U.S. GOVERNMENT PRINTING OFFICE

60–762 WASHINGTON : 1999

PERFORMANCE OF THE EMPOWERMENT ZONE/

ENTERPRISE COMMUNITY PROGRAM

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

OCTOBER 28, 1997

Serial No. 105–84

Printed for the use of the Committee on Ways and Means

(

(II)

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON OVERSIGHT

NANCY L. JOHNSON, Connecticut, Chairman

ROB PORTMAN, Ohio

JIM RAMSTAD, Minnesota

JENNIFER DUNN, Washington

PHILIP S. ENGLISH, Pennsylvania

WES WATKINS, Oklahoma

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

WILLIAM J. COYNE, Pennsylvania

GERALD D. KLECZKA, Wisconsin

MICHAEL R. MCNULTY, New York

JOHN S. TANNER, Tennessee

KAREN L. THURMAN, Florida

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.

(III)

CONTENTS

Page

Advisory of October 10, 1997, announcing the hearing ........................................ 2

WITNESSES

U.S. Department of the Treasury, John Karl Scholz, Deputy Assistant Secretary, Office of Tax Analysis ............................................................................. 21

U.S. Department of Housing and Urban Development, Howard B. Glaser,

Acting General Counsel ....................................................................................... 32

U.S. General Accounting Office, Stanley J. Czerwinski, Associate Director,

Housing and Community Development Issues, Resources, Community, and

Economic Development Division; accompanied by Robert E. Robertson, Associate Director, Food and Agricultural Issues, and Nancy A. Simmons,

Assistant Director, Community Development Issues ........................................ 56

Blaustein, Joan S., Pittsburgh Department of City Planning, and Pittsburgh/

Allegheny Enterprise Community ...................................................................... 93

Caprara, David L., National Center for Neighborhood Enterprise ..................... 142

Cowden, Richard H., American Association of Enterprise Zones ........................ 136

Fraim, Hon. Paul D., Mayor, City of Norfolk, VA ................................................. 75

Friedman, Miles, National Association of State Development Agencies ............. 120

Gillot, Beverly Carol, Pittsburgh/Allegheny Enterprise Community .................. 93

Gundersen, Daniel C., Philadelphia Empowerment Zone .................................... 102

Hinchey, Hon. Maurice D., a Representative in Congress from the State

of New York .......................................................................................................... 15

Lupke, Diane, National Council for Urban Economic Development, and Lupke

& Associates ......................................................................................................... 150

Posthumus, Hon. Dick, Majority Leader and State Senator, Michigan State

Senate ................................................................................................................... 83

Rangel, Hon. Charles B., a Representative in Congress from the State of

New York .............................................................................................................. 7

Schmoke, Hon. Kurt L., Mayor, City of Baltimore, MD ....................................... 71

Van Allen, Terry Wm., University of Houston-Clear Lake .................................. 131

SUBMISSION FOR THE RECORD

Riordan, Hon. Richard J., Mayor, City of Los Angeles, statement ...................... 164

(1)

PERFORMANCE OF THE EMPOWERMENT

ZONE/ENTERPRISE COMMUNITY PROGRAM

TUESDAY, OCTOBER 28, 1997

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON OVERSIGHT,

Washington, DC.

The Subcommittee met, pursuant to call, at 10:10 a.m., in room

1100, Longworth House Office Building, Hon. Nancy L. Johnson

(Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

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Chairman JOHNSON of Connecticut. Good morning. The hearing

will come to order.

Today we are going to examine some of the most fascinating initiatives to revitalize the deteriorating urban and rural areas that

have ever been undertaken by government. During the many years

that Congress debated whether and how to create enterprise zones,

most of the States didn’t wait, they established their own programs. The Connecticut program, for instance, began in 1982.

Today, there are over 3,000 zones established under State law in

37 States.

The 103d Congress established the Federal program, the Empowerment Zone and Enterprise Community Program, as part of

the Omnibus Budget Reconciliation Act of 1993. This 10-year program provided for over 100 urban and rural zones and enterprise

communities. The recently enacted Taxpayer Relief Act creates an

additional 22 empowerment zones primarily as a result of the interest of our first witness Mr. Rangel.

There are also proposals before the Congress to create additional

zones. Most notably, the Watts-Talent American Community Renewal Act would create economic empowerment and tax incentives

for up to 100 renewal communities.

The revitalization that is occurring in many neighborhoods and

around the country is innovative and exciting. It is also costly. The

5-year revenue loss for the Federal program is estimated at 2.1 billion. An additional 1 billion is available in Federal social services

block grants. In Connecticut alone nearly 1.7 million in corporate

business tax credits have been claimed by qualified businesses.

This is not necessarily too much to spend on programs that work

well, but we owe it to taxpayers, especially those who are not receiving the tax breaks, and to people living and doing business in

neighborhoods that are not receiving these initiatives, to take a

hard look at how well the programs are working. We need to ask

some tough questions. The most obvious is how do we define and

measure success.

There is an inherent tension between giving communities the

flexibility they need to develop innovative programs and establish

useful benchmarks for success, a basis for comparison, and comparing the results of one program to those of another. This may be

difficult, but we have to try. We have to wrestle with the equities

of providing an incentive to hire people who live in some distressed

communities but not others. We have to ask whether current law

provides the right mix of tax incentives for capital and labor or

whether we are subsidizing capital at the expense of labor. We

need to concern ourselves with whether redevelopment is leading

to gentrification and driving low-income residents into other neighborhoods. We need to take a hard look at whether the impediments

to capital investment in a zone can be overcome through tax incentives, or whether they are more closely related to infrastructure

and public services. And finally we need to ask whether these incentives actually create opportunities or whether they simply move

jobs and investments from one neighborhood or community to another.

I am also interested in learning more about the interaction between State and Federal programs. In Connecticut we have 17

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State enterprise zones and 12 State enterprise corridor towns. The

programs provide corporate income tax credits, sales and use tax

exemptions, local property tax abatements, and job incentive grants

and vouchers. Bridgeport and New Haven have been designed as

enterprise communities under the Federal program and qualify for

both State and Federal benefits.

How do communities leverage both State and Federal resources

to maximum advantage? As we begin this hearing, I am absolutely

convinced that one of the great strengths of these programs is that

they bring local officials, community leaders, and business people

together to develop a strategy for dealing with the challenge of revitalizing neighborhoods. I am looking forward to finding out more

about what we are learning in the various enterprise zones

throughout the countries.

I want to thank our witnesses for appearing before us and at this

time I would like to recognize my cochair Mr. Coyne for his opening

statement.

Mr. COYNE. Thank you, Madam Chairwoman. Today the Oversight Subcommittee of Ways and Means will conduct a hearing to

examine the performance of the Empowerment Zone and Enterprise Community Program. The EZ and the EC Program were enacted in 1993 and expanded recently in the Taxpayer Relief Act of

1997. This 10-year program is intended to foster national and local

partnerships to address economic revitalization in our urban and

rural areas.

In December 1994, the Administration announced the designation of 6 urban EZs, 3 rural EZs, 65 urban ECs, and 30 rural ECs.

In legislation enacted this year, 20 new EZs are to be designated

in a second round of competition, using expanded criteria and additional tax incentives.

I want to commend the subcommittee Chair Mrs. Johnson for

holding this hearing on this important issue. It is critical that the

Congress periodically conduct oversight review of progress being

made throughout the country in reversing years of economic decline

in many of our urban and rural areas.

The U.S. General Accounting Office will join us today to present

the results of their efforts to monitor EZ and EC implementation

at the national and local level. I appreciate their hard work and encourage the GAO to continue its ongoing oversight effort.

Also, it is important that the Department of Treasury and the

Department of Housing and Urban Development appear jointly at

our hearing to discuss their mutual efforts to ensure an effective

and coordinated implementation of the EZ/EC Program and related

tax benefits.

Finally, I want to personally welcome as hearing witnesses our

two colleagues, Mr. Rangel and Mr. Hinchey; and also Joan

Blaustein, manager of special projects for the City of Pittsburgh,

and Ms. Beverly Gillot, Coordinator of the Pittsburgh Allegheny

Enterprise Community. Thank you for joining us here today.

[The opening statement follows:]

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Chairman JOHNSON of Connecticut. Thank you, Mr. Coyne.

Mr. Rangel, it is a pleasure to welcome you to our Subcommittee

hearing. You certainly have had a long history of intense interest

in urban problems and legislation to help our cities revitalize their

economic base. I look forward to hearing your comments this morning.

STATEMENT OF HON. CHARLES B. RANGEL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK

Mr. RANGEL. Thank you. I ask unanimous consent that my written statement be placed in the record.

Chairman JOHNSON of Connecticut. So ordered.

Mr. RANGEL. Let me thank you, Madam Chairlady and Mr.

Coyne, for showing an interest in this very, very important subject

matter. And in the prior administration, that is, during the

Reagan-Bush administration, I chaired the House Select Committee Against Narcotic Abuse. During all of that time while I sat

on this committee, when witnesses would come, I would ask them

what really was the cost of addiction in economic terms, and it was

very difficult for me to get answers, because they said that this

type of information was difficult to measure.

Finally, somebody in the Bush White House had a tragic event

in their family where a Harvard-trained lawyer, relative, became

addicted to drugs. And before I could ask the question, he made it

clear that he was going to get the information because drug addiction was not confined to poor communities. When the information

came, even I was shocked to see that, during those years, $300 billion a year was attributed just to dealing with the criminal justice

system as related to drugs. And by the time they added the cost

of jails, the cost of the health care of AIDS, of unwanted children,

of homelessness, crime and violence, lost productivity as a result of

the mandatory sentences, and lost revenue that could be gained if

indeed these people were working, it came close to a trillion dollars

a year. I could not believe the figures.

And so the question was, then, what are we going to do about

it? Well, unbelievably, wherever we found drug addiction, we found

the worst schools, we found the highest unemployment, the highest

poverty, the highest welfare, the highest crime, the highest homelessness. And so it really didn’t take too much when you start putting these pins in the map to find that there were areas in the

United States that congressional districts were getting more per

capita than other districts for the wrong reasons, and that was trying to remedy a bad situation. Our emergency rooms were costing

more. Our hospitals were costing more. It was $1,500 a day just to

keep an underweight baby in the hospital. And the—it was millions

of dollars involved in rehabilitation of kids that were shooting kids

and remain permanently paralyzed. And so we saw, really, money

just going out of the budget into the poor community, but nothing

being left but misery, pain, joblessness and hopelessness. And so

we said what are we going to do about it?

Well, fortunately, Bobby Garcia and Jack Kemp were around,

and they had these ideas about empowerment zones. I was a cosponsor, but I wasn’t that enthusiastic because they were just dealing with tax issues, and it just appeared to me that giving tax inVerDate 11-MAY-2000 13:27 Jun 07, 2000 Jkt 063427 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HEARINGS\60762 pfrm07 PsN: 60762
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centives to employers to come into communities that had no health

system, no educational system, that was rife with crime and violence, that the tax incentive wasn’t enough.

But I got together with Jack Kemp and Newt Gingrich, and we

were able to put together the type of bill that not only dealt with

tax incentives, but brought in the private sector to work with the

communities in order to determine what the employment needs

were going to be, and also to make certain that we got the city and

the State to come forward to say what they were going to do to try

to remedy this and to get the community to say that they, too, were

going to participate.

The idea was so exciting that we had no problem in passing the

bill. Unfortunately, it was included in a tax bill, and it was vetoed

by President Bush. And then when President Clinton came, he

adopted the idea, and we swiftly incorporated the new administration’s ideas with the old ideas, and we reached a point that not

only where we are today, but in the last bill we were able to expand the concept.

One of the most difficult things to explain, but yet one of the

most exciting things about the process of empowerment zones, is

that how losers can still be winners, even though they were not

designated to become empowerment zones.

In my particular case, I was able to meet with the mayor, Mayor

Dinkins, and to meet with the Governor, Governor Cuomo. And in

order to come together to put together a proposal, they had to find

out first what was the problem and what they were doing about the

problem. Then if they were going to say that they wanted the

schools to be more responsive to the needs of the private sector,

they had to find out first what were the schools doing and not

doing. Then they had to go to the local politicians and ask were

they going to unify behind a program, or did they want to fight in

a partisan way or in a political way, or did they want to come

there.

Well, I was fortunate because in the city of New York, the mayor

said whatever the Federal Government is prepared to put up, we

will put up. I then took that and went to the Governor and said,

the mayor is putting up $100 million, and HUD would put up $100

million. He said, put me down for $100 million.

We then went to Columbia and said, we have a potential of $300

million, but we have need some technicians to put a plan together.

Could you ask what they need, and work with HUD? Columbia

said, yes, but we want to work with the city university system, too.

So we were able to bring community leaders to tell our architects

of the plan what was needed, with the political support of the city

and the State, and even though, as the prime author of the bill,

some people thought I was entitled to one, in my heart, I knew if

I never got one, I had more just in bringing the people together to

take a look at the problems that we were having in the community.

And they were starting to work on the problems that they had even

before we were designated.

Now, we had a major setback, because both Mayor Dinkins lost

and Governor Cuomo lost, and it was during the budget time, and

this hundred-million-dollar pledge, the first thing that happened

was they acknowledged they were going to keep it, but then they

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went to try to find the money, and the city and the Governor were

not compatible, and it took 6 months, really, of all of this fighting

back and forth until HUD had to say that there were other communities that had plans that they were rejected because they did not

reach the quality of the New York plan, but if that was going to

deteriorate, they could not in all fairness fulfill their commitment

without the city and State fulfilling theirs.

The adverse publicity caused them to come together. And even in my opinion, I thought that—well, the $10 million, the $100 million really, did not mean in their opinion $10 million the first year,

and we lost half of that.

Having said that, that is the negative part. The positive thing is

that once they decided to get together, Madam Chairperson, the

whole city knew it, the whole business area knew it. And everybody

that either did not participate formally were asking, what can we

do to help.

Last night I attended a briefing of the board of directors, and I

would like to add that our board is made up of not just community

people and educators, but private sector people, and our chairman

is the president of Time Warner, who came from a community like

mine. And when I asked whether or not he could bring his managerial skills and the prestige of his office, he said he would not only

welcome the opportunity to pay back a community that supported

him, but he would encourage others who were successful not to forget this inner city and to come back and to try to compensate for

the fragile family units that we have in poor communities that find

itself suffering with joblessness and drug addiction.

And as a result of him doing this, last night, McKinsey, Incorporated, which is a multinational firm that evaluates the decisions

that are being made by the private sector, not only evaluated

where we were going, but on the Internet was able to show all of

us where we could go if we unified our resources and was prepared

to work together cutting the red tape that business people find in

local and State governments. The tax incentive is there, but the

business people said that if we can make certain that we are preparing a work force that is dedicated to being effective and efficient, that they really didn’t need the tax incentives even though

smaller businesses might do it.

And so we can go to the telephone company and to the stockbrokers, all of which complained about the public school system not

being able to produce literate people, not being able to produce

those that they would not have to spend hundreds of millions of

dollars and retrain, and tell them, for God’s sake, tell us what you

want, tell us where the job is, and our kids can not only look forward to graduation, but look forward to a job, because the specifications were given to the schools to produce not just academically

a graduate, but someone that can make a contribution.

I truly believe that the President of the United States should be

given authority to negotiate not only foreign policy, but trade policy. And yet I cannot see my way clear to support giving the President fast track authority, because, until recently, I never heard the

President talk about those Americans that know that they are not

included in the progress that this country expects for the next century.

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Oh, we hear a lot of talk about higher-paying jobs and high-tech

jobs, but the schools that produce more kids that go to more funerals than go to graduations, they know that success is not in their

community. They know that people that have the skills of television repair, cleaning clothes, selling food come from outside the

community. They know we can’t even produce firemen or policeman

because the school system, coupled with the lack of hope, coupled

with the fact that many of the families don’t give the time and attention to the schools that they should, that they just come to the

schools as losers, drop out of the schools. And when I talk with

them and talk with their parents, they want to know what do they

lose with drug addiction? Do they lose their family’s good name? Do

they lose their job? Do they lose their reputation? To many kids

going to jail, it is no big deal. They come out, they have been there,

they are from the hood, they have gone, they have come out.

IV drug disease is costing more than the educational budget. And right now as we talk, we spend $84,000 a year to keep a bum kid

in Riker’s Island, and we are fighting over whether $6,000 or

$7,000 is enough money to keep him in public school.

And so I beg the President not just to look at this as a demonstration project, but he has been so successful in improving the

economy and reducing the deficit, and we can reduce it even more

if we did not have to pour this money out into our jail systems. Our

jail system alone costs $450 billion a year. And it is senseless to

see how State legislators are competing for jails and prisons the

same way we did in a Congress for unneeded military bases, but

they are doing it because jails in our States, and including New

York State, not only excel the costs of our university system, but

they are providing jobs for people, and politicians have to be concerned about economic development. And we now find that jails get

a higher priority than new schools, and the whole thing is senseless.

And so I know that to talk about a public works bill where everyone is able to get the skills, or to talk about a giant community

conservation corps, or to talk about creating jobs for people with

training, that this is not the time to discuss it. But I know one

thing, that we have our schools that have to be rebuilt, we have

our infrastructure that is falling apart, and if we are going to succeed in the next century, we have to make certain that transportation, communication, education is going to be there. And we will

not be able to effectively compete with 1.6 million people in jail,

most all of them young, most of them minorities, and none of them

unemployable.

So I came here really to support Congressman Watts and anybody else that was saying, isn’t it time that we look at some of our

most precious assets, human beings, and be able to tell the civilized

world that we want to educate them, make them employable, put

them to work, make them productive, because having a million and

a half people in jail just doesn’t make any sense at all.

And so I value this oversight. I think the empowerment zone is

exciting. It has been of major success throughout the country. And

even as we talk, HUD advised me this morning that they are going

to have an overall national review system so that we can find out

in Harlem, New York, what they are doing in L.A., what they are

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doing in Detroit, what they are doing in Philadelphia. And I don’t

think that any urban community or rural community that suffers

the way we are suffering, sure they should compete and meet the

criteria, but they shouldn’t be passed over. Thank you, Madam

Chairperson.

Chairman JOHNSON of Connecticut. Thank you Congressman

Rangel.

I don’t know whether you have ever had a blue ribbon school in

New York City, I am just not up on that, but I have had a number

of blue ribbon schools in my district, and for the first time an

urban blue ribbon school. And when you talk to the schools that

applied, whether they won or not, by the time they get up to the

end of the competition, they almost don’t care if they didn’t win,

because the consequences of the collaborative effort of preparing

the application among the teachers, the administrators, the parents, and the kids is so important and so extraordinary and so productive for them that whether they get the name or not isn’t of as

much consequence.

And what I hear you saying is that in your experience, the empowerment zone legislation did succeed in forcing people to look at

what is the problem and how would we solve it working together.

And that is very important testimony.

Did I understand you to say that recently the businesses were

heard to comment that the tax incentives were less important than

the work force quality?

Mr. RANGEL. With the larger multinationals, because I have this

area of poverty in one of the most successful political subdivisions

above Manhattan, and they were saying, and they said it again last

night, that if they can go into a community and bring that community back to life, they know how to make money, and they don’t

need the incentives as it relates to the employers’ tax credit. They

really wanted to cut out the red tape, let them get in there and let

them do what they can do best.

