The Congress established the EZ/EC program in the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66, Aug. 10, 1993). Under the act, the communities that wanted to participate in the program had to (1) meet specific criteria for characteristics such as geographic size and poverty rate and (2) prepare a strategic plan for implementing the program. The act also specified that the Secretary of Agriculture could designate up to 3 rural EZs and 30 rural ECs on the basis of their strategic plans. The act also amended title XX of the Social Security Act to authorize the use of the EZ/EC SSBG funds for the program and placed increased authority for funding decision-making with the local EZ/EC governance structures. Historically, the funds from the SSBG program that were allocated to the states could be used only for social service activities, such as programs to assist and feed children. However, under the EZ/EC program, the act expanded the permissible uses of the SSBG’s funds by allowing their use for such activities as purchasing or improving land and facilities or for providing cash payments to individuals for medical care. In addition to the EZ/EC SSBG funds, all of the designated communities are expected to receive several types of federal assistance. The businesses located in the EZs and the ECs are eligible for low-interest loans, resulting from the tax-exempt bonds issued by the state or local governmental unit, to be used to provide facilities and land for the businesses in the communities. In addition, the businesses located within EZs (1) are eligible to receive tax credits on the wages paid to the employees who live and work in the EZ and (2) may deduct higher levels of depreciation expenses. A number of federal departments and agencies also made a commitment to give all EZs and ECs special consideration in the competitions for funds from many other federal programs and to work cooperatively with them in overcoming regulatory impediments. The federal assistance received by the EZs and ECs must be spent in accordance with the communities’ strategic plans. These plans outline how the communities would achieve their goals, including ensuring the active participation of the members of the community, the local private and nonprofit entities, and the federal, state, and local governments. The EZs’ and ECs’ progress in achieving their goals is to be based on the performance benchmarks established by the communities, not on the amount of federal money spent. These benchmarks explain in some detail how the locality intends to achieve its goals. The benchmark document, which becomes a part of the overall plan, includes the specific projects that the EZ or EC will undertake and timelines showing when the projects will be instituted or completed. The benchmark document, which generally looks ahead 2 years, requires continuous review and modifications to accommodate the changes in the community’s needs as well as scheduling problems. These benchmark projects are to serve the EZs and ECs, as well as USDA, as an important management tool and provide the primary basis for evaluating the progress being made. The Department of Health and Human Services (HHS), USDA, and the states play key roles in administering the program. HHS makes grants to the states, and the designated state agency obligates the funds to the EZs and ECs as it receives, reviews, and approves requests from them to draw down funds for a particular benchmark project. In addition, the state must ensure that the requested expenditure is allowable under the state’s standards. USDA, as the lead federal agency for the rural EZ/EC program, is responsible for helping the rural EZs and ECs achieve their goals by evaluating their progress and providing technical assistance. The federal funds invested in the rural EZ/EC program, including loans, grants, and forgone tax revenues, will far exceed the $208 million in EZ/EC SSBG funds allocated to the program. In fact, we estimate that federal funds exceeding $1 billion will be invested in the program over its 10-year life. This estimate includes the EZ/EC SSBG funds, plus an estimated $428 million from tax incentives and about $600 million from USDA’s loan and grant programs. This $1 billion estimate does not include the other significant sources of investments in the program that will be provided by other federal agencies. Estimates from these sources were not available. If the program is successful, some offsetting benefits, such as loan repayments, increased tax revenue, and reduced welfare costs, should occur in the communities. The EZ/EC program has made three tax incentives available to the communities for economic development. The first two, available only to EZs, are (1) the Empowerment Zone Employment Credit, which provides qualified employers with a tax credit of up to $3,000 for each employee who lives and works in the EZ, and (2) the Empowerment Zone Expensing Allowance, which allows a qualified business to take a special depreciation deduction of up to $20,000 (for an annual total of up to $37,500) for equipment purchases each year. The third incentive, available to both the EZs and the ECs, is the Enterprise Zone Facility Bond, which provides up to $3 million in tax-exempt bond financing to qualified businesses for buildings or equipment. Using the data and assumptions from the Internal Revenue Service, we estimate that the cost of the EZ/EC tax incentives in rural areas will be about $428 million over the 10-year period. The EZs’ employment credit will account for $406.5 million of that total; the facility bonds and the expensing allowances will make up the remainder at $4.3 million and $17.2 million, respectively. USDA, HHS, and 13 other federal agencies have agreed to give special consideration to eligible EZ/EC applicants by giving them preferential treatment for funds from the agencies’ existing funding sources over the life of the program. Most federal agencies had not estimated the amount