Economic Development: Formal Monitoring Approaches Needed to Help Ensure Compliance with Restrictions on Funding Employer Relocations
Published: 2007-09-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Congress imposed restrictions on some federal programs to prevent funding of business relocations. Congress expressed concerns about state and local governments using federal funds to attract jobs to one community at a loss of jobs to another and about compliance with relocation restrictions. This report (1) identifies large federal economic development programs that state and local governments can use as incentives, (2) identifies which programs contain statutory prohibitions on funding relocations, and (3) assesses whether federal agencies had established and implemented procedures to help ensure compliance with prohibitions. To address these objectives, GAO searched federal databases, reviewed relevant statutes and regulations, and conducted limited testing of agency procedures.
section_title: What GAO Found
paragraphs: GAO identified 17 large federal economic development programs that offer financial assistance and services that state and local governments can use as incentives to attract and retain jobs. While academic studies indicate that it is difficult to quantify the funds used as incentives, particularly given differing definitions of incentives, the use of federal funds for such purposes appears to be more limited than the use of state and local funds. Although academic studies question the overall role and significance of incentives in firms' decisions to (re)locate, researchers with whom GAO spoke noted that incentives could influence firms that already had narrowed their choices. Nine of the 17 large federal economic development programs restrict the use of program funds to support employer relocation. Seven are grant programs, and two are loan guarantee programs. In many grant programs, initial recipients of funds (states and local governments) provide funds to others (e.g., businesses) to facilitate economic development; in loan guarantee programs, third-party lenders approve businesses for eligibility to receive funds. All nine programs prohibit using federal funds to support a business relocation that causes unemployment, but the thresholds for job loss differ. For example, a single lost job would trigger the provision for six programs, but for the other three programs, the job loss threshold is higher. Federal agencies administering the nine programs with a nonrelocation provision used various procedures, including screening applicants and monitoring recipients, to help ensure compliance, but the extent to which these procedures specifically addressed nonrelocation provisions was limited. The two loan guarantee programs emphasized screening procedures to help ensure compliance, and both programs had written guidance and other mechanisms that specifically addressed nonrelocation provisions. Screening may be effective for helping to ensure compliance in loan guarantee programs because federal agencies know at the time of initial application which businesses are requesting funds and how they plan to use them. In contrast, because of the way grant programs are structured, at the time of initial application, grant applicants do not always know which businesses later will apply for or receive assistance. As a result, officials administering grant programs relied more extensively on monitoring than screening to help identify instances of potential noncompliance. Despite this greater reliance on monitoring, only one of the grant programs GAO reviewed had written monitoring guidance that specifically addressed business relocation restrictions. Without formal policies and procedures, federal agencies have limited assurance that grant recipients and subrecipients are complying with statutory requirements that restrict the use of program funds to support employer relocations.

section_title: Letter
paragraphs: State and local governments are estimated to spend billions of dollars  annually in business incentives—financial assistance, tax concessions, and  other benefits—in an effort to attract and retain jobs. State and local  governments can directly or indirectly use funds and program services  from a variety of federal, state, and local programs to induce individual  businesses to relocate, expand, or maintain their operations in a state or  community’s jurisdiction. In response to concerns about state and local  governments using federal funds to attract jobs to one U.S. community at a  loss of jobs to another community, Congress began to impose restrictions  in the 1950s on some federal programs to prevent funds from being used to  relocate businesses.
In 1997, we provided an overview of eight major federal programs that  states and localities used at that time for economic development  purposes. However, relatively little is known about how many other  federal economic development programs state and local governments  currently use as incentives to attract employers or about the extent to  which restrictions exist against using funds to support an employer’s  relocation. You noted that in recent years the controversy about the costs  and benefits of using limited government funds to recruit businesses has  been growing and expressed concerns about efforts to help ensure  compliance with restrictions on the use of federal funds. The objectives of  this report are to (1) identify large federal economic development  programs that state and local governments can use as incentives to  businesses for attracting new jobs into their jurisdictions, (2) identify  which of these programs contain statutory prohibitions on using program  funds to relocate businesses, and (3) assess whether federal agencies had  established and implemented procedures to help ensure compliance with  these provisions.
To identify large federal economic development programs that state and  local governments can use in incentive packages for businesses, we  searched the General Services Administration’s (GSA) online Catalog of  Federal Domestic Assistance (CFDA) for economic development  programs that CFDA reported as having budget obligations of at least $500  million. We also searched the Congressional Research Service’s (CRS)  2006 Tax Expenditure Compendium for economic development tax  expenditure programs with reported estimated tax revenue losses of $500  million or more for fiscal year 2006. We then narrowed the list according  to criteria that enabled us to identify the largest programs most likely to be  candidates as a business incentive. Further, we reviewed the Web sites for  each of the 50 states’ economic development agencies to identify federal  programs typically marketed as business incentives. To identify the  programs with nonrelocation provisions, we reviewed relevant statutes  and regulations and focused on those programs that we identified as the  largest based on our review of CFDA and the CRS Tax Expenditure  Compendium. To assess the completeness of our search results, we  interviewed representatives of selected federal agencies, economic  development trade associations, and policy groups. To assess the extent to  which federal agencies had procedures in place to help ensure compliance  with nonrelocation provisions, we obtained documents from federal  agencies that described the procedures for helping to ensure compliance  and then conducted limited testing of these procedures (typically a  nongeneralizable sample of 10 cases for each program) to determine their  implementation. We did not conduct an overall evaluation of the  programs, evaluate how well the programs served their intended purposes,  or evaluate how nonrelocation provisions affect the relative success of the  programs in achieving their intended purposes. We also did not address  the impact these programs had on development efforts by state and local  governments. We interviewed representatives of six federal agencies— Department of Labor (Labor), Department of Housing and Urban  Development (HUD), Department of Agriculture (USDA), Small Business  Administration (SBA), the Department of Commerce’s Economic  Development Administration (EDA), and the Department of the Treasury’s  Internal Revenue Service (IRS). In addition, we interviewed academics,  researchers, representatives of economic development trade groups, and  consultants that businesses hire to identify and select new business  locations (site-selection consultants). We conducted our work in  Washington, D.C., and San Francisco and Fresno, California, from October  2006 through August 2007 in accordance with generally accepted  government auditing standards. Appendix I provides a more detailed  description of our scope and methodology.
subsections: section_title: Background
paragraphs: In 2000, the Council of State Governments reported that more than 40  states offered tax and financial incentives to businesses for activities such  as relocating, expanding, buying equipment, or creating and maintaining  jobs. The use of incentives to attract and retain businesses has been an  issue of debate for many years. Proponents maintain that economic  development incentives are an effective means by which states and  communities can compete for jobs. Opponents contend that the dollars  spent to provide incentives would be better used to support activities  believed to have more impact on a community’s economic development,  such as improvements to infrastructure and investments in education to  develop a competitive labor pool.
While states and localities compete with one another to attract businesses,  some states and localities have attempted to curtail the use of economic  development funds to relocate jobs. According to two policy groups  promoting accountability in economic development, three cities—Austin,  Texas; Gary, Indiana; and Vacaville, California—and nine states— Alabama, Connecticut, Florida, Iowa, Maryland, New Mexico, New York,  Ohio, and Wisconsin—prohibit using city and state resources, respectively,  to relocate jobs within their boundaries. For example, both policy groups  state that the Gary, Indiana, city ordinance prohibits tax abatements for  the relocation of existing jobs from outside the corporate limits of the city.  One of the groups also said that in Puerto Rico, the governor may refuse  any business application for tax incentives if doing so would adversely  affect the business’ employees in any state in the United States. Regional  entities also have established formal and informal agreements to curtail  the competition for businesses and jobs within their boundaries. These  entities include the Metro Denver Economic Development Corporation;  the tri-county region comprising Broward, Miami-Dade and Palm Beach  counties in Florida; and Contra Costa and Alameda counties in California.