But, of course, a community is not big business. A community

really is small business, and that is where the tax credit really is

important as—as employers have to almost train employees, many

of whom have had no work experience at all, and the tax incentive

allows them to be more competitive in doing it. But with the larger

firms that have no competition, they said give them an even playing field, give them employees that they can work with, they don’t

need the incentive. And this is especially so if we are able to relieve

them of the so-called retraining responsibility.

Chairman JOHNSON of Connecticut. Thank you, Mr. Rangel.

Mr. RANGEL. And I hope one day to come here, Madam Chairperson, with a proposal where any kid that lives in public housing,

that is trained to be able to do a job in public housing, whether it

is the manager’s job, or whether it is cleaning the floor, whether

it is security or elevator repair work, whether it is being an electrician or being a plumber. These public houses should be families,

it should be a village, it should be a community by itself. And job

opportunities—training and job opportunity, they should be given

preferential treatment the same way we have legislation now to

give law enforcement officers preferential treatment if they live

there so that the pride and dignity of having a job can keep toVerDate 11-MAY-2000 13:27 Jun 07, 2000 Jkt 063427 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HEARINGS\60762 pfrm07 PsN: 60762
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gether not only our communities, but to bring together and keep

together our families. Jobs mean so much to human beings’ dignity

and how they see themselves in their communities.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you. Congressman

Rangel.

Congressman Hinchey of New York.

STATEMENT OF HON. MAURICE D. HINCHEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK

Mr. HINCHEY. Thank you very much, Madam Chairman, Mrs.

Johnson. I very much appreciate the opportunity to be here before

you today.

Mr. Coyne, thank you also very much for exercising your oversight responsibility with regard to empowerment zones and enterprise communities.

I ask unanimous consent that my written statement be included

in the record.

First, I would like to associate myself with the remarks that

were just made by the dean of the New York delegation in every

respect. I think that he continues to put his finger directly on much

of what ails urban America. And if we are wise, we will heed his

advice, particularly with the misallocation of resources to prisons

and the misallocation of our future locked up in many of those prisons and what that implicates for the future of our country.

I have had the opportunity in my own district to examine the efficacy of enterprise communities close at hand. We have in the midHudson Valley of New York an enterprise community which is

known as the Kingston/Newburgh Enterprise Community. It combines two old blue collar river communities on the west bank of the

Hudson River.

The city of Kingston suffered recently economically as a result of

the downsizing of IBM and is in need of outside financial assistance, which has been provided by the establishment of this enterprise community. The city of Newburgh has been in decline since

the 1950s and gives evidence of every aspect of what ails our urban

communities. It is an aging city, its housing stock is grossly deteriorated, the businesses have moved out, and it is in dire need of

assistance. That assistance has begun to be provided by the establishment of this enterprise community, which combines both of

these communities.

In the city of Newburgh, job training and business development

have been critically important. The KNEC programs in Newburgh

also focus on areas such as housing, child care and health care.

And in addition to encouraging new businesses to locate in the enterprise community zones, the Kingston/Newburgh Enterprise

Community has opened a ‘‘One Stop Capital Shop’’ to provide small

businesses and entrepreneurs with the development services and

job training and the capital that they need to get started.

The KNEC has also committed over $500,000 to develop or rehabilitate nearly 75 single family homes and 65 units of senior citizen

housing in Newburgh. That is a lot for a city with a population of

less than 30,000. By year end, the community will have expended

almost $2.5 million on projects in both Kingston and Newburgh,

and these projects have been everything from the kind of housing

projects that I have described to financial arrangements for new

businesses to come into the community, which are successful, are

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employing people, and are showing how effective this program can

be.

I would like to point out one problem with the program as it currently exists, and that problem is being corrected, as I understand,

with the reauthorizing legislation which you are proposing and

moving forward with. That problem relates to one of the examples

that my dean mentioned a few moments ago, and that is the problem of the relationship between the enterprise communities or empowerment zones and the States in which they are located.

The original legislation not only required that the States provide

matching funding for the empowerment zones or enterprise communities, but it also provided that the State governments would

act as pass-throughs for the Federal funds. In other words, the

Federal funding goes to the State before it gets down to the empowerment zone or the enterprise community.

Now, in most States this has not been a problem, as I understand it, because the States have simply taken the Federal money

and then given it to the communities as the need was apparent.

However, in the case of the State of New York, something different

occurred. The State began to act as a fiduciary and, in effect,

blocked the allocation of Federal funds going down to the enterprise community of Kingston and Newburgh for a prolonged period

of time, thereby holding up the efficacy of this program. The people

who were administering the program as well as the members of

local government were seriously and severely frustrated in their attempts to break through this bureaucratic arrangement of the

State government, and that caused some very serious problems for

the operation of this enterprise community and these two small cities.

Now, as I understand it, this problem is being addressed as you

reauthorize this program, and this is pursuant to the recommendations of the President, because HUD, as the Federal administrator

of this program—which I believe has done an excellent job in administering the program at the Federal level—has recognized that

in some cases around the country the States have not been building

bridges, but have, in effect, acted as roadblocks in preventing the

Federal funding, not just the State funding, from getting down into

these communities, and this has created a very serious problem.

So I would urge the committee as it moves forward with reactivating and reauthorizing this legislation, that it provide for a system whereby the designated communities, which, after all, have

had to go through an application process and have had to clear numerous hurdles in order to qualify for the program, work directly

with the Federal Department of Housing and Urban Development

so that the funding they need can be accessed more readily. And

I think if that is done, the effectiveness of this program will be

greatly enhanced.

I would make just two other suggestions with regard to the bonding apparatus that is set up under the legislation. The bonding

ability of the designated communities is controlled and regulated

by the bonding cap of the States, which is affected by a number of

variables within the particular States. This has made it very difficult for the communities to exercise this bonding authority under

the State’s cap, because if the State’s cap has been reached, then

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the bonding ability of the locality, of course, is never able to realize

itself.

So I would suggest that in the new legislation, the bonding authority of the communities not be tied to the State, but rather, that

the bonding authority be tied to another criteria, say, for example,

the population of the enterprise communities or the empowerment

zones or some other variable that the committee may in its wisdom

deem to be more appropriate.

But I think it is important to get it out from under the cap of

the State, because the ability of the enterprise community and the

empowerment zone to go out into the bonding market and get this

capital that it needs is impaired very seriously by the State cap.

Additionally I would recommend that the bonds of these empowerment zone and enterprise communities be made bank-eligible. Under the present arrangement, banks are not able to participate in the lending regimens in the existing legislation. The bonds

are not bank-eligible. I would suggest that local banks know very

well or perhaps better than anyone else the needs of the local communities, and they are in a better position to respond to those

needs. And I think that banks are interested in making these loans

should you deem it appropriate to make these loans bank-eligible,

as I am urging.

I think if those two changes were made with regard to the bonding arrangements in the existing law, a substantial amount of additional capital would become available. After all, if the loans are

bank-eligible, banks will be able almost immediately to provide a

very substantial amount of financial resources to these communities. And that, of course, is precisely what the original legislation

envisioned.

Those would be my principal recommendations as you move forward with this. I would say just in closing again that I have witnessed this program close at hand. I participated in the application

process. I have watched the administrators of the program work locally. I have worked closely with the two local governments involved. It is a very good program. I think even within the constructs of the impediments that I have mentioned, even in spite of

it, I have seen this program working well.

I believe, however, that it can work much more effectively if we

can get the State out of the way and make these changes in the

bonding arrangements. And I thank you very much for the opportunity to testify on this matter before you.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you very much, Mr.

Hinchey. It has been very helpful to have you testify, given your

very close involvement in this program with your midsized city

community, which is more like my experience. It reminds you—and

if you look at the article in today’s Washington Post about Indianapolis, it does remind you about how differently communities need

to be able to choose to handle these problems, and how important

the resources are. Thank you very much for your testimony.

Mr. Coyne.

Mr. Coyne has no questions, so we will move on to the next

panel. Thank you very much for your testimony this morning.

Mr. RANGEL. Thank you, Madam Chairwoman.

Chairman JOHNSON of Connecticut. Dr. Scholz, the Deputy Assistant Secretary, Tax Analysis, of the Department of Treasury;

and Howard Glaser, Acting General Counsel and Deputy General

Counsel, formerly General Deputy Assistant Secretary of the Community Planning and Development of HUD. Welcome.

Mr. SCHOLZ. Thank you.

Chairman JOHNSON of Connecticut. Doctor Scholz.

STATEMENT OF JOHN KARL SCHOLZ, DEPUTY ASSISTANT SECRETARY, TAX ANALYSIS, U.S. DEPARTMENT OF THE TREASURY

Mr. SCHOLZ. Madam Chairwoman Johnson and Members of the

Committee, I am very pleased to have the opportunity to present

testimony today concerning the Empowerment Zone and Enterprise

Community Program. My testimony will describe the tax incentives

that are part of the program, recent changes to the program that

reflect taxpayer concerns, and revenue affects of the EZ/EC program.

Under OBRA 93, nine first-round empowerment zones and 95 enterprise communities were designated at the end of 1994. Nominated areas were required to satisfy certain eligibility criteria

based on poverty rates, population and geographic size, among

other factors. The recent tax bill authorized the designation of 22

EZs; two additional first-round EZs, and 20 second-round EZs.

These tax incentives are part of a comprehensive approach to address problems facing the EZ/EC communities.

The Federal Government provided flexible block grants to enable

communities to undertake a broad range of activities that cannot

easily be funded with tax incentives, such as community policing.

Communities in partnership with the private sector and local government developed strategic plans for community revitalization

that leveraged Federal resources in a wide range of creative programs.

The tax incentives which are the focus of my testimony lower the

cost of labor and capital in these distressed communities. An employment and training credit, for example, is available to firstround EZs. This is a 20 percent credit against income tax liability

available to employers for the first $15,000 of wages paid to each

employee who lives and works in the zone. As an additional incentive for both first-round and second-round EZs and ECs, zone youth

are included as an eligible target group for the work opportunity

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tax credit or WOTC. The WOTC is a 40 percent credit of up to

$6,000 of wages paid during the first year of employment.

The capital incentives, there are two of those, are targeted to

businesses that are likely to have a significant impact in the zone

while limiting the possibility of abuse. In particular, at least 35

percent of employees in an enterprise zone business must be zone

residents, and much of the activity and property must be in the

zone. My written testimony goes into some detail about these criteria.

The two—both the first- and the second-round EZs are granted an additional $20,000 in the expensing allowance under section 179

for depreciable business property. What this does is lower the cost

of capital for small zone businesses by allowing them to deduct the

total cost of an asset in the year it is purchased. The first-round

EZs and ECs also have the ability to issue tax exempt bonds.

Now, the administration, working with Congress, has tried to be

responsive to communities by modifying the first-round tax incentives to improve their effectiveness. For example, there were concerns that the first-round tax-exempt bond requirements were too

restrictive, as it was estimated that only five bonds were issued

since the beginning of the program. As a result, the new tax-exempt bonds, the empowerment zone facility bond, was created that

was outside the State private activity volume cap and not subject

to the size limits.

A couple other items were also changed in response to community and other concerns. The definition of what is a zone business

was also relaxed to make it work better, and a new phase-in period

for bonds was instituted.

Now, because the tax incentives are only a part of the EZ/EC

Program, a systematic complete evaluation should examine all components of the program and their effectiveness. Howard Glaser

from HUD will discuss their plans for such evaluations.

Tax data will eventually provide useful information to monitor

the EZ/EC Program; however, we do not yet have reliable tax return data on these incentives. Tax return data for the 1995 tax

year, the first full year in which the incentives were in effect, are

available, but are based on a small sample that probably does not

reflect accurately the use of the EZ/EC tax incentives by all businesses. Further, available data are unlikely to reflect the effects of

the EC/EZ Program because some zones are just beginning to implement their strategic plans.

To get a more complete understanding of the use of the EZ/EC

tax incentives, the IRS is collecting data from the full population

of business tax returns for the 1996 tax year. We expect to receive

these data early next year. Even with complete tax return data,

consolidation rules can make it difficult to determine which zone

is benefiting from business taking advantage of a particular tax incentive. For example, a corporation may have operations in both

the Detroit and the Atlanta EZs that can take advantage of the

employment credit. The tax return for the corporation would just

show the total employment credit taken in both zones.

With these caveats, tax return data should provide insights on

the investment and employment activity benefiting from the credits

as well as the characteristics of the businesses claiming the credits.

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When tax return information are available for several years, it will

also be possible to describe changes in economic activity in the

zones over time.

Even so, it will still be difficult to disentangle the effects of the

tax incentives from the other components of the zone program and

other factors that may affect employment and investment in the

designated areas, such as improvements in the economy or in the

area surrounding the zone.

The problem of determining what would have happened in the

absence of these incentives arises frequently in program analysis

and is probably best addressed by the impact and 10-year evaluations that Howard Glaser will describe. The tax data, however,

which we intend to monitor will play a useful role in establishing

a baseline of how frequently the incentives are being used and how

those patterns change over time.

That concludes my prepared remarks, and I would be pleased to

respond to any questions.

Chairman JOHNSON of Connecticut. Thank you very much, Dr.

Scholz.

[The prepared statement follows:]

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Chairman JOHNSON OF CONNECTICUT. Mr. Glaser.

STATEMENT OF HOWARD GLASER, ACTING GENERAL COUNSEL, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Mr. GLASER. Okay. Thank you, Madam Chairwoman, Ranking

Member Coyne, and other distinguished Members of the committee. I will be very brief with my comments.

We have provided to the committee material on the HUD performance reports and other supportive material to give you a really

full understanding of where we think the program stands at this

point.

Let me say that we are pleased on behalf of Secretary Cuomo

and the Department to be able to provide this to you today. Secretary Cuomo asked that I provide to you his thanks for your continued support of this initiative. It was, after all, this committee

that, 13 years after the first enterprise zone ideas first came to the

United States from England, made it a reality in 1993 and has continued to support the program as we move forward.

I will briefly tell you a little bit about some of the things we

measure the program against. This was designed to be a different

kind of Federal program in a number of ways. First, it was designed to be performance-based, rather than measuring process or

money spent. The empowerment zones and enterprise communities

set performance benchmarks against which both residents and investors can measure their progress, and which govern the receipt

of future Federal dollars.

Also, unlike typical Federal urban programs of the past, the empowerment zone approach recognized that economic opportunity

and self-sufficiency are the most important elements of a comprehensive strategy; also recognized that private sector investment

was critical to the success of rebuilding communities.

The Federal resources provide seed capital, but, ultimately, a

functioning inner city economy requires building a private market.

We also recognize that communities which have been starved for

investment and experienced extreme poverty for many decades cannot turn around overnight. And Congress wisely designed the program as a long-term, 10-year effort instead of the one-shot, shortterm approaches of prior Federal efforts.

And, finally, we recognize that the implementation of the program must be locally driven, not by a bureaucracy in Washington.

We heard a little bit in the differences between Congressman Rangel and Congressman Hinchey, how their districts are so very different. They have very different programs as a result.

In short, the Federal Government acts in this program much like

a venture capitalist. We say to the communities, if you bring everybody to the table, you put together a business plan for reviving

your community with some measurable benchmarks for success,

and you bring resources to the table that you are willing to risk,

then the Federal Government will step in and risk some of our resources as well on the success of your plan.

Those were the general major objectives of the program design,

the original program design. Earlier this year, we released 72 reports, performance reports, one on each of the empowerment zones

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and enterprise communities, which review the progress of each

zone in meeting their own strategic plan. And we have provided

summaries of those plans and can provide you with the originals

of those as well. What those reports show us in brief is that, although this is designed as a 10-year effort, the zones and communities are already showing some real and, in some cases, substantial progress in meeting their goals.

As you might expect, in any effort of this kind, of course, cities

perform at different levels. There are very high performers, moderate performers, and, frankly, there are some weak performers.

But throughout, the progress in each zone is measured against

their own goals that they set for themselves, not a one-size-fits-all

Federal cookie cutter standard.

The overall picture that we get from the reports from the 72

zones is that, nationwide, these zones are stimulating billions of

dollars of new investment, private investment. They are beginning

to revive inner-city neighborhoods once given up for dead, creating

jobs, helping families move from welfare to work.

We have seen some key lessons emerge from these reports as

well that we can apply as we move forward to the enhancement of

a second round. For example, we know a small amount of Federal

funding can attract significant private-sector investment. We know

that comprehensive results—comprehensive planning has had better results than piecemeal efforts. We have found that there is

some tension between city hall and community residents over the

investments made in their communities, but that working out that

tension is really essential for residents to have a long-term stake

in the outcome of the empowerment zone process.

Fourth, we found that performance measurement is an important

part of ensuring that Federal resources are used effectively; and,

finally, that interagency coordination at the Federal, State, and

local level is critical to program success.

We could spend some time walking through with what some of

the innovations are. They are in the reports. We will be glad to

share those with you. But even a brief review gives you some sense

of the new ideas being undertaken.

There has been a lot of bipartisan support for this program

throughout based on the early progress of the program, as we have

discussed here. The President proposed and Congress passed a second round of empowerment zones through the Taxpayer Relief Act

of 1997, and while the establishment of those 20 new zones is a terrific first step, the addition of flexible grant funds to accompany the

tax incentives will help ensure the success of that second round.

And the Department looks forward to working with the committee

on that challenge.

We will be happy to take any questions.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you very much.

Dr. SCHOLZ, you give the example of the corporation that has an

operation in both Detroit and Atlanta. Would it be hard to, early

on in the process like this, to get the companies to report differentially on their tax return what portion of the wage credit is ascribed to each enterprise zone?

It seems to me in the long run we will want that information,

and we ought to make that clear at the beginning. In their work

papers they must have done it, anyhow.

Dr. SCHOLZ. Right now, to take the wage credit, the company is

filing Form 8844, and companies typically file their tax returns on

a consolidated return basis. No tax rules, however, are written in

stone, and so I can go back and talk both to the Internal Revenue

Service and our office to see whether that is something that is feasible. Surely the companies internally have that information, and

so it may well be something that we can do.

Chairman JOHNSON of Connecticut. Thank you. I would appreciate it if you would do that, and also, talk with your department

about any other disaggregation of data that we ought to look at at

the beginning, so that over 5 years and 10 years we do have some

understanding of this that will be a sounder foundation for the future.

I personally, for instance, am very interested in whether expensing is a more powerful incentive than some of the other incentives.

We have people urging us to do nothing but zero capital gains. How

do we evaluate the use of these incentives, and how do we get some

input from the very beginning as to whether the wage subsidy was

far more important, and maybe on-the-job training subsidies would

be more important than property tax relief or capital gains relief

or corporate tax relief at the State level or expensing at the Federal level. And it may be that expensing is more important in communities like Mr. Hinchey’s where you have a lot more small businesses, and other things are more important in our kind of communities.

I think it would be a mistake not to recognize that right now our

way of collecting tax information from companies participating in

enterprise zones is inadequate to our needs. So, if you would, get

back to your staff about that and get back to us about their

thoughts and working with Mr. Glaser. I don’t think that we can

even evaluate the tax portion of this program with such gross information.

Dr. SCHOLZ. Right. We can start to, I believe, learn something

about effectiveness, about the mix of different incentives, as you

mentioned, since there is variation across the enterprise communities, the first round enterprise zones and the second enterprise

zones. So by examining the difference in development outcomes

across those different areas, we should be able to learn some things

about the effectiveness of different incentives.

Then, of course, we have some experience on worker training programs and efficacy of capital gains tax reductions from other contexts; but your point is very, very well-taken.

Chairman JOHNSON of Connecticut. Well, will you be able to tell

us, for instance, in 5 years how much of the enterprise zone money

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was spent on expensing and how much of that expensing was used

by companies of XYZ sizes?

