Manufacturing Extension Partnership: Centers Cite Benefits from Funding Change, but Impacts Hard to Distinguish from Other Factors
Released: 2019-03-07T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Small and medium-sized manufacturers are an important part of the U.S. economy. In 1988, to enhance the competitiveness, productivity, and technological performance of U.S. manufacturing, NIST established what is now called the MEP program. The program supports manufacturers through services provided by MEP centers. The centers, located in all 50 states and Puerto Rico, are operated by nonfederal organizations. The MEP centers provide assistance, either directly or through third parties, to help improve manufacturing firms' processes and productivity; expand their capacity; and help them adopt new technologies, utilize best management practices, and accelerate company growth. NIST enters into a cooperative agreement with the nonfederal organization that runs each center to provide federal financial assistance conditional upon the center contributing nonfederal matching funds—known as a cost share.

The AICA included a provision for GAO to review the effect of the 2017 cost share adjustment. This report describes (1) the MEP centers' views regarding the extent to which the recent cost share adjustment has helped them serve manufacturers and (2) the extent to which NIST data show impacts of the cost share adjustment on centers' finances and activities. GAO surveyed all 51 MEP centers, analyzed NIST data on the MEP program, and interviewed NIST and MEP center officials.

section_title: What GAO Found
paragraphs: Most Manufacturing Extension Partnership (MEP) centers reported that the January 2017 American Innovation and Competitiveness Act (AICA) cost share adjustment has helped them serve manufacturers, especially very small (i.e., less than 20 employees) and rural ones. The AICA adjusted the cost share ratio to remain at 1:1, that is, $1 of nonfederal contributions for each $1 of federal assistance. Before the adjustment, MEP centers' cost share requirement increased over the course of their cooperative agreements from 1:1 to 2:1, requiring centers to obtain a greater proportion of revenue from nonfederal sources. In GAO's survey of all 51 MEP centers, 44 centers cited positive effects of the adjustment on center operations, such as helping to improve center services or better reach underserved manufacturers. Also, 41 centers indicated the adjustment increased their financial stability, which some centers stated has allowed them to focus less on revenue generation and to serve very small and rural manufacturers. However, some MEP center officials observed that the AICA cost share adjustment impact is hard to distinguish from other factors, such as the National Institute of Standards and Technology's (NIST) recompetition of nearly all centers' cooperative agreements between fiscal years 2014 and 2017. The recompetition increased the level of federal financial assistance for most centers and reset many centers' cost share ratio from 2:1 to 1:1 prior to the 2017 adjustment. Still, center officials said that if the cost share requirement reverted to what it was prior to the 2017 adjustment, centers would be less able to serve manufacturers, particularly very small and rural ones.

NIST data show that there have been some changes in MEP centers' finances and activities since the AICA cost share adjustment; however, these changes generally began prior to the adjustment. For example, NIST data on centers' finances show an increase in federal assistance and a decrease in reported nonfederal contributions from fiscal year 2017 to 2018, but these changes generally began around fiscal year 2014, when NIST began the recompetition process. Similarly, NIST data on centers' activities show an overall increase in the numbers of very small and rural manufacturers served from fiscal year 2017 to 2018. While the change in the number of very small manufacturers served began around fiscal year 2014, the number of rural manufacturers served fluctuated from fiscal years 2014 through 2018. Like MEP center officials, NIST officials said the impact of the AICA cost share adjustment is intertwined with the recompetition impacts and, going forward, the AICA adjustment may help sustain recent increases in the number of very small and rural manufacturers served.

section_title: Letter
paragraphs: Small to medium-sized manufacturers are an important part of the U.S.  economy. According to the U.S. Census Bureau, in 2016 there were  about 290,000 firms in the United States with fewer than 500 employees,  representing nearly 99 percent of the nation’s manufacturers and  employing about 8.4 million people. To enhance the competitiveness,  productivity, and technological performance of the U.S. manufacturing  sector, in 1988 Congress directed the Director of the National Institute of  Standards and Technology (NIST) to establish a public-private program,  now known as the Hollings Manufacturing Extension Partnership (MEP)  program. NIST’s MEP program supports manufacturers primarily through  the efforts of nonfederal centers, known as MEP centers. The MEP  centers provide assistance, either directly or through third parties, to help  improve manufacturing firms’ processes and productivity; expand their  capacity; and help them adopt new technologies, utilize best  management practices, and accelerate company growth. The program  has grown from a pilot program of three centers for which Congress  appropriated $7.5 million as part of the annual appropriations process for  fiscal year 1989 into a national network of 51 centers, located in all 50  states and Puerto Rico, for which Congress appropriated $140 million as  part of the annual appropriations process for fiscal year 2018. In 2018,  the MEP program employed around 51 full-time equivalent federal staff at  NIST and about 1,400 nonfederal technical experts at the 51 centers.  According to NIST data, the MEP program served more than 8,400  manufacturers in fiscal year 2018.

