I. Introduction

The Appalachian Region is home to nearly 23 million people living in 410 counties (Passage of pending surface transportation reauthorization legislation may add up to 12 additional counties to the Appalachian Region.) within 13 Eastern states.  Congress, in 1965, acknowledged the profound economic and social problems in the region that made it "a Region apart" from the rest of the nation.  It authorized the creation and funding of the Appalachian Regional Commission (ARC) to address the unusual economic and quality of life issues facing the people in Appalachia by serving as an advocate, knowledge builder, investor, and partner at the federal, state, and local levels. ARC was created to assist the region to join the rest of the nation and contribute to the overall prosperity of the country rather than being a drag on its resources.

Congress directed ARC, as a partnership of the federal government and the 13 governors of the Appalachian states, to tackle two major regional barriers to success – its isolated geography and the other related socioeconomic deficits that have historically inhibited economic and social progress.  The barriers were not seen as independent – even if the isolation could be resolved by building major highways throughout the region, the other deficits would continue to inhibit Regional progress.  In fact, if federal highway investments were not accompanied by corresponding investments in socioeconomic development, the highways could end up serving as an Appalachian "by-pass" that would exacerbate rather than remedy its problems.

Although resources from various public and private organizations contribute to addressing these issues, the partnership between the Appalachian states and the federal government is crucial.  It should be noted that the member states pay one-half of ARC staff costs and are therefore fully and actively involved in ARC initiatives.  By using a "bottom up" approach, ARC seeks input and solutions from local, regional, and state bodies.  ARC provides funds to communities that cannot afford to meet other federal or state agency requirements. (The Commission is a partnership composed of the governors of the 13 Appalachian states and a presidential appointee representing the federal government. Grassroots participation is provided through 72 local development districts—multi-county organizations with boards made up of elected officials, businesspeople, and other local leaders.) In many cases, ARC is the predevelopment agency – it provides seed money unavailable elsewhere to stimulate activities that ultimately allow a community to seek additional public funding.

Through the years, ARC has effectively used its funds to help communities make use of limited resources from other federal agencies.  These federal funds combined with state, local, and private money provide a broad program of assistance to the region. Historically, every ARC dollar is leveraged five times with matching funds from other public and private sources. In short, ARC grants often serve as the "glue" that helps initiate or keep together projects that may not be viable otherwise.  ARC leadership, coordination, and advocacy help local communities in Appalachia leverage other resources.

Another important ARC distinction is its long-standing focus on results.  As stated previously, specific emphasis is placed on providing assistance to severely distressed counties and areas where over 50% of ARC funds are expended. The ARC Strategic Plan is a framework and a decision making tool. Individual projects must demonstrate how they support the goals and strategies in the Plan.  Grant applications must include a description of the benefits to be derived from the project with particular emphasis on the extent to which the benefits will be realized on a continuing rather than a temporary basis.  Specific output, outcome and efficiency measures must be included. The results of each grant are reviewed to determine if the investment met its objectives. Project performance information is presented in the Commission's policy development meetings and is used to shape future ARC programs. Performance results are reported annually in the ARC Performance and Accountability Report, along with financial results, and are posted on the public ARC website.

From a strategic perspective, macro indicators are reviewed to evaluate progress in improving the standard of living within the region.  Fine-grained analyses of decennial Census data are conducted to assess progress and changes throughout Appalachia compared with the rest of the U.S. The number of distressed counties is evaluated annually along with key indicators such as poverty, per capita income, and unemployment levels. In addition, needs assessments, program evaluations, and look-back studies are endemic to ARC's operations.  Reviews of program initiatives are conducted every 5 years on a rotating basis.  These studies are used to plan future projects, evaluate the results of ARC's programs, and adjust and develop new strategies for tackling difficult and in most cases generational, long-standing problems.

Since 1965, through advocacy and leadership, research and knowledge building, targeted grant-making that has leveraged substantial other public and private funding, and partnerships with other agencies, ARC has made considerable progress. It has:

• Reduced the region's isolation by constructing nearly 2,500 miles of new highways, which represents approximately 80% of the Appalachian Development Highway System (ADHS) initiative.  The ADHS replaces a network of worn, narrow, winding two-lane roads, snaking through narrow stream valleys or over high rugged mountains.
• Improved the region's economic progress by improving the employability of the workforce (education, health care, skills training, school-to-work transition), improving living conditions (water and sewer and environmental quality), and strengthening the region's basic infrastructure to support a growing workforce and encourage public and private sector organizations to locate in Appalachia.
• Promoted Appalachian entrepreneurship and business development, by providing technical assistance, financing, and support to the region in marketing its unique cultural heritage and Appalachian products.

• decrease the number of severely distressed counties by more than 63 percent, from 223 to 82 counties (see Appendix B);
• reduce the region's poverty rate by one-half, from 31 percent to 13 percent;
• lessen the per capita income gap between Appalachia and the rest of the U.S from 22 percent below the national average to 18 percent;
• reduce the infant mortality rate by two-thirds and strengthen the rural health care infrastructure through the addition of over 400 rural health facilities;
• increase the percentage of adults with a high school diploma by over 70 percent; and
• increase the number of Appalachian households with drinking water and in-door sanitation facilities by 800,000.

Two independent studies found that ARC's coordinated investment strategy has paid off for the region in ways that have not been evident in other parts of the country without a regional development approach. A study in 1995 funded by the National Science Foundation compared changes in Appalachian counties with their socioeconomic twin counties outside the region over 26 years, from 1969 to 1991. This analysis, controlled for factors such as urbanization and industrial diversification, found that the Appalachian counties grew significantly faster than their economically matched counterparts outside Appalachia. A more recent similar analysis by East Carolina University compared Appalachian counties with matched non-Appalachian counties in the southeastern states, with similar findings.

Yet ARC's mission has not been completed.  Over 80 counties and many more smaller areas still are classified as severely distressed.  Much work remains to leverage the federal investment in the ADHS and to position the region to achieve socioeconomic parity.  This integrated budget and performance request for FY 2006 describes the outcomes that will be achieved, strategies for achieving them, and the funding necessary to do so.  ARC will continue to provide leadership, analysis, and problem resolution approaches to make strategic investments in the region. It will work closely with the state and community partners, building on existing public and private sector partnerships, and seeking new and innovative approaches for achieving desired results. 