Mr. SCHOLZ. That specific question we should be able to answer.

Now, trying to get the specific geographic answers for areas, as my

oral remarks made clear, will be more difficult without moving further in the direction that you suggest, which of course requires a

careful trade-off between the increasing taxpayer reporting burdens

and the benefits of the knowledge that we gain. I recognize and I

am quite sympathetic to your suggestion, that given it is a new

program, we need to learn something about it, such that the increase in knowledge is very worthwhile.

Chairman JOHNSON of Connecticut. I am very concerned with the

bureaucratic reporting requirements. On the other hand, if we look

at what companies would normally be developing, what information they would normally be developing anyway to do their taxes

and what portion of that background information would be useful

to us, to maybe do that on a supplemental basis in enterprise zones

might very well be worth it. I think it is important to make those

determinations early.

Dr. SCHOLZ. No question about that.

Chairman JOHNSON of Connecticut. It is also very important to

be able to do it geographically. I, as a Member from the Northeast,

am increasingly sensitive to the extraordinary regional differences

that are totally and completely nonpartisan. Representing the oldest manufacturing region in the country, brownfields are a much

bigger issue. If you are in Arizona and you have only been manufacturing a few decades, brownfields aren’t such an issue. Some of

the interaction of the programs and interaction of portions of the

tax bill in these regions, we also need to be able to track, so I

would be interested in your getting back to us about that.

Dr. SCHOLZ. I sure will.

[The following was subsequently received:]

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Chairman JOHNSON of Connecticut. Mr. Glaser, if you could just

run down a few of the kinds of practical things. You mention in

your report about what works in the enterprise zones and the general matter of comprehensive planning being an asset, performance

measurement being an asset, interagency coordination being an

asset. Could you give us some examples of what works?

Mr. GLASER. I’d be delighted to. I want to point out, also, that

we have published last year a book called ‘‘What Works In The Empowerment Zones/Enterprise Communities.’’ This is a best-practices

type of manual.

One of the points of this program was to find out what works,

use these 72 cities as laboratories for urban experimentation, and

then import the ideas that worked to other communities. Congressman Rangel talked about even the communities that lost won just

by going through this process, and, in truth, they can use many of

these ideas in their own communities. You can find a whole wealth

of them in our Best Practices Guide. The information is also on the

Internet, and there are all kinds of ways to access this information.

A couple of highlights would be: First, the utilization of the Federal money is not to fund at 100 percent as in traditional grant

programs, but as leverage, a small amount of money to leverage a

large amount of private capital. In the first 24 months of the program, communities committed approximately $200 million of the

Federal Title 20 money. There was approximately $2.7 billion of

private investment reported during that period. It was a very good

ratio, and that is exactly what we sought to have occur, so that is

one example.

One way they did that especially is through community development banks in Los Angeles, in Louisville, in Baltimore, including

some of the rural zones as well. The Mississippi Delta created empowerment zone banks that enabled us to mix the private sector

leverage along with the Federal money to make more of it than

they originally had. So I would say that if there was one thing that

came out of the process, it was that you could use the Federal

money that way.

Chairman JOHNSON of Connecticut. Thank you. Would you care

to comment on this issue that is going to come up later in the hearing, on outputs versus outcomes as a weakness of the measurement?

Mr. GLASER. Well, as a starting point, performance measurement

is a critical piece of the program. At the beginning of the process

communities were asked to set specific measurable goals for each

of their activities, providing both themselves as residents and local

investors as well as the Federal Government a way to know whether or not we actually accomplished something other than how much

money did we spend. That process went on, and I think has been

a successful one.

The issue that you raised and that the GAO raised is what is it

that you exactly want to measure, an output versus an outcome?

And we are trying to make our measures more outcome-oriented.

I will give you an example of what we are talking about here.

Suppose a community has a goal of immunizing children, and

what we would call the goal, the benchmark would be let’s immunize 10,000 children who had not been immunized. That is specific.

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It is achievable. It gives them something both to shoot for and to

be measured against.

GAO takes a slightly different point of view. They say outcomes,

we want to look did the rate of infection, for the disease go down.

We are concerned about taking that approach because there are so

many external factors to whether or not you will be able to achieve

that goal. Economy is another one, number of jobs that you project

that you want to produce versus the effect on the unemployment

rate in the area.

Obviously, with the stock market going up and down, as we can

see today more than ever, who knows what the outcome is going

to be in local inner-city economies, and how can you hold accountable local communities for things that they do not have within

their control? That is what that debate has been about. We all

agree we need to be more performance-based. A little bit of discussion goes on as to whether or not that should be output versus outcome.

Chairman JOHNSON of Connecticut. Thank you very much.

Mr. Coyne.

Mr. COYNE. Thank you, Madam Chairwoman.

Mr. Scholz, From what you have witnessed so far of the program,

What would be the most important improvement we would make

in the program?

Dr. SCHOLZ. That is a very difficult question. My take on the program is it is very new and I think it is a very promising approach

for community development. There has been tremendous positive

response from communities in the process of making applications.

That tells us that there is a very sensible mix of incentives for

labor and capital in the program.

The one thing to improve the program (it is almost a negative

thing that I am going to say) is that it needs to be given time to

work. In this way, we learn even more from the kinds of things

that HUD is doing and disseminate information on the program to

other communities so that they can see what are promising economic development processes. However, this requires giving the

program time to work. It is very new. We want to see what is going

on.

Mr. COYNE. So you really haven’t had a chance to be able to formulate some response that would improve the program?

Dr. SCHOLZ. Well, we have made very important administrative

changes to the program between the so-called first-round designations and the second-round designations. I mentioned in my oral

remarks the bonds program wasn’t working very well, bonds

weren’t being issued. So we developed, in working with Congress,

a new bond that is going to be a much more flexible development

tool.

In addition, businesses were very concerned about whether they

were, in fact, in an empowerment zone or enterprise community. In

response, HUD and the Department of Agriculture set up a 1–800

number so businesses can find out. Further, the definition of ‘‘enterprise zone businesses’’ has been relaxed to make these incentives a more successful economic development tool. Those sorts of

changes have, I think, been quite important improvements.

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Mr. COYNE. What did you think of Congressman Hinchey’s idea

about local banks being able to issue the bonds?

Dr. SCHOLZ. Treasury has typically been quite reluctant to extend tax-exempt bond financing to financial institutions. Tax-exempt bonds are, I think, a more useful economic development tool

when issued directly to the people who will use the proceeds rather

than to intermediaries, but the idea is certainly worth additional

consideration.

Mr. COYNE. So you wouldn’t close your mind to looking at that

proposal?

Dr. SCHOLZ. Not close our minds, no.

Mr. COYNE. Relative to Congressman Watts’ and Congressman

Talent’s and Congressman Flake’s legislation, H.R. 1031, would either you or Mr. Glaser want to make any comments concerning the

need for this legislation or the impact of this bill?

Dr. SCHOLZ. I would like to make two brief comments, and then

perhaps my colleague would also.

The EZ/EC program is targeted on very distressed communities.

The poverty rate in the Atlanta EZ, I believe, is 50 percent. The

poverty rate in the Chicago EZ is 49 percent. These are very distressed areas. The American Community Renewal Act has a much

broader definition for ‘‘renewal communities.’’ For place-based development strategies to work effectively, I believe they need to be

narrowly targeted. That is one policy concern.

The second policy concern is over the mix of incentives in the

American Community Renewal Act. For example, the zero percent

capital gains rate invites tax sheltering activity. People are very

clever in manipulating these kinds of incentives so that the price

of property transferred between related businesses is advantageously altered. There is a myriad of ways of exploiting those tax

shelters, and I am afraid that would be an unproductive kind of

use of Federal money.

Similar concerns arise with the revitalization tax credit and

other provisions of this proposal. So we have policy concerns.

Mr. COYNE. Mr. Glaser.

Mr. GLASER. Not really too much to add to that. We certainly are

very supportive of any efforts to enhance these targeted kinds of

efforts. The question is whether or not there are going to be conflicts or confusion among communities that are designated, that

now have a separate mechanism or new bureaucracies perhaps to

implement the legislation. I think that is something we have to

look at.

Mr. COYNE. Thank you.

Mr. WATKINS. Madam Chair, members of the panel, I am delighted you are here today, but I come alarmed and concerned.

Madam Chairman and Mr. Coyne, my colleagues, I have had a

longtime commitment to empowerment communities, enterprise

zones. When I served in Congress previously, I worked with Jack

Kemp on this subject. We got one-third of the enterprise zones set

aside for rural areas of this Nation, because originally the legislation didn’t have any planned for rural areas, and I was deeply

bothered by that. Therefore, I was talking to my good friend, Mr.

Rangel from New York, a while ago about this rural set-aside.

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Poverty is poverty, and there is no greater, deeper poverty than

in the small economic rural communities where people are scattered and their voice is faint and no one is there to hear. You

know, the riots in Watts, California, back a number of years ago

started from a young lad that his parents left Oklahoma and went

there and caused social problems. I have told people the largest migration of human beings ever recorded in history was from small

rural areas of our Nation, the farms and all, into the urban centers, the shipyards and manufacturing plants of this country, the

Grapes of Wrath to the Great Depression.

I came along about 10 years after that, and I know my family

had to leave three times, Madam Chair, from rural, economically

depressed Oklahoma and Arkansas in search of jobs. I went there

three times as a youngster picking up potatoes and onions. That

was pre-Caesar Chavez days, basically. But no one would sound

the alarm, and it created social problems in the inner cities but

also created socioeconomic problems in the rural areas.

I am glad one-third of them have been set aside for rural areas.

But I am deeply concerned. We have got to have someone at the

table. I notice part of the panel is Mr. Robertson from Agriculture.

Is he here?

Madam Chair, why isn’t someone in that panel right there, right

now, speaking up for small cities and rural communities, depressed

areas, greater depression. I know in Oklahoma our capital income

is 80 percent of the national average. In the rural economically depressed areas it is probably 40 percent of the national average, and

I am a product of that. It is something, my whole public life is to

try to change it. I endorse, you bet, I am a champion in trying to

preach the gospel of what this can do to help our areas.

So let me say I am glad you are here, but I would like to think

there would be someone there and there would be someone behind

you that represents the rural areas and the rural empowerment

communities and the economic areas there. Let me just ask the

question. I noticed under the ’97 act, Mr. Scholz, from your testimony, there are 2 additional first-round EZ’s and 20 second-round

EZ’s, and the two first rounds are from urban areas.

Why isn’t there at least one for the rural areas?

Mr. GLASER. I guess my understanding is that our understanding

of the law, which is a little bit perhaps unclear, is that the intent

and the emphasis in the budget agreement was that those two additional zones were, in essence, upgrades of the two existing supplemental empowerment zones which did not harbor tax purposes.

Mr. WATKINS. In other words, it is political. You know, if there

are two for the urban, there should be one for the rural areas. I

mean, Madam Chair, I hope you will focus on that. I don’t have a

big city. I have got rural economically depressed areas that have

got a high percentage of native Americans. In fact, I was the only

non-Indian on the baseball team when I was growing up as a boy,

and I was a minority and I didn’t know it.

But I would like to see one crafted that—I don’t want it divided.

I want the Native American and also the rural communities and

rural economically depressed areas together, and we must have

something together. Because if we make it separate, we are going

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to cause a greater division in this country, and I did not know, just

as a lad, there is any difference in us as people.

But I am disturbed there is no one here around the table or invited to represent the rural areas. I don’t know if that is an oversight on our part or oversight on your part or some others that we

don’t have someone here.

Mr. GLASER. If I could make one comment, I am here on the

urban perspective. There are two lead agencies in the empowerment zone program. The Department of Housing and Urban Development does primarily the urban side, although it contains many

smaller cities as well. And Secretary Glickman and the Department of Agriculture are the lead agency on the other side, and they

can certainly brief you on what they are doing.

Mr. WATKINS. I understand that, but why aren’t they sitting

there? Is that our fault, or is it the fault of you folks?

Mr. GLASER. I can’t answer that question.

Mr. WATKINS. Have we ignored that?

Mr. GLASER. I don’t know if an invitation was extended to Agriculture.

On your point, Congressman, with the empowerment zones in

the second round, there are 20 new empowerment zones in the second round; and of those 20, and I don’t know that this was specifically in the oral statement, 5 of the new ones are rural zones. They

are full empowerment zones in the second round. I just wanted to

clarify that for the record.

Mr. WATKINS. I am just going on Mr. Scholz’s testimony here

where he says two new first-round EZ’s are located in urban areas,

and they increase to eight but not for rural areas.

Mr. GLASER. I believe that was really a technical fix from the

first round. And the second round are the new zones, the 20 zones.

And again, 5 of those are rural zones with the full package of tax

incentives.

Mr. WATKINS. Let me ask for additional time. I know we have

a time limit. I served on the Banking and Finance Committee one

time, and the chairman set up a committee called The Cities and

had New York, Chicago, Boston and one else there, and I sat there

and not one small rural community. Ignored totally. That was on

the Banking and Finance Committee.

And I took them to that rural economically depressed area finally. I had to shame them into it. And I remember one of the guys

landed in Tulsa, wasn’t there, and he didn’t come to the rural area

because he thought there was only one airport in Oklahoma. And

I said, no, we had people waiting in Oklahoma City. And he said,

‘‘Well, don’t worry about it. I will take a taxi.’’ That was 120 miles

away. He didn’t understand in rural areas you don’t take taxis.

But I ask the question, though, on the specifics and the meat of

the subject here. How many businesses and industries have taken

advantage of the tax provisions on the 20 percent wage-to-credit

and also the additional 20 percent there?

Dr. SCHOLZ. We don’t yet have the information to answer that

question. We are going to have a complete census of the firms that

have taken the incentives in 1996, and those data will be available

early next year.

Mr. WATKINS. Run that back by me again.

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Dr. SCHOLZ. We don’t yet have reliable data to answer that question. But we are working with the Internal Revenue Service to get

data for the calendar year 1996 to answer that question, and those

data will be available early next year.

Mr. WATKINS. Madam Chair, that is all the questions. I would

just like to close by saying I am genuinely alarmed that—I am a

believer. I know in my area of the State we do have one, but I have

got 21 counties and that covers just part of a county, part of two

counties. Some areas do not have one single manufacturing firm.

How do we build jobs? How are we able to provide gainful employment for the sons and daughters of people that are there? There

is a tremendous work ethic. They want to stay and live and work

and raise their families there.

And I understand the destruction of families because they have

to leave in the search for a job. It destroyed my family as a youngster, and that is why I have devoted my life to try to change that

area of the State of Oklahoma. I ask you to not lose the focus of

the rural areas. They are crying out but you cannot see them.

Sometimes in big cities they just burn down the buildings and

that gets attention. But the people can be dying, basically, out

there in rural areas and it doesn’t get much attention because their

voice is scattered and it is faint. I am their voice to a certain extent

here at this table, and I would like for someone to be on the other

side of that table telling me what they are doing and how they are

carrying it out and maybe have just as much attention for their efforts.

So, Madam Chairman, I appreciate you having these hearings,

and I welcome more opportunities like this to share and talk about

some of the problems there. Thank you.

Chairman JOHNSON of Connecticut. Well, thank you very much

for your comments. We do hope that the last panel will be able to

address both urban and rural experience. But we certainly will be,

as we move forward, looking very carefully at rural experience as

well as urban experience, though the third panel is primarily city

mayors and people with urban experience.

There are a couple of questions of which I want to conclude. First

of all, Dr. Scholz, it would be very helpful to me if you would put

in writing your concerns about the tax incentives contained in the

Watts-Talent bill, and particularly some examples of the kinds of

things that could go on under zero capital gains provisions. It is not

easy for me to imagine the gaming, and I am sure it is much easier

for you. But I think we need to understand the problems that could

be created through that mechanism as well as its opportunities.

Also, I would like both of you to think about what would be the

cost and the consequences of letting any community who meets certain criteria have access to these incentives, because Wes has

brought out a certain aspect of the problem of enterprise zones is

that they create winners and losers. In my district it is a very significant problem. Adjacent small cities are treated differently and

have different resources to attract jobs, though their community

circumstances are the same. So one of the things I think we have

to look at is, would it dilute the program to allow any community

who was willing to undertake this planning process and who met

certain criteria to have access to the same benefits?

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If you would, get back to me on those two things. And then I do

have a couple questions more for Mr. Glaser.

Mr. Glaser, GAO did interview participants in the urban EZ program about factors that constrained their efforts. And Dr. Scholz,

you brought to our attention the importance of letting this program

work. One of the things Congress has really done a terrible job on

is letting programs work before they try to fix them.

Our goal is not to try to fix something, but to understand how

it is working and to see whether or not it is accomplishing our policy goal, which was revitalizing the cities. Certainly I understand

the problem of the media and the public and the private sectors all

wanting quick action. That is not my concern. I understand that.

We are going to have to deal with that.

But three issues of some substance were raised by the GAO

interviews: First of all, the need for initial Federal funding for administrative activities, whether or not that is significant, legitimate, or whether that is a burden we legitimately should keep on

the local community in your estimation; the issue of bureaucracy

and layers, which Mr. Hinchey also pointed to; and then the most

concerning issue that they raised was the problem of governance at

the local level, and how you govern the planning process and how

you govern the implementation process. And what happens if you

govern the planning process and then turn the plan over to those

who didn’t make it and, therefore, aren’t vested in it, and also were

the very same people who didn’t think of it to begin with and who

had been governing for many years, and so on and so forth. We all

know those dichotomies.

So would you just comment briefly on your thoughts about governance?

Mr. GLASER. You put your finger right on some of the key issues

that came out, not only through the GAO study, but certainly

borne out through other daily experience with empowerment zones,

especially in the very early part of the program.

The governance issue, I will take that one first. You had a situation where in the application process you set the specific goal. You

said, ‘‘By June 30th, 1993,’’ whatever the date was, ’94, ‘‘you must

come together and put this plan together.’’ And the community

came together because they knew there was $250 million of tax incentives and $100 million of cash on the table, and suddenly all the

problems tend to be subsidiary to the benefits that could be

achieved.

Then they got the designation, and then you have some internal

working out of the tensions that were under the surface, which

have traditionally been there in these communities over the years

and which began to percolate up again after designation. And it

probably took, I think Congressman Rangel was correct, he said 6

months, I think even 8 to 10 months in the early stage of the program to work most of that through.

I think you would find today that if the GAO went back, that

would not be a hindrance in these areas. In fact, I think you would

find the fact that they worked through their local community tensions actually has strengthened the program. They had to go

through that process, as you point out, of bringing the new people

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on board, and where they have done that successfully, they prospered.

On the second issue of the layers of bureaucracy, as was mentioned by both of the Congressmen—and we heard that issue before, and you may hear it in some of the other testimony here today

as well—it has not been a widespread problem. But where State

governments in particular have made a decision that they want to

play—well, where they have let their bureaucracies, frankly, get involved, it has been a hindrance to the program.

On the other hand, where States have said, we want to be

proactive, we want to put our resources on the table and be a partner, it has been a very, very big help. So it is not that State involvement, per se, is a problem, it is when it gets into the machinery of bureaucracies and suddenly you have got to fill out 20 forms

in order to get money that you didn’t need a single Federal form

to fill out.

On the third issue of the administrative dollars up front, I think

that was a legitimate issue by and large. There was no administrative set-aside, per se. The communities were under a lot of pressure, and, frankly, we put them under some pressure to minimize

their administrative expenses. We want the maximum amount of

money to go to the communities for the programs, not to find its

way back to the city hall or to some new nonprofit to institute all

this.