In 2006, the total number of unemployed workers was 6.8 million in the  fourth quarter, compared to 145.6 million employed. According to the  Bureau of Labor Statistics (BLS), employers reported that a total of  894,739 workers lost their jobs because of extended layoffs in 2006 that  resulted from a variety of economic factors, such as bankruptcy and  reorganizations. A BLS survey of employers found that 20,199 of these  losses (about 2 percent) occurred because of business relocations within  the United States, the majority across state lines. Another source—the  National Establishment Time Series (NETS)—uses proprietary Dun &  Bradstreet data on U.S. companies to track business relocations.  According to a representative of the company that maintains the NETS  data, more than 2.8 million businesses have relocated since 1990 and about  100,000 of these (or almost 4 percent) occurred across state lines.
A number of federal programs fund or support economic development  activities. In prior work, we identified activities that are directly related to  economic development—planning economic development activities;  constructing or renovating nonresidential buildings; establishing business  incubators; constructing industrial parks; constructing and repairing roads  and streets; and constructing water and sewer systems. These programs  typically are available to applicants that include individuals; local, state,  territorial, and tribal governments; and nonprofit organizations through  loans, loan guarantees, and project and formula grants. Appendix II  provides a description of the nine federal economic development  programs that we identified as having nonrelocation provisions, including  information about program funding and how the programs operate.
section_title: State and Local Governments Can Use a Variety of Large Federal Programs to Attract Businesses
paragraphs: We identified 17 large federal programs that state and local governments  can use to attract businesses. These programs offer assistance to  businesses in the form of loans and loan guarantees, grants, job-training  services, and tax benefits as incentives to businesses. Of the 17 economic  development programs, states appear to have marketed 14 as incentives  for businesses. However, according to academic experts who study  economic development incentives and site-selection consultants, the  amount of federal funds used as incentives is likely more limited than the  amount of state and local funds used as incentives. State and local  governments have varying discretion over the use of the federal funds, but  can leverage federal funds to free their own resources for incentives or for  other purposes that support businesses. Finally, academic studies on  incentives and site-selection consultants have questioned whether  incentives offered by state and local governments influence a business’  decision to relocate or expand operations.
subsections: section_title: State and Local Governments Can Use Various Types of Federal Programs as Business Incentives
paragraphs: We identified 17 large federal economic development programs that state  and local governments can use as incentives to attract and retain  businesses, based on a search of the CFDA database, Tax Expenditure  Compendium, and state economic development Web sites. As shown in  table 1, five agencies administer the 17 programs, which offer a range of  assistance or services (such as loans, grants, tax benefits, and training  programs) to businesses.
Out of the 17 programs we identified,  five were direct loan or loan guarantee programs: the SBA 7(a) and 504,  USDA B&I, Farm Ownership Loans, and Farm Operating Loans; four were tax incentive programs: IRS’s New Markets Tax Credit, its two  private activity bond programs, and HUD’s Renewal Communities; three were programs that support job training services: WIA Adult,  Dislocated Workers, and Youth programs; and  five were programs that offer more than one type of financial assistance  (grants, direct or guaranteed loans, or tax incentives): the two HUD CDBG  programs, HUD EZ, USDA EZ/EC, and USDA Community Facilities.
State and local governments also can use federal economic development  resources to supplement their existing resources to attract additional  investment and potentially use federal economic development funds to  free up money for incentives they otherwise would have spent on  economic development. For example, according to USDA officials, EZs  and ECs often leverage federal program resources to obtain other funds,  thereby attracting businesses. Similarly, businesses located in EZs and  ECs can claim various state and federal tax credits, including IRS’s Work  Opportunity Tax Credit, which provides tax credits to employers hiring  individuals residing in an EZ or EC. According to our January 2007 report  on the New Markets Tax Credit program, these credits can be packaged  with other types of incentives, such as EZ/EC incentives or state and local  tax abatements, to make the investments in economically distressed  communities more attractive to investors such as banks. We previously  have reported that more than one-fourth of New Markets Tax Credit  projects were located in federally designated EZs. State and local  governments also can use federal economic development funds to support  economic development activities, thereby freeing up state and local funds  for business incentives or other uses.
Based on our review of state economic development Web sites, states  appear to market all but 3 of the 17 programs (Community Facilities Loans  and Grants, Farm Ownership Loans, and Farm Operating Loans being the  exceptions). The programs that appear to be marketed more than others  are the CDBG programs, SBA’s 7(a) and 504 loan guarantees, and private  activity bonds (at least 19 states appear to advertise each of these as  incentives). Benefits from EZs, ECs, or Renewal Communities, and job- training programs funded with WIA funds were the next most marketed  incentives, with at least nine states offering them. This appears to be  somewhat consistent with what site-selection consultants told us about  the specific federal incentives they see in business incentive packages. The  consultants told us that they see CDBG loans funded with Entitlement and  State block grants, private activity bonds, EZ/EC benefits and,  increasingly, customized job-training funds in incentive packages. In  contrast to the results of our Web site reviews, the consultants did not cite  SBA loans as being among federal resources included in business  incentive packages.
section_title: Use of Federal Funds as Business Incentives Appears to Be More Limited Than Use of State and Local Funds
paragraphs: Although federal programs are marketed as business incentives, the  amount of federal funds used as incentives appears to be more limited  than the amount of state and local funds used. While the precise amount of  federal funds used as incentives is not available, the Congressional Budget  Office (CBO) estimated that the federal government spent $27.9 billion to  support commerce and business in addition to $2.2 billion on credit  programs in 1995. CBO also indicated that the federal government  provides the bulk of its support to businesses through tax provisions. CBO  estimated tax revenue losses of at least $32.2 billion for the provision of  the tax code that yielded the largest amount of direct support for  businesses—depreciation of capital assets in excess of the alternative  deprecation system—but did not provide total estimates of foregone  revenue associated with all tax provisions. It is not clear from the CBO  report whether and to what extent state and local governments also used  these programs and tax provisions as incentives. We reviewed academic  studies on economic development business incentives offered from 1995  to 2005 and interviewed the authors of these studies. The academic  literature on economic business incentives generally focuses on state and  local government incentives rather than federal incentives. Academic  studies estimate that state and local governments spent from $20 to $50  billion annually on business incentives. While the amount of federal funds  used as business incentives has not been measured to any great extent,  some researchers with whom we spoke said that the amount of federal  funds used as business incentives is likely limited compared to the amount  of state and local funds used as incentives.
One limitation in developing estimates of federal, state, and local funds  spent on incentives is defining what constitutes a business incentive. For  example, a state or local government might offer indirect benefits, such as  infrastructure improvements, to attract or retain businesses, but these  might not be counted in estimates as business incentives. Moreover,  although the amount of federal economic development funds available as  incentives appears to be limited, money can be fungible, or freely  interchangeable, at the state and local level. Thus, even though the amount  of federal funds used as incentives might be limited, state and local  governments could leverage those funds to free up their own resources for  incentives or for other purposes that support businesses.
Furthermore, state and local governments have less discretion over the  use of federal resources than they do over their own, but the degree of  discretion varies with the program. For at least four of the programs  (SBA’s 7(a) and 504 loan programs, USDA’s B&I loan program, and IRS’s  New Markets Tax Credit), state and local governments have no direct role  in funding decisions. For these programs, third-party lenders, development  corporations, or the federal government decide which businesses receive  funds. In contrast, other programs provide states with more discretion  over how they can use funds. For example, under WIA, states and local  areas can use the discretionary and statutory funding from Labor to  develop job training and employer service programs, including customized  job training, which we previously have reported can be an important  factor in a company’s decision to locate in a particular area.