II. Special Focus on Distressed Counties

The Commission by law directs at least half its grant funding to benefit counties and areas that are the most severely economically distressed in the region. In part, ARC also gauges its long-term progress toward achieving economic parity between the region and the rest of country in terms of the gradual reduction of such areas over time. Appendix B shows the 223 severely distressed counties in 1960 and the 82 counties designated for FY 2005. The change is dramatic.

Each year, the Commission uses strict criteria to specifically designate severely distressed counties and as a way to target resources to the most lagging areas.  Unlike other agencies, ARC uses a very conservative measure of severe economic distress. Distressed counties must typically meet three criteria: 1) per capita market income is not greater than two-thirds of the U.S. average, 2) three year unemployment rate is 150 percent of the U.S. average or greater, and 3) poverty rate is at least 150 percent of the national average. However, counties with at least twice the national poverty rate and meeting one other criterion for economic distress are also classified as distressed.

Using data similar to that for designating distressed counties, ARC identifies specific sub-county areas within transitional counties in accordance with the guidance in the legislation. For FY 2005, there are 607 distressed census tracts, an increase from 2004. The population of both distressed counties and distressed areas together is almost 3.7 million, or 16 percent of the region total.

Distressed county indicators are also used to identify the relative status of all the other counties in Appalachia:

• transitional counties  have economies operating below national norms but do not fully qualify as distressed;

• competitive counties  have economies approaching national averages; and

• attainment counties have per capita income, poverty and unemployment rates equal to or better that the national rates.

The analysis for FY 2005 found that, of the 410 counties in the region, 82 are distressed, 300 are transitional, 20 are competitive, and only 8 are attainment counties. ARC policy stipulates that competitive counties may receive limited assistance, while funding for attainment counties is virtually eliminated. 

While policies stress funding in the designated distressed counties and areas, ARC recognizes and closely monitors transitional counties that are on the cusp of distress. These counties meet at least two of the Commission's three distress criteria and are very close to meeting the third.  Some may have just graduated from their distress designation or have experienced economic hardships causing them to fall back.  Currently the Commission has identified 65 counties which it considers nearly distressed.  ARC works closely with its federal, state, local and private partners to identify and implement programs to improve the socioeconomic status of these counties

Besides allocating funding to benefit distressed counties and areas, ARC has established other policies designed to reduce distress.  ARC normally limits its maximum program funding contribution to fifty percent of project costs, but will increase its funding share to as much as eighty percent in distressed counties.  Additionally, ARC has created a special opportunities fund and has set aside resources for technical assistance, capacity building, health care improvements, and educational enhancements including increasing college-going rates to benefit distressed counties and areas.

III. Current Challenges Confronting Appalachia That Require ARC Attention

Despite recent progress, Appalachia still does not enjoy the same economic vitality and living conditions as the rest of the country.  The region continues to battle economic distress, concentrated areas of high poverty, unemployment, low income, poor health, educational disparities, and population out-migration that are among the worst in the nation.  Weakness in civic capacity in Appalachia has inhibited leadership, broad citizen involvement, local strategic planning, and collaborations that are necessary for a sense of empowerment and civic engagement. Civic capacity is vital for communities to be strategically ready to take advantage of economic opportunities.

Increased global competition and technological change have resulted in job losses and restructuring in many key Appalachian industries.  Employment losses in non-durable goods and manufacturing and resource-based industries have been severe and disproportionately impacted much of the region. Some of these declines have been offset by employment growth in service sectors, but service sector average wages are often considerably lower than those in the goods producing sectors. The region's isolation and difficulty in adapting to changes over past decades and in retooling to be competitive are major factors contributing to the gap in living standards and economic achievement between the region and the rest of the country.

Demographic shifts between 1990 and 2000 have led to a decline in the region's share of the "prime-age" workforce, those between the ages 25 and 55, who are entering or reaching their peak earnings potential. Erosion of the high-earnings potential of the workforce has reversed the region's gains in per capita income, and at the local level led to declines in the tax base. Meanwhile, the region still confronts significant concentrations of high poverty, unemployment, low income, and out-migration

The region has been battered by structural economic shifts because of its disproportionate reliance on extractive industries and manufacturing.

• Primary metals sectors, such as steel, have lost over 20,000 jobs since 1993. Many of these losses have resulted from import penetration and plant relocations overseas.
• The Appalachian apparel industry has lost 97,000 jobs since 1993, and the textile industry has lost 33,000.  Over the last decade, one out of five jobs lost in textiles nationally occurred in Appalachia, and one out of three jobs lost in apparels occurred in Appalachia. An estimated one-third of the apparel losses and one-half of the textile losses are due to imports or plant relocations to other countries. 
• Appalachian coal-mining employment has fallen from 101,500 workers in 1987 to 46,000 in 2003, largely because of productivity gains. The Energy Information Administration has projected that over the next decade mining jobs in Appalachia could fall to as low as 22,000 workers, or even lower, depending on the economic and environmental assumptions that are made.

Research preceding the creation of ARC found that for many reasons, including dearth of leadership and lack of financial and technical resources, Appalachia had not been in a position to take advantage of many federal programs that could help mitigate long-standing problems, much less concentrate a range of investments on the greatest needs. In addition, the character of many programs better addressed mitigation of growth in parts of the nation rather than basic stimulation of growth. This situation has improved over time, but the region still receives federal economic development assistance disproportionately smaller than its population and its needs. Analyses of the Consolidated Federal Funds Report for 2002 by ARC and Census Bureau staff found that per capita total direct federal expenditures and obligations in Appalachia were $783 less than in the rest of the country. In federal grants alone, the region falls short of parity with the rest of the nation by $5.4 billion each year.

The coming years are critical. Considerable investment has been made in reducing Regional isolation through the funding and development of the ADHS.  As the highway system progresses toward completion, the region is positioning itself to take advantage of its newfound accessibility.  However, it must continue to address deficits in a number of areas to leverage the highway investment and the region's assets to create and attract businesses, retain existing jobs, and draw development and visitors.  Attention must also be given to overcoming the region's gap in the "highways of the future," broadband telecommunications.

