construction-related standards
the EZs and ECs should follow in using the EZ/EC SSBG funds and (2)
eliminate the conflicts between the Department's verbal and written
guidance on the states' fiduciary responsibility for the EZ/EC SSBG
funds. 


   RECOMMENDATION TO THE SECRETARY
   OF AGRICULTURE
------------------------------------------------------------ Letter :9

To improve USDA's oversight of the EZ/EC program, the Secretary of
Agriculture should instruct the Director of the Office of Community
Development to upgrade the Office's monitoring system so that it can
routinely provide the necessary information for assessing the
progress of the EZs and ECs in implementing the program.  This action
could be accomplished by more strictly enforcing the EZs' and ECs'
current self-reporting requirements and by developing more systematic
reporting requirements for USDA's EZ/EC state coordinators. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

We provided copies of the draft report for review and comment to USDA
and HHS.  These agencies' written comments and our responses appear
in appendixes III and IV, respectively. 

In commenting on the draft, USDA noted that it concurred with our
conclusions and was implementing changes in response to our
recommendation.  USDA also made a number of comments about the
difficulties of beginning a new kind of program, and we have revised
our report, where appropriate, to reflect these comments.  In
particular, USDA concurred with our finding that the time frames for
communities to apply for EZ/EC status were short and that should a
second round of EZs and ECs be authorized, the Department would
expect to be more fully staffed and able to better assist the
applicants, both through direct guidance and with a more structured
application format.  USDA also made a number of comments about our
analysis of the federal investment in the EZ/EC program and provided
additional information about the Department's future anticipated
financial support of rural EZs and ECs.  We have included this
additional information and revised our estimates in consultation with
USDA program officials. 

In their comments on the draft report, HHS officials stated that they
will work to clarify several issues raised in the report, including
the applicability of construction standards and federal fiscal
standards to the program.  HHS officials also suggested a number of
changes to the report that would, among other things, clarify local,
state, and federal roles in the EZ/EC program.  Furthermore, these
officials emphasized the need for flexibility in administering the
program so that it can achieve its full potential.  We incorporated
these comments where appropriate. 

We also sent the detailed information on each EZ and EC we visited
(as presented in app.  I) to the cognizant local officials for their
review and comment.  We made several technical changes in response to
the comments we received.  In addition, we sent the sections of the
report describing the problems resulting from the conflict between
HHS' written and verbal guidance on financial standards to the
cognizant state government officials for review and comment; these
officials concurred in our presentation of the issues discussed in
the report. 


   SCOPE AND METHODOLOGY
----------------------------------------------------------- Letter :11

We conducted our review from June 1996 through February 1997 in
accordance with generally accepted government auditing standards. 
Our scope and methodology are discussed in more detail in appendix
II. 


--------------------------------------------------------- Letter :11.1

As agreed with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 15 days from the date of this letter.  At that time, we will
send copies of this report to the House Committee on Agriculture,
other interested congressional committees, the Secretaries of
Agriculture and Health and Human Services, the Director of the Office
of Management and Budget, and other interested parties.  We will also
make copies available upon request. 

If you have any questions about this report, please call me at (202)
512-5138.  Major contributors to this report are listed in appendix
V. 

Robert A.  Robinson
Director, Food and
 Agriculture Issues


DESCRIPTION OF THE EMPOWERMENT
ZONES AND ENTERPRISE COMMUNITIES
GAO VISITED
=========================================================== Appendix I


   KENTUCKY HIGHLANDS EMPOWERMENT
   ZONE
--------------------------------------------------------- Appendix I:1

   Figure I.1:  Kentucky Highlands
   Empowerment Zone

   (See figure in printed
   edition.)


      GOVERNANCE
------------------------------------------------------- Appendix I:1.1

The Kentucky Highlands Investment Corporation is the lead entity for
the Empowerment Zone (EZ); this Corporation was created in 1968 to
foster economic development in the area.  A steering committee
consisting of representatives from each of the three subzone areas
was established; an effort was made to ensure that the committee was
balanced in terms of geographical representation, income, and
expertise.  The steering committee also includes representatives from
the Board of Directors of the Kentucky Highlands Investment
Corporation, local and state governments, economic development
agencies, universities, and local residents.  The steering committee
has the overall responsibility for implementing the strategic plan
and for providing guidance throughout the implementation of the plan. 