of support they expect to invest in the rural EZs and ECs over the 10-year life of the program. USDA, however, indicated that it alone intends to provide about $246 million to rural EZs and ECs over the first 4 years through existing funding sources such as its Rural Business Enterprise Grant program and the Water and Waste Disposal Loan and Grant programs. If this funding level is maintained over the 10-year life of the program, an assumption that USDA officials consider a reasonable expectation, USDA will provide about $600 million to EZ/EC communities. USDA officials noted that these funds, as well as those from the other agencies that have pledged to provide special consideration to EZ/ECs, represent existing appropriations that would be expended—not new moneys. In addition to the funds provided by federal agencies, the rural EZs and ECs are expected to obtain assistance from state, local, and private sources. Some EZs and ECs are using the EZ/EC SSBG funds as seed money to attract even larger amounts from nonfederal sources, such as foundations. USDA provided data showing that for the 3 EZs and 25 of the ECs, the communities were receiving more than one dollar from their state and local governments and from private and nonprofit organizations for every dollar of EZ/EC SSBG funds received. To the extent that the loans are repaid and that new jobs result in increased tax revenues and reduced welfare payments, the federal investment in the rural EZ/EC program will be offset. The 33 EZs and ECs have established the structures and procedures needed to implement their strategic plans. Nevertheless, the boards of directors for two of the ECs we visited were experiencing problems that could hinder their progress toward completing their benchmark projects. Overall, progress on these projects has varied widely. According to USDA officials, all communities have taken the initial necessary actions to manage and begin implementing their strategic plans, such as establishing a board structure and basic operating principles. These actions had to be formally agreed upon by the community, the state, and USDA in a memorandum of agreement. In order to complete a memorandum of agreement, the communities had to, among other things, establish their benchmarks and develop a budget for the first 2 years of implementation; create the bylaws and/or articles of incorporation for the group, known as the lead entity, that will manage the EZ or EC program; and establish the EZ’s or EC’s board structure. In addition, USDA reviewed the documents prepared by the lead entities to ensure that they had a policy to prevent conflicts of interest and strategies for ensuring broad participation within the community. We visited all three EZs and found that they were generally well-organized to manage the implementation of their strategic plans. For example, while the geographical boundaries of all of the EZs cut across several local government boundaries, such as county lines, they had all developed mechanisms for overcoming the potential problems in having the EZ work with more than one political entity. One EZ that spanned parts of four counties created four subzone boards to overcome the political divisions inherent in its organization. These subzones consider the communities’ proposals for implementing the benchmark projects that originate in their area. The proposals approved at the subzone level are then considered by the EZ’s full board. As of June 1996, nearly 1 year after the memorandum of agreement, the EZ reported some progress toward 45 of the 49 projects serving the subzones. Some of these projects served several subzones, while others served only one. Although the EZs appear to be well organized, two of the ECs that we visited were experiencing problems. For example, at one EC we visited, the board members were in such disagreement with the lead entity over the control of the EC funds that little business has been conducted, and the program has not been moving forward. At another EC, the state agency found that the board members were, among other things, submitting applications for projects that would benefit them financially. USDA requires EZs and ECs to report periodically on the progress they are making toward implementing the benchmark projects. These projects include such things as constructing child care facilities, initiating job training programs, beginning 911 emergency response services, and improving wastewater systems. While USDA has not received complete progress reports from all communities, the progress made by those that have reported varied widely. USDA had sufficient centralized information on 14 communities for us to determine whether (1) progress had been made toward implementing the benchmark projects scheduled to start before December 1996 and (2) the projects that were scheduled to be completed prior to December 1996 had in fact been completed. Progress, by these measures, varied widely among the 14 communities we examined. For example, one community reported that it had made at least some progress toward implementing all of the benchmark projects scheduled to start prior to December 1996 and that one project had been completed. On the other hand, two communities reported that either no progress had been made on projects or that they had not finished any of the projects scheduled for completion prior to December 1996. Overall, 8 of the 14 communities reported that they had not started or completed at least 50 percent of their benchmark projects on time. Appendix I presents information on selected benchmark projects at the eight communities we visited. The rural EZs and ECs have experienced difficulties that have slowed their initial efforts, continue to impede their progress, or both. The difficulties were the short time frame allowed for applying to the program and the misinformation provided by officials at USDA headquarters about the program’s basic operations. While these difficulties have been or are