IV. Strategic Goals

The Strategic Plan addresses the region's deficits and opportunities in four strategic goals, as discussed below.

Goal 1: Increasing Job Opportunities and Per Capita Income in Appalachia to Reach Parity with the Nation

Structural changes in sectors such as coal mining, steel, furniture manufacturing, textiles, and agriculture have hit Appalachia disproportionately hard, threatening to reverse the modest economic gains that many Appalachian communities have made over the last decade. 

Appalachia's economic vitality and stability require a more diversified regional economy.  In addition to attracting new industry and retaining and expanding existing businesses, the region needs to nurture home-grown firms and encourage innovation and risk-taking, as well as foster greater private sector investment.  Appalachia's rich assets, including its cultural heritage natural beauty, products, and crafts, must be better harnessed to provide local economic opportunities.

The region also faces entrepreneurial shortcomings that stem from Appalachia's longstanding dependence on extractive industries and branch plant manufacturing, and the presence of absentee landlords who, in some cases, have siphoned off value from the region.  Furthermore, the culture of entrepreneurship is neither broad nor deep and research findings indicate that there are many gaps in the infrastructure for supporting entrepreneurship, ranging from technical assistance to development finance.

Goal 2: Strengthen the Capacity of the People of Appalachia to Compete in the Global Economy

Jobs growth will not occur in places where there is an uneducated or unskilled workforce, or where health problems abound and access to care is poor. Global competition is reinforcing the economic premium on workers in knowledge-based industries, leaving low or unskilled U.S. workers increasingly vulnerable.  ARC seeks to increase the employment rate and productivity of Appalachia's workers, and attract educated and skilled workers to the region. This will attract desirable business to the region. Doing so will require considerable investment in improving educational achievement at all levels, as evidenced by Figure 1.

Figure 1: Appalachian Counties with Low College Completion Rates

For example, closing the job gap in telecommunications and information services industries will require an additional 200,000 information technology workers over the next seven years.  The current education and technical skill level of the regional workforce cannot meet this need.  Appalachia's higher education attainment gap with the rest of the nation has widened in the last decade for those with a college degree or graduate degree.  In 1990 the difference between the region and the nation's share of adults with college degrees was 6.0 percentage points, but in 2000 the gap widened to 6.7 percentage points.

As evidenced by Figure 2, access to quality health care is also lacking, which makes Appalachia a less desirable place to live and work. Appalachia suffers from disproportionately high rates of chronic diseases such as cardiovascular disease, cancer, and diabetes. Although the region has improved its health care infrastructure in recent years, it still needs to attract more physicians and medical facilities in order to be on par with the rest of the Nation.  Over two-thirds of the region's counties are fully or partially designated by HPSA as areas having a health care professional shortage.  Most Appalachian counties have had difficulty attracting basic services such as dentistry, outpatient alcohol treatment, outpatient drug treatment, and outpatient mental health services. 

Figure 2: Appalachian Counties Lacking Access to Health Care

Goal 3: Develop and Improve Appalachia's Infrastructure to Make the Region Economically Competitive

Many Appalachian communities, especially the most rural and economically distressed areas, lack basic infrastructure services that others take for granted.  Over 30 percent of households in central Appalachia are not connected to centralized wastewater treatment systems, and at least 15 percent of households lack both public water and wastewater services.  For many communities, this lack of service may force residents to haul water from springs or rain barrels; homes without sewers or septic tanks typically "straightpipe" their untreated waste directly to streams.  These fundamental problems threaten public health, damage the environment, and undermine economic stability for families and the region as a whole. 

ARC is completing a study to document the region's funding resources and funding gaps for drinking water and wastewater infrastructure.  Preliminary estimates indicate that Appalachian counties require investments of $11.3 billion for drinking water needs and $14.3 billion for wastewater needs, substantially more than the funding available from combined state and federal funding programs.  Reviewing per capita needs highlights the disparities facing the region.  Aggregated per capita drinking water needs in the Appalachian portions of the ARC states are estimated at $503.  In ten of the thirteen states, per capita needs are much higher in Appalachian counties than in the rest of the state, reflecting the traditional lack of capital investment in the region. 

Smaller rural Appalachian communities that have water and sewer systems face relatively higher investment costs, due to pressing economic development needs and increasing environmental requirements.  Communities that are experiencing declining customer bases and low household incomes cannot rely on rate increases to meet capital investment needs.  The local ability to pay is particularly low in 331 ARC counties where average household incomes were two-thirds or less of the national average, according to the 2000 Census.  These communities need additional technical, managerial, and financial assistance to meet their future needs.

Appalachia has other environmental problems that inhibit economic development.  For example, in addition to inadequate water and sewer services, the region has many tracts of land known as Brownfields, properties that have been developed for industrial or commercial purposes, polluted, and then abandoned or underused.  These properties are also some of the best in the region for economic development purposes, but restoring them to productive use requires considerable effort and resources. 

The region lags in access to broadband telecommunications so essential to today's commerce, as shown in Table 3. The table suggests that high-speed Internet access via cable, DSL or other means continues to grow at a substantially slower pace in the region than in the nation as a whole. (2004 Update: Links to the Future – The Role of Information and Telecommunications Technology in Appalachian Economic Development.  Michael Oden and Sharon Strover, June 2004) The deficit in the region will require aggressive attention if the President's national goal of universal broadband access by 2007 would be achieved. While progress has been made in reducing geographic isolation, the information superhighway and the digital revolution have been slow in coming to Appalachia's businesses and 23 million residents.  The region lacks an adequate telecommunications infrastructure.  Its people are less familiar with and therefore more easily intimidated by its complexity. 

Communities across the Appalachian Region, especially those in rural areas, face serious challenges in using new information, computing, and telecommunications (ICT) technologies to expand their economic development horizons.  The telecommunications infrastructure in the region is underdeveloped, and compares negatively to national averages on various indicators.  In addition, the capacities to use these technologies to improve performance in public and private sector institutions are often not as well developed as in urban centers.  A recent study found that the lack of advanced telecommunications services at prices affordable to local businesses and public organizations is a significant barrier to economic and social development in parts of the Appalachian Region. (Links to the Future – The Role of Information and Telecommunications Technology in Appalachian Economic Development, Michael Oden and Sharon Strover, June 2002.) For example, tech-related job growth in the region's rural areas from 1996-2000 was 21 percent versus the national average of 53 percent.