      FUNDING
------------------------------------------------------- Appendix I:1.2

The Empowerment Zone/Enterprise Community Social Services Block Grant
(EZ/EC SSBG) funds for the EZ pass through the Kentucky Department of
Financial Incentives to the Kentucky Highlands Empowerment Zone for
its use.  As of December 31, 1996, the EZ had obtained about $7.4
million of its allocated EZ/EC SSBG funds for use in its projects. 


      STRATEGIC PLAN
------------------------------------------------------- Appendix I:1.3

The EZ's strategic plan sets forth a four-pronged approach to
revitalizing the communities included within the Zone:  developing
economic opportunity; promoting tourism; building infrastructure; and
enhancing the quality of life.  The EZ has 24 benchmarks.  The
projects include the following: 

  -- establishing a development venture capital fund to invest in
     businesses located within the EZ;

  -- starting 150 home-based businesses in each of the three subzone
     areas, including training the home keyers to perform data entry
     work and assisting them in purchasing the computer equipment;

  -- building and equipping four rural fire stations within the EZ;
     and

  -- expanding a county library and increasing its telecommunications
     capacity. 


   MID-DELTA EMPOWERMENT ZONE
   ALLIANCE
--------------------------------------------------------- Appendix I:2

   Figure I.2:  Mid-Delta
   Empowerment Zone Alliance

   (See figure in printed
   edition.)


      GOVERNANCE
------------------------------------------------------- Appendix I:2.1

The Mid-Delta Empowerment Zone Alliance originated in January 1994 as
a collaborative arrangement between The Delta Foundation and The
Delta Council, representing poor minority and more affluent white
interests, respectively.  These two organizations came together to
develop a strategic plan to benefit all citizens of the area, to
apply for the EZ/EC program, and to establish the Alliance. 

The Mid-Delta Empowerment Zone Alliance Commission was formed in
April 1994; it includes representatives from--among other
elements--businesses, churches, colleges, community groups,
low-income groups, and public schools from all areas of the zone. 
The Commission reviews and votes on all proposals for projects to
address the benchmark projects on the strategic plan. 


      FUNDING
------------------------------------------------------- Appendix I:2.2

The EZ/EC SSBG funds pass through the Mississippi Department of Human
Services to the Mid-Delta Empowerment Zone Alliance for its use.  As
of December 31, 1996, the EZ had obtained about $221,000 of its
allocated EZ/EC SSBG funds for use in its projects. 


      STRATEGIC PLAN
------------------------------------------------------- Appendix I:2.3

The EZ's strategic plan focuses on three themes:  building community
in the Mississippi Delta, increasing economic opportunity in
Mississippi Delta communities, and sustaining community and economic
development in Mississippi Delta communities.  The EZ has 41
benchmarks.  Specific projects for the EZ include the following: 

  -- expanding and strengthening businesses and industries by
     providing assistance in accessing capital, business and
     technical assistance, and marketing;

  -- improving the quality and accessibility of health care by
     seeking to increase the number of doctors serving the Mid-Delta
     region;

  -- improving race relations by creating a race relations council;
     and

  -- promoting community beautification through the creation of a
     recycling program. 


   RIO GRANDE VALLEY EMPOWERMENT
   ZONE
--------------------------------------------------------- Appendix I:3

   Figure I.3:  Rio Grande Valley
   Empowerment Zone

   (See figure in printed
   edition.)


      GOVERNANCE
------------------------------------------------------- Appendix I:3.1

The lead entity is the Rio Grande Valley Empowerment Zone
Corporation, which was created to manage the EZ and implement the
strategic plan; the corporation is headed by a chief executive
officer who manages a small staff.  The Corporation reports to a
19-member board of directors, the majority of whom were appointed by
the county judges of the four counties.  The board members include
two directors from each of the four counties' subzone advisory
committees.  Each of the four counties appoints a subzone advisory
committee for advocating matters within the subzone; two of the four
subzones have also allocated funds to administration to employ a
full-time professional subzone manager to oversee the day-to-day
operations within the subzone. 


      FUNDING
------------------------------------------------------- Appendix I:3.2

The EZ/EC SSBG funds pass through the Texas Health and Human Services
Commission to the Rio Grande Valley Empowerment Zone for its use.  As
of December 31, 1996, the EZ had obtained about $4.9 million of the
EZ/EC SSBG funds for use in its projects. 


      STRATEGIC PLAN
------------------------------------------------------- Appendix I:3.3

The EZ's strategic plan focuses on 10 objectives, including (1)
improving the quality of life to discourage outmigration from the
area, (2) providing programs for literacy and living skills, (3)
initiating regional business development, and (4) improving the
availability of housing by providing new housing and increasing
access to the existing housing.  The EZ has 49 benchmarks.  Specific
projects include the following: 

  -- establishing a small business incubator;

  -- developing a historical district for small businesses;

  -- implementing a flood control project; and

  -- establishing a community elder care/youth recreation center. 