NIST provides funding to the MEP centers on a cost share basis; that is,  NIST and the MEP centers share the operating costs for the program. A  nonfederal organization—generally a nonprofit institution, state agency, or  university—is responsible for operating each MEP center. NIST enters  into a cooperative agreement with the nonfederal organization to award  federal financial assistance conditional upon the center contributing  matching funds and receiving a positive performance evaluation; the  agreement may be renewed annually.  The funding model for the centers  has evolved over the years. Under the original legislation, every $1  contributed by a center was matched by $1 of federal assistance (or a 1:1  cost share ratio) for the first 3 years of the center’s cooperative  agreement, and federal assistance gradually decreased to zero by the  end of the sixth year. For the fourth through sixth years of a center’s  cooperative agreement, the legislation directed the Secretary of  Commerce to determine the cost share. In 1990, NIST established the  cost share ratios for the fourth through sixth years as 3:2 after 3 years,  7:3 after 4 years, and 4:1 after 5 years. Three years later, NIST changed  those ratios to 3:2 after 3 years and 2:1 after 4 years.  In January 2017,  the American Innovation and Competitiveness Act (AICA) was enacted.  Among other things, the AICA adjusted the cost share to 1:1 for the life of  the cooperative agreement.

The AICA also includes a provision for GAO to submit a report within 2  years to the appropriate committees of Congress that analyzes, among  other things, whether the cost share adjustment has any effect on the  services provided. This report describes (1) MEP centers’ views regarding  the extent to which the recent cost share adjustment has helped them  serve manufacturers and (2) the extent to which NIST data show impacts  of the cost share adjustment on centers’ finances and activities.

To describe the MEP centers’ views regarding the extent to which the  recent cost share adjustment has helped them serve manufacturers, we  sent a survey to all 51 MEP centers and received a response from every  center. To obtain additional information on MEP centers’ views, we also  conducted follow-up interviews with officials from nine MEP centers using  a standard set of questions. We selected these centers to represent a  variety of characteristics, such as the number of manufacturers in the  state and whether the center is run by a nonprofit institution, state  agency, or university.

To describe the extent to which NIST data show impacts of the cost share  adjustment on centers’ finances and activities, we obtained and analyzed  NIST data on MEP centers’ finances and activities for fiscal years 2013 to  2018. We reviewed NIST guidance for the MEP program and interviewed  NIST and MEP center officials to gain an understanding of the data NIST  collects and any changes in the data. We assessed the reliability of the  data by reviewing agency documentation, verifying some data against  other sources, and interviewing NIST officials and selected centers. While  our efforts indicated some factors caused certain aspects of centers’  financial and activity data to be underreported to some extent, as noted in  the report, we believe the data are the best available and are sufficiently  reliable for identifying general changes in MEP centers’ finances and  activities as a result of the cost share adjustment.

To gain additional insight on the impact of the cost share adjustment, we  also interviewed NIST officials, members of the MEP Advisory Board, and  the head of an association representing the MEP centers.  To see  firsthand how a MEP center serves manufacturers, we visited a MEP  center in Bothell, Washington, and a manufacturer in Woodinville,  Washington, that used services from that MEP center. For additional  information about our objectives, scope, and methodology, see appendix  I.

We conducted this performance audit from March 2018 to March 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: According to its strategic plan for 2017 through 2022, the MEP program  aims to strengthen and empower U.S. manufacturers by providing them  with the information and tools to improve productivity, assure consistent  quality, and accelerate the transfer of manufacturing technology into  production processes and new products.  MEP centers do not all offer the  same services; however, across the network, their services span areas  such as the following:

Lean services. These services help manufacturers implement tools  and practices to incorporate “lean” manufacturing principles, which  involve producing more with existing resources through eliminating  and reducing incidental work or non-value-added activities.

Quality services. These services help manufacturers implement  management systems to achieve a defined industry-specific or  general quality certification or standard.

Growth services. These services provide manufacturers with the  tools and methods to identify and target opportunities to develop new  products, markets, services, or customers.

Technology/product development services. These services help  manufacturers identify, develop, and diffuse technology and new  products.

Workforce services. These services help manufacturers recruit,  retain, or develop human resources.

Some centers provide services directly to manufacturers, and others, to  varying extents, use external consultants to provide services. In fiscal year 2018, the 51 MEP centers served 8,425 manufacturers  encompassing a variety of manufacturing subsectors (see fig. 1).

To receive federal financial assistance from NIST, MEP centers must  match the federal contribution with a nonfederal contribution. MEP  centers provide their nonfederal contributions through various means,  such as fees collected from manufacturers for services provided or in the  form of cash or in-kind contributions from other sources, such as state or  local governments, trade associations, or community colleges. MEP  centers may receive nonfederal resources in any of those forms in excess  of the amount needed to match the federal contribution.

Prior to the 2017 AICA cost share adjustment, we, NIST, and others  reported on issues associated with the cost share structure for the MEP  program. For example:  In April 2011, we reported that MEP centers identified positive and  negative effects of the cost share structure in place at the time.   Positive effects of the cost share structure included encouraging MEP  centers to leverage resources and emphasize services relevant to  manufacturers, and negative effects included MEP centers spending  more time and effort seeking cost share matching funds and focusing  more on larger clients that could pay higher fees and less on rural  clients.

In July 2013, NIST analyzed the cost share structure and found that it  provided MEP centers with incentives to make strategic and  operational decisions based largely on which services generated  revenue rather than on which services manufacturers needed to be  competitive. NIST recommended several criteria upon which to base  the MEP program’s cost share, such as encouraging delivery of  innovative services, providing financial stability, and enabling the  program to adapt quickly to changing economic conditions and the  needs of small and medium-sized manufacturers. NIST requested that  the MEP Advisory Board review this analysis and provide  recommendations on how best to structure the cost share requirement  to provide for the long-term sustainability of the program.

