Testimony of David A. Sampson
Assistant Secretary of Commerce
for Economic Development
Economic Development Administration
U.S. Department of Commerce
Before the
Subcommittee on Economic Development,
Public Buildings,
and Emergency Management
June 11, 2003
Chairman
LaTourette, Ranking Member Norton and Members of the Committee, thank you for
this opportunity to appear before the Economic Development, Public Buildings,
and Emergency Management Subcommittee regarding the reauthorization of the Public
Works and Economic Development Act of 1965 (PWEDA), as amended.
The mission of the
Economic Development Administration (EDA) is to help our partners across the
nation (states, regions and communities) create wealth and minimize poverty by
promoting a favorable business environment to attract private capital
investment and higher-skill, higher-wage jobs through world class capacity
building, planning, infrastructure, research grants and strategic
initiatives. It is my goal to make EDA
the standard-bearer for domestic economic development.
EDA was created
in 1965 to help communities generate new jobs, retain existing jobs, and
stimulate industrial and commercial growth in economically distressed areas of
the United States. Assistance is
available to both rural and urban areas of the nation experiencing high
unemployment, low per-capita income, or other severe economic distress.
In fulfilling its
mission, EDA is guided by the basic principle that distressed communities must
be empowered to develop and implement their own economic development and
revitalization strategies through close collaboration with the private sector,
local governments, and universities.
Based on these locally and regionally-developed priorities, EDA partners
with state or local governments, regional economic development districts,
public and private nonprofit organizations, and Indian tribes to help them
solve problems associated with long-term economic distress; sudden and severe
economic dislocations due to natural disasters; the closure of military or
other installations; changing trade patterns; or the depletion of natural
resources.
EDA’s work to
help communities was greatly advanced by my predecessor Dr. Philip Singerman. His work with the Transportation and
Infrastructure Committee in 1998 to
reauthorize EDA, set the stage for the improvements we seek in our proposed
legislation.
Since its creation nearly forty years ago, EDA has invested over $12 billion dollars to help distressed communities create an environment conducive to job growth and economic opportunity. This is a small fraction of the overall federal investment in economic development activities over the same period. According to a General Accounting Office study of federal economic development programs conducted in 2000, there are at least 30 federal economic development programs, providing approximately seven billion dollars to support economic development activities. That number is substantially larger today. And yet, despite this significant allocation of federal resources, many communities still remain economically distressed.
A New Federal Economic Development Strategy for the 21st Century
President Bush has said, “The role of government is to create conditions in which jobs are created, in which people can find work.”
The goal of federal economic development programs is to raise the standard of living for all citizens through increasing the wealth and overall rate of growth of the economy by encouraging local and regional communities to develop a more competitive and diversified economic base.
Government does not create jobs; rather it promotes conditions to attract private capital investment and job creation. Government should promote innovation, productivity and entrepreneurship, which, in turn, empowers distressed communities to increase private-sector investment.
EDA’s budget of $318 million may seem insignificant when compared to the nation’s $11 trillion economy. Indeed, much larger macroeconomic policies such as the President’s Jobs and Growth Package, recently passed by Congress, are critical to encouraging job creation and long-term economic growth for the overall economy. EDA’s budget may seem small compared to the dollar figures associated with these macroeconomic policies; however, EDA has a proven ability to provide catalysts for economic growth, at the local level, in areas the marketplace continually bypasses or that are experiencing sudden and severe economic dislocation. But EDA must be flexible, and must continue to demonstrate that its investments are producing results.
EDA has demonstrated through measurable outcomes the value of its leading
programs. I promise to continue to work
to assure that EDA is the leading edge of research strategy in promoting
EDA continues to make significant advancements toward these goals. We are reorganizing our workforce to improve and streamline our internal operations; we have adopted a balanced scorecard as a tool to measure our performance; and, we were recognized by the Office of Management and Budget for our performance with an increase of $15 million in the President’s fiscal year 2004 budget request. We were pleased that the February 3, 2003, Federal Times noted OMB’s recognition of EDA’s strong performance-based management and its proven results. We are seeking to transform EDA into a flexible, forward looking federal resource that focuses on investing in economic infrastructure that will promote development of regional engines of economic growth.
But these achievements are not enough. Many communities are still distressed; people
are still out of work. The
Administration’s proposal for the reauthorization of the Economic Development
Administration, transmitted to Congress on
Increased
Flexibility
As I travel across the country talking with our economic development partners, they repeatedly comment on the value to them of our programs’ flexibility. We’ve listened to their ideas about increasing that flexibility while maintaining, even increasing, accountability for the expenditure of taxpayers’ funds.