So we, I think, frankly, pressed pretty hard to keep all that

down, maybe a little too hard. The communities came back and

said, the truth is it takes a while to get this going, and if we are

going to build a real capacity in our community to administer community development bank, we need administrative funds; don’t

beat us up for using administrative dollars.

And GAO, I think, was right in pointing out in the second round

we ought to have some—whatever the number is, 5, 8, 10—percent

of the dollars, that is for administration; you can’t go over that; but

we are not going to beat you up for using that money in the first

place.

Chairman JOHNSON of Connecticut. Thank you.

There is one other question. In reviewing the applications, the

original vision was that there would be a numerical scoring, that

the specific criteria, such as the strategic plan, the level of innovation, the community partnerships, and the need, each one of those

be examined and there would be a numerical score developed, and

from that numerical score, choices would be made as to who would

become the enterprise zones.

Since you have 500 applications, or basically 100 slots, how the

winners were chosen is a very important issue. Why was numerical

scoring abandoned?

Mr. GLASER. Well, numerical scoring was never intended to be

used in the first place. When talking about how the typical Federal

grant gets scored, you do it on a very quantitative basis and you

assign numbers. We again said this should be a different program;

let’s make a qualitative determination as to whether or not the

plan as a whole meets the specified criteria which were set out in

the notice of funding availability.

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We brought out, in one of the most unusual efforts, approximately 100 Senior Executive Service officials from around the Federal Government. These career officials worked on the task force

for about 3 months doing an analysis of these plans that sometimes

ran a couple hundred pages, an in-depth qualitative analysis. And

based on that, final, I guess, cuts, you could say, were made of

those that were better and worse, and I think there was consensus

among that group by the end of the day that the right finalists had

been in the selection process.

Chairman JOHNSON of Connecticut. Well, I am interested that

you were thinking of bringing in some new people. But the Inspector General’s report, Office of Inspector General audit report,

says—and I quote—‘‘The original documented design of the EC–EZ

task force review process called for a rating of each application on

a relative point scale, where points would be awarded for specific

criteria, such as the strategic plan, the level of innovation, community partnerships, and need. Before the application interview process began, CDB officials decided that applications would not be numerically scored.’’

Now, when you bring in senior executive core people, you give

them guidance, and I assume these were the factors they were

asked to consider. But how do you eliminate, in a sense, the variability and subjectivity of these senior executive core people who are

useful? And that was an interesting approach. But how do you

avoid the possibility of favoritism and bias?

Mr. GLASER. Well, that is an interesting question. You have what

is, basically, a subjective determination about quality of strategic

plan. In fact, that is the major defined characteristic in the statute:

They shall be based on the quality of strategic plan.

One executive’s assigned number versus another executive’s assigned number, it is very difficult to know whether they were looking at the same thing when they came up with their number for

that quality.

And I will dissent a little bit from the piece of the report that

you suggested. There was not a numerical—there may have been

some discussion like this: What is the best way to make the judgment? But there was never a numerical scoring plan.

The approach that they determined instead was to have the executives reach consensus decisions, so that you forced the discussion, ‘‘Well, is this commitment of private sector resources, is it

real? Is it better than this other community’s approach?’’ And we

thought by putting them all in the room together and forcing a consensus opinion that we could have a result that was more justifiable than if you simply said, ‘‘Okay, here’s the points. Run down

the point list.’’ And, therefore, it may look like you have less documentation perhaps, but you might not get the right answers that

way.

Chairman JOHNSON of Connecticut. So you are saying that after

you made the rough cut, then, as a group, the senior executives reviewed the applications and held discussions of that kind of point?

Mr. GLASER. That is correct.

Chairman JOHNSON of Connecticut. Thank you.

Mr. Coyne, do you have any further questions?

Mr. COYNE. No, I do not.

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Chairman JOHNSON of Connecticut. I thank the panel very much.

Next we will hear from the GAO. Mr. Czerwinski, associate director of housing and community development at the GAO; accompanied by Robert Robertson and Nancy Simmons.

Mr. Czerwinski.

STATEMENT OF STANLEY J. CZERWINSKI, ASSOCIATE DIRECTOR, HOUSING AND COMMUNITY DEVELOPMENT, U.S. GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY: ROBERT E.

ROBERTSON, ASSOCIATE DIRECTOR, RURAL AND AGRICULTURE ISSUES, AND NANCY A. SIMMONS, ASSISTANT DIRECTOR, COMMUNITY DEVELOPMENT ISSUES

Mr. CZERWINSKI. Madam Chairman and members of the subcommittee, we are pleased to be here today to discuss the Federal

Empowerment Zone and Enterprise Community program.

As you requested, our statement is based primarily on our December 1996 report, which focuses on the six empowerment zones:

Atlanta, Baltimore, Chicago, Detroit, New York, and PhiladelphiaCamden. However, before that statement, I would like to note that

to my right is Mr. Robertson, who is our associate director for rural

and agriculture development programs.

Mr. Watkins, as we agreed with the committee, we would focus

our statement today on the urban issues. However, Mr. Robertson

has done a similar analysis of rural issues, and we are prepared

in the questions and answers to discuss rural issues fully with you.

So we want to try to give equal treatment to both urban and rural

issues. This is something that we negotiated with the committee

staff to try to cover both aspects of the program.

Mr. WATKINS. Very good. Thank you.

Mr. CZERWINSKI. You are welcome, sir.

Today I would like to discuss three issues from our report: The

status of the program’s implementation, factors that participants

believe either helped or hindered the program, and the plans for

evaluating the program.

In summary, we found that, first of all, the EZ’s had in fact developed strategic plans which, as required, included details for implementing the program. They also drafted benchmarks to measure

the progress, and they had established governance structures. The

bottom line is that they had done the things that they were required to do.

We then asked the officials what kinds of factors helped or hindered them? I would categorize them as saying the glass is half full

and half empty.

For example, the kinds of things that the EZ officials told us had

helped them were community representation on governance boards;

enhanced communications among stakeholders; assistance from

HUD contractors, who are called generalists; and support from the

mayor, the White House, and Cabinet level officials.

On the other hand—and you will see that it is a very similar

type list, and that is why I say half empty, half full—the kinds of

things that hindered them were difficulty in selecting an appropriate governance board, preexisting relationships among the

stakeholders, lack of administrative funding, and pressure from the

media and public and private sectors for quick results.

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So it is sort of a mixed signal that we got back from the empowerment zone officials. And this probably makes the final point

especially crucial, and that is measuring what has been accomplished.

Third, we found that the benchmarks that HUD had asked the

EZs to establish had been compiled. But there is a critical issue

here. These benchmarks describe activities that the EZs planned to

undertake. In most cases, they indicated how much work they

hoped to produce. These measures, in the typical methodological

terms, are called ‘‘outputs.’’ However, such outputs may not fully

measure outcomes, or what you truly want to accomplish.

I would like to give you an example of that in Atlanta. We just

happened to pick them. I could have used any of the EZs. They

came first in the alphabet, so they got lucky for this example.

Atlanta established a single facility called the one-stop capital

shop, whose objective was to obtain capital resources and technical

assistance for business. The performance measure that they used

to determine whether this was actually working included the

amount of loans and the number of consultations provided. These

are relatively good measures of the amount of work produced.

However, we believe the performance measures would have been

more useful had Atlanta indicated how such outputs could help

them achieve the desired outcomes that they really wanted to get

for the community, i.e., economic opportunity, reducing unemployment.

We concluded that HUD and the empowerment zones and enterprise communities had made steady and commendable progress toward establishing output-oriented measures, and we believe they

should build on these efforts.

Specifically, we think that HUD and the EZs should now start

to focus on describing the measurable outcomes for key principles

and then indicate how these outcomes can be achieved in the work

outputs that they produce. Unless they can measure each EZ’s

progress towards these outcomes, HUD and the EZs will have difficulty in determining the overall accomplishment of programs and

then identifying specific activities that each EZ has accomplished

that then should be adopted program-wide.

This concludes my statement, Madam Chairman. I will be happy

to answer any questions that you and members of the subcommittee may have.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you very much, Mr.

Czerwinski.

There does seem to me to be a legitimate tension between describing outputs and focusing on outcomes. Do you think that HUD

is pressing communities to make the legitimate transition or to

focus their thinking on outcomes as well as outputs?

Mr. CZERWINSKI. First of all, I want to thank you for asking that

question. It is a very germane one. And I also want to thank you

for getting my name right. I can’t tell you the numbers of times I

have come up and testified and people sort of stumbled over my

name.

Chairman JOHNSON of Connecticut. I am from New Britain, Connecticut.

Mr. CZERWINSKI. Either that or Chicago, Milwaukee. Those folks

tend to get my name right; other places, not so well.

But to return to your question, if you think about getting to outcomes, it is a very difficult concept. We admit it and you are talking to some researchers, who tend to have a certain view of things.

But you are also talking to people who get to the nuts and bolts

of what really counts. And the example that I would use would be

the private sector one.

Let’s say you head a company and want to measure how well

your company is doing. Are you going to look at the sales that you

have? Maybe you are selling below what it costs you to produce. Or

are you going to look at what your profits are? And that is the difference between an output and outcome. You can sell an awful lot

of things and drive yourself right out of the business because your

outcome is not what you wanted. So I think there is a legitimate

aspect to that.

But putting ourselves in the shoes of the local communities,

these folks are not quite used to thinking this way, and it is

enough to get them just to measure their outputs to start with, but

it is time for them to start progressing to get more outcome oriented. And I think that HUD is supportive of this. It is just a matter of how quickly, and that is something we can debate.

Chairman JOHNSON of Connecticut. I think it is very, very important and it does represent a real challenge at the local level. The

question really isn’t, how many loans did you make? The question

is, how many businesses survived? How many jobs did they create?

Were they in the enterprise zone? And did the people employed

come from the enterprise zone? And it would be nice to know how

many of those people were unemployed beforehand, and so on and

so forth.

So it is dangerous—and we know that from a long history of failure of Federal programs—to look just at output. You can always

train people, and whether you train them for jobs or not is hidden

often by the data about training.

I think that the pressure you are putting on us all to look at outcomes as opposed to outputs and help communities to rethink those

issues is very, very important, because I think our failure to understand the difference between those two words is really one of the

big reasons why many Federal programs have, in fact, been failures in spite of the nice-looking data and the nice-sounding names.

So I do appreciate that very much.

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On two other issues, the half-full/half-empty issue of how has

this gone, what is your evaluation of the governance board structure? Having had intermittent involvement with both cities and

urban areas—and I would ask you both, Mr. Czerwinski and Mr.

Robertson, to answer this question—is it your conclusion that the

planning process in and of itself is very productive?

And then is it your conclusion that, if that is so, does it then follow that communities need to be able to set up nonprofits or some

other entity other than the local government to implement this

plan?

This is a big concern in my mind, because I can see why there

would be a desire to set up a separate entity, but, after all, we elect

local officials to govern locally. And there is a real danger—and I

have seen it in our neighborhood action groups—to the quality of

local government, to its effectiveness, if it does not become the implementing agency for community-based planning operations.

On both of those issues, I would like your comments.

Mr. CZERWINSKI. I think there are two questions that you asked.

The first one, planning, is something that is absolutely essential.

These things have to be planned out; there is just no question

about that. It really goes back to how you measure your results,

because if you don’t plan and don’t put in the pipeline the mechanisms for gathering information, for setting your goals, you won’t

know what you are going to achieve. So it is something that just

has to be done.

And this, again, if you think about the local government’s orientation, these folks are implementers, they are not planners. They

are not the strategists, to start with, they are the ones that make

things happen. So I am not speaking critically of them.

So planning, obviously, coming from our perspective, we would

agree with 100 percent.

The other part about who actually does this, I am not certain

that we would take a firm position as to whether it should be a

nonprofit or a local-government-run entity that essentially leads

the zone. However, the key issue is having the complete involvement of all stakeholders, the private folks that are going to have

to put the businesses in, the nonprofits, the residents themselves,

the local governments. I think, among them, what you have to look

at is who in each individual community is best suited to lead that.

I think that is probably going to bias you somewhat towards local

governments, because that is their business. But there may be instances where there is a very strong community group that really

does represent its interest. So I would urge a little bit of flexibility

there.

But the real principle is having sound involvement of all the parties that are going to have to live with things.

Ms. SIMMONS. I agree with what Stan said. I would like to say,

in the first round, when communities were setting up government

structure, they had no models. This was a new program. It was different from other programs that had been set up. So there wasn’t

anything for the communities to look to. And, in fact, some have

gone through the local government and have their government

structure through the city government on the urban side, and others have chosen to set up the nonprofits.

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We have been talking to HUD about this second round even before it came about. And one thing I know they are hoping to do is

to have some models out there for the next round so that the communities don’t have to go through a struggle and can choose to go

through the city. The nonprofits are set up differently and have different organizations advising them. But I think flexibility is the

key here.

Mr. ROBERTSON. I would hate to disagree now! I would echo the

great deal of emphasis, the importance, that Stan and Nancy have

put on planning in terms of a factor influencing the economic success of these communities.

As a matter of fact, Representative Watkins, as you were speaking, I thought about some work that we did a couple of years ago

that, basically, tried to get a handle on what are the factors that

influence the success or failure of rural communities. And the long

and short of it was, there are an awful lot of problems associated

with economic development in rural areas, and there are a lot of

factors that are, frankly, beyond the control of those local communities. But the one factor that isn’t, of course, is the leadership of

that community. The fact that this particular program emphasizes

the leadership factor, the community involvement, I think, is important. It won’t guarantee success, but it will certainly push the

odds in that direction.

Mr. WATKINS. Madam Chair, I would appreciate a copy of that.

I am fully aware many of our young people cannot go back. As I

tell them, education locks you out of going back to rural, depressed

areas, because there are no jobs that you can do. I have taken at

home to provide—in some cases to try to provide that kind of leadership, hopefully, the kind of vision and motive to try to help them

overcome some of the problems. And you have successes and failures, but the biggest failure of all is to do nothing, as I tell my

communities, is the biggest failure of all. So sometimes we have to

work through a few of those failures on the way.

But I would like a copy of that.

Mr. ROBERTSON. We would be happy to talk to you about the

study.

Mr. CZERWINSKI. And it would be fun. We love to give out our

products.

Mr. WATKINS. Does it include the rural area?

Mr. CZERWINSKI. It is all about rural areas. It is titled ‘‘Rural Development.’’

Mr. COYNE. This program was supposed to involve the wide

range of representatives from the local communities. I wonder if

you could give us some example of the types of representatives that

are involved in implementing programs in communities throughout

the country.

Mr. CZERWINSKI. Actually, I happen to have a listing from Baltimore. I understand that Mayor Schmoke is going to be here following us on the other panel. So he can also talk about the kinds

of those. But, for example, looking at the listing, for Baltimore,

there was the owner of a pharmacy, representatives of the local

residents, folks in the public housing authorities, from the mayor’s

office, and also state officials.

Ms. SIMMONS. Sometimes there are State representatives.

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Mr. COYNE. Would you repeat that?

Ms. SIMMONS. Sometimes there are representatives from the

State government. I don’t know if they are specifically on the board

of directors of local governance. There are also church leaders from

the community. Some of them have residents. I know in Atlanta

they have a provision where they have representatives from the

neighborhoods who are affected. There is representation from them,

private sector, academia. Pretty much anybody who is in the community is represented on these boards.

Mr. CZERWINSKI. Baltimore’s City Council is represented. I think

our examples are going through the alphabet, we picked out Atlanta first and then Baltimore. If you want, we can provide you

with an exact listing.

Mr. COYNE. The EZs and ECs have been using social services

block grants for a couple of years now. I wonder if you could cite

some of the activities funded with the grants.

Mr. CZERWINSKI. Actually, a very wide range of activities have

been funded, from using these grants for administrative purposes

to operate the boards to other things like getting involved in local

programs.

One of the empowerment zones—I can’t remember the city right

now—for example, used the seed money to leverage private investment in a corporation. I believe that their leveraging was quite

high, so that block grant money actually brought in five or six

times the amount of private funding. Also the typical purposes of

something called social services block grant—for social services,

such as, to use Mr. Glaser’s words, treating tenants for health concerns, et cetera. So it is a very wide range.

Mr. COYNE. Thank you.

Chairman JOHNSON of Connecticut. Just to follow up on Mr.

Coyne’s question, since it is such an important one, do you see any

difference between those communities that have the social services

block grant available to them and those that don’t? Is it representing any drag on the program that the recently passed law

does not provide social service block grants?

Mr. CZERWINSKI. That question really gets back to how much you

can measure. And it is very early in the program to measure what

is actually being produced. However, one thing that I ask you to

look at is the package of goods that is being given out for benefits.

The first is the tax bonds. Well, very, very few places have offered the bonds, partially because of the State cap issue. But, also,

I think there are some issues about the bonds themselves.

The second is the tax incentives. I believe the previous panel before us testified that those haven’t been that strong of an inducement either. So what does that leave us? It leaves us the grants.

And the grants range tremendously from 3 million in some areas

to over 100 million in others.

Now, the needs may also range that greatly, too, so I am not saying that there is an inequity here. By power of elimination you can

say if we eliminated bonds, having done that much, we have been

told that the incentives haven’t done as much, what does that leave

us? Grants.

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Chairman JOHNSON of Connecticut. And, Mr. Robertson, the

rural areas, the social services block grants, how important are

they?

Mr. ROBERTSON. Well, I would just echo what Stan said basically.

It is a bit too early to see what we have bought with the SSBG

funds.

Chairman JOHNSON of Connecticut. Don’t the macro figures indicate that rural enterprise zones, or whatever category, have used

more of their grant money proportionately than the urban zones

have?

Mr. ROBERTSON. That I would have to check for the record. I

don’t know.

Ms. SIMMONS. I believe that is true, that they have drawn down

a higher proportion of their funds. But I guess we have been reluctant to use that as any indicator that there is progress, because

what we have seen on the urban side is that some of these cities

that have drawn down lesser amounts have focused on different

things. I will give an example that they have leveraged the money

that they had to bring in private sector investment, and we haven’t

really done a lot to look at that.

Chairman JOHNSON of Connecticut. And, of course, the planning

process in the big cities is much slower and takes much longer.

Ms. SIMMONS. Yes.

Chairman JOHNSON of Connecticut. That doesn’t concern me at

all. In fact, it concerned me a little bit to see what percentage of

the funds the rural communities have already drawn down.

And, Mr. Robertson, you really can’t say anything about how

those can be used? Because my recollection is, and the staff would

have to help me here, but it is something like 42 million out of a

possible 60 million.

Mr. ROBERTSON. I can tell you about what the progress has been

in terms of using those funds as well as other funds in implementing some of the projects.

Chairman JOHNSON of Connecticut. What kinds of ways have

they used those funds in those areas?

Mr. ROBERTSON. They have used those funds, as well as other

funds, for job training programs. They have used them for 911

service. They have used them for starting small business incubators. They have used them for a variety of different social and economic development projects.

Chairman JOHNSON of Connecticut. Okay. I am sure we will get

into that more. And I would like to also have a copy of your rural

report.

Mr. ROBERTSON. Sure.

Mr. CZERWINSKI. We love to give them out if anybody else wants

them.

Chairman JOHNSON of Connecticut. Mr. Watkins.

Mr. WATKINS. Thank you, Madam Chairman. And let me say

again I appreciate this input, and I would like to pick that up later

on from you.