In October 2013, the MEP Advisory Board responded to a request in  NIST’s July 2013 report with a letter to the NIST Director largely  echoing the findings of the earlier reports—for example, that the cost  share structure in place at the time made it more difficult to serve  smaller and rural clients and drove centers to focus on larger  manufacturers that could pay fees. The MEP Advisory Board  recommended, among other things, adjusting the cost share ratio to  1:1.

In 2014, we reported on NIST’s spending on the MEP program and found  that NIST’s financial assistance to MEP centers did not take into account  variations across service areas in the demand for program services and  the cost of providing services. We recommended that the Secretary of  Commerce revise the program’s cooperative agreements to account for  such variations. Subsequently, from 2014 through 2017, NIST undertook  a system-wide recompetition of MEP centers’ cooperative agreements to  better align center funding levels with the national distribution of  manufacturing activity and cost of providing services. As a result, NIST  recompeted most MEP centers’ cooperative agreements and reduced the  number of centers to 51, with a single center in each state and Puerto  Rico. Additionally, the recompetition provided for a new minimum  annual funding level of $500,000 per center (previously eight centers  were below this mark) and nearly $20 million more in federal financial  assistance for 34 of the centers. According to NIST’s 2017 congressional  budget request, recompetition would increase the capacity and capability  of the MEP centers to help small and medium-sized manufacturers,  including very small manufacturers—those with fewer than 20  employees—and rural manufacturers.

section_title: Most Centers Reported that the Cost Share Adjustment Has Helped Them Better Serve Manufacturers, but Some Officials Noted that the Impact Is Hard to Measure
paragraphs: In response to our survey, most MEP centers reported that the AICA cost  share adjustment has helped them serve manufacturers, but some center  officials indicated that the impact is hard to measure. Specifically, most  MEP centers we surveyed reported that the AICA’s adjustment of the cost  share to 1:1 for the life of a center’s cooperative agreement has increased  their financial stability and helped them serve very small and rural  manufacturers. According to the survey results, centers run by nonprofit  organizations reported greater impacts of the cost share adjustment than  those run by states or universities. In follow-up interviews, some MEP  center officials indicated that the impact is difficult to measure because of  other recent changes that have also impacted their ability to serve  manufacturers.
subsections: section_title: Most Centers Reported that the Cost Share Adjustment Has Increased Financial Stability and Enhanced Their Ability to Serve Very Small and Rural Manufacturers
paragraphs: In response to our survey, most of the 51 MEP centers reported that the  cost share adjustment has had a positive impact on their finances,  particularly by increasing their financial stability. Specifically, in their  responses to an open-ended question on the effect of the cost share  adjustment on the overall financial resources to support center  operations, 44 centers provided examples of how the adjustment has  generally helped them in areas such as  improving center services (23 centers), better serving underserved manufacturers (17 centers),  improving collaboration with partners (10 centers),  improving planning and financial stability (10 centers), and  improving ability to secure funding (10 centers).

In responses to a separate question about the impact of the cost share  adjustment, 41 centers indicated that the adjustment has provided a more  stable financial outlook. Centers noted that in the past, meeting the 2:1  cost share often meant diverting their focus from serving manufacturers to  generating and documenting revenue. Some centers provided the  following examples of how the financial stability provided by the 1:1 cost  share has helped them:

One center stated that its staff now spend less time accounting for the  hundreds of small transactions used to count toward the 2:1 cost  share and can now focus their time on managing the program.

One center stated that its budget is now less complicated and center  staff are now less distracted by having to generate matching funds.

One center stated that before the cost share adjustment, it could not  plan on growing its capabilities after the third year of the cooperative  agreement because of the anticipated impact of increased cost share  requirements. The center noted that since the cost share adjustment,  it can continue to plan for growth and has modified its strategic plan to  reflect this shift.

With a decreased focus on generating revenue, some MEP centers  reported that they are now better able to serve manufacturers, particularly  very small and rural manufacturers. Overall, 47 of the 51 MEP centers (92  percent) reported that the cost share adjustment has helped them serve  manufacturers to a moderate or greater extent.  In particular, in response  to a question asking if MEP centers experienced certain changes as a  result of the cost share adjustment, 43 (84 percent) reported conducting  more work with very small manufacturers, and 39 (76 percent) reported  conducting more work in rural areas. MEP centers reported that the cost  share adjustment has allowed them to take a number of specific actions  to serve manufacturers, such as conducting additional outreach (46 of  51), providing new services (45 of 51), offering a greater quantity of  existing services (40 of 51), offering training events (39 of 51), and  providing services at reduced cost (28 of 51). In follow-up interviews,  officials from eight of the nine MEP centers we contacted stated that the  cost share change has either already helped or should help them serve  underserved manufacturers. These MEP center officials provided the  following examples:

One center official said that the cost share adjustment has allowed the  center to donate time to help manufacturers that could not afford to  pay the fees for the services provided.

One center official said that the cost share adjustment could provide  the financial stability to hire an additional staff person to serve rural  parts of the state that were underserved before the adjustment.

One center official said that the cost share adjustment has allowed the  center to provide new services that it was not able to provide prior to  the adjustment because the center struggled to meet its cost share  requirement. For example, the center expanded its work to help  manufacturers with Food and Drug Administration requirements  pursuant to the FDA Food Safety Modernization Act.