Goal 4: Build the Appalachian Development Highway System to Reduce Appalachia's Isolation

The region is well on its way to reducing geographic isolation by building the Appalachian Development Highway System (ADHS.)  ADHS is the first highway system designated by Congress to be built primarily for economic development purposes. As highways are constructed, considerable secondary and tertiary highway and road construction occurs.  This "spider web" effect makes it significantly easier to move products in and out of the region, to travel longer distances for employment opportunities, and entice businesses to locate along major thoroughfares and therefore strengthen the economy of the region.

The Appalachian Regional Development Act of 1965 authorized the Commission to construct the Appalachian Development Highway System (ADHS), a 3,025-mile road system, with assistance from the Secretary of Transportation as a highway system that supplemented the Interstate System and other federal-aid highways programs.  P.L. 108-199 added 65 miles to the system in 2004, for a new system total of 3,090 miles. Congress authorized this initiative because it recognized that regional economic growth would not be possible until the region's isolation had been overcome.

Because of the high cost of building roads through Appalachia's mountainous terrain, adequate roads had not been built in much of the region.  When the interstate system was built, large areas of Appalachia were simply bypassed, compounding the problems of the region's already troubled economy.  The ADHS was designed to link Appalachia with the US interstate system. The region has significantly benefited from the ADHS. New jobs have been created as businesses have located along the system. Substantial time savings have occurred as isolation is reduced, and crash and injury rates have dropped as much as 60 percent as two-lane roads are replaced by modern and safe four-lane thoroughfares.

More than 80 percent (2,480.1 miles) of the total 3,090 miles of the ADHS authorized by Congress for construction before 2005 are open to traffic, and another 147 miles are under construction. The remaining 462.9 miles are in the location or final design stages. The Commission continues its strong commitment to complete the ADHS, the centerpiece of ARC's strategic plan for the region. Table 4 and Figure 3 below show progress on the system through the end of FY 2003.

Completion of the ADHS will permit the nation to realize the system-wide efficiencies of linking with the interstate highway system and the nation's intermodal transportation networks.  Appalachia's strategic location between the eastern seaboard and the Midwest enhances the national value of the ADHS as a transportation asset to channel increasing domestic and international freight traffic between metropolitan centers and trade gateways. Forecasts of national freight demand over the next ten to twenty years by the U.S. Department of Transportation underscore the potential of the ADHS to help relieve congestion along major transportation routes and offer new and more efficient freight flows to trade gateways.

Figure 3—Appalachian Development Highway System Status of Completion as of September 30, 2004

V. ARC Performance Assessment

Independent Evaluations

Closely aligned with project performance tracking is a multi-year plan whereby ARC uses independent or external evaluations to determine how well projects have achieved their objectives. These evaluations place a special emphasis on assessing the utility and validity of output and outcome measures. Findings are made available to state and local organizations that are in a position to affect future programming, and evaluation reports are typically published on ARC's website. The following are highlights of recent evaluations by goal area.

Goal 1: Increasing Job Opportunities and Per Capita Income

Expanding entrepreneurship, which increases job opportunities, and supporting business development is essential to improving the viability and diversity of the region's economy.  A study issued in March 2001 of ARC's Entrepreneurship program found that the program has leveraged funds from other sources, helping businesses develop new products, expanding new businesses and creating jobs. (An Early Stage Evaluation of ARC's Entrepreneurship, Regional Technology Strategies, March 2001)

The study found that three-quarters of the projects had assisted firms to develop new products or upgrade new technologies.  In addition, half of the projects reported starting new businesses that led to the creation of 304 new firms -- 46 new firms with employees and 258 firms that were sole proprietors. There were 377 new jobs created according to the survey, with 69 jobs in new firms, 50 in existing firms, and 258 through self-employment. Furthermore, there were 74 jobs saved by project interventions. 

Since the 1980's the Commission has supported business development and assisted communities in the creation of over 60,000 jobs in Appalachia.  A key component of this business development effort has been the 30 plus Appalachian revolving loan funds that received ARC support. In addition to revolving loan funds, ARC has invested in international trade and market expansion for Appalachian companies; provided funds for downtown renewal and business incubators; supported tourism initiatives and industrial park development; and sponsored conferences on business issues.

Goal 2. Strengthening the Capacity of the People to Compete in the Global Economy      

A 2000 study of the results of 84 ARC education projects funded during the 1990's found that most of the projects in the study reached those segments of Appalachia that are most economically disadvantaged or geographically isolated and that the projects were successful in achieving the outcomes they set forth in their original requests for ARC support. (Evaluation of ARC's Educational Projects, Westat Corporation, 2000) Case Studies provided convincing evidence that the sample projects resulted in a broad range of educational, economic, and social gains. Moreover, the study found that 67 percent of these education projects reported that they would never have been implemented without their ARC award.

Goal 3a. Developing and Improving the Region's Infrastructure – Clean Water

ARC non-highway infrastructure projects, which typically include infrastructure investments such as the development of industrial parks and sites, water and sewer systems, access roads, and business incubators, have been highly successful.  A recent study of ninety-nine projects initiated and completed between 1990 and 1997, found a 33:1 return for every ARC dollar invested in terms of income from jobs created. For a one-time public investment in these economic development projects, there was approximately $9 of annual recurring personal income per public dollar invested. (Evaluation of the Appalachian Regional Commission's Infrastructure and Public Works Program Projects, The Brandow Company and Economic Development Research Group, June 2000.)  As indicated earlier, preliminary estimates of investment requirements are $11.3 billion for safe drinking water systems, and $14.3 million for wastewater infrastructure in Appalachia.  These estimates are expected to increase as ARC completes its current study of infrastructure financing needs.