Finally, the academic literature we reviewed questioned the importance of  incentives in location or relocation decisions. These studies, as well as  published articles in site selection industry magazines, indicate that other  considerations might outweigh economic development incentives when  companies decide where to locate. The studies explained that the critical  factors in deciding were more likely to be the size and education of the  labor force; local infrastructure such as telecommunication lines;  transportation options, such as access to ports, roads, and rail; and access  to consumer markets. However, the studies and consultants acknowledged  that the incentives state and local governments offered could influence a  business’ decision when the business already had narrowed its choice to  three or four locations.
section_title: Nine Large Federal Economic Development Programs Have Nonrelocation Provisions, but Requirements Vary
paragraphs: We determined that 9 of the 17 large federal economic development  programs that state and local governments can use as business incentives  contain statutory prohibitions against using funds to relocate businesses if  the relocation would cause unemployment. Seven of the federal  economic development programs with nonrelocation provisions were  grant programs, and the remaining two were loan guarantee programs.  The number of job losses and other requirements needed to trigger the  nonrelocation provision varied by program. Nonrelocation provisions for  the nine programs were enacted over a 40-year period. Recently, one  program has sought but not obtained congressional removal of its  nonrelocation provision.
subsections: section_title: Nine Large Federal Economic Development Programs Contain Statutory Nonrelocation Provisions
paragraphs: Based on our review of laws and regulations for the 17 large federal  economic development programs that state and local governments can use  as business incentives, we determined that nine contain statutory  prohibitions against using program funds to relocate businesses. (See  app. II for a more detailed description of each of these nine programs.)  They are the two HUD CDBG programs (Entitlement and State programs);  the WIA Adult, Dislocated Workers, and Youth programs; USDA and  HUD’s respective EZ/EC programs (for designated rural and urban  communities, respectively); USDA’s B&I program; and SBA’s 504 program.  SBA voluntarily applies a nonrelocation provision to its 7(a) program.
All nine programs that we identified with statutory restrictions on  employer relocations use job loss in a relocating company’s original  location as the primary criterion for applying a nonrelocation provision,  but the job loss threshold varies by program. As shown in table 2, the  statutory language for three programs—HUD and USDA’s EZ/EC program  and USDA’s B&I program—do not specify a job loss threshold, but these  agencies interpret the job loss threshold as one job lost. The three WIA  programs specify a job loss threshold of one job lost. The remaining  three—HUD’s CDBG Entitlement and State programs and SBA’s 504  program—have higher job loss thresholds. In addition to job loss, these  three programs specify other conditions for applying a nonrelocation  provision, such as requiring that the relocations occur across  geographically defined areas.
HUD regulations for the CDBG Entitlement and State programs make  business relocations ineligible for funding if they involve certain job  losses. Any relocation involving the loss of 500 or more jobs is prohibited.  In contrast, relocations involving the loss of 25 or fewer jobs are exempt  from the nonrelocation provision. For relocations involving between 25  and 500 jobs, the nonrelocation provision applies if the number of jobs lost  equals or exceeds one-tenth of one percent of the number of employed  persons in the labor market experiencing the loss. The CDBG program’s  statute does not specify a job loss threshold; it only requires that the  agency prohibit funding for business relocations that are likely to result in  a significant loss of employment. According to a HUD official, HUD chose  to exempt any relocation involving 25 or fewer jobs because losses of this  magnitude likely would not significantly affect a labor market of any size.  By exempting these smaller businesses from the nonrelocation provision,  this official said that the CDBG program retains some flexibility for  entitlement and nonentitlement communities to provide funds to  businesses to promote job growth. This official further noted that HUD  also determined that relocations involving 500 or more jobs would be  significant for labor markets of any size.
SBA’s 504 program, which guarantees the portion of a business loan that  nonprofit certified development companies make to businesses, features  potentially higher job loss thresholds. For example, SBA regulations  would require that applications for loans be denied if the relocation would  result in the business’s reducing its workforce by at least one-third, or  serious unemployment would result in the original business location or  any area of the country. SBA regulations allow for the waiver of these job  loss limits if the relocations would be key to the economic well-being of  the business or if the benefits to the applicant and the receiving  community would outweigh the negative impact to the community from  which the applicant would move.
As noted previously, three of the programs specify conditions in addition  to job loss for applying the nonrelocation provision, such as relocations  occurring across defined geographic areas and funding thresholds. For  example, HUD’s CDBG regulations for both the Entitlement and State  programs prohibit funding for a business that relocates to a different labor  market area. USDA’s B&I program, through which USDA guarantees up  to 80 percent of a loan that an approved third-party lender makes to  businesses, statutorily prohibits program funds from supporting business  relocations in cases in which USDA assistance exceeds $1 million. Our  review of congressional reports indicates that this minimum funding  threshold is intended to expedite the processing of small business  applications, based on the reasoning that the relocation of small  businesses would pose no threat to the labor force or other businesses in  the original location.
Congressional approval of the nonrelocation provisions for the nine large  programs was spread over a 40-year period (1958 to 1998). Table 3 shows  the date on which the nine programs became subject to nonrelocation  provisions.
One of the federal agencies has sought but not obtained removal of a  nonrelocation provision from its program. USDA officials said that since  2001 the agency has sought congressional support for the removal of the  nonrelocation provision for the B&I program, citing administrative burden  and other problems involved with ensuring compliance. A USDA official  explained that while Labor has the statutory responsibility to analyze labor  market information related to B&I applications—to help ensure that  funding will not result in the transfer of any employment or business  activity—Labor does not receive separate funding to support analysis of  this information. According to USDA, the agency has sent between 6 and  18 B&I applications to Labor for review in the past few years. Labor  confirmed that it does not receive separate funding to support its analysis,  but said the agency reviews all of the applications Labor provides.
section_title: Extent to Which Federal Agencies Had Established and Implemented Procedures to Help Ensure Compliance with Nonrelocation Provisions Was Limited
paragraphs: Federal agencies administering the nine programs with nonrelocation  provisions used various procedures to help ensure that program recipients  complied with overall program goals and requirements, but the extent to  which these procedures specifically addressed nonrelocation provisions  was limited. The Guide to Opportunities for Improving Grant  Accountability states that organizations awarding grants need effective  internal control systems to provide adequate assurance that funds are  properly used and achieve intended results. The two loan guarantee  programs—USDA’s B&I and SBA’s 504 programs—relied on screening  mechanisms (written review guidance and eligibility checklists or third- party verification of data) to help ensure compliance with nonrelocation  provisions. In contrast, officials who administer grant programs we  reviewed noted inherent limitations in using screening mechanisms for  grant programs, given that program recipients (states and local  governments) do not always know at the time of application which  businesses later will apply for and obtain assistance through the program.  Because of the inherent limitations of screening, the agencies  administering grant programs primarily relied on monitoring recipients  and subrecipients to help identify instances of potential noncompliance.  However, only one of the grant programs we reviewed had developed  monitoring guidance specifically tailored to the nonrelocation provision.  Without structured guidance and procedures in place, agencies have  limited assurance that recipients and subrecipients are complying with  statutory and regulatory requirements and spending funds on allowable  activities.
subsections: section_title: Agencies Had Eligibility Screening Procedures, but Focus on Nonrelocation Provision Was Limited
paragraphs: As stated in the Guide to Opportunities for Improving Grant  Accountability, organizations that award and receive grants need effective  internal control systems to help ensure that grants are awarded to eligible  entities for intended purposes and in accordance with applicable laws and  regulations. As shown in table 4, each of the four federal agencies we  reviewed had screening procedures covering applicants’ eligibility to  receive funds. The agencies used at least one of the following mechanisms:  written application or plan review guidance, eligibility checklists, self- certification forms, third-party verification of data, or business statements  of compliance. However, only four of the nine programs—including both  loan guarantee programs—used screening mechanisms that specifically  addressed a relevant nonrelocation provision.