One center official stated that the cost share adjustment provided the  center a strong financial basis upon which to begin offering  Manufacturing 4.0 services throughout the state.

section_title: Centers Run by Nonprofit Organizations Reported Experiencing Impacts to a Greater Extent than Centers Run by States or Universities
paragraphs: Our analysis of survey results indicates that MEP centers run by nonprofit  organizations reported impacts from the AICA cost share adjustment to a  greater extent than centers run by states or universities. For instance,  22 of 26 centers (85 percent) run by nonprofits reported that the cost  share adjustment has to a great or very great extent helped them serve  manufacturers, compared to 14 of 25 centers (56 percent) run by states  and universities. As table 1 shows, a greater percentage of nonprofit  centers reported experiencing certain changes, such as an increase in  center staff and the development of stronger partnerships, as a result of  the cost share adjustment compared to centers run by states and  universities.

Officials from MEP centers run by states and universities stated that their  centers are often directly funded by a state agency or educational  institution and already enjoyed some degree of financial stability, which is  why they generally reported fewer changes from the cost share  adjustment compared to centers run by nonprofits. In a follow-up  interview with the operations director of a MEP center run by a state  agency, the operations director told us that one advantage of being  funded by the state is that, even prior to the adjustment, the center had a  steady source of income to help meet its cost share. In response to an  open-ended survey question, one university-run MEP center noted that  being part of a university provided access to professional services,  support systems, and a network of resources that would not otherwise be  available at an affordable rate. In responding to another open-ended  question on the effect of the cost share adjustment on financial resources  to support center operations, another university-run MEP center noted  that the AICA adjustment has not resulted in significant changes to the  center’s financial resources but could put some of its university funding at  risk in the future. In a follow-up interview with the director of this MEP  center, she told us that in a university setting her center competes against  other university priorities for grant funding and being on a 1:1 cost share  puts the center on a less competitive footing against other candidates  because the center will no longer need additional university grant funding  to meet a higher cost share ratio in the later years of its cooperative  agreement.

section_title: Center Officials Noted that Other Factors Have Impacted Their Ability to Serve Manufacturers, Making It Hard to Measure the Impact of the Cost Share Adjustment
paragraphs: In survey responses and follow-up interviews, MEP center officials noted  that a number of factors have impacted their ability to serve  manufacturers in recent years. For example, in response to an open- ended survey question, centers provided the following as possible factors  other than the cost share adjustment that could have impacted their  operations:  the strength of the overall economy of the nation or of the state in  which they are located (19 centers), budgetary or political stability in their state (e.g., stability of state  funding) (19 centers), and

NIST’s recompetition of nearly all MEP centers’ cooperative  agreements between 2014 and 2017 (10 centers).

According to several MEP centers we surveyed or officials we  interviewed, it is difficult to identify the impacts of the cost share  adjustment because of the other factors that have also impacted MEP  center operations. For example, in its survey response, one MEP center  noted that it would not be easy to isolate the impact of the cost share  adjustment from the impact of factors such as the recent recompetition  that doubled the center’s federal financial assistance, new leadership at  the center, and an improving economy and a tighter labor market that  may have resulted in more companies needing the center’s services. In  our follow-up interviews, some MEP center officials said that the  recompetition, in particular, makes it difficult to isolate the effect of the  cost share adjustment. Officials from several MEP centers we contacted  cited effects of the recompetition, such as increased baseline funding,  resetting of the cost share to 1:1, center leadership changes, and  consolidation of centers within states, as reasons why it would be hard to  separate the effects of the recompetition from those of the cost share  adjustment.

For certain centers, the impact of the cost share adjustment was clearer  because they did not undergo recompetition, which meant that their cost  share had not been reset to 1:1 through that process. Seven MEP centers  were not included in the recompetition process that NIST began in 2014  because their cooperative agreements had recently been recompeted  (i.e., within 2 years before 2014). Four of these seven “legacy” MEP  centers were at or past the third year of their cooperative agreements  and, as a result, were at a greater than 1:1 cost share ratio when the  AICA was enacted in 2017. These four centers reported that the AICA’s  cost share adjustment was helpful in the following ways:

One center wrote that having to generate more matching contributions  during its fourth year in operation coincided with a drop in its  performance that continued until the 2017 cost share adjustment. This  center said the cost share adjustment allowed it to devote additional  resources to maintaining its services to manufacturers.

One center wrote that it was already scaling back its plans to expand  manufacturer engagement by the second and third years of its  cooperative agreement in anticipation of the higher cost share ratios  that would start in the fourth year of operation. This center noted that  following the 2017 cost share adjustment, it revised its strategic plan  to focus on growing its capabilities instead of scaling them back.

One center wrote that moving to the 1:1 cost share helped it increase  its focus on service delivery to clients with less concern for cost  matching.

One center wrote that the 2:1 cost share incentivized a focus on larger  manufacturers to meet the cost share requirement. Following the cost  share adjustment, the center is now able to develop new services for  small and very small manufacturers.