   CENTRAL SAVANNAH RIVER AREA
   ENTERPRISE COMMUNITY
--------------------------------------------------------- Appendix I:4

   Figure I.4:  Central Savannah
   River Area Enterprise Community

   (See figure in printed
   edition.)


      GOVERNANCE
------------------------------------------------------- Appendix I:4.1

As of January 1997, the EC was in the process of reincorporating and
negotiating revisions to the memorandum of agreement.  At the time of
our visit, the EC was governed by a board drawn from the 10 Census
tracts comprising the EC.  In addition, each of the 10 subzone areas
had established local EC boards to oversee projects within the
subzone.  The Central Savannah River Area Regional Development Center
was the lead entity for the EC. 


      FUNDING
------------------------------------------------------- Appendix I:4.2

The EZ/EC SSBG funds pass through the Georgia Department of Community
Affairs to the Central Savannah River Area Enterprise Community for
its use.  As of December 31, 1996, the EC had obtained about $429,000
of the EZ/EC SSBG funds for use in its projects. 


      STRATEGIC PLAN
------------------------------------------------------- Appendix I:4.3

The EC's strategic plan emphasizes seven goals:  (1) agriculture,
business, and economic development; (2) human development, health,
and public safety; (3) education; (4) housing; (5) arts, recreation,
and cultural tourism; (6) public infrastructure; and (7) community
organizing, coalitions, and partnerships.  The EC has 12 benchmarks. 
Specific projects include the following: 

  -- operating general education degree classes for the EC's
     residents;

  -- establishing family service centers providing such services as
     youth recreation and leadership classes and adult literacy
     classes; and

  -- training community outreach organizers to foster community
     involvement. 


   CRISP/DOOLY ENTERPRISE
   COMMUNITY
--------------------------------------------------------- Appendix I:5

   Figure I.5:  Crisp/Dooly
   Enterprise Community

   (See figure in printed
   edition.)


      GOVERNANCE
------------------------------------------------------- Appendix I:5.1

The Crisp/Dooly Partnership, Inc., is the lead entity and is
responsible for implementing the enterprise community's strategic
plan.  The Crisp/Dooly Partnership reports to a 32-member board
consisting of representatives of Crisp and Dooly counties, 16 from
each county, and are drawn from such organizations as economic
development councils, chambers of commerce, and boards of education
as well as from law enforcement groups, churches, and low-income
residents. 


      FUNDING
------------------------------------------------------- Appendix I:5.2

The EZ/EC SSBG funds pass through the Georgia Department of Community
Affairs to the Crisp/Dooly Joint Development Authority, which is
fiscally responsible for the EZ/EC SSBG funds.  The Crisp/Dooly Joint
Development Authority consists of a separate board of eight directors
who are appointed by the Crisp and Dooly county governments and who,
in turn, release the funds to the Crisp/Dooly Partnership, Inc., for
the implementation of the strategic plan.  As of December 31, 1996,
the EC had obtained about $215,000 of its EZ/EC SSBG funds program
for use in its projects. 


      STRATEGIC PLAN
------------------------------------------------------- Appendix I:5.3

The EC's strategic plan emphasizes five goals:  (1) social and
economic empowerment for developing innovative community services,
(2) development of Crisp/Dooly counties' economic partnership to
coordinate economic development initiatives, (3) human and community
development through improved community relations, (4) improving
education, and (5) improving the quality of life and of the
environment.  The EC has 37 benchmarks.  Specific projects include
the following: 

  -- building a postsecondary vocational-technical center;

  -- establishing an adult literacy program; and

  -- developing a rural transportation system. 


   CITY OF LOCK HAVEN ENTERPRISE
   COMMUNITY
--------------------------------------------------------- Appendix I:6

   Figure I.6:  City of Lock Haven
   Enterprise Community

   (See figure in printed
   edition.)


      GOVERNANCE
------------------------------------------------------- Appendix I:6.1

The lead entity for the EC is the City of Lock Haven City Council; a
full-time Federal Enterprise Coordinator was hired by the city to
manage the day-to-day operations of the EC.  A Federal Enterprise
Committee oversees the EC; several subcommittees, such as the
economic development subcommittee and health and human services
subcommittee report to the EC Committee. 