All four agencies had procedures for reviewing applications or plans to  help ensure that applicants were eligible to receive funds under the  program.
The two loan guarantee programs—USDA for its B&I program and SBA for  its 504 program—had formal written guidance that specifically addressed  the screening of applicants for compliance with the nonrelocation  provision. USDA’s formal written guidance listed the nonrelocation  provision as one of the ineligible purposes of a B&I loan guarantee. SBA  also incorporated specific references to its nonrelocation provision into its  standard operating procedures, which are addressed to SBA personnel and  lending partners who review and approve 504 loans. SBA also required its  504 lending partners to complete an eligibility checklist for each loan  guarantee applicant. One of the items on the eligibility checklist seeks to  determine whether 504 loan proceeds will be used to “relocate any  operations of a small business, which will cause a net reduction of one- third or more in the workforce of the relocating small business or a  substantial increase in unemployment in any area of the country.” In  reviewing the supporting documentation for 10 approved loans, we found  that certified development companies were using the eligibility checklist  SBA had developed to screen 504 loan applicants for these loans.
Each of the seven grant programs had formal written guidance covering  the review of required plans but with the exception of USDA’s EZ/EC  program, the guidance did not specifically address the nonrelocation  provisions for each program. Under the CDBG programs, recipients  (entitlement communities and states) must submit an action plan to HUD  each year that broadly identifies the activities that they will undertake to  meet the objectives of previously submitted consolidated plans. Labor  requires states to submit strategic plans for WIA describing how a state  intends to use WIA funds. Both agencies use written checklists as  guidance to determine whether the submitted plans are complete and both  agencies’ guidance includes an item to determine whether applicants have  assured their compliance with applicable laws and regulations. HUD  officials noted that its written guidance on review of action plans does not  require analysis of the nonrelocation provision, in part because CDBG  recipients generally do not know which businesses will apply for CDBG  funding at the time the plans are developed and submitted to HUD. HUD  officials explained that most CDBG recipients engaged in economic  development activities have an “open window” approach, in that  assistance is available to businesses on an “as needed” basis during the  program year.
For the EZ/EC programs, USDA had formal written guidance for reviewing  required application plans that referred to the program’s nonrelocation  provision, while HUD’s written guidance did not specifically address the  provision. Under the EZ/EC program, communities seeking EZ or EC  designation submit (1) a strategic plan outlining the community’s vision  for revitalizing its distressed area; (2) a tax incentive utilization plan  specifying how the community plans to use the tax benefits available  under the program; and (3) an implementation plan providing detailed  information on the activities and projects the community is undertaking to  implement its strategic plan. HUD officials said that while the agency does  not currently have review guidance specific to the nonrelocation  provision, the agency has been revising a review manual to incorporate  language specific to the provision and has been taking other steps, such as  communicating directly with EZs regarding compliance and providing  training to staff, to raise awareness of the provision and the need to  comply with it. USDA officials said that EZ/EC review staff were told to  reject any application for EZ/EC designation in which an applicant’s  strategic plan included evidence that the community intended to lure  businesses from other communities. The officials said that review staff  eliminated several applications for potential program designation because  intent to relocate jobs was evident in the submitted plans. However, we  were not able to verify this statement because USDA officials said that the  strategic plans eliminated from contention were discarded and are no  longer available for review.
Some officials, particularly those who administer grant programs, noted  the limitations of reviewing applications and plans to identify instances of  potential noncompliance with a nonrelocation provision. As noted above,  HUD CDBG officials said that action plans for its Entitlement program  were unlikely to identify specific businesses receiving funds because the  communities do not always know which businesses would apply for  assistance when they submitted the action plans. Similarly, the officials  noted that action plans for the State CDBG program do not contain a list  of proposed activities, but rather a description of the methods used to  distribute funds to local governments. HUD officials noted that under the  CDBG State program, individual states implement a method of distributing  funds that may or may not include economic development activities and  that in most cases the states evaluate applications from local governments  to determine which activities to fund.
subsections: section_title: Requirements for Self- Certification of Compliance
paragraphs: As part of the application review process, USDA’s EZ/EC and B&I  programs require applicants to sign self-certification forms that included a  specific reference to the nonrelocation provision for each program. For  example, USDA’s application for the EZ/EC program contained a form in  which an applicant self-certifies that “no action will be taken to relocate  any business establishment to the nominated area.” According to USDA  EZ/EC officials, this required certification sends a clear message to the  EZ/EC community that relocation is not permitted under the program.  Similarly, USDA’s B&I program requires loan applicants applying for loans  of more than $1 million that will increase employment by more than 50  employees to self-certify that “it is not the intention of the applicant or any  related company to relocate any present operation as a result of the  proposed project.”
Other agencies, such as HUD for both its CDBG and EZ programs and  Labor for its WIA programs, require more general statements of  compliance. For example, HUD’s application for Round II of the EZ  program contained a form in which an applicant self-certified that “the  nominating entities shall comply with state, local, and federal  requirements, and have agreed in writing to carry out the Strategic Plan if  designated.” Similarly, HUD’s CDBG program requires applicants to self- certify their compliance with “applicable laws,” which HUD officials said  includes the Housing and Community Development Act of 1974, as  amended, which contains the nonrelocation provision. According to the  officials, HUD saw no need or statutory basis to add a special certification  for the nonrelocation provision, particularly since not all states or  entitlement communities use CDBG funding for economic development  purposes. Labor’s statement of compliance, included in WIA state strategic  plans, requires the governor of each state to assure that WIA funds “will be  spent in accordance with the Workforce Investment Act and the Wagner- Peyser Act and their regulations, written Department of Labor guidance  implementing these laws, and all other applicable federal and state laws  and regulations.” Labor officials noted that this general statement of  compliance covers compliance with the nonrelocation provision. During  our review of 30 USDA EZ/EC, HUD EZ, and Labor WIA approved grant  applications (10 applications for each program), we found that recipients  had completed the required self-certifications for each of the applications  we reviewed.
section_title: Pre-Approval Third-Party Verification
paragraphs: As part of the pre-approval process for the B&I program, USDA turns over  information that certain loan applicants provide to Labor for independent,  third-party verification. For guaranteed loans in excess of $1 million that  will increase employment by more than 50 jobs, USDA will send an  applicant’s certification of nonrelocation and the market and capacity  information form to Labor for clearance. In-turn, Labor sends the form to  state-level workforce agencies, where the business’ competitors are  located, for analysis and direct solicitation of the competitor’s comments.  According to USDA officials, Labor must complete this third-party  verification before USDA can approve a B&I loan guarantee request. Our  review of loan documentation for 10 approved B&I loan applications  indicated that both USDA and Labor carried out these procedures for the  applications we reviewed. As discussed earlier in this report, USDA  officials have been asking Congress to remove the nonrelocation provision  from the B&I program, citing an administrative burden and costs incurred  in helping to ensure compliance.
section_title: Requirements for Written Statements of Compliance from Businesses
paragraphs: Regulations for HUD’s Entitlement and State CDBG programs and Labor’s  three WIA programs require grant recipients (such as a state or local  government) to obtain a signed written statement of compliance with the  nonrelocation provision from businesses before providing direct  assistance to them. For example, under the CDBG programs, there is a  two-step process. First, businesses receiving CDBG assistance must  submit a written statement to the recipient (entitlement community or  state), subrecipient, community-based development organization, or  nonprofit providing the assistance whether the activity will result in the  relocation of jobs from one labor market area to another. Second, if the  assistance will not result in the relocation of jobs covered by the statutory  prohibition, the business must provide a certification that it has no plans  to relocate jobs (in a manner that would violate the nonrelocation  provision). However, these statements are not included in a recipient’s  application for funding (action plan), and thus HUD does not review them  during the action plan review process. HUD officials noted that it would  not be possible for an entitlement community to provide these statements  to HUD with an action plan because, as previously noted, most entitlement  communities do not know at that time which businesses will apply for  CDBG assistance. Similar to HUD, Labor’s regulations for WIA require that  local workforce investment boards conduct a pre-award review of  businesses seeking job training funds, which includes obtaining a written  certification from the business indicating whether WIA assistance is being  sought in connection with past or impending job losses at other facilities.
