Mr. Chairman and Members of the Subcommittee:

I appreciate having the opportunity to appear before you and review the work of the Appalachian Regional Commission (ARC). Governor Mark Warner, the States' Co-Chair this year, is out of the state on an economic development mission and cannot be with us today, but I am pleased to be joined this afternoon by his Alternate to the ARC, Bill Shelton. Governor Warner has been a passionate advocate for the Appalachian part of his state, and he, Bill, and I enjoy a strong working relationship.

At the outset, Mr. Chairman, let me say that we appreciate your personal leadership in guiding our reauthorization measure last year. This is the longest reauthorization in the agency's history and President Bush was pleased to sign this bipartisan measure last spring. I can report that the reauthorization is working well. We are moving forward to make the new program authority in telecommunications an integral part of our activities, and we are renewing our commitment to target our funds to the region's most severely and persistently distressed counties and areas.

As the subcommittee knows, ARC is a unique federal-state partnership, with decision-making shared equally between the federal government and the Governors of the 13 Appalachian states. We like to say that this is neither dictation by Washington to the states nor is it simply turning funds over to the states through a block grant. Rather, it is true collaboration. It is a model that for over 35 years has demonstrated its effectiveness in meeting the special needs of the Appalachian region.

ARC focuses on the key building blocks of economic development. Our statute recognizes that giving Appalachia a full seat at the table of American prosperity requires a multi-faceted approach to economic development. As a result, Congress has given us a combination of broad program authorities.

The report that led to ARC's creation in the 1960s proclaimed that Appalachia was "a region apart—both geographically and statistically." We were established to address economic distress that is persistent, widespread, and systemic. Our task is to tackle the challenges of an entire region that had been left behind for generations, a region suffering from pronounced underinvestment, isolated by terrain and history from the currents of national economic growth. This is complementary to the Economic Development Administration's mission to serve communities suffering from persistent economic distress or communities facing sudden economic dislocations.

Many Appalachian communities are really almost in a pre-development stage of economic development. They face formidable barriers to economic opportunity and growth, such as inadequate infrastructure, limited financial resources, and weak local institutions. ARC was created to help get these communities "in the game." Our goal is to help them become net contributors to the national economy. We are all better off when this occurs.

Our strategic plan reflects this comprehensive approach. Our investments can fall into five general areas: education and training, basic infrastructure, local leadership development, small business assistance and diversification, and health care. If a community is going to become economically self-sustaining—and that is our objective—it must have all five of these basic building blocks. ARC brings a rich menu of options to the task of promoting economic development.

In many ways ARC acts as the facilitator of local economic development, helping local communities create their own vision for growth and then working with them to create opportunities for achieving that vision. We help them identify and coordinate a broad variety of outside resources, ranging from local dollars to assistance from nonprofit organizations to private sector investments. In short, we are much more than a grant-making agency; we are a convener, a catalyst, an advocate.

We are often described as the "glue money," the "mayo on the sandwich" that makes a project go. Communities often come to us only after they have been unable to match up with the grant funds that are available at other federal agencies. Or, they see ARC money as a way of getting an even bigger impact out of a project that one of our sister agencies is funding. In yet other cases, we provide the initial assistance, through a small planning grant or a capacity-building project, that ultimately leads to an application for funding by another agency. In short, our small dollars are used to help our communities get access to the folks that have the big dollars, the larger federal agencies like EDA, Rural Development, or HUD.

One key group that we interact with is the network of 72 local development districts (LDDs) which serves every one of our 410 counties. These multi-county planning and development agencies are the front-line troops in our battle for economic opportunity in Appalachia. Their boards are made up of local elected officials and other local leaders—the people who best understand what our communities need. These are also the people who are most likely to be providing the vision for their communities. Across Appalachia, more than 2,000 local leaders participate through the boards of these LDDs, helping craft regional development strategies, piloting innovative approaches, and leveraging ARC dollars with other public and private sector investments.