      FUNDING
------------------------------------------------------- Appendix I:6.2

The EZ/EC SSBG funds pass through the Pennsylvania Department of
Public Welfare to the City of Lock Haven Enterprise Community for its
use.  As of December 31, 1996, the EC had obtained about $456,000 of
the EZ/EC SSBG funds for use in its projects. 


      STRATEGIC PLAN
------------------------------------------------------- Appendix I:6.3

The EC's strategic plan states that its main goal is to promote
economic development through job creation and retention.  The EC has
36 benchmarks.  Specific projects include the following: 

  -- establishing a micro-revolving loan fund to assist small and
     start-up businesses;

  -- establishing a partnership among the city, Clinton County, local
     banks and lending institutions, local housing nonprofit
     organizations, and housing developers to expand the supply of
     affordable housing for elderly and low-income residents; and

  -- assisting in the renovation of a job training facility and in
     funding job training workshops in such subjects as computer
     skills. 


   NORTH DELTA MISSISSIPPI
   ENTERPRISE COMMUNITY
--------------------------------------------------------- Appendix I:7

   Figure I.7:  North Delta
   Mississippi Enterprise
   Community

   (See figure in printed
   edition.)


      GOVERNANCE
------------------------------------------------------- Appendix I:7.1

When the EZ/EC program was announced in 1994, a group of 22 citizens
from this very poor area of Mississippi came together to discuss
applying for designation as an EZ or EC.  With the assistance of an
established local Planning and Development District, they applied for
and were subsequently designated as an EC.  In November 1995, this
group was incorporated as the North Delta Mississippi Enterprise
Community Development Corporation.  A 22-member board, consisting of
the citizens who had been involved in the preparation of the
strategic plan, was installed and authorized to determine the major
personnel, fiscal, and program policies and the overall program plans
and priorities and to give final approval to all corporate
initiatives. 


      FUNDING
------------------------------------------------------- Appendix I:7.2

The EZ/EC SSBG funds pass through the Mississippi Department of Human
Services to the North Delta Enterprise Community for its use.  As of
December 31, 1996, the EC had obtained about $25,000 of the EZ/EC
SSBG funds for use in its projects. 


      STRATEGIC PLAN
------------------------------------------------------- Appendix I:7.3

The EC's strategic plan focuses on four areas:  (1) economic and
community development, (2) empowerment through the ability of the EC
to solve its own problems and create its own opportunities, (3) human
services and physical development, and (4) natural resources and
environmental concerns.  The EC has 16 benchmarks.  Specific projects
include the following: 

  -- developing parks,

  -- recommending state legislation for a tax-incentive program,

  -- providing small business training, and

  -- increasing the availability of safe and affordable housing. 


   CITY OF WATSONVILLE ENTERPRISE
   COMMUNITY
--------------------------------------------------------- Appendix I:8

   Figure I.8:  City of
   Watsonville Enterprise
   Community

   (See figure in printed
   edition.)


      GOVERNANCE
------------------------------------------------------- Appendix I:8.1

The City Council of Watsonville is the lead entity for the EC; the
deputy city manager has the day-to-day responsibilities for the EC. 
An advisory steering committee represents the residents of the EC;
however, the city council has decision-making responsibility. 


      FUNDING
------------------------------------------------------- Appendix I:8.2

The EZ/EC SSBG funds pass through the California Department of Social
Services to the City of Watsonville Enterprise Community for its use. 
As of December 31, 1996, the EC had obtained about $250,000 of the
EZ/EC SSBG funds for use in its projects. 


      STRATEGIC PLAN
------------------------------------------------------- Appendix I:8.3

The main emphasis of the EC's strategic plan is youth development. 
The EC has 15 benchmarks.  Specific projects include the following: 

  -- establishing youth job training, including teaching basic
     job-seeking strategies;

  -- expanding and renovating recreation facilities for at-risk youth
     in several impoverished parts of the city;

  -- building and operating a small business retail incubator in
     conjunction with the new transit center; and

  -- improving the downtown area by refurbishing retail businesses'
     facades. 


OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================== Appendix II

To estimate the cost of the rural EZ/EC program, we reviewed
information on the resources available to the EZ/EC program from the
U.S.  Department of Agriculture (USDA), the Department of Health and
Human Services (HHS), and 13 other federal agencies.  We also
obtained tax-incentive information from the Internal Revenue Service
and spoke with officials in the Office of Tax Assessment. 