in the process of being resolved, two other issues continue to be of concern. These issues are a lack of clarity about which standards the communities should follow for construction projects when using EZ/EC SSBG funds and the disparity between HHS’ verbal guidance and written guidance to the states on their responsibilities for releasing the EZ/EC SSBG funds to the communities for the EZ/EC program. Officials at each of the rural EZs and ECs we visited commented that the period for preparing an application for the EZ or EC designation was too short for the amount of work required. The communities applying for the program had 5-1/2 months after the President announced the program to submit an application. During that time, they had to achieve grass-roots involvement, gain consensus on the needs and vision of the community, elect a board of directors, produce a strategic plan, and prepare to begin operating. These tasks were particularly difficult to carry out in rural areas that often (1) did not have organized coalitions or the expertise available to articulate a vision and develop a complex strategic plan and (2) are spread out over a large geographical area, which makes putting together all parts of the application more difficult. While the communities met their application deadlines, some officials believe that a longer period to organize would have allowed them to better galvanize the public’s support and involvement and that, in some instances, they would have been better able to identify their needs and establish appropriate goals. USDA and HHS officials acknowledged that the communities faced short time frames. Some USDA officials stated that the short time frames required that the rural communities act quickly both to generate local involvement and to create the vision and strategic plan required to meet the application deadline. They noted that the federal agencies involved faced organizational pressures as well. The EZ/EC program’s timetable required the federal agencies to develop their coordination strategy, perform detailed planning, hire and train staff, and begin operating the program within the 16 months between the passage of the legislation and the designation of the EZs and the ECs. HHS and USDA officials generally agreed that, should a second round of EZs and ECs be authorized, it may be beneficial to allow the communities a somewhat longer time to apply in order to facilitate broader public involvement and a fuller consideration of the vision and the steps needed to accomplish it. Furthermore, some officials said that, if a second round is authorized, the federal government may need to provide more guidance on how to prepare the application documents to ensure a somewhat greater uniformity than they had experienced in the current program. At seven of the eight rural EZs and ECs we visited, officials noted that erroneous information, provided primarily by officials from USDA headquarters at meetings around the nation, caused misunderstandings about the operations of the EZ/EC program. At some of the meetings, the federal headquarters officials said that the EZs and ECs would receive the EZ/EC SSBG funds directly. Two of the EZs expected to receive the total amount of the EZ/EC SSBG funds—$40 million—in two consecutive annual payments, while some ECs believed that they would receive their total payment of about $2.9 million shortly after they were selected. In fact, as we discussed earlier, the communities are receiving their funding incrementally through the state agency as needed to pay for benchmark activities. Furthermore, some communities were told, incorrectly, that they did not have to get approval from any federal or state entity to use the funds for projects that were consistent with the strategic plan. The incorrect information provided by USDA officials caused difficulties for several state agencies and rural communities. For example, one EC had to revise its plan when it learned how the funds were actually to be distributed. The community had planned to obtain the lump-sum payment, put it into an interest-bearing account, and use the interest, which would have been considerable, to fund some part of certain projects. Since no lump sum was made available, the EC revamped its plan to obtain alternative sources of funding for some of its projects. Several of the EZs and ECs that we visited have encountered some difficulty in sorting out which federal standards apply to certain types of projects financed with EZ/EC SSBG funds. Those funds can be used for construction projects, such as water and sewer proposals, if the projects are related to one of the program’s goals, such as providing training to disadvantaged youth. However, the act did not specify any standards for these new allowable uses. As a result, the communities have been deciding for themselves which construction standards they will follow. The communities have taken different approaches to address this difficulty. For example, officials at one EZ seeking to build a water system told us that they were unable to get guidance from HHS and decided to follow the environmental regulations that they considered most appropriate—those governing the use of the Department of Housing and Urban Development’s Community Development Block Grant program—for that project and for any other project that might involve environmental issues. Faced with a similar dilemma, another EZ took a different approach, deciding to follow the environmental regulations associated with the primary funding source for a given project. Some rural EZ officials seeking clarification on this issue contacted HHS, which oversees the EZ/EC SSBG funds. According to these officials, HHS did not indicate what construction standards should be used. Consequently, the community officials have used their best judgment on how to proceed with specific projects and activities. Some EZ officials added that they are concerned that they may be legally liable if they choose to