Although the focus of this hearing is on ARC's non-highway work, I do need to point out that the construction of the Appalachian Development Highway System (ADHS) has been central to ARC's mission since the agency's creation. Largely bypassed by the interstate system and plagued by an inadequate network of unsafe, winding, two-lane roads, Appalachia's communities were effectively cut off from national and international markets. Congress recognized that a modern highway system was critical to the economic future of Appalachia. The ADHS is the only major highway system created primarily to foster economic development.

We are making great progress with the ADHS. Now 85% of it is open to traffic or under construction. And the ADHS is having the intended impact. A study conducted by Wilber Smith Associates in 1998 analyzed the economic development impact of 12 of our 26 corridors that were largely complete. By 1995 these highways had yielded a net increase of 16,000 jobs that would not have existed without these ADHS corridors. The study predicted that by 2015 these corridors, which are less than half of our total number of corridors, will have created 42,000 net new jobs.

Accomplishments

The efforts of ARC, in collaboration with a variety of other federal and state programs, have contributed to significant accomplishments in moving the Appalachian region into the nation's economic mainstream. These improvements reflect the steady and persistent work of ARC and its partners over the past 38 years. The accomplishments suggest that a long-term commitment to reversing historic patterns of neglect and underinvestment can pay off. The number of economically distressed counties, for example, has been cut in half, from 223 in 1965 to 121 in 2003. Based on the most recent data, that number will drop even more dramatically to 91 next year.

Since our creation in 1965, the poverty rate has been cut by more than half (from 31.1% to 13.6%), the infant mortality rate has been reduced by two-thirds, and the percentage of adults with a high school education has increased by over 70% (putting it on par with the rest of the country). A network of 400 ARC-funded health clinics has improved access to health care across the region and more than 800,000 Appalachians now have access to clean water and sanitation facilities through ARC-funded projects.

A look at last year's work suggests both the scope and the impact of ARC's programs. The Commission's $72 million leveraged $334 million in other public and private funds—$219 million from other public sources and another $115 million in private investment. That's a leverage of almost $5 in other money for every $1 in ARC funds.

Here's the impact of those funds last year:

• 19,500 jobs were created through industrial infrastructure improvements
• 11,500 households received water and sewer service for the first time, and another 62,600 households were served by upgraded water and sewer systems
• 9,200 jobs were created through small-business assistance programs
• 25,600 students participated in school readiness, dropout prevention, school-to-work and GED programs, while 5,200 trainees received basic education, skills training, or customized training for industry
• 66 physicians were placed in the region through the J-1 visa waiver program

Challenges Remain

While we have seen remarkable progress in the region, much remains to be done. Almost a fourth of our counties continue to be persistently and severely distressed. Appalachia's per capita market income still is only about three-fourths of that of the nation at large. Our poverty rates are still higher than the national average. Our college graduation rates are failing to keep pace with those of states outside the region. And major swaths of Appalachia—particularly in New York, Pennsylvania, and West Virginia—experienced a significant loss of population during the 1990s.

Appalachia faces a particularly challenging set of economic difficulties, as globalization and the technology revolution transform the international economy. Economic downturns tend to go deeper and last longer in our region than they do in the rest of the country. We are disproportionately dependent on manufacturing jobs. Over the past decade we have lost over 100,000 manufacturing jobs in the non-durable goods sector. One out of every three jobs lost in the apparel industry occurred in Appalachia, and one out every five jobs lost in textiles came in our region. Similar challenges now threaten the furniture industry.

And, Mr. Chairman, I don't need to tell you about the difficulties confronting the steel industry. In the last decade, primary metals sectors such as steel have lost over 23,000 jobs in Appalachia.

Similar declines have hit our extractive industries. Appalachian coal-mining employment has dropped by more than half in the past 15 years, as mechanization, competition from western coal, and foreign production reduce the need for Appalachian miners.

These statistics suggest that there is still much to be done if we are to make Appalachia's communities economically self-sustaining.