To review the status of the EZ/EC program's implementation and
identify the difficulties that communities have encountered, we
talked with officials and obtained information at all 3 rural EZs, 5
of the 30 rural ECs, six states, and the two principal agencies, USDA
and HHS.  We selected ECs that are located in the same state as the
EZs and added ECs from three other states to provide geographic
distribution.  During our visits to these communities, we visited
selected projects to discuss the EZ/EC program with the individuals
most directly involved at the local level.  We also reviewed the
strategic plans, benchmarks, status reports, and funding documents
for the eight EZ/ECs visited, as well as information maintained by
USDA on the remaining 25 rural ECs.  We also examined the progress
reports available at USDA's headquarters. 

To evaluate USDA's oversight of the EZ/EC program, we reviewed the
applicable regulations, discussed the roles of the USDA state
coordinators with USDA headquarters officials, examined USDA's
central files on progress reports, and requested reports from USDA's
State coordinators.  We also interviewed the USDA state coordinators
in the six states we visited. 

We performed our work in accordance with generally accepted
government auditing standards from June 1996 through February 1997. 




(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
AGRICULTURE
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the U.S.  Department of
Agriculture's letter dated March 10, 1997. 


   GAO COMMENTS
-------------------------------------------------------- Appendix II:1

1.  We agree with USDA that the EZ/EC program is different from
traditional federal programs and that the program challenges
communities to engage in activities with which they have little
experience.  We have modified our report accordingly. 

2.  While we recognize that this program required a steep learning
curve for all participants, we still believe that USDA has had a
sufficient amount of time--42 months after the passage of the
authorizing legislation--to have put into place systematic oversight
of the program. 

3.  We believe the commitment and actions outlined by USDA to address
the recommendations in our report go a long way toward correcting the
problems we noted concerning the need to upgrade the Office of
Community Development's monitoring system. 

4.  We have modified our report to include USDA's concurrence that
all parties agreed that the initial time frames permitting
communities to apply for EZ or EC status were inadequate. 

5.  We have deleted the references to supplantation in the report.  A
discussion of supplantation was not needed to illustrate our concern
about the possible conflicts between verbal instructions and written
regulations on administering EZ/EC SSBG funds. 

6.  We have added statements about USDA headquarters staff members'
visits to rural EZs and ECs and about the responsibilities of the
state coordinators. 

7.  We agree with USDA that situations such as the one portrayed in
our report will arise.  This is precisely the reason why we believe
that USDA needs a strong oversight capability, i.e., one that will
identify problems early on and help focus the assistance, training,
and consultation needed to help the EZs and ECs resolve the problems. 

8.  We have clarified the language to recognize that the report's
estimates of total EZ/EC funding includes funds that would not
represent additional appropriations but, rather, a special targeting
of appropriations that would have been made in any case in order to
support rural communities under the various programs of the
participating agencies.  We have also added language to the report
which notes that there may be some offsetting benefits to the
government, such as increased tax revenues, resulting from the
creation of new jobs.  Finally, USDA's statement that funds are
approximately $30 million less than GAO's estimate was in response to
a prior GAO estimate.  USDA agrees with the estimates contained in
this report. 




(See figure in printed edition.)Appendix IV
COMMENTS FROM THE DEPARTMENT OF
HEALTH AND HUMAN SERVICES
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the Department of Health and
Human Services' letter dated March 17, 1997. 


   GAO COMMENTS
-------------------------------------------------------- Appendix II:2

1.  We have revised the report to consistently use the term "special
consideration."

2.  We have revised the report to clearly note that EZ/EC SSBG funds
are to be spent in accordance with the communities' strategic plans. 

3.  We have revised the report to highlight the authority that local
governance structures were given under the amended SSBG program. 

4.  We do not believe that the additional information on HHS'
guidance was necessary to understand the report's findings. 
Therefore, we did not include it as an appendix. 

5.  We have added more detail on USDA's role in the EZ/EC program. 

6.  We have revised the report to recognize that HHS officials
believe that the short application period created planning and
organizational difficulties. 

7.  We have revised the report as suggested to note that the 1993 act
provided the authority to use the EZ/EC SSBG funds for a wider
variety of purposes than was previously permitted. 

8.  Our report is not intended to question the ability of local
officials to make decisions.  Rather, it merely points out that local
officials told us that they need additional guidance on what
standards to apply to the EZ/EC SSBG funds. 

9.  We have deleted the references to supplantation in the report.  A
discussion of supplantation was not needed to illustrate our concern
about the possible conflicts between verbal instructions and written
regulations on administering EZ/EC SSBG funds. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

Robert C.  Summers, Assistant Director
John K.  Boyle, Project Leader
Clifford J.  Diehl
Carol Herrnstadt Shulman
Patricia A.  Yorkman


*** End of document. ***