follow an incorrect standard and may have to replace such things as improperly sized water or sewer pipes, thereby incurring considerable costs and causing disruption. According to the HHS regulations and the Terms and Conditions of the EZ/EC program, the financial standards that the states are to apply in administering the EZ/EC SSBG funds are the standards that they use for expending their own state funds. However, officials in three of the states we visited told us that HHS program officials had verbally appealed to them to be flexible in applying their standards. This conflicting guidance has led to disagreements between some of the state agencies and the EZs and ECs over who has oversight responsibility. For example, when one EC requested a drawdown of funds for expenses that included liquor, the state agency disallowed payment for the liquor. The state agency argued that Office of Management and Budget Circular A-87, the standard adopted by the state, did not allow expenditures of federal funds for liquor. State agency officials told us that HHS verbally asked the state agency to be flexible and allow the expenditure and advised them not to worry about having to repay the expenditure at a later date. The state agency officials told us that they wanted to cooperate with HHS in the EZ/EC program, but they also wanted the state to comply with its own regulations, including Circular A-87. The state ultimately disallowed the expenditure. In another state, the EZ submitted 22 project proposals to the state agency for its review prior to a formal request to draw down funds. According to state agency officials, the proposals did not meet the state’s fiscal standards in that most of the proposals had budgets that were inconsistent with reasonable and prudent business practices. These budgets reportedly included such items as salaries and fringe benefits that were above the industry’s average. State officials told us that HHS had appealed to them on numerous occasions to be more flexible in their reviews of the EZ’s proposals. As of February 3, 1997, the state had approved no funds for these 22 proposals. Under the EZ/EC program, USDA’s Office of Community Development is responsible for overseeing the participating rural EZs and ECs. It is to carry out its responsibilities through site visits by USDA state coordinators and USDA headquarters’ reviews of the progress reports periodically submitted by the EZs and ECs. However, USDA cannot adequately fulfill its oversight responsibilities because it has not received complete progress reports from all of the USDA state coordinators or the EZs and ECs. USDA’s EZ/EC state coordinators do not provide systematic reporting on the progress of rural EZs and ECs. Among other things, the state coordinators are responsible for reviewing all benchmark changes to ensure the communities’ participation and conformance with the strategic plan. They are also involved with the initial approval of these changes. Most of these coordinators, who were chosen from the existing staff at the USDA state offices, have had little experience in overseeing the broad range of a community’s economic and social development projects and have not received training in how to monitor and report on the communities’ progress. USDA officials agreed that their EZ/EC state coordinators needed training but told us that funding constraints prevented them from developing and offering oversight training. Oversight is further hampered because the EZs and ECs are not consistently reporting their progress to USDA. USDA’s regulations require the EZs and ECs to report their progress at least annually. However, as noted earlier, the information provided is inadequate. Only 14 of the 33 communities had provided systematic information on their progress as of January 1, 1997. As a new approach to providing development assistance to rural areas, the EZ/EC program has faced a number of problems, several of which were associated with the program’s start-up and are no longer of immediate concern. However, some issues related to the guidance for the program continue to cause confusion among the program’s participants and could hamper the program’s progress. These issues include (1) the absence of written guidance defining the standards to be followed when using EZ/EC SSBG funds for construction-related projects and (2) conflicting guidance about the fiduciary responsibilities that the participating states should exercise for ensuring that the EZ/EC SSBG funds are spent in accordance with the appropriate financial standards. Additionally, in view of the significant level of federal funds supporting rural EZs and ECs, it is important that USDA have a sufficient capability to oversee the progress that these communities are making in implementing the program. USDA’s current oversight system, however, provides only piecemeal information on the EZs’ and ECs’ progress. As a result, USDA lacks the systematic information necessary for overseeing the program, including identifying problems and helping the communities to develop solutions. To reduce confusion about the program’s guidance on the uses of and financial controls over the EZ/EC SSBG funds, the Secretary of Health and Human Services should direct the Assistant Secretary for Planning and Evaluation to (1) clarify which construction-related standards the EZs and ECs should follow in using the EZ/EC SSBG funds and (2) eliminate the conflicts between the Department’s verbal and written guidance on the states’ fiduciary responsibility for the EZ/EC SSBG funds. To improve USDA’s oversight of the EZ/EC program, the Secretary of Agriculture should instruct the Director of the Office of Community Development to upgrade the Office’s monitoring system so that it can routinely provide the necessary information for assessing the progress of the EZs and ECs in implementing the program. This action could be accomplished by more strictly enforcing the EZs’ and ECs’ current self-reporting