Our review of 10 approved WIA grants indicated that businesses had  completed the required statements of compliance for each of those grants.  With respect to HUD’s CDBG program, we did find one case in which a  HUD CDBG entitlement community recipient we contacted told us that its  subrecipient (a nonprofit development corporation) was not obtaining the  required written statements of compliance. An official from the  entitlement community said that neither the entitlement community nor  the subrecipient had developed formal procedures to help ensure  compliance with the regulatory requirement. In addition, neither HUD nor  Labor require that recipients provide copies of completed written  statements to HUD or Labor, although a HUD official noted that the  written statements would be available to on-site reviewers during  monitoring visits. HUD officials also said that HUD is revising a monitoring  handbook to include a question addressing the business’ written  statements of compliance. We discuss agency monitoring procedures and  guidance in greater detail in the next section.
section_title: While Monitoring Is a Key Control for Helping to Ensure Compliance with Nonrelocation Provisions, Only One Grant Program Had Written Guidance Specific to the Provision
paragraphs: The Guide to Opportunities for Improving Grant Accountability states  that once grants are awarded, agencies need to ensure that grant funds are  used for intended purposes and in accordance with applicable laws and  regulations. The guide also states that it is critical to identify, prioritize,  and manage potential at-risk subrecipients to ensure that grant goals are  reached and resources are properly used. Due to inherent limitations in  using the screening process to help ensure compliance with nonrelocation  provisions, other procedures, such as monitoring activities, become key  controls. Having established, written procedures in place helps to ensure  that agencies achieve their monitoring objectives and that staff are  consistently implementing monitoring procedures.
Officials at some of the agencies we reviewed told us that they rely on  complaints as a mechanism to monitor compliance with the employer  nonrelocation provision. A HUD official said that an employer relocation  that resulted in significant job loss and involved the use of federal funds  likely would result in the affected community or state raising a complaint  to the federal agency or to their congressional representatives. HUD,  Labor, SBA, and USDA officials all reported receiving few if any of these  complaints, in some cases over the course of many years. For this reason,  some officials did not consider the risk of noncompliance to pose a  significant risk to the programs. However, this complaint-based approach  is reactive and does not necessarily provide reasonable assurance of  compliance. Standards for Internal Control in the Federal Government  states that an agency’s monitoring activities should be performed  continually and be ingrained in agency operations. As shown in table 5,  the four agencies administering programs with nonrelocation provisions  used various other mechanisms, including on-site review, to monitor fund  recipients. All of the agencies had formal written guidance covering the  monitoring of program participants. However, only one program—HUD  for its EZ program—had a monitoring procedure that specifically  addressed the nonrelocation provision.
To effectively leverage limited staff resources, HUD and Labor told us that  their respective agencies conduct on-site monitoring reviews in  accordance with risk-based procedures intended to focus monitoring  resources on areas requiring the most attention. For example, HUD’s  procedures for the EZ program specify factors for reviewers to consider  when determining the scope of a review. These factors include funding  amount, outstanding complaints related to noncompliance with a legal  requirement, and unresolved monitoring or assessment issues. Similarly,  for the CDBG program, reviewers consider factors such as the complexity  of a state or entitlement community’s activities and use of subrecipients to  carry out funded activities. According to HUD CDBG officials, on-site  monitoring is the most effective way to identify potential violations of the  nonrelocation provision for the CDBG program. Labor also conducts on- site monitoring of states and a sample of local workforce investment  agencies. As part of Labor’s risk-based procedures, reviewers may  consider factors such as the number of federal grants a state administers,  a history of disallowed costs or administrative findings in previous  reviews, and percentage of grant funds subcontracted.
USDA’s monitoring for the EZ/EC program involves two staff members— one in a state office and the other in the national office—reviewing  requests for drawdown that EZ/ECs make several times during the year.  Drawdown requests include a specification of how an EZ or EC will use its  funds. Prior to disbursing requested funds, USDA staff members review  the request to ensure that the funds will be used to carry out the  community’s strategic plan (which includes a certification form that  specifically refers to the nonrelocation provision and which USDA reviews  at the time of initial application). In addition to reviewing drawdown  requests, USDA staff in both the state and national offices review  mandatory annual reports describing a community’s progress in  implementing its strategic plan. According to USDA officials, the review of  annual reports also includes a review of any updates to the strategic plan  to ensure that no relocation support has crept into the plan since the initial  review. A USDA official added that USDA staff have made on-site  monitoring visits to all of the rural EZ/ECs.
Officials of SBA’s 504 and USDA’s B&I program told us that they do not  monitor for compliance with the nonrelocation provision because, unlike  federal grant programs, in loan guarantee programs, a federal agency can  determine which specific businesses will receive assistance and for what  purpose (relocation, equipment purchase, etc.) before an agency  guarantees a loan. SBA officials explained that SBA and certified  development companies (CDC) approve a project for 504 financing before  construction begins, but SBA does not disburse loan funds or issue a  debenture guarantee until after the project is completed. According to  SBA officials, CDC staff review the completed project before closing on a  loan, at which time loan funds are disbursed and a debenture guarantee  issued. Similarly, USDA officials told us that their field staff verify uses for  loan proceeds when they review a loan closing package, specifically the  settlement statement, before guaranteeing a loan. USDA officials  explained that once a loan is fully disbursed, subsequent monitoring of the  use of loan proceeds for compliance focuses on other issues, such as the  number of jobs created, rather than compliance with the nonrelocation  provision, because the loan proceeds already have been used for their  intended purposes. The emphasis on screening rather monitoring seemed  appropriate for the two loan guarantee programs since the federal  agencies know which specific businesses are requesting funds and the  purposes for which the funds will be used.
HUD’s EZ program was the only program we reviewed that had written  monitoring guidance specific to the nonrelocation provision at the time of  our review. As of July 2007, HUD had used this monitoring guidance in  four on-site reviews. HUD’s guide for the review of Round II EZ strategic  plan compliance calls for review staff to determine whether there is “any  evidence to indicate that the EZ is complying with the prohibition against  assisting a business to relocate.” The guide did not provide specific  procedures or steps that staff should follow to make the assessment of  compliance, but rather referred to the program’s implementing regulation  for the nonrelocation provision. HUD officials said that under current  procedures, on-site reviewers rely on receiving complaints of  noncompliance or on information obtained by asking open-ended  questions about compliance to determine whether communities are  complying. For the four reviews in which HUD had used the guidance at  the time of our review, the narrative supporting the reviewer’s assessment  of compliance indicated that approved implementation plans, discussions  with EZ staff regarding standard operating procedures, and a review of  loan file documents were among the bases on which HUD reviewers  determined that EZs were complying with the program’s nonrelocation  provision. HUD officials said that for additional on-site reviews planned  for fiscal year 2007, the agency is considering reviewing implementation  plans to specifically check for compliance with the nonrelocation  provision. HUD officials said that they would focus on plans involving  sites with potential for commercial development to determine whether  HUD-approved activities or projects involving marketing or promotional  efforts encouraged relocations to an EZ.