Goal 3b.  Developing and Improving the Region's Infrastructure – Expanding Telecommunications Capacity

There are 240, or 59 percent, of the counties in the Appalachian Region that are underserved by Internet services. An ARC report, Program Evaluation of the Appalachian Regional Commission's Telecommunications Projects (2003), examined 70 projects that were started and completed between 1995 and 2001.  Investments involving information technology based training, e-learning/distance learning, e-commerce, telemedicine, network and infrastructure initiatives, and community access centers were among the projects evaluated.  The study measured the extent to which the projects enhanced access to telecommunication services and improved the use of these services to meet communities' needs.  Also, the study assessed the degree to which projects involved and served community stakeholders.

Most projects reported fulfilling their goals to the same or greater extent than projected.  For example, for projects involving:

Goal 4.  Building the ADHS

An independent study has documented the benefits of the completed portions of the Appalachian Development Highway System (ADHS.) An extensive independent study found that:

Table 4 and Figure 4 on page 16 illustrate the progress made on the Appalachian Development Highway System in each state through the end of FY 2003.

Figure 4: Leveraged Public and Private Investment, 2004

Across All Goals.  Building Community Capacity

ARC-funded community capacity-building projects can be classified into one of four strategies: vision and direction, including strategic planning; community involvement; developing skills and knowledge; and support activities. A Westat study in March 2004 evaluated 100 of ARC's 168 capacity-building projects from the 1995-2002 period including a review of the literature, assessment of project files and reports, and follow-up validation data collection in the field.  Almost two-thirds (62 percent) of projects employed a skills-related strategy, while 47 percent conducted an involvement-related strategy.  Thirty-nine percent of projects focused on a single strategy type (most notably skills)—while 55 percent employed activities that cut across two or more strategies. 

Implementation and outcomes of the 42 projects were reviewed in detail with respect to the projects' original objectives. Most (70 percent) of the 179 outcomes proposed by the case study and telephone interview projects were successfully achieved.  Of the remaining 53 outcomes, 16 were not achieved, 17 were proposed by projects that were still open (and therefore could not yet be categorized as successful or unsuccessful) and 20 lacked information regarding level of attainment.  However, only 37 percent of the outcome statements involved a numeric benchmark that could be used to determine the scope of the intended impact and assess whether the outcome had been achieved.

In contrast, qualitative evidence from across the site visits and telephone interviews support the view "that projects in many cases had far-reaching effects in communities. Besides important psychological and attitudinal changes, projects gave rise to more concrete benefits, including the development of individual skills and knowledge, increased collaboration, the strengthening of community organizations and infrastructure, increased volunteerism, and improved planning."       

The study found the overall thrust of the program achieved its objectives, and makes recommendations about how to improve the performance measurement process, principally through the use of a computer-based performance assessment tool for community capacity-building developed by the contractor for ARC.  As a result of this evaluation study, ARC is now designing a web-based project design tool to incorporate performance measurement into the entire project life cycle.

Program Assessment Rating Tool (PART) Results and Corrective Actions

 OMB has conducted a first PART review of the Commission program and issued a score of Adequate. The PART assessment awarded high scores for clarity of purpose, planning, and management. It also noted progress in developing outcome-related measures, but acknowledged the difficulty of performance measurement because ARC co-funds projects with other agencies. The Administration plans to continue focusing ARC efforts on distressed areas, revising performance measures, and sharing performance data and research results among federal agencies to better understand the link between federal investment and community change. As a result of the PART process across economic development agencies, ARC is participating under OMB sponsorship in an interagency coordinating council on economic development to address collaborative opportunities and common measurements for agencies with economic development missions.

VI.  FY 2006 Budget and Planned Performance

ARC's general goals and associated performance measures are displayed below in Table 5.  These goals specifically address the Congressional mandate set out in the Appalachian Regional Development Act of 1965 as well as the Commission Strategic Plan.   They are designed to ensure that investments in community and economic development accompany the large federal highway investment in the region, benefiting not only the region but the U.S. economy as a whole.  During FY 2006 ARC will devote its resources to programs and actions that tie to and specifically support these goals. ARC will place significant emphasis on reducing regional deficits and building upon regional assets.  This includes ensuring that the region has an employable workforce, ensuring that non-highway infrastructure such as water and sewage meets basic standards, ensuring adequate access to broadband telecommunications, completing the ADHS, and encouraging and promoting entrepreneurship and business development throughout the region. 

ARC Priorities in FY 2006

ARC's FY 2006 priorities are designed to help it achieve its long-term goals.  At the highest level, ARC is determined to significantly reduce economic distress within the Appalachian Region and target the neediest areas to help close the socioeconomic gaps between the region and the rest of the nation.  Doing so requires successful achievement of four inter-related long-term goals, as shown in Table 5 below.  

Figure 5 provides a more detailed display of the ARC program logic model for 2006 program operations, including the relationship of annual performance targets, major 2006 strategies and activities, and the current funding request to the mission and goals of the Strategic Plan.

Figure 5: Appalachian Regional Commission Program Logic Model for 2006

ARC general and performance goals for FY 2006 are summarized on the following pages.  Strategies for achieving the goals are summarized below and presented in more detail within the respective program budget descriptions. The linkage between ARC's general goals, strategies, and performance targets is shown in Table 6 on page 33.

Goal 1: Increasing Job Opportunities and Per Capita Income in Appalachia to Reach Parity with the Nation

In partnership with other agencies, ARC will help local and state leaders diversify local economies, support entrepreneurship, increase domestic and global markets, and foster new technologies in order to address job shifts throughout the region. In addition, ARC will encourage local leaders to build on the opportunities presented by Appalachian highway corridors and to examine heritage, cultural, and recreational assets that can create job opportunities while preserving the character of the region's communities.

ARC has jointly funded many business development projects over the years with federal agencies, and has vigorously reached out to both public and private partners in recent years to promote entrepreneurship in the region.  The Commission launched a Regional entrepreneurship initiative in 1997 to foster homegrown businesses.  The regional strategy involves cooperating with the Federal Reserve, SBA, EDA, TVA and the NEA to educate current and future entrepreneurs, both youth and adults; improve access to capital for local businesses; strengthen local economies by capitalizing on strategic sectors such as regional cultural heritage products; and nurture new and expanding businesses by providing technical assistance and creating and supporting rural business incubators and multi-tenant facilities. 