requirements and by developing more systematic reporting requirements for USDA’s EZ/EC state coordinators. We provided copies of the draft report for review and comment to USDA and HHS. These agencies’ written comments and our responses appear in appendixes III and IV, respectively. In commenting on the draft, USDA noted that it concurred with our conclusions and was implementing changes in response to our recommendation. USDA also made a number of comments about the difficulties of beginning a new kind of program, and we have revised our report, where appropriate, to reflect these comments. In particular, USDA concurred with our finding that the time frames for communities to apply for EZ/EC status were short and that should a second round of EZs and ECs be authorized, the Department would expect to be more fully staffed and able to better assist the applicants, both through direct guidance and with a more structured application format. USDA also made a number of comments about our analysis of the federal investment in the EZ/EC program and provided additional information about the Department’s future anticipated financial support of rural EZs and ECs. We have included this additional information and revised our estimates in consultation with USDA program officials. In their comments on the draft report, HHS officials stated that they will work to clarify several issues raised in the report, including the applicability of construction standards and federal fiscal standards to the program. HHS officials also suggested a number of changes to the report that would, among other things, clarify local, state, and federal roles in the EZ/EC program. Furthermore, these officials emphasized the need for flexibility in administering the program so that it can achieve its full potential. We incorporated these comments where appropriate. We also sent the detailed information on each EZ and EC we visited (as presented in app. I) to the cognizant local officials for their review and comment. We made several technical changes in response to the comments we received. In addition, we sent the sections of the report describing the problems resulting from the conflict between HHS’ written and verbal guidance on financial standards to the cognizant state government officials for review and comment; these officials concurred in our presentation of the issues discussed in the report. We conducted our review from June 1996 through February 1997 in accordance with generally accepted government auditing standards. Our scope and methodology are discussed in more detail in appendix II. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days from the date of this letter. At that time, we will send copies of this report to the House Committee on Agriculture, other interested congressional committees, the Secretaries of Agriculture and Health and Human Services, the Director of the Office of Management and Budget, and other interested parties. We will also make copies available upon request. If you have any questions about this report, please call me at (202) 512-5138. Major contributors to this report are listed in appendix V. The Kentucky Highlands Investment Corporation is the lead entity for the Empowerment Zone (EZ); this Corporation was created in 1968 to foster economic development in the area. A steering committee consisting of representatives from each of the three subzone areas was established; an effort was made to ensure that the committee was balanced in terms of geographical representation, income, and expertise. The steering committee also includes representatives from the Board of Directors of the Kentucky Highlands Investment Corporation, local and state governments, economic development agencies, universities, and local residents. The steering committee has the overall responsibility for implementing the strategic plan and for providing guidance throughout the implementation of the plan. The Empowerment Zone/Enterprise Community Social Services Block Grant (EZ/EC SSBG) funds for the EZ pass through the Kentucky Department of Financial Incentives to the Kentucky Highlands Empowerment Zone for its use. As of December 31, 1996, the EZ had obtained about $7.4 million of its allocated EZ/EC SSBG funds for use in its projects. The EZ’s strategic plan sets forth a four-pronged approach to revitalizing the communities included within the Zone: developing economic opportunity; promoting tourism; building infrastructure; and enhancing the quality of life. The EZ has 24 benchmarks. The projects include the following: establishing a development venture capital fund to invest in businesses located within the EZ; starting 150 home-based businesses in each of the three subzone areas, including training the home keyers to perform data entry work and assisting them in purchasing the computer equipment; building and equipping four rural fire stations within the EZ; and expanding a county library and increasing its telecommunications capacity. The Mid-Delta Empowerment Zone Alliance originated in January 1994 as a collaborative arrangement between The Delta Foundation and The Delta Council, representing poor minority and more affluent white interests, respectively. These two organizations came together to develop a strategic plan to benefit all citizens of the area, to apply for the EZ/EC program, and to establish the Alliance. The Mid-Delta Empowerment Zone Alliance Commission was formed in April 1994; it includes representatives from—among other elements—businesses, churches, colleges, community groups, low-income groups, and public schools from all areas of the zone. The Commission reviews and votes on all proposals for projects to address the benchmark projects on the strategic plan. The EZ/EC SSBG funds pass through the Mississippi Department of Human Services to the Mid-Delta Empowerment Zone Alliance for its use. As of December 31, 1996, the EZ had obtained about $221,000 of its allocated EZ/EC SSBG funds for use in its projects. The