Many of the proposed changes in the bill are related to this objective. For example, this bill clarifies that certain non-profit organizations and special units of government qualify for EDA assistance. Community development corporations and municipal utility districts across the country are involved in promising economic growth strategies. This bill provides that EDA will work closely with them on these strategies. Many of these entities were not in existence when the EDA was created in 1965.
This legislation allows the savings, from construction projects completed under budget, to be used to improve a project, or allows EDA to recapture these under-utilized resources to fund additional economic development projects. Under current law, these funds are either returned to the federal treasury or are used to improve a project. EDA needs the flexibility to use these funds to invest in additional projects in distressed communities.
Finally, the Administration’s bill eliminates the provision in our law
dealing with overcapacity (Section 208).
This provision was more of an issue when EDA made large loans to entire
industry-sectors and has proven to be administratively burdensome to both our
grantees and our staff. We would also
note that communities providing mandatory matching funds will not invest in
projects creating over-capacity because they will not be viable over the long
term and the private-sector will not invest unless market demand exists. We will use investment guidelines to achieve
the purposes of this section in a less burdensome manner.
Enhanced
Coordination
This legislation proposes several changes to existing law to promote coordination among federal economic and workforce development programs, such as those authorized under the Workforce Investment Act. For example, a highly trained and skilled workforce is crucial to our economic growth. The President has stated that a better-educated workforce means America is more productive and that means more jobs and higher paychecks. This Administration is committed to developing closer linkages between workforce development and economic development. I have been working closely with my counterpart at the Department of Labor’s Employment and Training Administration to build these linkages. Our proposed statutory changes would make it easier for partnerships to be built at the local level.
Rewarding Results
With regard to
the bill’s proposals concerning results, EDA evaluates its programs by
measuring the results in such areas as the number of jobs created and the
amount of private-sector funds leveraged.
Correspondingly, EDA also requires its grantees to measure the results of
their projects.
This Administration expects high levels of
performance and results from the recipients of EDA investments and commits to
providing recipients an incentive to reach high performance goals. When an EDA-funded project provides excellent
results, taxpayers gain prompt project implementation, faster creation of
higher-skill, higher-wage job opportunities, timely investment of private
sector funds, and communities that are economically stable and more competitive.
EDA proposes a performance-based incentive
recognizing the importance we place on achieving results and the critical role
that our partners play in transforming distressed communities into successful,
economically stable communities.
EDA’s Transferable Performance Credit (TPC) will award our highest-performing partners with credit worth up to ten percent of the recipient’s grant amount. EDA will publish regulations clearly stating the performance requirements necessary to earn a TPC award. A TPC, recipient can choose to use their credit in one of the following three ways:
We believe that by recognizing high performance recipients with a significant and tangible incentive-based reward, the Transferable Performance Credits Award Program will raise the performance bar across the board for all EDA recipients. It will also help EDA evaluate projects at the front end of the process as it will encourage applicants to focus on achievable goals for the projects in submitting their applications. We also expect that the transferable feature of the performance credits will promote greater regional cooperation as neighboring communities collaborate to sell or trade credits for future EDA investments, thereby strengthening their regional competitiveness.
Twenty–seven years ago EDA created the first economic development revolving loan fund (RLF). Today, with a portfolio of over six hundred RLF’s, worth approximately $1 billion, EDA believes that it is both necessary and appropriate to implement critical management reforms to ensure the continued effectiveness and accountability of these funds. In its reauthorization proposal, EDA seeks new authority to correct technical issues to ensure the efficient operation and financial integrity of our Revolving Loan Fund Program.
Financial Integrity and Accountability of the Revolving Loan Fund Program
Over the past three years, the Office of Inspector General and others have conducted 52 audits and reviews of EDA Revolving Loan Funds.[1] I can tell you first hand that the seriousness of financial integrity problems in the revolving loan fund program is demonstrated by the several file cabinets full of documents we have had to review to resolve significant problems. 50 of these reports – 96 percent – revealed serious instances of non-compliance or failure to safeguard RLF assets. The findings reported the following:
1) 32 reported unused RLF assets due to start-up delays or insufficient demand for loans (61 percent);
2) 18 reported ineligible loans or borrowers, and failure to properly document loan decisions (35 percent); and,
3) 37 reported poor accounting and financial management practices, including failure to safeguard and protect RLF assets (71 percent).
The Inspector General reported significant problems for Revolving Loan Funds operated in every region of the nation, by many different local, state and regional development organizations. These 50 RLF’s represent a significant portion of EDA’s overall portfolio and I believe are indicative of problems with the program. We must act now to avoid much larger problems in the future.
Our proposed legislation provides EDA with the authority to write specific regulations addressing basic financial accountability standards that every EDA RLF must meet. These uniform standards will then be incorporated into the Single Audit Act compliance requirements. This will allow certified public accountants conducting RLF audits to verify the financial integrity of EDA RLFs on a regular basis.