Should the cost share structure revert to what it was before the 2017  adjustment, most of the 51 MEP centers that we surveyed stated that  they likely would be less able to serve manufacturers, particularly very  small and rural manufacturers. In response to an open-ended survey  question on the effect of changing the cost share requirement back to  what it was before enactment of the AICA, 45 of the 47 MEP centers that  responded to this question wrote that such a change would generally  reduce their ability to serve manufacturers by causing them to do one or  more of the following:  shift to higher-revenue clients and services (23 centers),  reduce center services and staff (21 centers),  seek new revenue sources (11 centers),  reduce staff (10 centers),  reduce ability to collaborate with partners (7 centers), and  increase fees (7 centers).

section_title: NIST Data Show Some Changes in Centers’ Finances and Activities, but the Changes Generally Predate the Cost Share Adjustment
paragraphs: Our analysis of NIST data indicates that there have been some changes  in MEP centers’ finances and activities since the 2017 AICA cost share  adjustment. However, these changes generally began around the time  NIST recompeted the centers’ cooperative agreements, before the  enactment of the AICA, and cannot necessarily be linked to the cost  share adjustment.

NIST data on funding for the MEP centers show that, from fiscal year  2017 to fiscal year 2018, the amount of federal assistance to the MEP  centers increased and funds reported by MEP centers to meet cost share  requirements decreased. However, these changes generally began  around fiscal year 2013. As figure 2 shows, during the period from fiscal  year 2013 through fiscal year 2018, federal assistance to MEP centers  increased from about $81 million to $116 million while MEP centers’  reported nonfederal contributions decreased from approximately $195  million to $135 million. The centers’ reported nonfederal contributions  generally decreased across all three of their primary sources of  revenue—program income, cash contributions, and in-kind contributions.  Specifically, the amount of program income centers reported to meet their  cost share requirement decreased from approximately $95 million in fiscal  year 2013 to $71 million in fiscal year 2018. Reported cash and in-kind  contributions decreased from approximately $100 million in fiscal year  2013 to $65 million in fiscal year 2018. In particular, the MEP centers  reported a substantial decrease in in-kind contributions over this time  period, from approximately $25 million in fiscal year 2013 to $5 million in  fiscal year 2018.

Based on our analysis of NIST data, the overall changes in center  financing—that is, the changes in both federal assistance and reported  nonfederal contributions—were influenced by NIST’s recompetition of  nearly all MEP centers’ cooperative agreements. When NIST recompeted  the MEP centers’ agreements, it increased the level of federal assistance  for 34 of the 51 MEP centers, constituting an overall increase in base  funding amounts for federal assistance from about $90 million before  recompetition began in fiscal year 2014 to about $110 million after the  recompetition process was complete.  Additionally, as MEP centers’ cooperative agreements were recompeted, the centers’ cost share was  reset to 1:1, and the centers’ reported nonfederal contributions began to  decrease. As figure 3 shows, in fiscal years 2013 and 2014, before the  new cooperative agreements began taking effect, most MEP centers  operated under a 2:1 cost share. After fiscal year 2014, the number of  MEP centers operating under a 1:1 cost share began to increase. With  enactment of the AICA, all MEP centers operated under a 1:1 cost share  in fiscal year 2017.

NIST data show that there also may have been some changes in MEP  centers’ activities since the 2017 cost share adjustment. Our analysis of  NIST data indicated that from fiscal year 2017 to fiscal year 2018, the  total number of manufacturers MEP centers reported serving increased from  approximately 8,000 to 8,400,  very small manufacturers MEP centers reported serving increased  from approximately 2,600 to 2,700, and  rural manufacturers MEP centers reported serving increased from  approximately 1,500 to 1,600.

As with the changes in MEP centers’ finances, the changes in the  numbers of total manufacturers and very small manufacturers these  centers reported serving generally began before the cost share  adjustment. When we analyzed NIST’s data, we found that the total  number of manufacturers and the number of very small manufacturers  served began increasing around fiscal year 2014, when NIST started  recompeting centers’ cooperative agreements, and this increase  continued through fiscal year 2018. The overall direction of the change in  the number of rural manufacturers served during this period was mixed.  Specifically, the number of rural manufacturers centers reported serving  increased from fiscal year 2014 to fiscal year 2015, then decreased  through fiscal year 2017, and then increased in fiscal year 2018.

NIST officials, like MEP center officials, said that it may not be possible to  separate the effects of the AICA cost share adjustment from the effects of  the recompetition. NIST officials stated that a longer time span would be  needed to identify trends in the manufacturers served by MEP centers;  however, even then, confounding factors, such as overall economic  conditions, could continue to make it difficult to analyze and isolate the  effect of the AICA’s cost share adjustment. Looking forward, NIST  officials said one impact of the 2017 cost share adjustment is that it will  help sustain recent increases in the number of very small and rural  manufacturers served by MEP centers.

In addition, establishing a link between changes in MEP centers’ finances  and activities and the cost share adjustment is difficult not only because  the changes generally predated the cost share adjustment, but also  because MEP centers likely underreport certain data to NIST.  Specifically:

Financial data underreporting. NIST officials stated that because  MEP centers are not required to report all of their nonfederal  resources in excess of the nonfederal contributions required to meet  their cost share, the amount of resources available to centers is likely  underreported. According to NIST officials, NIST’s Grants  Management Division policy provides that centers will generally be  held accountable for any amounts that they opt to pledge in excess of  the 1:1 cost share. According to NIST officials, centers are thus  operating rationally and legally in pledging and reporting only the  amount needed to meet their nonfederal contribution for their cost  share match.