EZ’s strategic plan focuses on three themes: building community in the Mississippi Delta, increasing economic opportunity in Mississippi Delta communities, and sustaining community and economic development in Mississippi Delta communities. The EZ has 41 benchmarks. Specific projects for the EZ include the following: expanding and strengthening businesses and industries by providing assistance in accessing capital, business and technical assistance, and marketing; improving the quality and accessibility of health care by seeking to increase the number of doctors serving the Mid-Delta region; improving race relations by creating a race relations council; and promoting community beautification through the creation of a recycling program. The lead entity is the Rio Grande Valley Empowerment Zone Corporation, which was created to manage the EZ and implement the strategic plan; the corporation is headed by a chief executive officer who manages a small staff. The Corporation reports to a 19-member board of directors, the majority of whom were appointed by the county judges of the four counties. The board members include two directors from each of the four counties’ subzone advisory committees. Each of the four counties appoints a subzone advisory committee for advocating matters within the subzone; two of the four subzones have also allocated funds to administration to employ a full-time professional subzone manager to oversee the day-to-day operations within the subzone. The EZ/EC SSBG funds pass through the Texas Health and Human Services Commission to the Rio Grande Valley Empowerment Zone for its use. As of December 31, 1996, the EZ had obtained about $4.9 million of the EZ/EC SSBG funds for use in its projects. The EZ’s strategic plan focuses on 10 objectives, including (1) improving the quality of life to discourage outmigration from the area, (2) providing programs for literacy and living skills, (3) initiating regional business development, and (4) improving the availability of housing by providing new housing and increasing access to the existing housing. The EZ has 49 benchmarks. Specific projects include the following: establishing a small business incubator; developing a historical district for small businesses; implementing a flood control project; and establishing a community elder care/youth recreation center. As of January 1997, the EC was in the process of reincorporating and negotiating revisions to the memorandum of agreement. At the time of our visit, the EC was governed by a board drawn from the 10 Census tracts comprising the EC. In addition, each of the 10 subzone areas had established local EC boards to oversee projects within the subzone. The Central Savannah River Area Regional Development Center was the lead entity for the EC. The EZ/EC SSBG funds pass through the Georgia Department of Community Affairs to the Central Savannah River Area Enterprise Community for its use. As of December 31, 1996, the EC had obtained about $429,000 of the EZ/EC SSBG funds for use in its projects. The EC’s strategic plan emphasizes seven goals: (1) agriculture, business, and economic development; (2) human development, health, and public safety; (3) education; (4) housing; (5) arts, recreation, and cultural tourism; (6) public infrastructure; and (7) community organizing, coalitions, and partnerships. The EC has 12 benchmarks. Specific projects include the following: operating general education degree classes for the EC’s residents; establishing family service centers providing such services as youth recreation and leadership classes and adult literacy classes; and training community outreach organizers to foster community involvement. The Crisp/Dooly Partnership, Inc., is the lead entity and is responsible for implementing the enterprise community’s strategic plan. The Crisp/Dooly Partnership reports to a 32-member board consisting of representatives of Crisp and Dooly counties, 16 from each county, and are drawn from such organizations as economic development councils, chambers of commerce, and boards of education as well as from law enforcement groups, churches, and low-income residents. The EZ/EC SSBG funds pass through the Georgia Department of Community Affairs to the Crisp/Dooly Joint Development Authority, which is fiscally responsible for the EZ/EC SSBG funds. The Crisp/Dooly Joint Development Authority consists of a separate board of eight directors who are appointed by the Crisp and Dooly county governments and who, in turn, release the funds to the Crisp/Dooly Partnership, Inc., for the implementation of the strategic plan. As of December 31, 1996, the EC had obtained about $215,000 of its EZ/EC SSBG funds program for use in its projects. The EC’s strategic plan emphasizes five goals: (1) social and economic empowerment for developing innovative community services, (2) development of Crisp/Dooly counties’ economic partnership to coordinate economic development initiatives, (3) human and community development through improved community relations, (4) improving education, and (5) improving the quality of life and of the environment. The EC has 37 benchmarks. Specific projects include the following: building a postsecondary vocational-technical center; establishing an adult literacy program; and developing a rural transportation system. The lead entity for the EC is the City of Lock Haven City Council; a full-time Federal Enterprise Coordinator was hired by the city to manage the day-to-day operations of the EC. A Federal Enterprise Committee oversees the EC; several subcommittees, such as the economic development subcommittee and health and human services subcommittee report to the EC Committee. The EZ/EC SSBG funds pass through the Pennsylvania Department of Public Welfare to the City of Lock Haven Enterprise Community for its use. As of December 31, 1996, the EC had obtained about $456,000 of the EZ/EC SSBG funds for use in its projects. The EC’s strategic plan states that its main goal is