HUD and Labor officials told us that their agencies were developing  monitoring guidance specific to the nonrelocation provision for the CDBG  and WIA programs, respectively, but that such guidance is in draft form.  As of July 2007, HUD and Labor had not finalized this guidance or used it  in a monitoring review. HUD officials said that HUD expects to finalize the  monitoring guidance tailored to the nonrelocation provision by December  31, 2007. The officials explained that HUD was developing monitoring  guidance for inclusion in a forthcoming revision to a monitoring handbook  that HUD uses for all of its major Office of Community Planning and  Development grant programs, including the CDBG and EZ programs. HUD  undertook the revisions because the current version of the handbook was  issued prior to the promulgation of the CDBG program’s nonrelocation  provision in December 2005. HUD CDBG officials stated that including a  question on compliance with the nonrelocation provision is intended to  ensure that compliance reviews by HUD staff in this area would be  consistent. Labor officials explained that their monitoring handbook for  employment and training grant programs, including WIA programs, is  generic and limited to examining core activities found in all of Labor’s  employment and training programs. In contrast, Labor’s formula grant  supplement to the monitoring handbook, currently under development and  in draft form, will provide a more detailed examination of statutes, rules,  and regulations specific to the formula-based programs once finalized.  Labor officials said that the formula grant supplement has been tested in  field offices and will address the nonrelocation provision. The officials  said that they expect to publish the formula grant supplement in the latter  half of calendar year 2007.
section_title: Conclusions
paragraphs: State and local governments use incentives, including funds from federal  economic development programs, to attract business investment and  create jobs in their communities. Although it is difficult to determine the  extent to which state and local governments use federal funds as business  incentives, 9 of 17 large federal economic development programs contain  statutory restrictions against using program funds to relocate jobs if the  use of such funds creates unemployment. Thus, for these nine federal  programs, the agencies charged with their administration are responsible  for helping to ensure that program funds are used for intended purposes  and in accordance with applicable laws and regulations, including  compliance with nonrelocation provisions.
Each of the four agencies that administer the programs with nonrelocation  provisions used screening and monitoring mechanisms to help ensure that  fund recipients were eligible to participate in the programs, meeting  program goals, and complying with legal requirements. The two agencies  administering the loan guarantee programs we reviewed—SBA for the 504  program and USDA for the B&I program—relied primarily upon screening  mechanisms to help ensure that applicants would not use loan proceeds to  relocate businesses and jobs. For these two programs, screening  mechanisms may be sufficient since the agencies can determine which  specific businesses will receive assistance and how the loan proceeds will  be used. In such cases, a screening process can determine if loan funds  will be used to support a business relocation. In contrast, officials from the  other programs we reviewed, particularly those that administer grant  programs, noted limitations in using screening mechanisms for such  programs. For example, with grant programs, fund recipients (e.g., states  and local communities) do not always know which businesses will apply  for or receive funding at the time the recipient submits an initial plan or  application for funding.
Acknowledging the limitations of screening for helping to ensure  compliance with nonrelocation provisions, agency officials regarded on- site monitoring as the most effective way to detect an instance of potential  noncompliance in their grant programs. However, officials also noted that  they targeted their limited monitoring resources on recipients that posed  the greatest risk. Furthermore, they maintained that noncompliance with  nonrelocation provisions did not present a significant risk to the programs  they administered because they received few or no complaints over the  years and regarded complaints as a barometer for undertaking monitoring  activities.
We recognize that there are costs associated with monitoring program  recipients for compliance with nonrelocation provisions. Nevertheless, a  reactive approach in which agencies assume there are no problems  because outside parties do not report them, by itself, is an insufficient  means to help ensure that problems do not exist and federal internal  control standards state that monitoring should be performed continually  and be ingrained in agency operations. Further, USDA EZ/EC program  officials said that they have rejected applications for zone designation  because intent to relocate jobs was evident in the applications, providing  evidence that applicants do sometimes seek to use program funds to lure  businesses away from one community to another.
Given the relatively large size of some federal grant programs and their  complicated funding structure (including the number of recipients and  subrecipients involved in the process), it is important that agencies  develop and use cost-effective approaches to identify, prioritize, and  manage potential at-risk recipients. Specific monitoring guidance and  procedures would provide staff impetus and direction in their monitoring  roles and help ensure consistent monitoring efforts across locations.  Moreover, written guidance would provide recipients and subrecipients  with specific information on the types of business support activities  allowed under each program. For example, we learned that there are HUD  CDBG subrecipients who may be unaware of the requirement that  businesses receiving assistance under the program must provide written  statements of compliance with the nonrelocation provision. Absent such  guidance and related controls, agencies have limited assurance that  recipients and subrecipients—which include state and local governments  as well as individual business—are meeting statutory and regulatory  responsibilities that restrict the use of program funds to support employer  relocations.
section_title: Recommendations for Executive Action
paragraphs: To provide greater assurance that grant recipients and subrecipients of  federal economic development programs are complying with statutory  restrictions against the use of program funds to support employer  relocations, we recommend that the Secretaries of Labor (for the WIA  Adult, Dislocated Workers, and Youth programs); Agriculture (for the  EZ/EC program); and Housing and Urban Development (for the CDBG  Entitlement and State programs) direct their respective offices to develop  (or finalize the development of) and implement formal and structured  approaches for federal reviewers to follow when monitoring for  compliance with nonrelocation provisions.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Secretaries of the Departments of  Labor, Agriculture, Housing and Urban Development, and Commerce; the  Acting Commissioner of the Internal Revenue Service; and the  Administrator of the Small Business Administration. We received written  comments from Labor that are summarized below and are reprinted in  appendix III. USDA’s Acting Assistant Deputy Administrator for  Cooperative Programs provided oral comments on August 8, 2007, which  are summarized below.
In its written comments, Labor stated that the department concurred with  our recommendation that it develop and implement formal and structured  approaches for federal reviewers to follow when monitoring compliance  with nonrelocation provisions. In addition, Labor stated that it agreed that  such guidance and approaches will assist states in monitoring local  subrecipient compliance with these provisions. Labor stated that to  support efforts to monitor and ensure compliance with nonrelocation  provisions, it is implementing two complementary strategies. First, Labor  is developing a formal policy guidance letter that clarifies allowable and  unallowable uses of WIA funds for economic-development-related  activities and that will specifically address prohibitions related to the  nonrelocation provision. Second, Labor said that its Core Monitoring  Guide and draft Formula Grant Supplement to the guide provide federal  reviewers with tools for monitoring compliance with the nonrelocation  provision. Labor said the draft Formula Grant Supplement includes  indicators of compliance along with each governor’s responsibility to  determine which costs are allowable or unallowable under WIA, including  prohibitions against using WIA Title I funds to encourage business  relocation and related restrictions. Labor stated that its regional office  reviewers have extensively tested the draft Formula Grant Supplement  since the fall of 2006, and the supplement will enter the formal clearance  process shortly. Labor said that when completed in final form, which the  department expects to occur by December 31, 2007, the supplement will  provide federal reviewers, as well as state review staff, with a valuable  resource for assessing recipients’ compliance with the nonrelocation  provision under the WIA Adult, Dislocated Worker, and Youth programs.
In oral comments, USDA’s Acting Assistant Deputy Administrator for  Cooperative Programs stated that USDA concurred with the report’s  recommendation. The Acting Assistant Deputy Administrator also  provided us with documentation showing that USDA is taking initial steps  to implement the recommendation.
We also received technical comments from Labor, USDA, HUD, IRS, and  SBA that were incorporated into the report as appropriate. Commerce did  not provide comments on the draft report.