Interagency Collaboration

One key to ARC's success is its ability to work with other federal agencies. The Economic Development Administration is one of our best partners. We have enjoyed a strong and productive relationship with EDA through the years. Sometimes we go in together to fund a project—in our role as facilitator—while at other times they administer projects for us, even though they have no funds in the project themselves.

We believe this partnership with EDA is working effectively, and, as stated in the President's FY 2004 budget, we are open to further collaboration in the areas of performance measurement and strategic regional investment. Our programs complement each other well.

I should point out that, in addition to EDA, ARC works with a variety of other federal agencies, as our programs are comprehensive and address many of the pre-development barriers that confront our communities. Last year, for example, we invested over $16 million through 57 projects with Rural Development at USDA, $9 million in 14 projects with the Tennessee Valley Authority, $6.7 million in partnership with HUD, and $2.3 million in 12 projects with EDA. In most cases, these projects would not have gone forward without the ARC assistance.

Let me review a few of our more recent activities that build on relationships with our sister agencies.

• Providing access to capital for small business. The Commission has provided over $2.9 million in support to eight emerging investment funds designed to address one of the significant barriers to growth facing Appalachian entrepreneurs: the lack of risk capital. To date, these emergent Appalachian funds have leveraged ARC's support to bring over $70 million in new capital into the region from private, philanthropic, and public sources, including the Federal Home Loan Bank system, the Small Business Administration's New Markets Venture Capital Program, and the Community Development Financial Institutions Fund at the Treasury Department.
  
  We have, for example, provided technical assistance and/or start-up capital to help two new Appalachian venture capital funds qualify for substantial Small Business Administration support as New Market Venture Funds. This fall ARC provided $900,000 to support creation of the Southern Appalachian Fund. The fund has raised an additional $4.1 million in private investment and has received conditional approval from SBA for support of $7.5 million. Without the ARC support, this fund would likely not have been eligible to receive SBA consideration.
  
  These venture funds, backed by major private sector investment, target Appalachian businesses for investment to spur local growth. They are already having an impact. Earlier this year, Butterfly.net, a small start-up software company in West Virginia, announced a major partnership with Sony and IBM to create a new generation of computer online games. Butterfly.net received significant investment from Adena ventures, another New Markets Venture Fund that ARC helped support. This will result in new jobs in Appalachia.
  
  In a related matter, we are currently working with a number of local banks, private investors, and ARC-funded revolving loan funds to enable them to compete for the New Markets Tax Credits provided by the Treasury Department. If these actions are successful, they will likewise result in substantial new private sector investment in Appalachia.
  
  These efforts to stimulate private investment in Appalachian businesses rest on the belief that the private sector must and should play a key role in enabling Appalachian communities to become economically self-sustaining. Government alone cannot do the job. Our role is to help create the conditions for private investment and growth, to provide the communities with the opportunity to compete. But it is up to those communities and the private sector to take advantage of these opportunities.
  
  
• Improving health care. Through an agreement with the Centers for Disease Control and Prevention, our two agencies are spearheading an effort to reduce the incidence of diabetes and cervical cancer in Appalachia. Our region suffers from disproportionately high rates of these two diseases.
  
  We are also collaborating with HHS Secretary Thompson's Rural America initiative in crafting a special program to target the special health care needs of our region, particularly certain significant health disparities and the problems of substance abuse in the region. We expect to join with Secretary Thompson in publicly unveiling this initiative this summer.
  
  Finally, we have a vibrant partnership with the State Department, the Immigration and Naturalization Service, HHS, and our state health offices in placing foreign physicians in health professional shortage areas throughout Appalachia. This "J-1 visa waiver program" has improved access to health care for literally thousands of Appalachian citizens.
  
  
• Supporting brownfields redevelopment. When EPA launched its brownfields program several years ago, we discovered that they were getting very few applications from Appalachia. We entered into a memorandum of understanding with EPA to jointly sponsor a series of outreach conferences to acquaint Appalachian communities with the opportunities offered by brownfields redevelopment. This is a good example of how our dollars are helping Appalachian communities get in the game to compete for monies from other agencies. In addition, our grants are being used, along with EPA funds, to clean up and redevelop these brownfield sites. We're the junior partner, but our grants are critical to the success of these projects.