I noticed on page 4 of the Community Development Federal Department Zone Enterprise Community Program, there is a couple

of different areas you have declared, and you provided six communities. The HUD Secretary has also designated six communities as

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Supplemental Empowerment Zone and Enhanced Enterprise Communities.

Do you have any designation like that in the rural area?

Mr. ROBERTSON. I am sorry. Could you repeat the question,

please?

Mr. WATKINS. It says, in addition, the HUD Secretary also designated six communities as Supplemental Empowerment Zones and

Enhanced Enterprise Communities. Like the other EZs and ECs,

these communities each receive grants through HUD’s Economic

Development Initiative. The supplemental zones located in L.A.

and Cleveland receive EDI grants of $125 million and $87 million

respectively. The enhanced communities located in Oakland, Boston, Kansas City and Houston each received EDI grants of 22 million.

Mr. ROBERTSON. The rural counterpart to that basically would be

the champion communities. And their—their benefits basically are

along the lines of getting preferential treatment from other Federal

agencies in their grant and loan programs.

Mr. WATKINS. I have been on a couple, two or three meetings on

the discussion of champion communities. I think Ada, Oklahoma

may be a champion community, but I don’t know what their status

is. Are you familiar with that?

Mr. ROBERTSON. Not with that particular community, but we can

certainly talk with you about the concept of champion communities.

Mr. WATKINS. I sure want to get you more familiar with Oklahoma. But Ada, I know they had an application in. And that is also

an area that is headquarters of the Chickasaw Nation, and that

rural area, that area south and east and to the—kind of the southwest there, there is really a—I would like to discuss that with you

at a time that you could call me and give me a little opportunity.

Mr. ROBERTSON. We would be delighted.

Chairman JOHNSON of Connecticut. I noticed in dividing that out,

there is a breakdown of each urban EZ allocated at 100 million.

Each rural area was allocated 40 million. That is out of 140 EZs.

I just wanted to kind of follow up on those dollars and see where

we are on those.

But let me ask, it is my understanding that under the Tax Relief

Act of 1997, the designation would be allowed of kind of the dual

incentives if an area is designated under 168(J), which is the Indian reservation, in order to form any territory; and also, number

2, the areas designated EZ or EC, tax incentive area. Is that your

understanding also?

Mr. ROBERTSON. Stan, I am going to refer this question to you.

I am not familiar with it.

Mr. CZERWINSKI. The interpretation that we have is that there

would be 20 new EZs under this second round, and that the split

would be 15 urban, 5 rural.

Mr. WATKINS. I understand that split. I am just talking about

the tax incentives themselves. You may not be familiar how——

Mr. CZERWINSKI. We haven’t evaluated the specifics of that proposal, so I really couldn’t get into the details of the tax incentives.

I am sorry.

Mr. WATKINS. I was talking to Steve and Mac a while ago. If our

interpretation is correct, we will be able to have a dual designation,

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which some would be helped a great deal in trying to get out of

that extreme poverty situation.

Ms. Simmons, are you, in your community development as an assistant director, are you housed at HUD or under a——

Ms. SIMMONS. I am with the General Accounting Office, so we

are not part of them.

Mr. WATKINS. So you have got a dual relationship, also.

Ms. SIMMONS. Well, I—we work for the legislative branch. So we

are only at HUD to do our audit work of specific programs, like the

EZ program.

Mr. CZERWINSKI. Mr. Watkins, I probably should have explained

up front, and I apologize for not setting up clearly. I am responsible

for the GAO’s housing and community work. Nancy is my assistant

director for the community development aspect of that. Bob is my

counterpart for the rural development work.

Mr. WATKINS. Okay. I should have been probably knowledgeable

about that.

Mr. CZERWINSKI. No, it is me. It is my apology. I should have explained that up front. So that is why I was really happy that we

spoke with one voice, because it would have been a long cab ride

back to GAO if we didn’t.

Mr. WATKINS. Let me say, I look forward to having the opportunity to visit one on one and discuss some more of these. And I

appreciate the patience of the Chairman and also Mr. Coyne for his

patience allowing me to have this opportunity to have this chance

to interface and have a dialogue.

So thank you. I appreciate your commitment and dedication.

There has got to be a way we can turn some of these depressed

areas around. And I would like to say, Madam Chair, I am one who

has lost sleep also worrying about how do we save the children in

the inner cities. I do worry about that. So my commitment is not

just the rural areas. That is where I am. I represent that. But I

really worry—at least in the rural areas, lots of times, we know

people. I appreciate—in fact, I grew up in the small community.

When I graduated in that little community, I worked for everyone

in the area. When I graduated, I got 59 pairs of socks, because everyone knew me, and I knew everyone.

And I think it is sad enough, some of the small communities that

are in some of the urban inner cities, that the children don’t

know—have no role models. And you wonder how do we save them,

how do we lift them out of the problems they have there.

So I have high hopes. And I hope and pray they work in the

urban inner cities. And I just know we can make some things happen good out in the rural economic-depressed area. So thank you,

Madam Chairman.

Chairman JOHNSON of Connecticut. Thank you very much. And

I thank the panel.

I would like to call now the next panel, Kurt Schmoke of Baltimore, the mayor of Baltimore; Paul Fraim, the mayor of Norfolk;

Dick Posthumus, the Senate Majority Leader of Michigan; Joan

Blaustein, the Special Projects Manager, Department of City Planning of Pittsburgh; and Dan Gundersen, the Director of Economic

Development, city of Philadelphia Empowerment Zone.

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I welcome the panel and invite the mayor of Baltimore, the Honorable Kurt Schmoke, to proceed. But first, I would like to recognize my Ranking Member, Mr. Coyne.

Mr. COYNE. Thank you, Madam Chairwoman. I just want to say

in welcoming the panel and Mayor Schmoke to the committee here

today that Congressman Cardin is unable to be with us today. He

wanted me to welcome you and to let you know that the testimony

that you are going to give is going to be of great interest to this

committee and help us in our deliberations. And I would like unanimous consent to be able to submit a statement of Congressman

Cardin for the record.

Chairman JOHNSON of Connecticut. So ordered, Mr. Coyne, and

thank you.

[The information was not available at the time of printing.]

Chairman JOHNSON of Connecticut. My apologies, Mr. Schmoke,

for mispronouncing your name the first time away. You may proceed.

STATEMENT OF THE HONORABLE KURT SCHMOKE, MAYOR,

CITY OF BALTIMORE

Mr. SCHMOKE. Thank you very much, Madam Chair. If you can

do Czerwinski, you can do Schmoke.

I do appreciate this opportunity and Members of this subcommittee to allow us to testify concerning the strategies and accomplishments of the empowerment zone initiative in Baltimore. I

have submitted written testimony and, in the interest of time, will

just provide a summary of some of the highlights of that testimony.

Before getting into that, though, in listening to some of your earlier questions, I just wanted to ask you to keep in mind two factors

as it relates to Baltimore’s empowerment zone initiative. The first

is that it has been a community-led—from the time of the drafting

of the proposal until today, our empowerment zone initiative is led

by a private, nonprofit board, Empower Baltimore Management

Corporation, which has a 30-member board of directors representing a diverse group from our city, faith-based organizations,

business community, private, nonprofit groups, public housing residents, and many others. And so we, from the very beginning, had

a consensus that this should be run not from city hall, but by a private nonprofit organization, and that has continued until today.

The second factor is that I believe, and it has been the consensus

of our group, that the empowerment zone initiative should be

viewed as not the solution to urban America’s problems, but as a

tool towards a solution. It is, in fact, a very important tool that we

have been using, and we believe that steady progress has been

made. And, clearly, of course, having this initiative occur at a time

of an improved national economy has made a great deal of difference to the quality of life in our city.

I want to bring you up to date on the progress of our empowerment zone by focusing quickly on four components of our empowerment zone strategy: business development, work force development,

improving the quality of life, and community capacity building.

With respect to the business development, we have worked hard

on creating jobs, on financing businesses, and the establishment of

a Business Empowerment Center. To date, the Empower Baltimore

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Management Corporation, the nonprofit organization that runs our

EZ strategy, has created more than 1,900 jobs through business

startups, locations, and expansions in the empowerment zone.

With respect to work force development, we recognize that it is

critical to have a pool of job-ready employees available to take advantage of opportunities as they arise, so the management corporation has designated over 3 million of empowerment zone funds for

customized job training, occupational skills training, and literacy.

To date, about 159 positions for zone residents have been created

through the customized training agreements with Baltimore area

employers; that is, employers who don’t—who are not necessarily

located in the zone, but who have turned to our management corporation to customize a training program for workers that they

would like to have who happen to be residents of the zone.

Many other zone residents have received job placements through

our Office of Employment Development. Over 800 of those zone

residents have received jobs that way.

With respect to the third part of our empowerment zone strategy,

improving the quality of life for residents and businesses, we have

worked on issues of enhancing community policing, creating mobile

police stations, investing in home ownership, and curriculum

changes in certain schools that are located in the empowerment

zone.

Through this work, among other things, we have seen a substantial decrease in crime in the empowerment zone area, almost 24

percent in the last 2 years. And, also, we have seen an increase in

home ownership through a Housing Venture Fund that has been

established.

The final part of our strategy is what we call community capacity

building, and that is enhancing the capacity of the community to

improve its own life. And there we have been working on improving

leadership skills and making sure that the community is very involved in the implementation of this program. We do that through

what has been called village centers. These are six communitybased organizations, which were established to identify and mobilize zone residents to take advantage of the opportunities created

by this initiative. Village centers have worked very well and have

helped us in achieving these goals.

There are many other specifics that I can go into, but I think,

at this point, if there is any significant change that we would like

to see, it is really that we would like to be able to improve the marketing of this program so that the business community would understand that the empowerment zone initiative is far more an investment tool for business rather than another social program from

the Federal Government.

Those businesses that have moved or expanded in the zone understand the importance of the tools that they have been given. We

would simply like to do more in terms of marketing this to other

corporations.

Thank you very much, Madam Chair, and I look forward to answering your questions.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you very much. It was

very interesting

The Honorable Mr. Fraim.

STATEMENT OF THE HONORABLE PAUL D. FRAIM, MAYOR

CITY OF NORFOLK; ACCOMPANIED BY MASON ANDREWS,

FORMER MAYOR, CITY OF NORFOLK

Mr. FRAIM. Madam Chairman, I thank you for the opportunity

to appear today to comment on Norfolk’s experience as an enterprise community. It is the only urban EC awarded in Virginia, one

of several ECs identified by HUD as a top performer.

If I may, I would like to also, Madam Chair, introduce Dr. Mason

Andrews, who is with me today. He is the former mayor of the city

of Norfolk and truly the architect of our very successful program.

Chairman JOHNSON of Connecticut. Thank you.

Mr. FRAIM. And he is here to answer questions.

Chairman JOHNSON of Connecticut. We welcome him as well.

Mr. FRAIM. And if I may make a comment that the enterprise

community strategy in Norfolk is also led by a private nonprofit,

much like Baltimore’s. We have extensive community involvement

in this implementing agency. They range from city officials to housing authority officials, heads of the business departments of our

two local universities, community groups, representatives from the

Urban League, from the NAACP. We have residents, other representatives from our community college and from higher education, community leaders, also business leaders as well.

Norfolk is a midsized city unable to expand geographically because we are bounded by water and fixed jurisdictional boundaries.

Norfolk is one of the Nation’s older cities, which means aging public schools and infrastructure and little undeveloped plan to attract

new business. We are, in fact, 96 percent developed. Additionally,

nearly 50 percent of our land is tax-exempt.

This is why the EZ/EC program is vital to Norfolk, to those who

live here, and in the surrounding communities in the region, and

to inner cities throughout the Nation.

Essentially, there are two aspects of the EZ/EC designation.

There are tax incentives and the original Social Service Block

Grant funds provided under title XX. In addition, Federal EZ/EC

designations trigger certain State tax benefits and grants, which

are beneficial.

It is Norfolk’s view that SSBG funds and tax incentives properly

crafted and implemented are needed if we are to revitalize the distressed areas in our Nation’s cities. For Norfolk, however, it is the

SSBG, the grants funding, that has really made the difference.

This is the case, despite the fact that ECs receive only $3 million

to be used over the entire 10 year life span of the program.

The central focus of the Norfolk EC program is to enable substantial numbers of EC residents who would not otherwise do so

achieve economic self-sufficiency, develop their potential for upward mobility and contribute to the city’s economy. Working

through existing neighborhood centers with the city’s organized

business community and a number of existing training organizations, this is happening. Motivation, basic job readiness training,

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training in a variety of skills using existing and new programs, job

placement, and on-the-job follow-up are all involved.

Our job placement rate is about 60 percent, with another 22 percent pursuing additional training or educational opportunities.

Nearly 500 individuals have been employed. The retention rate is

75 percent. The word is spreading that a better life is available,

and demand for training exceeds supply. The cost per person

trained and employed is about $2,800, substantially lower than

most employment training programs.

We have been very prudent in using our funds. We have expended about 60 percent after 2 years in operation. We would encourage attention to the need for renewal funding in the near future, at least for communities that are meeting their objectives.

Madam Chairman, I would ask that you consider rewarding topperforming communities’ priority status for new funding and be upgraded to the EZ standard.

Our efforts have been devoted to providing a variety of job training, mostly job readiness training, and placement. We have been

successful, but we need to do more with skills training so that EC

residents can compete for the better-paying jobs. Such programs

are more expensive to provide, but we believe they are well worth

the investment.

Regarding the other aspects of an EC/EZ designation, the tax incentives, the only one available to ECs is expanded use of tax-exempt private activity bonds. Other communities may have a different experience but, for Norfolk, we have no indication that this

incentive has been of value attracting new businesses to our EC.

We are told that it is too restrictive and complicated; for example,

by requiring services provided to be predominantly in the EZ/EC

program—in the area. Perhaps, too, this incentive is not well directed to attracting small businesses.

I might offer an observation regarding tax incentives intended to

attract businesses to EZs and ECs. Incentives should not be viewed

as if all other things are equal. Incentives to cause businesses to

locate in ECs or EZs need to be attractive enough to compete not

merely with other areas of the same city with the same property

tax rate, but with locations outside the city where the cost of doing

business may be lower or appears so to corporate relocators.

Tax incentives to businesses to hire EZ/EC residents are another

matter and should be of significant benefit. However, ECs do not

receive the employer wage credit available to EZs. Conceptually,

the Work Opportunities Tax Credit should provide similar advantages, but in practice, it is not used extensively. The employers tell

us it is burdensome and overly bureaucratic. We understand some

changes have been made. Hopefully these will make the WOTC attractive. If not, additional changes should be considered.

Again, thank you very much for the opportunity to share my

thoughts with you today. As I have already indicated, it is our view

that SSBG funding and tax incentives are needed. Thank you very

much.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you very much,

Mayor.

And now the Honorable Dick Posthumus, Senate Majority Leader

in the State of Michigan.

STATEMENT OF THE HONORABLE DICK POSTHUMUS, MAJORITY LEADER AND STATE SENATOR, STATE OF MICHIGAN

Mr. POSTHUMUS. Thank you, Madam Chair. I would like to thank

you for the opportunity to come here today and talk to you a little

bit about what we have been doing in Michigan to bring new life

to some of our blighted areas.

Working together, the Michigan Legislature and our Governor,

John Engler, has taken on a problem that has, really, leaders

throughout the country kind of wringing their hands in frustration.

Michigan, like most other States, have blighted areas, most of

which are in urban areas, but many of which are in our rural areas

as well. They come in all sizes. They come in all shapes. And they

characteristically are represented by residences that are decaying

to the point to where many of those that are living there are losing

hope or already lost hope. Some have abandoned their homes and

leaving them in the hands of greedy slumlords or the hands of the

runaway drug culture. Many of the businesses there have already

closed down because they couldn’t make it economically, and those

that have stayed are barely, barely hanging on.

The solution that we developed to begin to reverse this decay is

one that we think is so simple that, for many people, it is hard for

them to understand. We have taken the idea that we believe has

transformed Michigan from being the broken buckle of the Rust

Belt, as our Governor has described it, to changing it to the turbocharged engine performing the high-performance heartland economics that we need.

And it is based on the belief that high taxes are negative, that

high taxes hinder communities and their growth, that government

programs make people dependent, not independent. And is it any

wonder, then, that in our decaying areas, where we have the highest tax rates, where we have the biggest government programs,

that we continue to see blighted problems?

So what we have done in Michigan is told the residences and the

businesses in those areas, just keep your taxes, keep your State

taxes, keep your local taxes that you would normally pay over the

next 15 years. That is right. Boiled down in its simplest form, we

are saying that people in renaissance zones are not going to pay

any State or local taxes. It is based on the belief that when government lets loose of the reins that affect investment and production,

there will be a change, there will be a rebirth, there will be a renaissance.

I might point out at this time, there is some difference between

what we are doing in our renaissance zones and what the Federal

Government has done with empowerment zones. In essence, with

the empowerment zones, the Federal Government takes taxpayer

money and redistributes it. What we have decided to do, instead,

is let people keep their own money; let them spend it on their families, on their homes, on their businesses. I believe that is governVerDate 11-MAY-2000 13:27 Jun 07, 2000 Jkt 063427 PO 00000 Frm 00087 Fmt 6633 Sfmt 6602 E:\HEARINGS\60762 pfrm07 PsN: 60762
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ment at its best. It is government that gives individuals and businesses much more room to expand and to grow.

Our renaissance zones, I believe, serve as a redevelopment model

for States all around the country. It is fairly simple. It is easy to

duplicate. And very honestly, it works. And we have only had them

now less than a year, and I, I think, left you a format that explains

where our zones are, how they operate, some of the businesses that

have already announced their redevelopment efforts.

Very simply, what we are saying is, to all the homeowners and

businesses, not just the new ones that are moving in, but to all of

them that are in that specific identified area, that they would be

able to waive their State and local property taxes, almost all of

them, and there are seven of them in particular; that is, Michigan

single business tax, which is our form of the business tax. It is a

value-added tax. It includes Michigan personal income tax. It includes Michigan’s 6-mill property tax for education. It includes the

local personal property tax, the local real property tax, the local income tax, and, in the case of Detroit, also the utility users tax.

Someone might say, well, what is the catch? There really is no

catch. What you see is what you get.

And I might point out just a couple of the specific examples of

how it has worked in two of our cities, Grand Rapids and Detroit.

The first example is in Detroit where SBF Automotive, Incorporated, which is located or was located in a suburb west of Detroit

and is a supplier to the auto industry had decided that it needed

to expand. When it did so, based on the Renaissance zone in Detroit, it decided to move its facilities into the city of Detroit. In fact,

most of the people that were working there came from the city, and

they were having to bus them out. Now they are not going to have

to do that and, in the process, are helping to rebuild the city itself.

On the other side of the State, in west Michigan where I come

from, in Grand Rapids, we had a business called P.B. Gast & Sons.

It was located right in the heart of the city, a very rundown area,

and they were faced with a dilemma. It was a 100-year-old company that was expanding. They were looking, very honestly, again,

to expand to the suburbs, but with our renaissance zones, they decided that they now could do it right in the city. And about 3 weeks

ago, I was there for the ground-breaking of a 30,000-square-foot addition right in the middle of the city of Grand Rapids.

If you take up just in the about 11 months now that we have

been operating, or 10 months we have been operating this program,

already, just in the private sector, we have had announcement of

investors of $290 million of new funding, new companies, new business and expansions that mean about 3,000 new jobs in our most

blighted areas.