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If you or your staff have any questions concerning this report, please  contact me at (202) 512-8678 or shearw@gao.gov. Contact points for our  Office of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff who made key contributions to this  report are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To identify large federal economic development programs, we conducted  a search of the Catalog of Federal Domestic Assistance (CFDA) database  (using key word searches of “jobs” and “economic development”) and  focused on those programs that can be used to provide assistance to  businesses and that CFDA reported as having obligations of at least $500  million for fiscal year 2006. In a prior report, we found inconsistencies in  how agencies reported budget data for CFDA, resulting in potential over- reporting of data. However, for purposes of this report, because we are  using CFDA to identify large federal economic development programs, the  risk is acceptably low of CFDA not covering large programs we would  have otherwise selected. We, therefore, consider CFDA to be a sufficiently  reliable source of data for use in this report. Because CFDA does not  include tax expenditure programs, we searched the Congressional  Research Service’s (CRS) Tax Expenditure Compendium (using key word  searches of “community development” and “private activity bonds”) for  economic development tax expenditure programs that support businesses  for which CRS reported as having estimated tax revenue losses of at least  $500 million in fiscal year 2006. We also confirmed these budget figures  with agency officials. We excluded programs that are only available under  specific circumstances or are not available nationwide, such as regional  economic development programs or those that are only available under  disaster assistance designations.
In addition to these database searches, we reviewed each of the 50 states’  economic development Web sites to identify the federal programs that  states marketed as incentives or financial assistance for businesses. While  this search did not provide us with a comprehensive list of federal  programs used as business incentives, it provided us with additional  information on how the programs we identified through CFDA and the  CRS compendium might be used as incentives.
To identify large federal programs currently or formerly subject to  restrictions against use for relocating jobs among U.S. communities, we  reviewed laws and regulations. Our review included the use of electronic  databases. We identified relevant nonrelocation provisions for four federal  agencies—the Departments of Housing and Urban Development (HUD),  Agriculture (USDA), Labor, and the Small Business Administration  (SBA)—and a former provision for one federal agency—the Department of  Commerce’s Economic Development Administration (EDA). To assess the  completeness of our search results, we interviewed representatives of  select federal agencies as well as representatives of economic  development trade associations and policy groups. To identify  congressional purpose in adopting or rescinding restrictions, we reviewed  implementing laws and their legislative histories, including congressional  reports and the Congressional Record.
To assess federal agency procedures to help ensure compliance with  nonrelocation provisions, we requested, obtained, and analyzed the  following information from HUD, Labor, USDA, and SBA     policies and procedures designed to ensure compliance with    data on the number of complaints received regarding the provisions;    data on the number of violations identified; and  information about any enforcement actions taken, as well as the status of  those actions.
We also conducted a limited test of agency procedures by reviewing a  small and random, but not generalizable sample of case file documentation  for each of the programs (generally 10 files for each program). These  documents included the mechanisms agencies have developed to screen  for compliance with nonrelocation provisions, including    an eligibility checklist (SBA’s 504 program);    self-certification forms (USDA and HUD’s Empowerment Zone/Enterprise    business statements of compliance as a condition of receiving assistance  (Labor’s Adult, Dislocated Workers, and Youth programs under the  Workforce Investment Act); and third-party verification of data that applicants self report (USDA’s  Business and Industry Guaranteed Loan program).
Further, we reviewed monitoring guidance and exhibits for each program  having such guidance; completed monitoring reports; publications on  effective internal control and grant management practices; and recently  issued reports we completed on the programs. To supplement our  document reviews and testing procedures, we conducted interviews with  officials at each agency.
The scope of our work in this area was focused mainly on whether the  agencies had screening and monitoring procedures. We did not test the  effectiveness of the implementation of these procedures. Furthermore, we  did not conduct an overall evaluation of the programs, evaluate how well  the programs served their intended purposes, or evaluate how  nonrelocation provisions affect the relative success of the programs in  achieving their intended purposes. We also did not address the impact  these programs had on development efforts by state and local  governments.
We conducted our work from October 2006 through August 2007 in  Washington, D.C., and San Francisco and Fresno, California, in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Description of the Nine Large Federal Economic Development Programs with Nonrelocation Provisions
paragraphs: The following is a description of the nine large federal economic  development programs that we identified as having statutory restrictions  against using program funds to relocate businesses and jobs. Seven are  grant programs in which a federal agency provides funds to recipients  (generally a state or local government) that, in turn, may provide funds to  a subrecipient (such as a nonprofit entity or for-profit business) to  facilitate economic development activities. They are  the Department of Housing and Urban Development’s (HUD) Community  Development Block Grant (CDBG) Entitlement and State programs;   HUD and U.S. Department of Agriculture’s (USDA) Empowerment  Zone/Enterprise Community (EZ/EC) programs (urban and rural  respectively); and the Department of Labor’s (Labor) three Workforce Investment Act (WIA)  programs—Adult, Dislocated Workers, and Youth.
The two remaining programs—USDA’s Business and Industry (B&I)  program and SBA’s 504 program—are loan guarantee programs in which  federal agencies guarantee loans that third-party lenders and nonprofit  development corporations make.
subsections: section_title: HUD CDBG Entitlement and State Programs
paragraphs: HUD’s CDBG program provides communities with grants for activities that  will benefit low- and moderate-income people, prevent or eliminate slums  or blight, or meet urgent community development needs. The Entitlement  program provides grants to qualifying local governments. The State  program provides states with grants for distribution to the smaller,  nonentitlement communities. Both programs fund a wide range of  activities—including those that support housing, public improvements,  public services, and economic development—which involve the use of  funds to assist, recruit, and retain individual businesses. According to the  Catalog of Federal Domestic Assistance (CFDA), fiscal year 2006  estimated budget authority for the CDBG Entitlement program was $2.6  billion and $1.1 billion for the State program.
HUD’s Office of Community Planning and Development (CPD) administers  the CDBG program. A headquarters office sets program policy while 43  HUD field offices monitor recipients. HUD distributes funds to entitlement  communities and states based on the higher yield of two formulas. See  figure 1 for an overview of the funding process for economic development  projects involving businesses. Entitlement communities may carry out  activities under CDBG directly, or they may award funds to subrecipients,  which include, as HUD defines them for the purposes of the CDBG  program, governmental agencies such as housing authorities as well as  private nonprofit and a limited number of private for-profit entities. Under  HUD regulations, subrecipients must enter into a signed, written  agreement with entitlement communities regarding compliance with laws  and regulations. States distribute their funds to nonentitlement  communities for activities such as business financing. The distribution  mechanisms vary by state; some states set aside a certain percentage of  funds for economic development while others do not take into account the  category of activity. Neither HUD nor the states distribute funds directly to  citizens or private organizations. Moreover, HUD does not select the  business entities that receive CDBG assistance; recipients and  subrecipients make these decisions.
Businesses receive assistance through the CDBG program either from a  recipient (such as an entitlement community) or from subrecipients (such  as designated public agencies or nonprofit development corporations). For  example, once an entitlement community or a state receives its allocation,  businesses may apply for economic development funding, assuming that  the recipient has elected to operate an economic development program.  This assistance may take the form of loans, grants, technical assistance, or  infrastructure improvements. This approach assumes that the recipient’s  consolidated and action plans include and authorize these types of  economic development activities.
For a related GAO product on the CDBG program, see Community  Development Block Grants: Program Offers Recipients Flexibility but  Oversight Can Be Improved. GAO-06-732. Washington, D.C.: July 28, 2006.
section_title: HUD and USDA EZ/EC Programs
paragraphs: HUD and USDA’s EZ/EC program targets federal grants and provides tax  relief to distressed communities in urban and rural areas, respectively, to  help those communities overcome economic and social problems. EZs and  ECs can use grant funds for a range of activities identified in strategic  plans, which are developed in conjunction with community stakeholders.  Strategic plans outline the urban or rural community’s vision for  revitalizing its distressed areas and the activities and projects planned to  accomplish this task. These activities can include education, infrastructure  development, workforce development, and assistance to for-profit  businesses. According to CRS’s Tax Compendium, estimated revenue  losses for USDA’s and HUD’s EZ/EC program were $1 billion combined for  fiscal year 2006.