ARC has provided a forum for stakeholders and forged alliances with major financial institutions to pursue this strategy.  Partner organizations include banking institutions, including the Federal Home Loan Banks in Atlanta and Cincinnati, the Federal Reserve Banks in Cleveland and Richmond, the Federal Deposit Insurance Corporation in Atlanta, and Wachovia/First Union Bank; and national foundations, including the Ford, Kauffman, Benedum, and Kellogg foundations, community colleges and local development organizations. The National Commission on Entrepreneurship, National Business Incubator Association, Distributive Education Clubs of America, and Future Farmers of America have also joined with the Commission in supporting Appalachian initiatives.

The Strategic Plan identifies seven objectives to increase jobs and income:

1.1: Foster Civic Entrepreneurship, building the capacity of three interdependent elements: individual leaders, organizations, and the community as a whole. Leadership development skills; broad citizen involvement; strategic planning processes; and collaborations among business, government, nonprofit, and philanthropic organizations contribute to a sense of empowerment and sustained economic well-being. These activities foster broad-based civic engagement and support strategic readiness to take advantage of economic opportunities.

1.2: Diversify the Economic Base to provide new employment opportunities. Prosperity and stability for Appalachian communities will depend on their ability to find new business and economic opportunities that can build on the region's strengths while diversifying its base. This will include expanding workforce training and entrepreneurial development; export creation; and promoting applications of business technology and technology-related businesses and services. ARC will also help existing businesses modernize, retain jobs, and be competitive in the global economy.

1.3: Enhance Entrepreneurial Activity in the Region, because locally owned businesses are essential for sustainable local economies and improving the quality of life in Appalachian communities, especially in economically distressed areas. Many communities need assistance in developing support for business incubators and providing entrepreneurial training and financial services. This will require further access to investment capital for local businesses; promoting entrepreneurial training in middle schools, high schools, and community colleges; and supporting business technical assistance networks.

1.4: Develop and Market Strategic Assets for Local Economies. A recognized way of strengthening communities and their economies is through the identification and development of local cultural, heritage, and natural assets. This approach to development recognizes and builds on indigenous resources, experience, wisdom, skills and capacity that exist in Appalachian communities. Creating local homegrown economic opportunity is central to this asset-based approach. Appalachia's arts, crafts, music, and heritage resources and its natural and recreational assets can be leveraged for the economic benefit of the region. 

1.5: Increase the Domestic and Global Competitiveness of the Existing Economic Base. Many Appalachian communities have embraced not only new domestic business development strategies but also global strategies that promote increased international business activity in order to be competitive. By helping local firms find new markets at home and abroad, communities can assist in job creation. Foreign direct investment is another effective approach that can generate additional job opportunities and help communities enhance their competitive advantage. ARC will exploit research opportunities and support technical assistance to businesses as well as promote foreign direct investment where possible.

1.6: Foster the Development and Use of Innovative Technologies. Information technology represents an important opportunity to close the job gap in Appalachia through high-value-added industries such as telecommunications and computing services. Appalachian communities should partner with federal and private-sector research labs, research universities, and other technology organizations to help create and retain technology-related jobs through business assistance, supporting and capitalizing on research in universities and elsewhere, and promoting public-sector science and technology programs.

1.7: Capitalize on the Economic Potential of the Appalachian Development Highway System. The ADHS presents perhaps the greatest community and economic development opportunity in the region. To maximize its potential, programs and activities must be designed to capitalize on the system's connectivity. This will require supporting local and regional economic and community development initiatives that effectively use completed sections of the ADHS; encouraging strategic planning to guide appropriate development on the corridors; and promoting cooperative initiatives between economic development and highway officials.

In 2006, ARC will:

• Diversify the economy by promoting entrepreneurship, asset based development, and business vitality through advocacy, regional forums, information sharing, training, and cooperative funding.

Work in 2006 would continue ARC's regional initiative to create indigenous businesses and thereby expand the economic base. Creation of home-grown jobs is essential to mitigate the effects of industrial declines and business out-migration from the region. The performance target for Goal 1 in 2006 is to create or retain 20,000 jobs and direct at least 50 percent of grant funds to distressed counties and areas. In addition, the Commission has set a target investment ratio of at least four private sector dollars for each ARC dollar invested.

General Goal 2: Strengthen the Capacity of the People of Appalachia to Compete in the Global Economy

The people of Appalachia must have the skills and knowledge required to develop, staff, and manage globally competitive businesses. In addition, the region's communities must provide adequate health care in order to keep existing businesses and develop new ones.

ARC will continue to support local efforts to make all of the region's citizens productive participants in the global economy. The Commission's focus will be to address a range of educational issues, such as workforce skills, early childhood education, drop-out prevention, and improved college attendance; and health issues, such as the recruitment and retention of health-care professionals in areas with documented shortages and the promotion of better health through wellness and preventive measures. In addition, ARC will develop partnerships with other organizations to address the high incidence of life-threatening diseases in the region.

ARC will work to improve educational capabilities and achievement.  With its state and local partners, it will upgrade the region's education climate, improving educational capabilities and providing re-entry programs, school-to-work transition programs, and skills training for specific employers located in or moving into the region.  The Department of Education and the Public Health Service have longstanding agreements in place with the Commission to support projects in the region. 

Strategic Plan objectives are as follows:

2.1: Foster Civic Entrepreneurship to strengthen collaborative relationships among communities, agencies, and individuals, that encourage innovative and achievable first steps, and that provide an increase in awareness of and dialogue on strategic opportunities contribute to improved community responsibility and use of resources. Collaboration must be expanded between businesses and training institutions, schools and community development, and youth and their communities. Community-based dialog must also be promoted on critical health issues.

2.2: Enhance Workforce Skills through Training. As the changing global economy affects Appalachian communities and businesses, many adults in the region find it difficult to retain their jobs or seek new ones without significant retraining and additional education. Most new jobs are in sectors that require a higher level of education. To respond to new economic opportunities and weather economic uncertainty, workers must have the opportunity to continually build skills and experience through vocational schools and other training resources.

2.3: Increase Access to Quality Child Care and Early Childhood Education to enable parents and guardians to take advantage of job opportunities. In addition, studies have shown that the benefits of high-quality early childhood education programs, especially for children from low-income families, last at least into early adulthood. Many families in Appalachia often do not have the resources, in terms of finances or time, to take full advantage of such services.