to promote economic development through job creation and retention. The EC has 36 benchmarks. Specific projects include the following: establishing a micro-revolving loan fund to assist small and start-up establishing a partnership among the city, Clinton County, local banks and lending institutions, local housing nonprofit organizations, and housing developers to expand the supply of affordable housing for elderly and low-income residents; and assisting in the renovation of a job training facility and in funding job training workshops in such subjects as computer skills. When the EZ/EC program was announced in 1994, a group of 22 citizens from this very poor area of Mississippi came together to discuss applying for designation as an EZ or EC. With the assistance of an established local Planning and Development District, they applied for and were subsequently designated as an EC. In November 1995, this group was incorporated as the North Delta Mississippi Enterprise Community Development Corporation. A 22-member board, consisting of the citizens who had been involved in the preparation of the strategic plan, was installed and authorized to determine the major personnel, fiscal, and program policies and the overall program plans and priorities and to give final approval to all corporate initiatives. The EZ/EC SSBG funds pass through the Mississippi Department of Human Services to the North Delta Enterprise Community for its use. As of December 31, 1996, the EC had obtained about $25,000 of the EZ/EC SSBG funds for use in its projects. The EC’s strategic plan focuses on four areas: (1) economic and community development, (2) empowerment through the ability of the EC to solve its own problems and create its own opportunities, (3) human services and physical development, and (4) natural resources and environmental concerns. The EC has 16 benchmarks. Specific projects include the following: developing parks, recommending state legislation for a tax-incentive program, providing small business training, and increasing the availability of safe and affordable housing. The City Council of Watsonville is the lead entity for the EC; the deputy city manager has the day-to-day responsibilities for the EC. An advisory steering committee represents the residents of the EC; however, the city council has decision-making responsibility. The EZ/EC SSBG funds pass through the California Department of Social Services to the City of Watsonville Enterprise Community for its use. As of December 31, 1996, the EC had obtained about $250,000 of the EZ/EC SSBG funds for use in its projects. The main emphasis of the EC’s strategic plan is youth development. The EC has 15 benchmarks. Specific projects include the following: establishing youth job training, including teaching basic job-seeking expanding and renovating recreation facilities for at-risk youth in several impoverished parts of the city; building and operating a small business retail incubator in conjunction with the new transit center; and improving the downtown area by refurbishing retail businesses’ facades. To estimate the cost of the rural EZ/EC program, we reviewed information on the resources available to the EZ/EC program from the U.S. Department of Agriculture (USDA), the Department of Health and Human Services (HHS), and 13 other federal agencies. We also obtained tax-incentive information from the Internal Revenue Service and spoke with officials in the Office of Tax Assessment. To review the status of the EZ/EC program’s implementation and identify the difficulties that communities have encountered, we talked with officials and obtained information at all 3 rural EZs, 5 of the 30 rural ECs, six states, and the two principal agencies, USDA and HHS. We selected ECs that are located in the same state as the EZs and added ECs from three other states to provide geographic distribution. During our visits to these communities, we visited selected projects to discuss the EZ/EC program with the individuals most directly involved at the local level. We also reviewed the strategic plans, benchmarks, status reports, and funding documents for the eight EZ/ECs visited, as well as information maintained by USDA on the remaining 25 rural ECs. We also examined the progress reports available at USDA’s headquarters. To evaluate USDA’s oversight of the EZ/EC program, we reviewed the applicable regulations, discussed the roles of the USDA state coordinators with USDA headquarters officials, examined USDA’s central files on progress reports, and requested reports from USDA’s State coordinators. We also interviewed the USDA state coordinators in the six states we visited. We performed our work in accordance with generally accepted government auditing standards from June 1996 through February 1997. The following are GAO’s comments on the U.S. Department of Agriculture’s letter dated March 10, 1997. 1. We agree with USDA that the EZ/EC program is different from traditional federal programs and that the program challenges communities to engage in activities with which they have little experience. We have modified our report accordingly. 2. While we recognize that this program required a steep learning curve for all participants, we still believe that USDA has had a sufficient amount of time—42 months after the passage of the authorizing legislation—to have put into place systematic oversight of the program. 3. We believe the commitment and actions outlined by USDA to address the recommendations in our report go a long way toward correcting the problems we noted concerning the need to upgrade the Office of Community Development’s monitoring system. 4. We have modified our report to include USDA’s concurrence that all parties agreed that the initial time frames permitting communities to apply for EZ or EC status were inadequate. 5. We have deleted the references to supplantation in the report. A discussion of supplantation was not needed to illustrate our concern about the possible conflicts between verbal instructions and written regulations on administering EZ/EC SSBG funds. 