We are, in my view, creating a process which is based on the idea

that, in order to rebuild a community, they need good housing

stock, they need good businesses that are doing well in the industrial sector, as well as profitable retailers. And by reducing the cost

of living and working in these areas, we are rebuilding these communities for tomorrow.

I appreciate the chance to share that with you, and I will be glad

to answer any of your questions.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you very much. I appreciate your testimony. And we will get back to questions.

Ms. Blaustein.

STATEMENT OF JOAN S. BLAUSTEIN, MANAGER, SPECIAL

PROJECTS, DEPARTMENT OF CITY PLANNING, CITY OF

PITTSBURGH; ACCOMPANIED BY BEVERLY CAROL GILLOT,

PITTSBURGH/ALLEGHENY ENTERPRISE COMMUNITY COORDINATOR

Ms. BLAUSTEIN. Thank you. I would like to thank you, Madam

Chairwoman, for the opportunity to talk to you today. In particular, I want to thank your distinguished colleague Representative Bill Coyne for his ongoing support of our program, as well as

Congressman Mike Doyle, who has been instrumental in forming

and maintaining this partnership. Although their districts aren’t in

the enterprise community, I want to thank Congressmen Frank

Mascara and Ron Klink for their support of our efforts.

The Pittsburgh/Allegheny Enterprise Community won designation in December of 1994 and was awarded just about $3 million

in Social Services Block Grant funds.

Our enterprise community is made up of six municipalities, the

cities of Pittsburgh, Duquesne, McKeesport, the boroughs of Homestead, West Homestead, Rankin, and Allegheny County.

Over the past 3 years, this partnership has made tremendous

strides in implementing the objectives set forth in the Strategic Vision for Change. In that plan, we identified four major strategies

for realizing this vision: First, to create a new neighborhood housing model that includes the elimination of concentrated public

housing developments and the creation of a broad range of housing

choices; establish a community-owned preventative service system

that includes family support centers, after-school safe places, community centers, and community college center of opportunity; to

create a state-of-the-art community policing program; and to create

employment and investment opportunity through capital formation

and the development of brownfields.

One of the most critical accomplishments of this program has

been the formation of the 26-member Governance Committee. This

committee is unique compared to others in the country in that it

is made up of more citizens than elected officials. The Governance

Committee task forces are organized by functional areas rather

than geographic areas.

The areas that make up the Pittsburgh/Allegheny Enterprise

Community are generally more distressed than the surrounding

area. Family incomes in the EC range from 18 to 42 percent below

the county averages. The poverty rate overall in Allegheny County

is 11 percent, but the poverty rates in the EC communities range

as high as 42 percent. Housing values and rent levels are lower in

these communities. The elderly population is proportionally higher

there.

Pittsburgh grew as a central city that was the focal point for

commerce, trade, and manufacturing and services for the region.

Historically the area has been very dependent on large companies

and heavy manufacturing industries. These industries were fueled

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by the availability of raw materials and the inland waterways that

provide inexpensive and ready transportation.

But in the past several decades, Pittsburgh’s economic base has

shifted dramatically. With the well-documented decline in the region’s integrated steel industry, Pittsburgh’s economy has moved

from manufacturing-oriented to service-oriented. This economic restructuring has been very painful. The basic steel industry lost

66,000 jobs, while other manufacturing industries lost about 81,000

jobs between 1979 and 1996. Many of these jobs are located in the

enterprise community areas. Manufacturing now represents only

12 percent of the employment base, down from 30 percent in 1970.

While manufacturing is still important, it is not the driving force

behind the local economy any longer.

Politically, our area is extremely fragmented. This situation has

made previous redevelopment efforts difficult, if not impossible. Allegheny County is the most fragmented county in the United

States, with 130 municipalities, 116 police departments, 58 public

service dispatching points, 100 comprehensive land use plans, and

43 school districts. With more than 40 economic development

groups in the region, there are multiple goals and fragmented efforts.

Our region is in transition stage now, though. Many initiatives

under way in the area reflect a mix of attention to the economy,

the environment, education, quality of life, and local communities.

An area like ours that has had to confront so many challenges has

to avail itself of Federal intervention that allows opportunities to

leverage other funds and harness local energies. The Empowerment Zone/Enterprise Community Program has given us those opportunities.

The partnership that was created through the designation of the

Pittsburgh/Allegheny EC, which is unprecedented both in our region and in the EZ/EC Program, has brought together areas whose

common thread is not political boundaries or geographic location,

but the desire to overcome obstacles of unemployment, family distress, and disinvestment.

The designation as an EC has been the catalyst for institutional

reform, reinvestment, and a minute hope for the future by

stengthening our communities from the family up.

The $3 million in Social Services Block Grant funds has been

able to leverage over $182 million in private and other public

funds. These funds have been used for the demolition of over 1,500

existing public housing units to make way for new neighborhood

housing models that include mixed income, mixed tenure, racially

integrated developments with both rental units and home-owned

households.

The expansion of the McKeesport Family Support Center that

will serve as an incubator for the provision of human services to

that community could be a national model for human services reform.

The creation of a multijurisdictional weed and seed zone has resulted in the reduction of crime and the addition of 17 new police

officers. We have created a serious offenders program that will

serve 120 habitual juvenile offenders over 3 years. The creation of

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a pool of $60 million in flexible public capital for economic development in the Pittsburgh portion of the EC.

We have created an economic and industrial development corporation to purchase real estate for development in the Pittsburgh

area, too. Seven projects have begun, which will lead to the retention of 789 jobs and the creation of 384 new jobs. These projects

have leveraged over $122 million in private investments.

There has been the development of a 210-boat slip marina in an

old industrial mole site in the McKeesport section of the EC, and

the creation of 17 equipped Internet access sites for low-income

communities. Three hundred individuals have been trained to date.

These accomplishments detail some of the successes in the Pittsburgh EC during the first 3 years of this 10-year designation. The

continued success of the partnership will ultimately be measured

by whether there will be substantially more employed residents, by

whether there are substantially more investments in land, building, and businesses, and most importantly whether the economic

characteristics of the areas in the EC become closer to that of the

rest of the region through increases in household income, home

ownership, business investment, and the amount and accessibility

of capital.

The next hurdle our community faces is the challenge of demonstrating the value and market advantages as former industrial

sites. Over 1,500 acres in the city of Pittsburgh and the municipalities are in various stages of cleanup, reuse, nonuse, and development.

As the Pittsburgh/Allegheny region was once the heart of this

country’s industrial production, now it is the locus of one of the

greatest concentrations of former industrial sites with the potential

for economic reuse anywhere in our country. Our riverfront land,

ripe for redevelopment, represents one of our region’s greatest assets.

The enterprise community now has the dual challenge of dealing

with all the issues of site reuse and dealing with the legacy of multiple jurisdictions that have historically had difficulty collaborating

around almost any issue. The EC provides the structure that will

serve as the platform to begin that collaboration, allow for knowledge transfer leading to site development and economic revitalization, and bring the stakeholders to the table with the goal of embracing the advantages of a regional approach to development.

The skills and tools we need to attack the technical aspects of

brownfield redevelopment are readily accessible in our EC, but the

adaptive aspect of the problem is a greater hurdle and can be approached on the enterprise community platform given the proper

guidance and support.

I want to thank this committee for the opportunity to speak

about our Pittsburgh/Allegheny Enterprise Community. And I look

forward to our continued participation and your continued support

of the Empowerment Zone/Enterprise Community Program. Thank

you.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you. Thank you very

much. Very interesting.

Ms.—is it Gillot?

Ms. GILLOT. Yes. I am just here to answer any questions you

may have.

Chairman JOHNSON of Connecticut. Thank you.

Mr. Gundersen.

STATEMENT OF DANIEL C. GUNDERSEN, DIRECTOR OF ECONOMIC DEVELOPMENT, CITY OF PHILADELPHIA EMPOWERMENT ZONE

Mr. GUNDERSEN. Congresswoman Johnson, Members of the Oversight Committee, thank you for this opportunity to comment regarding conditions existing within the Philadelphia Empowerment

Zone and impacts that the program has had within the city of

Philadelphia.

In late 1994, about 21⁄2 square miles of Philadelphia and a portion of Camden, New Jersey, were selected as one of only six urban

zones in the country, the smallest of the zones. These neighborhoods were chosen precisely because of their pervasive poverty, unemployment, and distress. Here are some statistics available at

about the time of designation as an empowerment zone. Of the

39,000 residents in the Philadelphia zone, 49 percent live below the

poverty line, and at least one in four adults are unemployed. The

largest private employer in the Philadelphia zone has a work force

of less than 140. The two largest employers are both not-for-profit

inner-city hospitals. Over two-thirds of the employment base is

with retail, religious, human, or social organizations. In most every

corner of the Philadelphia zone, there has been no new construction in over 30 years. In fact, most of the zone is in an area of the

city that has lost 100,000 jobs over the last 25 years.

Things are changing. We are witnessing an unprecedented degree of public/private collaboration. Zone funds have leveraged

local, State, and additional Federal dollars and a small army of

help from the grass roots to Washington, D.C.

I am pleased to report that the Federal Government has delivered on its promises to deliver support. A representative from the

Regional Secretary’s Office of the U.S. Department of Housing and

Urban Development meets with senior-level zone staff several

times each month. This hands-on approach is apparent at the highest levels, too, from the Community Empowerment Board, chaired

by Vice President Gore, and its member agencies in the Cabinet.

For example, representatives of the General Services Administration, as I speak to you today, are conducting a workshop for Philadelphia zone businesses wanting to compete for Federal contracts.

All of our combined efforts are beginning to bear fruit. Today

there are several indicators of early success and signs that fundamental economic change is under way. Approximately 50 new businesses have been attracted to this Federal urban zone, and several

existing businesses have expanded operations. They join the approximately 800 now operating in the Philadelphia zone.

There has been over $32 million in public and private lending in

the Philadelphia zone since designation, resulting in a commitment

from businesses to hire 1,000 new employees over the next 3 years.

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The zone has tracked an additional 3 dozen new companies to the

zone that received no public financing.

Once-vacant buildings throughout the zone are being sold and

put back into productive use. New construction is finally taking

place; a large supermarket, a sports arena, pharmacy, a new office

complex, an infrastructure to establish an industrial park. The

total financing for business-related projects has been calculated at

over $32 million since designation. Seventy percent of this has occurred in the first 9 months of this year, an explosion of activity

for such a small section of the city.

These economic indicators are affected by the empowerment zone

investments being made at the community level. Hundreds of residents participate in a democratic process for deciding how best to

solve the problems of their neighborhoods. Contracts totaling over

$33.8 million have been awarded to service providers to execute

community-based benchmark projects. They include establishment

of three community lending institutions and 21 community development projects, five relating to family and children’s issues, two to

support housing issues, five to support a healthy community, six to

enhance community safety, and three to support arts, culture and

recreation.

Despite this progress, serious economic development challenges

remain. This summer we conducted a survey of 793 EZ businesses

in Philadelphia. Fifty-four responded. We found that 16 percent

utilized the EZ wage tax credit. Sixty-three percent reported having EZ residents employed, and of these businesses, 26 utilized the

credit. Greater than 60 percent of all respondents have future hiring plans.

This suggests that while the credit can be of value, some businesses may not understand or have the accounting controls to utilize the credit, or do not have or show a Federal tax liability and

cannot utilize the credit. In the Philadelphia zone where most businesses are very small and likely not very profitable, this suggests

the need for more technical assistance to help businesses grow to

the point where the credits can be utilized.

Businesses are finding it difficult to locate suitable space in the

zone. The Philadelphia zone is only 2.5 square miles. There are

only so many good prospects. We need to find ways to renovate

older structures more cost-effectively, we need to spur new development, and we need to compete with suburban areas for construction of state-of-the-art buildings. And we need to make it easier for

parcels of land to be assembled for business purposes.

A big challenge is providing full-scale technical assistance for entrepreneurs in the preventure stages, early start-up businesses and

struggling enterprises.

To conclude, while significant challenges remain, there is evidence to suggest that the Philadelphia Empowerment Zone is experiencing a critical shift in the neighborhood economy. New businesses are forming. Aggressive real estate transactions are taking

place. And there is solid and active interest from prospective businesses.

In one of the zones we can envision high technology companies

finding a home; in another, retail and entertainment venues are

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blossoming; and in the third area, distribution and light manufacturing is making a comeback.

It is too early to claim unqualified success. Our momentum, however, indicates that the zone benefits are being multiplied.

Mayor Rendell commends the administration and Congress for

recognizing the positive influences that the Empowerment Zone

Program has had in communities around the country by expanding

the program under the Taxpayer Relief Act of 1997. Moreover,

Mayor Rendell applauds the Federal Government for its willingness and follow-through in making continuous improvements that

strengthen the program.

Thank you for this opportunity to submit testimony on the performance of the Philadelphia Empowerment Zone before this Subcommittee on Oversight of the House Ways and Means Committee.

Thank you.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you. I appreciate the

testimony of the panel. It has been very helpful, and I would also

say very impressive.

Ms. Blaustein, it was very useful to hear your experience in applying this concept regionally. In so many parts of the country, regional cooperation has been difficult to achieve, but is essential to

solving the problems of the major cities. That was extremely helpful to me.

It has also been impressive—would you all agree, a number of

you mentioned, that there hasn’t been that much loaning; that the

tax incentives, with the exception of you, Mr. Gundersen, the tax

incentives don’t seem to be that powerful, the grants seem to be

very powerful, and you’d like it if the wage subsidies were better.

Mr. SCHMOKE. That is a good summary.

Chairman JOHNSON of Connecticut. Why are the wage subsidies

not working? I know some of you are in enterprise zones or enterprise communities. At least under the new law they won’t have access to as much wage subsidy. I think I am recollecting that properly. But the Work Opportunities Tax Credit was supposed to be

also a complementary proposal. I don’t hear much enthusiasm for

either of the wage subsidy provisions.

Mr. FRAIM. Madam Chairman, we think that the tax credits are

an excellent idea. It has been in the application that we seem to

have had some problems, that paperwork seems to be cumbersome.

There is not a good understanding among the local business community of what is being asked of them. The short-term application

of some of these credits, the year-to-year types of things, don’t really place a lot of confidence in the program, to be honest with you.

It might be well—we can produce several businessmen from the

city, small and large companies, who might be able to provide some

information that would help streamline the application process so

it can be of greater benefit.

But we do find that the grants are a great help to us. They are

very flexible, allow us to do more than just move people from welfare to work, but also the unemployed, the underemployed, it is

helping in a lot of ways.

Chairman JOHNSON of Connecticut. Mr. Gundersen, you mention

the need for more technical assistance in part to help businesses

understand the tax credits and what they can do. You know, would

you say that the majority of the 32 million in investment that you

have leveraged, was a lot of that as a result of the tax benefits

available?

Mr. GUNDERSEN. I think a portion of that—of those businesses—

may be taking advantage of the tax credits. I don’t know the exact

number. The 32 million that I reference refers to public and private

lending within the zone. What we have noticed is that in this year

alone we have seen 33 transactions, and that is up from 5 of last

year. I think that is a pent-up demand for the capital, and particularly the coming on-line of our community-based lending institutions that are controlled by the community, which is to say they

have representatives on their board from the community, and they

are making the loans that the banks had not made in the past.

I should mention that community lending institutions were capitalized with the title 20 funds.

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Chairman JOHNSON of Connecticut. Well, that is interesting with

the title 20 funds.

So the bonding mechanism hasn’t been very useful to you, but

you have been able to meet the loan needs through using the Community Service Block Grant dollars that way?

Mr. GUNDERSEN. That is right. Of the $79 million that Philadel- phia received, about $24 million has been directed to the establishment of three separate lending institutions, one for each of the

three distinct areas within the empowerment zone. They are set up

as 501(c)(3) nonprofit organizations with their own board and with

their own loan committee. And each of those does have communitybased representation.

They are making loans at a very small level, microloans, from $500 to $1,500. They are making small business loans up to

$500,000 that many of the commercial lenders may have been reluctant to make. And they also have the capacity to become equity

partners in business deals if we have a business—that might be interested in pursuing that.

Chairman JOHNSON of Connecticut. That is very interesting and

very helpful.

Senator Posthumus, what is happening to the local tax revenues

as a consequence of the State government relieving people of local

property taxes?

Mr. POSTHUMUS. What we have done is, when we created the act,

which was a legislated act, we said we were only going to create

11 zones. We have got six urban zones, three rural and two enclosed military installations.

We gave communities the option—no community has to be part

of a renaissance zone. Every community in this State was given the

option of applying to be part of the renaissance zone so that there

would be a partnership between the State and local government.

And there are—I think there were 21 communities that applied, of

which we got 11. And they had a very short time period because

we wanted to put it in place very quickly.

When they did that, they knew that, in the short term in the

zone, and they got to pick the zone. Each community picked the

zone. The State didn’t pick it. The community picked it and recommended it. They knew that in that zone they would forgo all

taxes, local taxes, and the State would forgo all State taxes. And

that is part of the agreement in order to rebuild the community.

We just felt that—one of the problems you heard earlier, that tax

credits were difficult and weren’t having as much of an impact, the

problem is for an employer or job provider, the cost for locating or

expanding in a blighted urban area is significantly higher, and so

we felt we had to do something very bold in order to reduce that

cost. And that is why we said, we are going to do away with all

of your taxes for the next 15 years or up to 15 years. And we are

finding a much quicker response to that, as I said, in just in the

last 10 months.

I visited an old foundry that had been closed down for 10 years

in Grand Rapids. Nobody was doing anything with it. As soon as

the renaissance zone came about, developers went in there, took

the old foundry and are recreating it into a building that will be

partially for offices, partly for small business start-ups.

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So I think it is critical, if we are going to do something to blighted areas, we have to create some new ideas. I think the empowerment zones are working, but I think we need to even go beyond

that.

Chairman JOHNSON of Connecticut. I think your idea is a very

exciting one and a very dramatic one. The goal is to reduce the cost

of doing business to encourage people to come in and create businesses and create jobs.

Mr. POSTHUMUS. And homeowners as well. Remember, this is

also for the residents as well as the business. This is for everybody

in the zone.

Chairman JOHNSON of Connecticut. That is right. Nobody pays

any taxes, the people who live there and the people who do business there. It is really quite a dramatic concept. And it is interesting that you have gotten so much activity in such a short time.

But just to make it clear, not all of Grand Rapids and not all of

Detroit are in these renaissance areas. They choose a smaller area.

Do you limit the amount they can choose?

Mr. POSTHUMUS. We said that they can take up to 5,000 acres.

And initially, the idea was to create one zone in every community.

The cities came back to us and said, wait a minute, we think that

just by putting it all in one area, we are going to create some problems, because within those areas, we have some that are doing

pretty well. Why should we be helping those areas that are doing

fairly well?

So we gave them the ability to divide it up into areas that there

is still—I think they can’t be any smaller than 1/250th of the city’s

geographical area. But the city of Detroit, for example, will have—

has five separate zones equaling about 1,300 acres. I think Lansing

has two separate zones. So it is each up to—each community can

then kind of make it fit their needs.

Chairman JOHNSON of Connecticut. Is there any resentment by

other homeowners in these cities of the people who are homeowners in the zones and don’t have to pay any taxes, and, likewise,

the business down the street who was carved out?

Mr. POSTHUMUS. Certainly there is some of that, no question.

And somebody is going to say, why do they get the break, and we

don’t? But, in fact, we believe that it is a risk worth taking in order

to redevelop our blighted areas. You have got even some are arguing, if they are not even in a city that has a zone, why should the

business that is located in this blighted area get the break?