These changes in our RLF program will produce positive effects on our partners around the country. With a more robust audit, EDA need only require an annual report from our RLF’s instead of the semiannual reports currently required.
Additionally, over sixty EDA RLF operators manage from two to four EDA RLFs, capitalized at different times from different EDA appropriations, such as a Long Term Economic Deterioration (LTED) RLF, a defense adjustment RLF, or created following a natural disaster. The proposed technical corrections will enable EDA to, merge multiple RLFs into a single, efficient fund per operator, thereby greatly simplifying the administrative and reporting burden for both the grantees and EDA. In many instances RLFs will decrease from four reports to one report, annually, and numerous RLF operators will decrease from eight reports to one report, annually. These changes will reduce bureaucracy, improve accountability, and save valuable staff time and resources for both our RLF operators and EDA.
Transfer of RLFs to Third Parties for Liquidation:
The legislation also seeks
new authority to transfer RLF portfolio assets to third parties for
liquidation. Due to issues of
non-compliance or simply for the convenience of the parties, EDA, in some
cases, needs to terminate an RLF. To
date, the uncertainty of how to deal with, and pay for, the liquidation of an
outstanding portfolio of loans has seriously impaired EDA’s ability to dispose
of these assets in a timely manner. By
allowing EDA to arrange the transfer of the RLF portfolio to a third party, the
new law will enable EDA to arrange for the orderly or timely disposition of an
RLF while paying for the necessary costs of liquidation activities from the
assets of the RLF being terminated.
Release of the Federal Interest in EDA RLFs:
Finally, the legislation seeks new authority to closeout existing RLFs by allowing the repayment of the initial grant used to capitalize an RLF after a period of twenty years. EDA fully recognizes the history, the differing concerns and the perspectives of the Committee, the RLF operators and economic development community. EDA believes it is time to address this long-debated issue. We believe that a solution, similar to the release characteristics of the U.S. Department of Agriculture’s (USDA) Intermediary Re-lending Program RLF’s (IRP-RLF), serves the interests of all parties. The IRP-RLF is capitalized with a thirty-year one-percent USDA loan. After repayment of the original USDA loan, the IRP-RLF, which continues to hold substantial assets, is free of its federal strings.
It is important to note that this provision is a very modest change to current law. Current law provides that a RLF grant recipient can cut its strings with the federal government by repaying the amount of the initial grant plus the federal share of the interest accrued on loans made with these funds. Our proposed provision would allow a RLF grant recipient to cut their strings with the federal government by repaying the amount of the initial grant only.
This provision would apply to RLFs that have demonstrated and sustained financial and program performance. I believe that after twenty years any high performing RLF will have provided considerably more new jobs and increased leverage of private-sector investment than originally anticipated.
We anticipate that the proposed buy-out option will be particularly attractive for the best performing RLFs and will become an important performance incentive for all RLFs. We also see great merit in treating EDA RLFs similar to USDA’s IRP-RLFs. By releasing the federal interest after repayment of the original investment, the new law will establish a more uniform federal policy for this unique type of federal economic development tool.
The ability of an RLF to close-out their grant from EDA after 20 years of successful management will provide EDA a powerful new management tool and RLFs with a strong incentive to increase their efficiency.
Further, this new authority will help EDA to correct the historic and growing imbalance of finite EDA resources available to monitor and administer an ever-increasing number of RLFs. The gradual reduction of EDA’s RLF portfolio will enable EDA to effectively utilize its staff for higher quality administration of the remaining grant portfolio. It will allow us to recognize our successes from the last twenty years and move on to future challenges.
Summary
Mr. Chairman and Members
of the Subcommittee, the Administration’s legislative proposals are valuable
program enhancments, critical to EDA’s continued success. They will safeguard the financial
integrity of EDA’s programs while ensuring a more flexible and forward looking
organization to meet the challenges of the 21st Century.
The testimony from my colleagues that you heard here
today demonstrates exciting new growth opportunities in the area of economic
development. To take advantage of these
opportunities the Administration’s legislation focuses on:
1) increasing flexibility to
allow us to take advantage of these exciting opportunities;
2) enhancing coordination to
work in a comprehensive fashion with other agencies to achieve results; and
3) most importantly the legislation
offers us a vehicle to reward results to our most successful partners.
Thank you for the opportunity to testify before you today
and I look forward to answering your questions.
[1]. 52 Audits include: 41 OIG RLF audits; 1 draft audit report; 1 audit of funding awarded under the defense conversion program; 4 single audit reports which were conducted by various independent public accounting firms; and 5 quality control reviews (QCRs) conducted by the OIG of independent public accounting firms that have performed audits of organizations receiving RLF funding.