2.4: Increase Educational Attainment and Achievement. Research has shown that high levels of educational attainment and achievement are associated with better health for individuals and their children, longer life expectancies, and higher salaries. While progress has been made in improving levels of educational attainment and achievement in Appalachia, resources are still needed to close a widening gap in educational attainment between the Appalachian region and the rest of the nation. To strengthen Appalachia's economic competitiveness, more Appalachians need to graduate from high school and continue with post-secondary education at community colleges, universities, or professional schools.

2.5: Provide Access to Health-Care Professionals. Activities and policies that improve the supply and distribution of Appalachia's professional health-care workforce (physicians, nurse practitioners, psychologists, dentists, medical technicians, etc.) can help ensure that health care is comprehensive, affordable, and tailored to the specific needs of each community. Many communities in remote areas of the region find it difficult to recruit and retain health-care professionals. ARC experience has shown that this problem can be addressed effectively by recruitment strategies such as the J-1 Visa Waiver Program, and by supporting primary care systems and training of health care professionals.

2.6: Promote Health through Wellness and Prevention. Appalachia suffers from disproportionately high rates of chronic diseases such as cardiovascular disease, cancer, and diabetes. This has a significant adverse effect on workforce participation and productivity, and impedes opportunity for economic growth. Education on positive health behaviors is critical to developing a stronger workforce and ensuring the long-term viability of the region.

In 2006, ARC will:

This work will include continuing ARC's successful partnership with the Department of Energy for student/teacher technology workshops, as well as collaboration with the Rural Systemic Initiative in the distressed counties of the region. Improving health care will include continuing ARC's widely recognized efforts to increase the supply of health professionals in underserved communities, and deployment of telemedicine as a means of universal access to comprehensive health care.  ARC will identify and address health care delivery gaps and, through continuing partnerships with the Centers for Disease Control and Prevention (CDC) and various medical centers/health care organizations, institute screening, prevention, and control programs in distressed counties.  The CDC and the National Cancer Institute (NCI) have committed funds to special initiatives in Appalachia in recent years as a result of ARC advocacy.  ARC intends to continue developing its relationships with the CDC and NCI to focus on chronic diseases such as diabetes, cancer, and heart disease. Other ARC activities have been jointly funded or administered by the Economic Development Administration and the Tennessee Valley Authority.

The performance targets for Goal 2 in 2006 is to position 20,000 Appalachians for enhanced employability and direct at least 50 percent of grant funds to distressed counties and areas. In addition, the Commission has set a target investment ratio of at least one non-ARC dollar for each ARC dollar invested.

General Goal 3: Develop and Improve Appalachia's Infrastructure to Make the Region Economically Competitive

To compete in the global economy, Appalachia must have the infrastructure necessary for economic development, including water and sewer systems, telecommunications systems, and efficient connections to global transportation networks. But barriers such as rugged terrain and low population density have hindered the region from developing adequate infrastructure. ARC will continue to address the lack of adequate water and sewer systems and telecommunications systems and services in the region, and will build partnerships to address the critical issue of intermodal connections to improve access to the global market.

It is hard for most Americans to fathom that in the 21st century basic water and sewer problems remain a critical issue, but this is true for many smaller, poorer communities of Appalachia. And without the basics, business and industry simply are not interested in locating in the region. A fundamental feature of the Commission since its creation has been to coordinate with and make best use of all public and private resources to assist Appalachian community development. The scope and flexibility of ARC funding enables the Commission to supplement, extend, and attract other federal program funds to address local priorities.

ARC has collaborated with federal agencies to support water resource management and cooperative solutions among providers; promote multi-county approaches and private sector partnerships to manage solid waste disposal, water, and wastewater treatment; support waste recycling and new disposal technologies; ensure that remote rural area needs are represented in infrastructure policy formulation and funding; and identify innovative ways to address unmet needs in Appalachian communities and sub-regions. 

Currently, the Economic Development Administration, Rural Development, the Department of Housing and Urban Development, and the Tennessee Valley Authority are administering active projects under the supplemental grant provisions of the Appalachian Regional Development Act.  Agreements are also still in place with other agencies that have conducted substantial program activities with ARC in the past, including the Federal Aviation Administration, the Federal Railway Administration, the Environmental Protection Agency, the Natural Resources Conservation Service, the Army Corps of Engineers, and the National Park Service.  Appalachia will also work to make developable prime sites that have not been available due to environmental problems such as pollution.

3.2: Build and Enhance Basic Infrastructure. Communities must have adequate water and wastewater treatment systems and decent, affordable housing to sustain businesses, generate jobs, protect public health, and ensure a basic standard of living for residents. Many Appalachian communities continue to lack this very basic infrastructure, compromising the region's ability to pursue basic development activities. Investing in basic infrastructure is an investment in the wellness, as well as the economic potential, of Appalachia.

3.3: Increase the Accessibility and Use of Telecommunications Technology. Communities across the Appalachian region, especially those in rural or economically distressed areas, face serious challenges in taking advantage of new information, computing, and telecommunications technologies that have the potential to expand their economic development horizons. Changing regulations have resulted in access issues for rural communities and reluctance on the part of service providers to make capital investments in less-dense areas where it is more difficult to generate adequate returns on investments. ARC has developed a broad base of experience with such approaches as telemedicine, telecommunication applications in business, education and government, and acting strategically to increase local and regional broadband connectivity.

3.4: Build and Enhance Environmental Assets. Cleaning up defunct industrial sites, promoting environmentally sensitive industries, and providing responsible stewardship and use of Appalachia's natural assets can play a vital part in putting the region on an equal economic footing with the rest of the nation. This includes the reclamation of former industrial sites and mine-impacted lands for viable use. ARC's statute also encourages eco-industrial development that can responsibly take advantage of the region's natural-resource assets

3.5: Promote the Development of an Intermodal Transportation Network. In the twenty-first century, growth and prosperity depend on the ability to develop intermodal transportation systems with fast, efficient, and dependable access to worldwide suppliers and markets. Appalachian communities and businesses must continue to strengthen support for intermodal transportation strategies designed to improve access to Appalachia's transportation network (including aviation, local transit systems, railway systems, and inland waterways) as well as to increase the responsiveness of that network to the needs of businesses, communities, and residents. ARC sees the value of regional forums and studies of specific intermodal opportunities in the region to support inland ports and other facilities. Access roads providing better linkages to completed ADHS corridors will also be important.