We plan to continue these kinds of interagency undertakings. For example, we are in the final stages of developing a partnership with the National Endowment for the Arts that will help Appalachia's artisans focus on the business side of their work. We have a rich cultural and artistic heritage in this region that can be the basis for significant local economic activity. But many of our communities—and the artists themselves—lack the strategy and skills to capitalize on these economic opportunities. We and NEA hope to help correct that, with the result being the creation of new jobs and more vibrant local communities.

President Bush recognizes the importance of Appalachia and the economic challenges facing the region. The President strongly supports investing in Appalachia through a variety of federal programs, such as the No Child Left Behind Act, that will strengthen Appalachia's economy and lead to an improved quality of life for Appalachia's people.

The Administration is committed to strengthening the coordination between all the federal agencies that serve the region. ARC will be working with these other agencies to discuss how their programs and dollars can be better deployed to meet the needs of Appalachia's communities.

The Administration will also be exploring ways for these various economic development programs to do a more consistent and better job of measuring their performance. In promoting the development of Appalachia, it is important that the taxpayers get the biggest possible impact for their investment in this region. We will be working to craft common performance measures across agencies so that we can better assess how effective these programs are in fostering economic growth.

Keys to ARC's Success

Mr. Chairman, I think there are five key factors that explain why ARC has been so successful.

• It's targeted to the unique needs of Appalachia. Most federal programs have to craft their guidelines and regulations to respond to national needs and demands, and sometimes these don't really fit Appalachia. In a collaborative effort with our states and local development districts, ARC is able to tailor its programs to the particular challenges of this special region and develop strategies that sweep broadly across Appalachia. No other federal program has this kind of regional focus on Appalachia.
• It's flexible. Because of its broad program authorities, ARC funds can be used in ways that most other agencies' dollars cannot. One county may need ARC dollars to provide improved water service to attract new industry, while another may need ARC support to improve access to health care. This kind of flexibility encourages innovation and experimentation. It enables communities and states to respond effectively to emerging opportunities for economic growth.
• It's bottoms-up. ARC projects usually originate at the local level, reflecting local priorities and local needs. The local development districts help shape the response to those needs and, in many of our states, prioritize the projects being considered for ARC funding. Acting as a facilitator, ARC equips communities with the tools they need to achieve the vision that they themselves have set.
• It's shared decision-making. Both our funding guidelines and our grant decisions require the approval of both the Governors of our states and the Federal Co-Chair. Our guidelines and programs must advance the economic development strategies that our Governors have declared for their states. But at the same time, they must reflect the broader national interest of the federal government as well.
• It's adaptable. Throughout its history, ARC has been able to re-invent itself as the challenges—and opportunities—facing Appalachia have changed. Recognizing the importance of diversifying local Appalachian economies, ARC in 1997 launched a major initiative in entrepreneurship, designed to foster the creation, support, and expansion of home-grown businesses. Similarly, with the emergence of broadband technologies and services, ARC has moved aggressively to offer programs and funding that address the critical needs for access and use of telecommunications in Appalachia.

In conclusion, Mr. Chairman, ARC is on the right track. We are making progress in Appalachia. But this region is not yet fully integrated into the nation's economic mainstream. Wide swaths of persistent distress still sweep across the region, setting it apart economically from the rest of the nation. To make more rapid progress in addressing the needs of Appalachia, we need to better coordinate the resources of other federal agencies whose programs serve the region.

Through the years, ARC has developed a keen understanding of the impediments to economic development in Appalachia. We have seeded projects that demonstrate a variety of approaches for overcoming these obstacles. Through interagency coordination efforts, ARC will continue to contribute its knowledge of the region to better enable other federal programs to respond to Appalachia's unique challenges.

We appreciate the support we have received from you and this Subcommittee through the years, and we look forward to working with you in our common goal of reaching the day when the economic landscape of Appalachia looks like that of the rest of the country and ARC's special assistance is no longer needed.