6. We have added statements about USDA headquarters staff members’ visits to rural EZs and ECs and about the responsibilities of the state coordinators. 7. We agree with USDA that situations such as the one portrayed in our report will arise. This is precisely the reason why we believe that USDA needs a strong oversight capability, i.e., one that will identify problems early on and help focus the assistance, training, and consultation needed to help the EZs and ECs resolve the problems. 8. We have clarified the language to recognize that the report’s estimates of total EZ/EC funding includes funds that would not represent additional appropriations but, rather, a special targeting of appropriations that would have been made in any case in order to support rural communities under the various programs of the participating agencies. We have also added language to the report which notes that there may be some offsetting benefits to the government, such as increased tax revenues, resulting from the creation of new jobs. Finally, USDA’s statement that funds are approximately $30 million less than GAO’s estimate was in response to a prior GAO estimate. USDA agrees with the estimates contained in this report. The following are GAO’s comments on the Department of Health and Human Services’ letter dated March 17, 1997. 1. We have revised the report to consistently use the term “special consideration.” 2. We have revised the report to clearly note that EZ/EC SSBG funds are to be spent in accordance with the communities’ strategic plans. 3. We have revised the report to highlight the authority that local governance structures were given under the amended SSBG program. 4. We do not believe that the additional information on HHS’ guidance was necessary to understand the report’s findings. Therefore, we did not include it as an appendix. 5. We have added more detail on USDA’s role in the EZ/EC program. 6. We have revised the report to recognize that HHS officials believe that the short application period created planning and organizational difficulties. 7. We have revised the report as suggested to note that the 1993 act provided the authority to use the EZ/EC SSBG funds for a wider variety of purposes than was previously permitted. 8. Our report is not intended to question the ability of local officials to make decisions. Rather, it merely points out that local officials told us that they need additional guidance on what standards to apply to the EZ/EC SSBG funds. 9. We have deleted the references to supplantation in the report. A discussion of supplantation was not needed to illustrate our concern about the possible conflicts between verbal instructions and written regulations on administering EZ/EC SSBG funds. Robert C. Summers, Assistant Director John K. 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Summary: Pursuant to a congressional request, GAO reviewed selected aspects of the Department of Agriculture's (USDA) rural Empowerment Zone/Enterprise Community (EZ/EC) Program, focusing on: (1) the federal funding levels of the rural EZ/EC program over the 10-year life of the program; (2) the status of the implementation of the program; (3) the difficulties that the communities have encountered in implementing their plans; and (4) USDA's oversight of the program. GAO noted that: (1) it estimates that federal funding for the rural EZ/EC program will total more than $1 billion over the 10-year life of the program; (2) this amount includes the $208 million in EZ/EC funds from the Social Services Block Grant (SSBG) program and an estimated $428 million from tax incentives; (3) estimates for direct funding from federal, state, and local programs as well as private sources are not generally available; (4) however, one federal agency, USDA, reports that it plans to provide about $246 million to the rural EZs and ECs over the first 4 years alone and that its funding for the 10-year life of the program could reasonably be expected to reach $600 million; (5) the status of the communities' implementation of the EZ/EC program varies; (6) all 33 rural EZs and ECs have established the basic organizational structures and procedures necessary to implement their strategic plans; (7) in terms of implementing the projects contained in these plans, such as day care services, emergency 911 services, and job training, some communities have made considerable progress and some have made very little; (8) the rural EZs and ECs have experienced a number of difficulties that have slowed their initial efforts, continue to impede their progress, or both; (9) these difficulties include the short time frames provided for applying to the program and the initial misinformation provided by officials at USDA headquarters about the program's basic operations; (10) while some of these difficulties have been or are in the process of being resolved, two issues continue to be of concern; (11) these issues are a lack of clarity about which federal regulations are applicable to the construction projects funded by EZ/EC Social Services Block Grants, and the conflict between the verbal guidance and the written guidance that the Department of Health and Human Services (HHS) has provided to the states on their responsibilities for ensuring that funds are reasonably and prudently spent; (12) under the EZ/EC program, USDA is responsible for overseeing the progress of the rural EZs and ECs and USDA is to accomplish this oversight through reviews of the periodic reports submitted by the EZs and ECs and by site visits conducted by USDA field personnel, known as EZ/EC state coordinators; (13) however, USDA cannot adequately fulfill its oversight responsibilities because the EZs, the ECs, and the EZ/EC state coordinators do not provide USDA with complete and systematic progress reports; and (14) consequently, USDA lacks the basic management information for identifying problem areas.