Economic Development:

Formal Monitoring Approaches Needed to Help Ensure Compliance with Restrictions on Funding Employer Relocations

GAO-07-1005: Published: Sep 10, 2007. Publicly Released: Sep 12, 2007.

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Congress imposed restrictions on some federal programs to prevent funding of business relocations. Congress expressed concerns about state and local governments using federal funds to attract jobs to one community at a loss of jobs to another and about compliance with relocation restrictions. This report (1) identifies large federal economic development programs that state and local governments can use as incentives, (2) identifies which programs contain statutory prohibitions on funding relocations, and (3) assesses whether federal agencies had established and implemented procedures to help ensure compliance with prohibitions. To address these objectives, GAO searched federal databases, reviewed relevant statutes and regulations, and conducted limited testing of agency procedures.

GAO identified 17 large federal economic development programs that offer financial assistance and services that state and local governments can use as incentives to attract and retain jobs. While academic studies indicate that it is difficult to quantify the funds used as incentives, particularly given differing definitions of incentives, the use of federal funds for such purposes appears to be more limited than the use of state and local funds. Although academic studies question the overall role and significance of incentives in firms' decisions to (re)locate, researchers with whom GAO spoke noted that incentives could influence firms that already had narrowed their choices. Nine of the 17 large federal economic development programs restrict the use of program funds to support employer relocation. Seven are grant programs, and two are loan guarantee programs. In many grant programs, initial recipients of funds (states and local governments) provide funds to others (e.g., businesses) to facilitate economic development; in loan guarantee programs, third-party lenders approve businesses for eligibility to receive funds. All nine programs prohibit using federal funds to support a business relocation that causes unemployment, but the thresholds for job loss differ. For example, a single lost job would trigger the provision for six programs, but for the other three programs, the job loss threshold is higher. Federal agencies administering the nine programs with a nonrelocation provision used various procedures, including screening applicants and monitoring recipients, to help ensure compliance, but the extent to which these procedures specifically addressed nonrelocation provisions was limited. The two loan guarantee programs emphasized screening procedures to help ensure compliance, and both programs had written guidance and other mechanisms that specifically addressed nonrelocation provisions. Screening may be effective for helping to ensure compliance in loan guarantee programs because federal agencies know at the time of initial application which businesses are requesting funds and how they plan to use them. In contrast, because of the way grant programs are structured, at the time of initial application, grant applicants do not always know which businesses later will apply for or receive assistance. As a result, officials administering grant programs relied more extensively on monitoring than screening to help identify instances of potential noncompliance. Despite this greater reliance on monitoring, only one of the grant programs GAO reviewed had written monitoring guidance that specifically addressed business relocation restrictions. Without formal policies and procedures, federal agencies have limited assurance that grant recipients and subrecipients are complying with statutory requirements that restrict the use of program funds to support employer relocations.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To provide greater assurance that grant recipients and subrecipients of federal economic development programs are complying with statutory restrictions against the use of program funds to support employer relocations, the Secretaries of Labor (for the WIA Adult, Dislocated Workers, and Youth programs); Agriculture (for the EZ/EC program); and Housing and Urban Development (for the CDBG Entitlement and State programs) should direct their respective offices to develop (or finalize the development of) and implement formal and structured approaches for federal reviewers to follow when monitoring for compliance with nonrelocation provisions.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: HUD has taken or has underway four actions in response to our recommendation. According to HUD, it has highlighted for its field staff the prohibition against using CDBG funds for employer relocations. Specifically, HUD noted that it had included issues related to job relocation in the training provided to its field and/or grantee staff in four cities as of July 30, 2008. Second, HUD stated that the restrictions against the use of CDBG funds for employer relocations were discussed during a bi-weekly conference calls with its field directors shortly after the issuance of the GAO report. According to HUD, the purpose of the reviewing the regulatory requirements is to ensure that the field directors can accurately convey to their staff the requirements associated with the job relocation provisions and to ensure thorough and adequate reviews. Third, HUD stated that it was in the process of finalizing guidance to its grantees highlighting the need for grantees to properly their economic activities consistent with regulatory requirements and the need for HUD field staff to check that documentation. According to HUD, the guidance was expected to be finalized by the end of September 2008. Lastly, HUD has revised its program monitoring handbook to include questions related to grantee compliance with the employer relocation provisions in its March 2008 update of the handbook, which is available from its website.

    Recommendation: To provide greater assurance that grant recipients and subrecipients of federal economic development programs are complying with statutory restrictions against the use of program funds to support employer relocations, the Secretaries of Labor (for the WIA Adult, Dislocated Workers, and Youth programs); Agriculture (for the EZ/EC program); and Housing and Urban Development (for the CDBG Entitlement and State programs) should direct their respective offices to develop (or finalize the development of) and implement formal and structured approaches for federal reviewers to follow when monitoring for compliance with nonrelocation provisions.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Not Implemented

    Comments: DOL has indicated that it is implementing two strategies to address our recommendation. On December 11, 2007, DOL issued a formal policy directive that clarifies clarifies allowable and unallowable uses of Workforce Investment Act (WIA) funds for economic development activities. The Training and Employment Guidance Letter directly addresses the concern raised by GAO regarding the use of funds for employer relocations by clearly articulating that this is an unallowable cost under WIA. Second, DOL has stated that it has drafted a supplement to its core monitoring guide that provides guidance regarding which costs are allowable or unallowable under WIA, including prohibitions against using WIA funds to encourage business relocation and related restrictions. The supplement was expected to be issued in 2009; however, ETA had to shift its focus on implementation of the Recovery Act. DOL anticipates issuing the supplement before the end of calendar year 2011.

    Recommendation: To provide greater assurance that grant recipients and subrecipients of federal economic development programs are complying with statutory restrictions against the use of program funds to support employer relocations, the Secretaries of Labor (for the WIA Adult, Dislocated Workers, and Youth programs); Agriculture (for the EZ/EC program); and Housing and Urban Development (for the CDBG Entitlement and State programs) should direct their respective offices to develop (or finalize the development of) and implement formal and structured approaches for federal reviewers to follow when monitoring for compliance with nonrelocation provisions.

    Agency Affected: Department of Agriculture

    Status: Closed - Implemented

    Comments: In response to our recommendation, USDA has added a new question to the form used by its reviewers to approve the disbursement of EZ/EC funds to record whether grant funds will not be used for business relocation purposes. Additionally, USDA has included instructions to its reviewers alerting them to the new question that was added to the review form. USDA held Webinar training on October 28, 2008, with its EZ/EC communities and USDA Rural Development staff. The Webinar training included a review of the relocation regulations and the requirement to answer the relocation question with each disbursement request, which is then monitored by the state. Additionally, the monitoring of the relocation regulation was added to USDA's Fiscal Year 2009 EZ/EC program Management Control Review guide.

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