Activity data underreporting. NIST officials said that because MEP  centers are not required to report activity data on manufacturers  served if the services provided used nonfederal resources that were  not directly related to meeting the MEP centers’ cost share, certain  activity data, such as the number of rural manufacturers served, is  likely underreported. During their discussions with some MEP centers  leading up to the 2017 AICA cost share adjustment, the NIST officials  learned that some centers were not reporting activity data on  manufacturers served if the services provided used nonfederal  resources that were not directly related to meeting the MEP centers’  cost share. An official with one such center provided us with  information indicating that the number of rural manufacturers served  in fiscal year 2016 was about 36 percent more than the number the  center reported to NIST. According to NIST officials, centers are not  obligated to report activity data on manufacturers served if those  activities are not directly related to funds used to meet the MEP  centers’ cost share requirements.

Because of this underreporting, NIST officials stated that the amount of  nonfederal resources in excess of the nonfederal contributions required to  meet the cost share, as well as the total number of manufacturers served  and the number of very small and rural manufacturers served, are likely  higher that what centers reported to NIST. Moreover, the officials noted  that, because of the recompetition and the 2017 AICA cost share  adjustment, they believe that the extent of MEP centers’ underreporting  may have increased in recent years as more centers began operating  under a 1:1 cost share ratio.

section_title: Agency Comments
paragraphs: We provided a draft of this report for review and comment to the  Secretary of Commerce. NIST provided technical comments, which we  incorporated as appropriate. NIST’s comments also included some  comments of a more general nature. For example, NIST highlighted the  impact that the recompetition had on MEP centers. NIST also noted that  while it cannot directly attribute recent increases in the number of  manufacturers served to the AICA cost share adjustment, it believes the  AICA cost share adjustment has fundamentally allowed MEP centers to  deliver more value to clients rather than tie up resources in fundraising.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Commerce, and other interested parties. In  addition, the report is available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or neumannj@gao.gov. Contact points for  our Offices 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 II.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of our review were to describe (1) Manufacturing  Extension Partnership (MEP) centers’ views regarding the extent to which  the recent cost share adjustment has helped them serve manufacturers  and (2) the extent to which National Institute of Standards and  Technology (NIST) data show impacts of the cost share adjustment on  centers’ finances and activities.
subsections: section_title: MEP Centers’ Views
paragraphs: To describe MEP centers’ views regarding the extent to which the 2017  American Innovation and Competitiveness Act (AICA) cost share  adjustment has helped them serve manufacturers, we sent a survey to all  51 MEP centers and received a response from every center. We  administered this survey in July and August 2018. Because this survey  was not a sample survey, there are no sampling errors. As part of  developing this survey, we conducted pretests over the telephone with  four MEP centers to ensure that the questions were understandable, that  the data collected are uniform and usable, and that the survey would  place minimal burden on center officials. We pretested our survey with  the MEP centers for California, Kentucky, Virginia, and Washington.  Using data on MEP center characteristics provided by NIST, we selected  these centers to reflect a range of characteristics in the following  categories, among others: the number of manufacturers in the state, the  type of MEP organization (i.e., whether the center is run by a nonprofit,  state agency, or university), and NIST’s classification of the state as  urban or rural. We made changes to the content and format of the survey  based on the feedback we received.

In the survey, we asked the MEP centers about the effects of the cost  share adjustment, both experienced and anticipated, using several  different types of questions. For example:

We asked the MEP centers whether the cost share adjustment has  resulted in or will likely result in changes such as an increase in center  staff; an increased use of contractors; an increase in overall financial  resources to support the centers’ operations; a more stable financial  outlook; or the ability to develop stronger partnerships, conduct more  work in rural areas, or conduct more work with very small  manufacturers (fewer than 20 employees).  If centers responded in  the affirmative, we asked whether those changes have already  allowed the center to take specific actions such as conducting  additional outreach to manufacturers, providing new services to  manufacturers, offering manufacturers a greater quantity of existing  services, providing services to manufacturers at reduced cost, or  offering training events to manufacturers.

We asked questions that allowed the MEP centers to identify the  extent to which they had experienced a change. For example, we  asked, “Whether or not there were any specific types of  manufacturers that may have previously underutilized the center’s  services, to what extent has changing the federal/nonfederal cost  share to 1:1 for future years for all centers regardless of when they  began operating helped the center serve manufacturers overall?” The  centers could select one of the following responses: very great extent,  great extent, moderate extent, some extent, little or no extent, don’t  know.

We asked open-ended questions to gain additional understanding  about the effect of the cost share adjustment, including the following:

What, if any, other factors might contribute to the changes or lack  of changes identified in ? Please consider  factors such as general economic conditions in the center’s state,  the recompetition of the center’s cooperative agreement with  NIST, or other factors.

What has been the effect of changing the federal/nonfederal cost  share to 1:1 for future years for all centers regardless of when  they began operating on the overall financial resources to support  the center’s operations?

What, if anything, would the center change about how it provides  services to manufacturers in that state if the federal/nonfederal  cost share were to change back to the way it was prior to  enactment of the AICA in January 2017?