Congress authorized three rounds of EZ designations and two rounds of  EC designations. HUD and USDA have primary oversight over the  program, which involves reviewing strategic plans, designating  communities as EZs or ECs, and evaluating the progress EZs and ECs  make in implementing their strategic plans. However, two other agencies,  the U.S. Department of Health and Human Services (HHS) and the Internal  Revenue Service (IRS), also have had responsibility for administering the  program. For the first round of the program which began in 1993, HHS had  fiscal oversight over the program, in which HHS issued grants to states,  which served as pass-through entities that in turn distributed funds to  individual EZs and ECs. For the second round of the program, which  began in 1998, Congress appropriated grant funds through USDA and  HUD, but not through HHS. For the third round, which began in 2001,  Congress appropriated grant funds for rural EZs but not for urban EZs. In  addition to grants, businesses that locate in an EZ or EC can claim tax  benefits, such as the Work Opportunity Tax Credit, which IRS administers.  Tax benefits have been available in all three rounds of the EZ/EC program,  but not the EC program.
As shown in figure 2, businesses can receive funds directly from the  designated EZ/EC cities or from nonprofit corporations the city  establishes to administer the program. For example, EZs/ECs issue  requests for proposals and review applications for EZ/EC funding,  including those that businesses submit. The EZs/ECs that a corporation  oversees generally have a board of directors consisting of community  members who review and have final approval for funded activities (with  input from advisory committees). Businesses then receive funding in the  form of grants, loans, and other assistance. Businesses eligible for federal,  state, and local tax benefits claim these benefits directly on tax filing  forms.
For related GAO products on the EZ/EC program, see    Empowerment Zone and Enterprise Community Program:  Improvements Occurred in Communities, but the Effect of the Program  Is Unclear. GAO-06-727. (Washington, D.C.: Sept. 22, 2006), and   Community Development: Federal Revitalization Programs Being  Implemented, but Data on the Use of Tax Benefits Are Limited. GAO-04- 306. (Washington, D.C.: March 5, 2004).
section_title: Labor WIA Adult, Dislocated Workers, and Youth Programs
paragraphs: The WIA Adult and Dislocated Workers programs provide a variety of  services to individuals, including help with job searches, skills assessment,  and occupational training. The Adult and Dislocated Workers programs  provide similar services, but differ in their eligibility requirements. The  Youth program is designed to prepare high school students for  employment or postsecondary education. All three programs require that  states and local areas use a one-stop center approach, which consolidates  16 categories of programs under four agencies (Labor, Education, HHS,  and HUD) to provide services for several employment and training  programs. In addition to employee services, state and local workforce  investment boards may use WIA funds from the three programs to provide  services to employers, including helping employers identify and recruit job  candidates. States and local boards can also offer various job training  programs, such as classroom-based, on-the-job, or customized training to  meet employer needs. According to CFDA, fiscal year 2006 estimated  obligations for the WIA Adult, Dislocated Workers, and Youth programs  were $857 million, $1.181 billion, and $926 million, respectively.
Labor oversees all three WIA programs, but states and local boards have  flexibility over how they use WIA funds. WIA specifies a different funding  source for each of the Act’s main clients—youth, adults, and dislocated  workers. Labor distributes WIA funds to states and states distribute funds  to local areas based on specific formulas that account for unemployment  (see fig. 3 below for an overview of the three WIA program funding  streams). Labor allots 100 percent of the adult and youth funds and 80  percent of the dislocated worker funds to states (the Secretary of Labor  sets aside 20 percent of the dislocated worker funds primarily for national  emergency grants, but these funds can be used for other job training  purposes). The states can then set aside up to 15 percent of the funds as  discretionary funds to support state employment activities. (For the  dislocated worker program, the state can set aside no more than 25  percent of the funds for rapid response activities, such as notifying  workers on how to access unemployment and one-stop center benefits in  the event of mass layoffs.)
The remainder of the funds are distributed to local areas based on a  formula. Local workforce investment boards, in turn, may provide services  to businesses. Businesses are generally connected to these services  through one-stop career centers.
For related GAO products on the Workforce Investment Act, see    Workforce Investment Act: Labor and States Have Taken Actions to  Improve Data Quality, but Additional Steps Are Needed. GAO-06-82.  Washington, D.C.: November 14, 2005;   Workforce Investment Act: Substantial Funds Are Used for Training, but  Little is Known Nationally About Training Outcomes. GAO-05-650.  Washington, D.C.: June 29, 2005; and    Workforce Investment Act: Exemplary One-Stops Devised Strategies to  Strengthen Services, but Challenges Remain for Reauthorization. GAO- 03-884T. Washington, D.C.: June 18, 2003.
section_title: SBA 504 Loan Program
paragraphs: SBA’s 504 loan program provides businesses with long-term, fixed-rate  financing for major fixed assets, such as land, buildings, and machinery  and equipment. To qualify for an SBA loan guarantee, a project must meet  job creation or other community development goals, such as increasing  the number of minority-owned businesses in an area. For the job creation  requirement, a business must generally create or maintain one job for  every $50,000 in SBA assistance.
While SBA administers the 504 loan guarantee program, it relies on  development companies to originate 504 loans. SBA participates in the 504  loan program by guaranteeing loans that certified development companies  (CDC) make. CDCs generally are private nonprofit corporations  established to contribute to the economic development of their  communities. For a typical 504 loan project, the borrower (a business)  must cover at least 10 percent of a project’s costs, a private third-party  lender provides at least 50 percent of project costs, and a CDC provides up  to 40 percent of project costs. SBA guarantees 100 percent of the CDC’s  portion of the loan. According to SBA, in fiscal year 2006, the agency  provided 504 program guarantees totaling $5.7 billion.
section_title: USDA B&I Program
paragraphs: USDA’s B&I program seeks to improve the economic and environmental  climate in rural communities by providing guarantees on loans private  lenders make to borrowers that meet certain economic development  criteria, such as creating employment or encouraging the development and  construction of renewable energy systems. The program finances business  and industry acquisition, construction, conversion, expansion, and repair  in rural areas. Loan proceeds can be used to finance the purchase and  development of land, supplies and materials, and start-up costs for rural  businesses.
USDA administers the B&I program through field offices located in each of  the states. A borrower first secures a loan from a USDA-approved private  third-party lender. The borrower then applies to USDA for a B&I loan  guarantee. USDA will evaluate the application and make a determination  on whether the borrower is eligible and the proposed loan is for an eligible  purpose, there is reasonable assurance of repayment ability, there is  sufficient collateral and equity, and the proposed loan complies with all  applicable statutes and regulations. USDA will notify the lender in writing  if it is unable to guarantee a loan. USDA also works with the lender to  negotiate the percentage of guarantees, but USDA can guarantee up to 80  percent of loans for $5 million or less, 70 percent of loans between $5 and  $10 million, and 60 percent of loans exceeding $10 million. According to  USDA, in fiscal year 2006, the B&I program guaranteed 350 loans with a  face-value of $766.3 million.
section_title: Appendix III: Comments from the Department of Labor
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the above contact, Harry Medina, Assistant Director;  Meghana Acharya; Dianne Blank; Bonnie Derby; Ronald Ito; Terence Lam;  John McGrail; Carl Ramirez; Barbara Roesmann; Paul Schmidt; Michael  Springer; and Kathryn Supinski made key contributions to this report.