But, in effect, they have had to pay a larger cost for locating

there. P.B. Gast & Company in Grand Rapids has had to pay a

higher cost for staying in the city of Grand Rapids than a company

that was willing or went out to the suburbs and located in the

greenbelt. So all those factors are—we just took them into account

and said it is worth it to redevelop those blighted areas of the

State.

Chairman JOHNSON of Connecticut. That is very interesting.

Mr. Coyne.

Mr. COYNE. Thank you, Madam Chairwoman.

Ms. Blaustein, what are the biggest obstacles that you run into

relative to redeveloping brownfields, and what do you think the

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Federal Government could do to make it easier to overcome those

obstacles?

Ms. BLAUSTEIN. It varies from area to area. There are certainly

a large number of variables in each case. Some sites have no cleanup at all yet, and they need help from the ground up. And other

areas are well on their way to being cleaned up, but need help in

marketing these areas and finding businesses that are interested

in developing there.

There is a lot of education that has to happen, both in marketing

these sites and in bringing the community members together to understand what the value of these sites are.

Certainly, we have had some help in the city of Pittsburgh from

the Federal Government in terms of EPA funds to redevelop some

of our sites. The Mon (Monon GAHELA) Valley sites are far behind. They have no paid staff people to manage this redevelopment.

They need capacity from every level in order to market these sites,

clean them up, and find developers.

But we are competing against each other. And there needs to be

a concerted effort that is now under way to market these sites and

clean them up jointly. We have learned things in the city of Pittsburgh that can be of use to the Mon Valley communities in terms

of dealing with some of the contaminants there.

If we could share our resources of knowledge and market these

regionally, rather than individually, we have a much greater potential of competing with the suburban sites that are green and ready

to go and that attract a lot of businesses more quickly. But we need

to educate ourselves and the public at large and the business community about what the advantages are.

Mr. COYNE. I assume from reading your testimony that the

benchmarks that you are using to measure the progress on the enterprise zone project are employment, investment, household income, home ownership, and access to capital; is that correct?

Ms. BLAUSTEIN. Uh-huh.

Mr. COYNE. Have you compared your progress to the benchmarks

as of yet?

Ms. BLAUSTEIN. Yes, we have. We have finished a performance

review in July that measured our performance based on what we

had set out to do. We have made a tremendous amount of accomplishment in terms of housing. That was our biggest commitment.

We have begun the change from concentrated public housing to

rebuilding those sites and bringing in not just subsidized housing,

but a range of rental and home ownership. We had an opportunity

to show the Manchester area off to HUD when they were here

about a month ago to see how these homes had been redeveloped

and the increased pride of those communities in having real homes

with real quality as their basis.

The other area that a tremendous amount of effort has gone into

but was a very great challenge was the development of family support centers. We are now under way with developing the first one

that will bring together agencies that had been scattered throughout the area of McKeesport into one central location. People can

come there and find all the services they need under one roof, as

well as with Internet access connecting to those other service agencies that may not be located right in that location. That took a long

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time to get under way, but now they have started. And our next

set of reviews will show what accomplishments that has made and

will be a model we can use in other areas of the city as well.

Ms. GILLOT. If I can jump in here, one of the things that is not

reflected in the performance review that I think should be, especially in our area, is the amount of effort and time it takes for the

process, for the capacity-building process, and that is not reflected

in an evaluation. You know, and because of the fragmentation in

our enterprise community and the turnover in the county government after 60 years, there was a major turnover right in the middle of our first 3 years of designation, we had to bring all kinds of

players up to speed, and that process, and that catharsis, is so important, and it is not reflected anywhere in the performance review.

We have talked to HUD about this. We are hoping that that is

at least incorporated if not in this current designation, in the second round. But that partnership is what is going to expand into

other opportunities, like the brownfields and other opportunities

that we have seen in our area, and we need to evaluate that, and

that is not reflected. But that is one of our main accomplishments,

also, is the partnership that has been formed among these municipalities that may have—that have never worked together before.

Mr. COYNE. The Family Support Services Program, that was initiated by the prior administration at the county level?

Ms. BLAUSTEIN. Uh-huh.

Mr. COYNE. And at that time, were any of those facilities in the

city?

Ms. BLAUSTEIN. No. None existed the way they do now, no.

Mr. COYNE. But now we will be able to have those in the city

with this——

Ms. BLAUSTEIN. Yes.

Mr. COYNE. Very good.

What is the biggest obstacles that you run into in implementing

the enterprise program?

Ms. BLAUSTEIN. I think, as Beverly said, it was getting everybody

at one table. There has been a lot of distrust from one area to the

other, and to deal with this many municipalities who had preconceived notions about what their role was going to be and how

they would work with each other and with the city, it took a long

time to develop a level of trust that we have finally developed.

I mean, there are people talking to each other who may have

only lived 10 miles apart but have never spoken about these common interests before. We do share a lot of common problems. And

we have to work on them together, because there is no way that

any of these municipalities can deal with them individually. We

simply don’t have the resources to do it. The only way to be successful is to do it jointly.

Mr. COYNE. Thank you very much.

Chairman JOHNSON of Connecticut. I am pleased to welcome

Congressman Cardin. And thank you. It is nice that you have been

able to join us.

Mr. CARDIN. Well, Chairman Johnson, I really want to first applaud you for holding these hearings. This has been very helpful

to us to see not only how the Federal empowerment zone legislaVerDate 11-MAY-2000 13:27 Jun 07, 2000 Jkt 063427 PO 00000 Frm 00122 Fmt 6633 Sfmt 6602 E:\HEARINGS\60762 pfrm07 PsN: 60762
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tion is operating, but also to see what other local governments are

doing in an effort to encourage economic development in difficult

areas.

And I want to thank Mr. Coyne for welcoming my mayor here

at the beginning of this panel.

Kurt, I am sorry I was not here to hear your testimony, but I

have read it, and I certainly concur in your comments.

Let me just make, if I might, just one quick observation; and that

is, I think this program in Baltimore has worked better than Congress had anticipated.

I was present with Mayor Schmoke at community meetings in

the planning stages. And to see that, how local communities have

organized to have a meaningful role in their community and using

the empowerment zone legislation, has been very, very encouraging. And in Baltimore we have not only used the local community, we have also energized our private sector under the umbrella

of the Federal program to accomplish the goals I think all of us had

hoped would be done under the empowerment zone legislation.

Mr. Mayor, I have read your testimony. I concur in it. But I just

really want to underscore the point about improving the quality of

life, because I have seen the communities come back to life and

crime rates drop. That is very noticeable to the people who live in

those communities. I have seen home ownership grow one building

at a time. As we increase home ownership in these areas, we also

improve the public schools.

So I just really want to applaud you in the effort you have made

in Baltimore using this program. I think it has been a model program. And congratulations. Anything we can do to help, please let

us know.

Mr. SCHMOKE. Thank you, Congressman.

I forgot to mention with me is Diane Bell, who is the president

of the Empower Baltimore Management Corporation, the nonprofit

that operates our empowerment zone, and it has been her leadership in working with the various elements of the community that

has allowed us to move forward. And I did want to acknowledge

her. And thank you very much for your very strong support

throughout this entire endeavor.

Chairman JOHNSON of Connecticut. Thank you.

One of the problems with hearing everybody individually and

then going to questioning is that you forget the questions you were

going to ask one person by the time you get to the end.

But I did want to ask you, in terms of the curriculum project, did

that just come out of the larger planning process, or was some of

the Community Services Block Grant money used to accomplish

that? Were there things that were done as a result of the enterprise zone effort that actually didn’t involve using incentives or

grant money, but just were spinoffs of the planning process, or did

they in some way all include usage of grant monies?

Mr. SCHMOKE. There was a mixture. Some were spinoffs. Others,

however, needed the block grant in order to succeed. The focus on

the curriculum was something that occurred during the course of

the planning process. That was something that the communities

agreed to and all of us bought into that plan and felt that it was—

it would be essential for certain of those neighborhoods to have

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that increase. The implementation wouldn’t have occurred, however, without the use of a grant.

Chairman JOHNSON of Connecticut. I would be interested to have

any of you who care to undertake it to list out for us how other

Federal grants also fed into this planning process; once you got the

plan, that that directed how you used, perhaps, some of your education dollars, perhaps some of your job training dollars, perhaps

other Federal grants, because we need to sort of see how does the

enterprise zone planning process affect the implementation of other

Federal programs and the usage of other public dollars.

Mr. SCHMOKE. Madam Chair, we tried throughout the process,

and the board focuses on this, to try not to duplicate existing programs, but to make sure that things are working in a complementary fashion so that we do get the benefits from other programs,

not only the Federal level, but the State and the private sector

level.

Chairman JOHNSON of Connecticut. So did you then use the block

grant money available under the enterprise zone legislation to establish your six community-based village centers, but then they

just made more efficient use of all of the various foster care dollars,

food stamp monies, and all those other things?

Mr. SCHMOKE. The village centers have been primarily information and referral. They were not set up to be the service provider.

They were to make sure that the community groups had access and

individuals had access to all these other programs.

Chairman JOHNSON of Connecticut. Thank you. Thank you very

much for your testimony. I appreciate the panel’s thoughtfulness

and the complete record that you created in your written statements. And thank you for your summaries and this discussion.

Thank you.

And I would like to call our last panel.

Miles Friedman, the Executive Director of the National Association of State Development Agencies; Terry Van Allen, Director of

Research Initiatives at the University of Houston; Richard Cowden,

Executive Director of the American Association of Enterprise

Zones; David Caprara, Director of Policy for the National Center

for Neighborhood Enterprise; and Diane Lupke from Indianapolis

on behalf of the National Council of Urban Economic Development.

Chairman JOHNSON of Connecticut. Mr. Miles Friedman.

STATEMENT OF MILES FRIEDMAN, EXECUTIVE DIRECTOR,

NATIONAL ASSOCIATION OF STATE DEVELOPMENT AGENCIES

Mr. FRIEDMAN. Madam Chairman and Members of the Committee, thank you very much for having me here today. I am Miles

Friedman, Executive Director of the National Association of State

Development Agencies. We are the umbrella organization nationally for State economic development agencies, and we coordinate

and provide support services to those who administer State enterprise zone programs and to those who work with the Federal Empowerment Zone/Enterprise Community Program.

I am particularly pleased for the States to have the opportunity

to provide some input today and to be recognized as important

partners in the process. Thank you.

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We want to express our support for the Federal Empowerment

Zone/Enterprise Community Program and for the designation of additional zones under a second round.

I do have a number of points I would like to make in terms of

clarifying the State role and how we see the States being most effectively utilized in this program. I think you could classify these

under two general headings. One is the relationship of the program

to States and how they do ] business, and the second is to the potential role that States can play in the program and have played

in the program.

I think, in looking at enterprise zones, the whole enterprise zone

concept, whether it be the current Federal program or the programs that have been in place in 42 States now for some 16 or 17

years, we look at the issue of targeting as being critical. For States,

this was a new way of doing business by and large.

And I know that there is a lot said in Washington and other

places about how little attention States pay to targeting to communities, especially to distressed communities and distressed areas.

And, in fact, what has happened is virtually a revolution in the

way States do business over the last 17 years in that States largely

under the rubric of enterprise zones have begun targeting resources not only in direct support of State enterprise zone programs and now in support of the Federal Empowerment Zone and

Enterprise Community Program, but, in fact, States are targeting

more and more of their other programs in areas like job training,

finance, lessening of taxes and regulations on businesses, training

for entrepreneurs, assistance with insurance issues, and other ways

that States can become actively involved in helping largely the

smaller communities and the smaller businesses that are trying to

grow, that are struggling to make it in the world. States are now

targeting resources more than ever before to these businesses and

these individuals in these communities. That is a very important

issue for us because the States are now spending several billion

dollars a year on economic development.

Secondly, as much as we appreciate and applaud the fact that

States are recognized as partners, we also believe that States could

play an even more active role in supporting the program, not so

much from an administrative point of view. You will find that the

State economic development agencies are less anxious to be in

charge, less anxious to administer, less anxious for control, and

more anxious to play a technical support role. They would like to

be more involved in the application and designation process. They

would like to be more involved in providing technical assistance.

They would like to be more involved in trying to help develop the

strategies that are being used to support the economic recovery in

these distressed areas.

The States can be very good partners in these communities, and

it is in that role, in the technical role and the substantive participation in the program, that we think States could be recognized

and allowed to play an even more active role.

We think the current Federal program is a very good start. As

I say, we support designation of a second round. We also believe

that, in at least one area, the expansion of the State role on the

substantive side and, secondly, in allowing more time for strategy

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development, because if we have learned nothing else from the

State experience, it is that enterprise zones must be seen as part

of a larger concept, part of an overall economic development program.

On their own, they are not the be-all and the end-all for economic development, nor should they claim to be. But States who

last year put about $2 billion into their participation in the program feel that the communities, especially the smaller communities, need time to truly develop the strategies that they are going

to use so that they can most effectively utilize the dollars that are

being directed their way.

I have many other things I could say, but I want to conclude, if

I could, by talking about the real impact on real people for just a

moment.

We convene the State enterprise zone administrators and those

who participate in the Federal program once a year in February.

And last February, here in Washington, we had many of those people here for a conference, and we gave out some awards. And one

of the most exciting things was to see the mayor of a small community in Michigan talk about the enormous decrease in the unemployment rate in her community and talk about how much it meant

to have the Federal Government provide some recognition, and not

only tools, but recognition, of what was happening.

And to see a small town in Louisiana, Macon Ridge, actually

send about 20 people here to Washington to accept the award and

talk about the community involvement in Macon Ridge and how

much it meant to them to have the State and Federal Government

recognize what they did, and perhaps most instructive was that, in

both cases, with the communities who were there to accept the

awards were people from their State economic development agencies.

So I thank you for this opportunity. I hope it has been helpful.

There is a more complete statement that has been supplied for the

staff. And, again, I will be happy to answer any questions.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you very much, Mr.

Friedman.

Mr. Van Allen.

STATEMENT OF TERRY VAN ALLEN, PH.D., DIRECTOR OF RESEARCH INITIATIVES, UNIVERSITY OF HOUSTON-CLEAR

LAKE, HOUSTON, TX

Mr. VAN ALLEN. Thank you, Chairwoman Johnson, and the committee. I have studied enterprise zones across the Nation, and I

have had an opportunity to investigate and see some of the outcomes to some of the questions that you had asked previously, at

least in regard to State zones. The Federal zones, of course, have

only been around a couple of years.

I just, first of all, wanted to say that I support the program and

would very much like to see it improve. I think that the empowerment zone program needs to be greatly improved.

One thing that I wanted to point out is that where zones are successful, existing businesses are able to expand. So many times people concentrate on some big home run where they are going to attract a big business, but in reality it is the small businesses and

medium-sized businesses that are expanding. They have community roots, and new startup businesses like them occur in the more

successful zone areas across the Nation. So, therefore, I always try

to steer people away from the zero sum model where one community loses while another community gains.

I am from Houston, and in Houston we have an enhanced enterprise community. And many of you may know that in Houston, we

are the number one city in the Nation for creating businesses, but

in our empowerment zone, we have created zero businesses with

the incentives, because the incentives are so meager.

Again, we are an enhanced community, which means that we

only receive 3 million in social service grants. So we really have not

seen the success that we would like to see. And we, of course, will

keep working at it.

Speaking of businesses in Houston, for instance, Magic Johnson,

who is a basketball legend, has been creating businesses across the

Nation, actually movie theaters. He has one in Houston, but, unfortunately, it is not in the zone. And one of the things that I have

felt, that with much better incentives, that people like Magic Johnson can give to the communities that they have—that people have

come from.

So many people that succeed leave their communities, and I

think that one of the things that I am attracted to with enterprise

zones is that, if there are incentives, individuals can create jobs

and businesses in communities where they feel that they have

roots.

Another thing that I have been concerned about with the program is that a former HUD official, I won’t name him at the moment, but he said that his concern was this program is turning out

to be too much like a—just another grant program and because not

enough jobs are being created. Again, the program has only been

around a couple of years. And I think that there is success in the

program. I do believe that there is modest success. I just would like

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to see much greater success because the need is so great and so

desperate in so many poverty areas.

That is why I have very much promoted and supported the

Watts-Talent bill, because the Watts-Talent bill does provide capital gains tax exemptions, just like the new District of Columbia

zone, and I feel that that is a key provision, because what I have

found in investigating zones across the Nation is that, just looking

at it from a job creation perspective—and I realize that there are

other aspects to zones than just job creation, but that is my primary focus, is that the amount of incentives are correlated to the

amount of jobs that are created in zones. And there doesn’t seem

to be any way around that.

So that is why I find it to be vital to have stronger incentives,

especially in the Watts-Talent bill. The Senate has a companion

bill; Joseph Lieberman and Senator Abraham have a companion

bill that supports the same type of legislation.

My light is on here. Do I still have a minute?

Chairman JOHNSON of Connecticut. Probably 30 seconds.

Mr. VAN ALLEN. Okay. And you have heard a lot of testimony

today. And I think that, for instance, the Michigan zone program

is an example of one that is going to have a major effect as far as

the State zone program because of their incentives.

And the gentleman here, Congressman Watkins, talked about

how in rural areas people leave because, if they get skills, there

aren’t jobs. And my concern, of course, is to create jobs and to support businesses so that they can succeed in a higher risk environment.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you very much, Dr.

Van Allen.

I would like to recognize Mr. Cowden, executive director of the

American Association of Enterprise Zones.

STATEMENT OF RICHARD H. COWDEN, EXECUTIVE DIRECTOR,

AMERICAN ASSOCIATION OF ENTERPRISE ZONES

Mr. COWDEN. Thank you, Madam Chairwoman. We greatly appreciate this opportunity to offer testimony that reflects the experiences of many city and State officials who work with a wide variety

of targeted redevelopment programs. I will summarize our written

testimony briefly.

I should note that, from the outside, enterprise zones were not

expected to operate simply as a set of local tax breaks. They were

designed to create a linkage among local, State, and Federal initiatives. Because Congress did not act on Federal zone legislation

until 1993, virtually all the research in this area has focused on the

effects of State and local tax incentives, which have only a moderate impact on business location decisions.

But most studies the State designated zones did not measure

was the degree to which cities and States used the program as a

targeting mechanism for a wide range of strategies. In many cities,

local officials have learned to deal comprehensively with several

factors, not just tax costs, that deter reinvestment in aging areas.

By far the most successful zones have combined the idea of incentives with practical measures to improve infrastructure and basic

services.

Since our organization formed in 1985, we have consistently advocated a Federal zone policy that is based on the knowledge that

cities and States have already gained about such programs. Although the new empowerment zone program parallels rather than

dovetails with the State zones, we are encouraged that some new

Federal measures, such as the brownfields program and new empowerment contracting program, may well compliment both Federally and State designated zones. Congress and the administration

should explore additional policies like these.

Those of us who have come to appreciate enterprise zones as a

routine redevelopment planning technique have urged Washington

lawmakers to adopt our demystified view of the concept. We note

that only here within the beltway are enterprise zones still considered to be new and exotic. Washington has fallen behind the curve

almost entirely because of its partisan differences.

Throughout the 1980’s, most Democrats rejected such bills, largely because Jack Kemp had introduced them. Most Republicans

would only support a bill that was designed as a demonstration of

supply side economics. Neither party sought to enact a consensusdriven zone proposal until civil disturbances shook Los Angeles in

1982.

I realize that today’s hearings are for oversight purposes, but as

we work toward new legislation, all parties at interest should bear

in mind some sound guiding principles.