In 2006, ARC will:

ARC will build on its past successes in joint efforts with various agencies and organizations such as the Small Business Administration and National Business Incubator Association, supplementing the work of other federal programs, facilitating technology ownership in the home, funding community learning/technology access centers, and assisting in providing enhanced telecommunication services to facilitate smart parks and IT incubator development opportunities.

The performance targets for Goal 3 in 2006 are to provide basic infrastructure services to 20,000 households, expand broadband service to five communities for each $1 million invested in telecommunications, and direct at least 50 percent of grant funds to distressed counties and areas. In addition, the Commission has set a target investment ratio of at least two non-ARC dollars for each ARC dollar invested.

General Goal 4: Build the Appalachian Development Highway System to Reduce Appalachia's Isolation

For Appalachia to compete economically with communities across the nation, it must have a safe and efficient transportation system connecting it to national transportation networks. Because of its difficult terrain, Appalachia was largely bypassed by the national interstate highway system, leaving the region with a network of winding, two-lane roads, which presented a major barrier to development. When ARC was established, Congress, recognizing the importance of overcoming the region's geographic isolation, authorized the construction of an interstate-quality highway system in Appalachia. The Appalachian Development Highway System (ADHS) was created, and is being built, to enhance economic development opportunities in the region by providing access to markets for goods, to jobs for workers, to health care for patients, and to education for students.

The strong partnership of ARC, the U.S. Department of Transportation, and state departments of transportation will continue to oversee the planning and construction of the Appalachian Development Highway System. ARC will work to identify and overcome barriers to the timely completion of the ADHS.

The three objectives in the Strategic Plan supporting completion of the development corridor system are as follows:

4.1: Foster Civic Entrepreneurship. Long-term strategic planning by local and regional leadership is critical to taking full advantage of the economic and community-building opportunities presented by existing and planned ADHS corridors. New outreach and awareness efforts are needed to help communities fully integrate the ADHS into their economic development planning. ARC is positioned to continue to serve as a focal point for removing barriers to ADHS completion and ensuring collaboration among the U.S. Department of Transportation, and other state and federal agencies involved in the region's economic development.

4.2: Promote On-Schedule Completion of the ADHS. Timely completion of the ADHS is an essential step toward fostering economic growth and enabling Appalachia to become a significant contributor to the national economy. When completed, the system will connect the 13 states in the region with nationwide and global economic opportunities.  ARC will continue to work with federal and state departments of transportation and other entities to expedite location studies, solve design problems, and accelerate construction while working to preserve the cultural and natural resources of the region.

4.3: Coordinate Work on ADHS State-Line Crossings. Completing the ADHS expeditiously will require close coordination of activities on those segments of the system that cross state lines. ARC will coordinate technical information, funding disbursements, and construction scheduling between adjoining states to facilitate completion of state-line crossings of ADHS corridors.

In 2006, ARC will:

• Continue to build the ADHS in close cooperation with state and federal partners as Highway Trust Fund financing becomes available.

The performance target for Goal 4 in 2006 is to build 25 additional miles of the Appalachian Development Highway System.

Table 6 summarizes the performance indicators that will be used to measure progress on all the major strategies for FY 2006.

Table 7 presents ARC's summary of the requested resource levels for FY 2006 by goal.  Additional detail and discussion is included below. 

* measured in higher educational attainment, increased access to health care, or employment after training.

 ** ARC reports total target jobs of funded projects; related validation studies and ROI data separately reported

The allocation of requested funds across program areas for FY 2006 is displayed in the chart in Figure 6.

Performance Challenges

ARC can effectively and efficiently implement its FY 2006 strategies and achieve its performance targets, assuming that it obtains sufficient resources and is able to carry out its planned activities.  However, several external and a few internal factors might affect ARC's ability to achieve its goals.  These risks are discussed below.

External Challenges 

Economic down turns could adversely impact ARC performance goal achievement.  Economic down turns are felt acutely in the Appalachian region. They hit typically hit more deeply and last longer.  This may have an impact on what ARC is able to accomplish in the region.

Success is very dependent on both state and regional cooperation and having flexibility to shift funds when new and promising projects are identified. A value of the ARC partnership is being able to act in response to changing conditions in the region. Investment priorities may be shifted if necessary from original projections.

Sustained funding levels consistent with amounts authorized by Congress are essential for ARC's strategies to be effective.  Any significant reduction in funding could have an impact on the willingness of the states to cooperate and partner with the ARC.  Although ARC achieves around a 10 to 1 leverage ratio of the funds it invests in the region, the seed money must be sufficient to make cooperative efforts worthwhile.

Macro-economic conditions can affect relative regional economic performance.  National and global economic changes can significantly alter the competitiveness of Appalachian businesses and can influence demographic and structural shifts that could pose new barriers to closing the socioeconomic gaps with the rest of the country.

Internal Challenges

ARC is a small streamlined organization and therefore faces challenges in preparing staff to succeed current leadership.  ARC has a streamlined organizational structure.  There are 11 federal employees and 48 FTE non-federal trust fund employees.  Although this means that ARC is able to operate efficiently, with extremely modest administrative costs, it also means that key ARC staff members have no "back ups"—in sports parlance, "no bench."  This creates potential challenges when considering succession planning and addressing expanding roles for staff in performance measurement and restructuring business processes.

Early or forced retirements or poor market performance could substantially accelerate the requirement for contributions to the Commission's retirement fund from the federal Appropriation or from member states to keep the fund actuarially sound.            ARC is under a separate retirement system that is not fully funded.  A large number of retirements could impair the financial health of the system.  Additionally, should a reduction in funding necessitate a reduction in staff size, ARC would not have sufficient monies to fund severance benefits.

Limited money for administrative/IT expenses creates challenges in keeping pace with government-wide requirements and initiatives.  Implementing e-government initiatives can be an expensive undertaking for small agencies with very limited resources.  ARC will need to integrate with the e-grants system and the e-travel system.

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