We analyzed the survey responses using content analysis and descriptive  statistics. Using content analysis, we analyzed the responses to the three  open-ended questions listed above by identifying common themes in  centers’ open-ended survey responses to establish categories. Two  analysts independently reviewed and coded the survey responses to the  categories. Then the analysts compared their coding and if there was  disagreement, they discussed their assessment and reached a final  determination on the categorization. We also used descriptive statistics to  analyze centers’ survey responses to evaluate the impact of the cost  share adjustment on different types of MEP centers. For example, we  compared the number of centers responding to certain survey questions  by center type (i.e., nonprofit institutions, state agencies, or universities)  as well as centers whose cooperative agreements were or were not  recompeted.

To further understand the impacts of the AICA cost share adjustment on  different types of MEP centers, we conducted follow-up interviews with  officials from nine MEP centers using a standard set of questions. We  selected these MEP centers based on our analysis of centers’ survey  responses. Furthermore, we selected these centers to include the  perspectives of a variety of MEP centers, accounting for factors such as  when the center’s agreement was recompeted, number of manufacturers  in the state, and whether the center is operated by a nonprofit institution,  state agency, or university. During these follow-up interviews, we asked  the centers questions such as the following:

To what extent did the cost share change affect the center and why?

Please explain.

Please explain how the center meets the cost share requirement.

What has changed since the AICA set the cost share at 1:1?

To what extent will the cost share change help or hinder the center’s  ability to reach underserved manufacturers?

Is there any way that the center can isolate the changes in the cost  share from the recompetition?

section_title: GAO Analysis of NIST Data
paragraphs: To describe the extent to which NIST data show impacts from the AICA  cost share adjustment, we obtained NIST data on MEP centers’ finances  and activities for fiscal years 2013 through 2018. We selected this period  to encompass the year prior to when NIST began recompeting MEP  centers’ cooperative agreements. NIST collects financial information from  each MEP center, including the amount of financial assistance received  from NIST, program income received from manufacturers for services  provided, cash received from other sources (such as grants), and in-kind  contributions. We analyzed these data to identify any changes in centers’  finances for fiscal years 2013 through 2018. We also obtained NIST data  detailing the cost share under which each center was operating for fiscal  years 2013 through 2017. We assessed the reliability of centers’  financial data by reviewing agency documentation, verifying some data  against another data source, and interviewing NIST officials and officials  from selected centers. We determined that NIST’s data on MEP centers’  federal assistance and nonfederal contributions are the best available  data and are sufficiently reliable to describe general changes in these  aspects of centers’ finances during this time period. However, as noted in  the report, we found that some centers underreport their nonfederal  resources in excess of the nonfederal contributions required to meet their  cost share. As a result, we expect that centers’ total available  resources—including their federal assistance, nonfederal contributions,  and nonfederal resources in excess of their nonfederal contributions—are  higher than what we present in the report. We determined this because  the underreporting we identified with centers’ nonfederal resources in  excess of their nonfederal contributions would tend to understate the  amount of these resources over time and because we did not find  evidence of overreporting that would contradict this pattern. In addition,  we did not independently verify the nonfederal contributions reported by  the MEP centers because it was outside the scope of our work.

We also obtained and analyzed NIST data on MEP centers’ activities,  such as data on the size, location, and number of manufacturers the  centers reported serving in fiscal years 2013 through 2018. NIST  guidance for MEP centers calls for centers to report various information  about the manufacturers that they serve, including company name, Dun  and Bradstreet number, and the North American Industry Classification  System code. NIST uses the Dun and Bradstreet number to compile  other information about each manufacturer, including location and  number of staff. We analyzed the data to identify any changes in centers’  activities and to determine the extent to which any changes might be  associated with the AICA cost share adjustment. We also reviewed NIST  guidance for the MEP program and interviewed NIST and MEP center  officials to gain an understanding of the MEP center activity data NIST  collects. We assessed the reliability of the activity data by reviewing  agency documentation and interviewing NIST officials and selected  centers. As noted in the report, these efforts indicated that cost share  changes caused some centers’ activity data to be underreported. While  we were not able to precisely determine the extent of underreporting or  precise changes in centers’ activities over time, as noted in the report, we  believe the data are the best available data and are sufficiently reliable to  describe general changes in centers’ activities during this time period. We  determined this because the underreporting we identified would tend to  understate the increases in the total number of manufacturers and the  number of very small manufacturers served over time and because we  did not find evidence of overreporting that would contradict this pattern.  Since the number of rural manufacturers served fluctuated during this  time period, however, we were unable to determine whether complete  data would indicate a general increase in the number of rural  manufacturers served similar to the increases in the total number of  manufacturers and the number of very small manufacturers served.

section_title: Other Efforts
paragraphs: To help us understand the legal framework for the cost share adjustment,  we reviewed the AICA. We reviewed other documents to provide  additional context regarding MEP centers’ cost share requirements,  including past GAO reports and reports from the Congressional Research  Service and National Academies of Sciences, Engineering, and Medicine.  We also reviewed reports on the MEP program’s cost share structure  from NIST and the MEP Advisory Board. To gain additional insight on the  impact of the cost share adjustment, we also interviewed NIST officials,  members of the MEP Advisory Board, and the head of an association  representing the MEP centers. Further, we visited a MEP Center in  Bothell, Washington, and a manufacturer in Woodinville, Washington, to  obtain a more in-depth perspective on the services MEP centers provide  to manufacturers.