First, the legislative process should start with an understanding

that a geographically targeted initiative can be a sensible component of our overall policy on cities. It should be flexible enough to

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accommodate proposals from across the political spectrum. This can

be done only if those who develop the legislation can agree to iron

out their ideological differences through compromise.

Second, the legislation should not be aimed at identifying one or

two Federal benefits that are the answer to urban poverty. Economic problems in cities relate to a complex of causes and therefore

are unlikely to respond to simplistic solutions. Congress should not

overestimate the power of any given Federal incentive, nor should

it underestimate the power of zone programs to stimulate local

problem-solving activities.

Third, experimentation was central to the original enterprise

zone proposal. Any new program should incorporate that principle.

Lawmakers should be willing to sign on to a program that includes

provisions they favor, as well as to those about which they have

doubts. Incentives should be tested at more than one rate in order

to identify their marginal levels of efficiency.

Finally, regardless of what benefits ultimately are included in a

prospective zone program, it is critical that all sides accept a single

set of implementation criteria as the ongoing policy framework. As

of today, the empowerment zone program relies on one set of eligibility standards, and H.R. 1031 would use another. The differences

are immaterial, and yet adoption of H.R. 1031 in its current form

would give us two entirely separate Federal zone programs with incompatible sets of regulations and implementation systems. A better option would be to use the existing EZ–EC methodology and improve on it over time.

Thank you for your attention, and I will be happy to answer

questions later.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you, Mr. Cowden.

Mr. Caprara.

STATEMENT OF DAVID CAPRARA, DIRECTOR OF POLICY,

NATIONAL CENTER FOR NEIGHBORHOOD ENTERPRISE

Mr. CAPRARA. Madam Chair, Mr. Coyne, at the beginning of the

104th Congress the Speaker asked the National Center for Neighborhood Enterprise to convene neighborhood leaders to look at

pressing problems of poverty in the inner cities. And from our

neighborhood leaders task force recommendations, many are found

in the Community Renewal Act sponsored by Messrs. Talent,

Watts, and Flake, including measures for expanded capital access

for small businesses, removing the discrimination against faithbased service providers in our cities, strengthening the role of parents in education, and directly empowering neighborhood groups

though vehicles like charity tax credits.

We believe this approach will be a complement to the Administration’s program by recognizing the role that grassroots groups

play in moral and spiritual and cultural renewal that underpins

development.

In the past year, we demonstrated that the restoration of civil

order is a key prerequisite for development. When 12-year-old Darrell Hall was murdered here in D.C. in a housing project in January, in a housing development called Benning Terrace, our president, Bob Woodson, stepped in with a group called the Alliance of

Concerned Men and together forged a truce between rival youth

factions in that community. That was the subject of a special hearing by House Judiciary on May 8.

Today this area, which was once known as the most murderous

section of D.C., is now being hailed as one of the best kept, with

manicured lawns and gardens, that are actually kept up by a group

called Concerned Brothers of Benning Terrace.

In today’s Washington Post is an article about common-sense

capitalism in the City of Indianapolis, which is another area where

we trained neighborhood leadership with the support of Mayor

Goldsmith over the last 3 years. And I think the neighborhood

leaders there again demonstrated the importance of civic order as

a prerequisite for the rebirth of community capitalism.

This weekend, we are meeting with grassroots leaders from Hartford, Connecticut, Dallas, L.A., and Washington to further develop

this youth crime intervention model as a grassroots prototype. And

I do commend your joint consideration of this model with House

Judiciary and the Housing committees as one key element for

urban revitalization.

In the District, as you know, the Enterprise Community program

has not gotten off the ground, where $3 million has been allocated

but stalled. I commend to this committee the work of former Representative Fauntroy and longtime ESOP pioneer Norman

Kurland, who have called for a D.C. ‘‘capital homesteading plan.’’

This approach would fund a new stream of economic development

not through the Tax Code or social service appropriations, but by

dramatically accelerating growth through the use of the discount

window of the Federal Reserve system to provide low-cost, unsubVerDate 11-MAY-2000 13:27 Jun 07, 2000 Jkt 063427 PO 00000 Frm 00146 Fmt 6633 Sfmt 6602 E:\HEARINGS\60762 pfrm07 PsN: 60762
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sidized capital credit through D.C. banks to finance new enterprise

formation.

This so-called ‘‘super-empowerment zone’’ would expand asset

ownership for D.C. residents through mechanisms such as ESOPs

and comparable profit-sharing mechanisms at the community level.

I would like to acknowledge the presence of Antonio Bentancourt,

president of the World Institute for Development and Peace, that

has been involved in championing this program throughout D.C.

and the developing world.

Given the nonperformance of the D.C. Enterprise Community to

date, I urge this committee to examine the efficacy of testing this

alternative strategy as a national exemplar to promote expanded

capital ownership, through community intermediaries in the private sector that would spur high rates of growth independent of

taxpayer subsidies.

I would note that many members on this committee, including

Chairman Archer, previously cosponsored expanded capital ownership legislation, dating back to 1975 with the Jobs Creation Act.

Another comparable approach, individual development accounts,

or IDA’s, have been pursued by the Corporation for Enterprise Development and others as a universal savings mechanism for low-income residents for education, health, business start-up, retirement,

and home ownership. And I suggest that these asset development

mechanisms for persons at the lower rung of the economic development ladder be looked at.

I was involved with Jack Kemp as a Deputy Assistant Secretary

at HUD. I also served on the President’s task force after the L.A.

riots. And I must say, when I went from that post to work with

Governor Allen to run the Virginia enterprise zone program, I was

heartened by the vigor that Secretary Cuomo brought to the EZ–

EC program. I give high marks to the way it was packaged.

I wish I could say the same with regard to HHS. Many of the

Title XX block grants, as you are aware, have reflected unwieldy

coordination not only at the Federal level but at the State level as

well, where I think this ‘‘two-stop shop’’ approach has created problems.

So I conclude by noting the wisdom of this Congress in the last

session in devolving many welfare and domestic programs to greater and greater coordination and leadership roles at the State level,

and would suggest that this committee, HUD, governors and mayors, grassroots leaders, and Representatives Talent and Watts perhaps team up to incorporate some of the other recommendations we

have heard here, to offer new incentives, ‘‘by right’’ or right of first

refusal, to State enterprise zone departments.

I like something Dick Cowden has pushed for years, a two-tiered

program that would again make a number of Federal incentives

available ‘‘by-right’’ to State zones. And I would suggest that this

one-stop shop, at the State level, will be closer to the people and

the engines of private enterprise.

Thank you.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you very for your interesting testimony.

And now Ms. Lupke. I understand you are from Indianapolis. I

missed that. I compliment you on the article in the paper today.

STATEMENT OF DIANE LUPKE, PRINCIPAL, LUPKE & ASSOCIATES, INDIANAPOLIS, IN, ON BEHALF OF THE NATIONAL

COUNCIL FOR URBAN ECONOMIC DEVELOPMENT

Ms. LUPKE. Thank you, Chairman Johnson and Mr. Coyne. I appreciate your inviting me to testify on the performance of the empowerment zones and enterprise communities program.

I am a consultant who specializes in community economic development work and have worked with zones, the State-designated enterprise zones over the past 15 years, and now with empowerment

zones and enterprise communities. Today I am here on behalf of

the National Council for Urban Economic development. CUED is a

nonprofit membership organization representing over 1,900 public

and private economic development professionals and elected officials from cities, counties, and States.

Our members strive to develop and revitalize economically distressed areas by helping to create, expand, and retain job opportunities and increase local tax revenues, clearly the intent of our

members, as reflected in the purpose of the EZ–EC program. I appreciate the opportunity to share some of their experiences today.

I would like to summarize some of the comments from our members from my written testimony.

First, let me begin by saying that the EZ–EC program has broken new ground, in terms of building unprecedented partnerships

within the community, coordination between agencies and levels

government, and marrying the socioeconomic agenda with the more

market-oriented economic development goals that the State zones

had. These challenges are critical to successful community revitalization.

The basic framework and the intent of the program can work

more effectively, but with refinements, certain key economic development provisions. In short, the foundation has been laid, but the

house is yet to be finished. The house will, in large part, be built

by private-sector dollars.

Thus, it is incumbent upon any program that seeks to revitalize

blighted areas to leverage public funds with private-sector investments. The EZ–EC program must enhance the capacity of communities to attract private-sector resources by providing them with

the adequate tools needed and further resources.

There are a number of provisions in the EZ–EC program that

can specifically support economic development activities, but they

have not reached their optimum potential. In a membership survey

conducted this last summer on the empowerment zone and enterprise community program, our members rated the economic development impact of the program as, on average, somewhat effective,

with 16 percent responding that the program was currently ineffective.

I would like to focus on three of the programmatic elements that

require attention: The EZ bond, the employment tax credit, and

brownfields redevelopment.

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First, let me comment on the EZ bonds. The tax-exempt private

activity, EZ facility bond, the EZ bond, could allow for greater

funding opportunities for business expansions, especially for

midsized cities that are located in low-density States.

One of our members, the city of San Diego, began marketing the

new EZ bond to businesses soon after receiving the designation, but

they encountered a number of difficulties in attempting to work

with the bond.

First, in attempting to put together a data base, the city staff actually had to walk the boundaries of the zone to gather the street

addresses to form a database of zone residents. This is really too

expensive for most communities.

Secondly, the low $3 million tax-exempt cap created another hurdle, this time with bond underwriters. The maximum bond issue

size made the investment of numerous hours of legal work seem

unappealing and, of course, very expensive.

Over a period of months, the city was able, at considerable cost,

to create the necessary forms and develop criteria. And, most importantly, they did find an eligible business to work with. Figi

Graphics, a giftware manufacturer and distributor, was able to

keep 227 jobs in the EC and, in addition, create 61 more jobs with

the use of the EC bond to finance its expansion.

The bond is important, and I think it should be kept, but two

changes must be made: First, raise the tax-exempt cap; and, second, streamline regulations. These changes would allow the bond

to reach its potential as a financing mechanism and raise important capital for cash-strapped businesses.

Let me turn now to a second benefit, the employment credit.

Linking zone residents with job opportunities has been a challenge

since the first State zones were designated some 15 years ago. An

important part of our ability to place zone residents in employment

opportunities has been employment credits. With regard to the federal program, selected companies have been able to use the work

opportunity tax credit.

One of our members, Wal-Mart, the retail giant who is located

in all 50 States and in nearly all of the enterprise communities,

has been successful using this credit. Unfortunately, most of our

other smaller business members within EZ–ECs have not been able

to use it. In addition some nonprofit corporations who work with

businesses in helping them to access benefits have chosen not to

offer that benefit any longer because it is simply too difficult for

most of our businesses to access. Our members encourage the continuance of the WOTC but with refinement to make it easier to access.

I would also suggest that there needs to be a continued connection with the brownfields program. EPA’s program has been helpful, and we appreciate that, but there needs to be a direct incentive

to businesses to invest, clean up, and develop brownfields areas. Individual investors and developers cannot be expected to take on the

entire cost of clean up and development.

Finally, let me mention a couple of other issues of coordination.

The empowerment zone and enterprise community program is on

track. The design acknowledges the fact that revitalization is not

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just a result but it is a process and it is a process of shared vision,

coordinated action, and entrepreneurial ingenuity.

The empowerment zone program has brought many changes to

the initial investments that were made by State zones. The Federal

program has encouraged partnerships among the levels of government, different government agencies, residents, businesses, and institutions in each community that have been a very valuable part

of the process of revitalization.

These partnerships have been invaluable in creating a sense of

empowerment among program participants by returning the responsibility for the community to its citizenry. However, the empowerment that is created by this program should be sustainable

and the impact of the program should not stop once the public program funds have been depleted.

Investment now in public resources, if properly leveraged, will

result in an ongoing process so that revitalization leads to more

long-term development. The EZ–EC program still does not offer

enough incentives to really capture business investments for revitalization.

Madam Chairman, thank you, and members of the subcommittee, thank you again for the opportunity to share the experiences of our members at CUED.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you very much for

your testimony. It was very helpful and very interesting.

I would like to go back through a couple of little things. This

business of a nonprofit and setting up an entity, one possible way

to manage this would be to always require that they be sunsetted,

so that after 5 years they would have to be recreated.

The reason is that they can, after the initial period of change,

take on a life of their own, and since they are not elected officials

and since they are governing public money, it can become a problem. They can become the captive of one group in the city, as opposed to a synthesis of all groups in the city. So the issue of

sunsetting is something I hope some of you who have more experience than I do will think about.

I would also like to go back to Mr. Caprara’s issue of the ESOP

mechanism. For many years I have been talking about this, those

of us who are interested in the microenterprise zone legislation, the

micro loans, and we had testimony from the earlier panel about

how the bonding mechanism wasn’t as useful as using title 20

funds to give microloans.

ESOP’s would allow, as part of this community planning process,

communities to decide what kind of businesses they wanted, and

people to make, like, $50 investments in ownership, and those who

invested could be given an automatic employment preference because they owned a training preference.

So I think that is a tool for commitment and involvement that

has enormous possibilities for us, because we have seen, through

community policing, we have seen through a lot of other mechanisms, that if you can get people to buy in, a lot of other things

happen, just like the things that have happened in the D.C. neighborhoods as we got people to buy in.

Do we need to change the ESOP law in any way to make it more

usable in these circumstances?

Mr. CAPRARA. Well, I really share your desire to see from the bottom up microenterprise and individual development accounts,

mechanisms to expand ownership in the neighborhoods being a pivotal part of this program.

What Mr. Kurland, in a detailed paper that I will provide to the

committee, explained would be the notion of low-cost capital credit

being made available through the Federal Reserve Bank under section 13, under its current powers. He has recommeded a demonstration of, basically, through the banks as an exemplar for what

could be done around the country, making low-cost credit available

for firms in this sort of super-empowerment zone that would be

tied to asset or stock ownership, not only through ESOP’s, but related community ventures—taking the CDC the next step further

to actually vesting residents in the community in that stock ownership capacity.

So it is a very innovative idea that I think has been ahead of our

time for a while. But, as you know, since 1975 ESOP’s have been

gaining hold in the country, and I will leave with the committee

information that would describe approaches to expand dramatically

the access to that capital credit for ESOP’s in the District and

around the country, without requiring costly new appropriations or

tax subsidies.

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Chairman JOHNSON of Connecticut. Thank you. I would appreciate that very much.

[The information was not available at the time of printing.]

Chairman JOHNSON of Connecticut. And for those of you who testified that you think—Dr. Van Allen, you were certainly one of

them—that zero capital gains would be a useful additional incentive, those who did testify and didn’t testify, I am happy to hear

your comments on this.

My concern about that is that capital gains is such a long-term

thing that really expensing is much more powerful. I got the Renaissance testimony in Michigan, where your immediate relief from

current tax liabilities is much more powerful.

I guess I don’t get it about the zero capital gains as an incentive,

and I am concerned about Treasury’s comment that you can really

game this.

Mr. VAN ALLEN. Well, let me just say that, as I am sure you are

well aware, capital gains is all about investment. And I think for

these communities, to turn around, it is going to take a long-term

approach, and I think that time is an important factor as far as

incentives and the impacts over the long run.

Treasury historically has been against any tax incentive. I

worked for HUD in the early/mid-1980’s when we were discussing

legislation, and Treasury was always against enterprise zones to

begin with although I think that they are more on board now, at

least with this program.

I just see that there are major investment incentives needed. I

think that the empowerment zone program has a lot of good aspects to it. I just know that in Houston there is no way we could

convince some Magic Johnson or anybody else to build a business

or to renovate buildings in a low-income area without that.

Chairman JOHNSON of Connecticut. I think one of the things we

all need to think about a little bit more than we have in the policymaking process in the past is long-term/short-term impacts, and

with some of the incentives in the current law, they are, in a sense,

easily withdrawn. You know, expensing for what equipment you

buy during this period, they are easily withdrawn.

With capital gains, you set up different action for different people

over a very long period of time. That concerns me. That is what

happened with the notch issue in Social Security. There have been

other instances in which we have set up, in a sense, long-term varied treatment depending on sort of time and place of what you did.

One of the problems with enterprise zones is that it sets up inequities, and I think the Renaissance program, as interesting as it

is, also does raise, you know, ‘‘You across the street don’t have to

pay property taxes, and I on the other side do, and I send your kids

to school.’’

So I am very concerned about the capital gains issue because the

benefit is only long-term, and with the reduction in rates that we

just passed, and particularly the advantage that we give holdings

over 5 years, it seems to me that we are rewarding long-term capital gains much more generously than we have in the past.

Mr. VAN ALLEN. Madam Chairman, I was going to quickly comment that for large-scale investment by business, there has to be

an incentive to do so if you are in an enterprise zone, if you are

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someplace else. Actually, the tax rates in enterprise zones tend to

be higher than outlying communities, and, of course, there are

crime issues and much more things. So to even cut taxes in an enterprise zone area, in essence, levels the playing field somewhat.

Chairman JOHNSON of Connecticut. Actually, that is a very good

point, Dr. Van Allen. Tax rates in the cities do tend to be very

much higher, and enterprise zones would only marginally cut into

that.

Mr. Cowden.

Mr. COWDEN. We have been interested in a variation on the capital gain incentive, actually a rollover, which provides a more immediate benefit rather than a long-term benefit, in which you

would have to hold your assets in a particular company for a time.

The idea would be to give a company or give a taxpayer an incentive to get out of one investment and invest those funds in a zonebased business.

One way to avoid the problem that you have identified with

being in the zone or out of the zone situation, if the incentives were

targeted to or reserved for value-added or, you know, manufacturing-based businesses, you would have less problems of the—you

know, the mom-and-pop store across the street not getting an incentive while another one does. You would tend to have fewer of

those kinds of concerns.

At the same time, you get a better economic bang for your buck

if you do target incentives to the value-added sector.

Chairman JOHNSON of Connecticut. Dr. Van Allen, you did not

comment on the planning process. I thought your testimony was

very interesting, and has been echoed in the preceding panel, that

this is primarily about expanding businesses, about creating small

businesses, it is rarely about attracting very big businesses into an

enterprise zone. But you don’t comment on the power of the planning process. It is kind of an interesting distinction between your

testimony and others.

Do you think it hasn’t had an effect in Houston?

Mr. VAN ALLEN. Well, unfortunately, Houston is probably the

case that HUD wouldn’t want us to cite today. But the planning

process has not worked. People have not been able to get together

very well. There just has not been strong enough leadership from

the mayor’s office. And, in reality, the incentives are not that

strong with the enhanced community that Houston was designated.

It is just 3 million in social service, welfare grant, and minimal

other incentives.

So the engine in Houston, unfortunately, has not transferred into

the zone as much as we all would like.

CHAIRMAN JOHNSON of Connecticut. Thank you very much.

Does anyone have any comment on any aspect that I didn’t ask

about and you are burning to share with us?

Thank you very much for your testimony. It has been very helpful.

I am sorry, I didn’t realize my colleague, Congressman English,

had joined us.

Mr. ENGLISH. No, Madam Chairman. Actually, I enjoyed the testimony, and I don’t have any further questions that need delay

this. I appreciate the recognition.

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Chairman JOHNSON of Connecticut. I am very glad you can be

with us. Some of the time, this is the day when Members are traveling, so they are not able to be back as early as they would have

liked to. It is a pleasure to have you here.

Thank you.

[Whereupon, at 1:50 p.m., the hearing was adjourned.]

[A submission for the record follows:]

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