We conducted this performance audit from March 2018 to March 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

section_title: Appendix II: GAO Contact and Staff Acknowledgements
subsections: section_title: GAO Contact

section_title: Staff Acknowledgements
paragraphs: In addition to the contact named above, Chris Murray (Assistant Director),  Arvin Wu (Analyst in Charge), Stephen Betsock, Kevin Bray, Mark Braza,  TC Corless, Ellen Fried, Jill Lacey, John Mingus, Calaera Powroznik,  Sara Sullivan, David Wishard, and John Yee made key contributions to  this report.

Fast facts: Commerce's Manufacturing Extension Partnership (MEP) Program has centers in each state that help small- and medium-sized companies improve their technology and management practices.

Recent legislation set the cost sharing ratio at 1:1, reducing the cost burden for some centers. All centers now match federal funding dollar for dollar. Prior to the change, the cost share increased over time from $1 for $1 to $2 for each $1.

Most centers told us this change improved their financial stability, allowing them to better serve very small and rural companies; however, recent program changes and other factors make it hard to determine the exact impact.

Question-summary annotations: questions: question: How has the AICA impacted MEP centers?
answer: Most Manufacturing Extension Partnership (MEP) centers reported that the January 2017 American Innovation and Competitiveness Act (AICA) cost share adjustment has helped them serve manufacturers, especially very small (i.e., less than 20 employees) and rural ones.
child_questions: question: How did the AICA adjust the cost share ratio?
answer: The AICA adjusted the cost share ratio to remain at 1:1, that is, $1 of nonfederal contributions for each $1 of federal assistance.  Before the adjustment, MEP centers' cost share requirement increased over the course of their cooperative agreements from 1:1 to 2:1, requiring centers to obtain a greater proportion of revenue from nonfederal sources.

question: What improvements resulted from the adjustment?
answer: In GAO's survey of all 51 MEP centers, 44 centers cited positive effects of the adjustment on center operations, such as helping to improve center services or better reach underserved manufacturers.

question: What was the financial influence of the adjustment?
answer: Also, 41 centers indicated the adjustment increased their financial stability, which some centers stated has allowed them to focus less on revenue generation and to serve very small and rural manufacturers.

question: What other factors may have influenced the centers?
answer: However, some MEP center officials observed that the AICA cost share adjustment impact is hard to distinguish from other factors, such as the National Institute of Standards and Technology's (NIST) recompetition of nearly all centers' cooperative agreements between fiscal years 2014 and 2017.
child_questions: question: How did the recomposition change the level of federal financial assistance?
answer: The recompetition increased the level of federal financial assistance for most centers and reset many centers' cost share ratio from 2:1 to 1:1 prior to the 2017 adjustment.
child_questions: question: What did center officials maintain about the AICA?
answer: Still, center officials said that if the cost share requirement reverted to what it was prior to the 2017 adjustment, centers would be less able to serve manufacturers, particularly very small and rural ones.

questions: question: What do NIST data suggest?
answer: NIST data show that there have been some changes in MEP centers' finances and activities since the AICA cost share adjustment; however, these changes generally began prior to the adjustment.
child_questions: question: What is one example of this process?
answer: For example, NIST data on centers' finances show an increase in federal assistance and a decrease in reported nonfederal contributions from fiscal year 2017 to 2018, but these changes generally began around fiscal year 2014, when NIST began the recompetition process.

question: What is another example of the data?
answer: Similarly, NIST data on centers' activities show an overall increase in the numbers of very small and rural manufacturers served from fiscal year 2017 to 2018. While the change in the number of very small manufacturers served began around fiscal year 2014, the number of rural manufacturers served fluctuated from fiscal years 2014 through 2018.

question: What conclusions can be drawn about the AICA cost share adjustment from this data?
answer: Like MEP center officials, NIST officials said the impact of the AICA cost share adjustment is intertwined with the recompetition impacts and, going forward, the AICA adjustment may help sustain recent increases in the number of very small and rural manufacturers served.

questions: question: What is the role of smaller manufacturers in the U.S. economy?
answer: Small and medium-sized manufacturers are an important part of the U.S. economy.

question: What is the MEP program?
answer: In 1988, to enhance the competitiveness, productivity, and technological performance of U.S. manufacturing, NIST established what is now called the MEP program.
child_questions: question: What is the role of MEP centers?
answer: The program supports manufacturers through services provided by MEP centers. The centers, located in all 50 states and Puerto Rico, are operated by nonfederal organizations. The MEP centers provide assistance, either directly or through third parties, to help improve manufacturing firms' processes and productivity; expand their capacity; and help them adopt new technologies, utilize best management practices, and accelerate company growth.

question: How does NIST parter with the nonfederal organization?
answer: NIST enters into a cooperative agreement with the nonfederal organization that runs each center to provide federal financial assistance conditional upon the center contributing nonfederal matching funds—known as a cost share.

questions: question: Why did GAO conduct this review?
answer: The AICA included a provision for GAO to review the effect of the 2017 cost share adjustment.

question: What does this report describe?
answer: This report describes (1) the MEP centers' views regarding the extent to which the recent cost share adjustment has helped them serve manufacturers and (2) the extent to which NIST data show impacts of the cost share adjustment on centers' finances and activities.
child_questions: question: How did GAO conduct their research?
answer: GAO surveyed all 51 MEP centers, analyzed NIST data on the MEP program, and interviewed NIST and MEP center officials.