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entitled 'Status of Two Authorities Granted to the Department of 
Commerce's Economic Development Administration' which was released on 
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United States Government Accountability Office: 

Washington, DC 20548: 

December 21, 2005: 

The Honorable James M. Inhofe: 
Chairman: 
The Honorable Jim Jeffords: 
Ranking Minority Member: 
Committee on Environment and Public Works: 
United States Senate: 

The Honorable Don Young: 
Chairman: 
The Honorable James L. Oberstar: 
Ranking Democratic Member: 
Committee on Transportation and Infrastructure: 
House of Representatives: 

Subject: Status of Two Authorities Granted to the Department of 
Commerce's Economic Development Administration: 

The Department of Commerce's (Commerce) Economic Development 
Administration (EDA) Reauthorization Act of 2004[Footnote 1] directed 
us to regularly review the implementation of two authorities granted to 
the Secretary of Commerce: (1) allowing excess funds from projects 
constructed under projected cost to be reinvested in new or existing 
projects and (2) establishing a performance award process for grant 
recipients that meet or exceed performance measures established in 
connection with the grant. This report transmits briefing slides we 
provided to committee staff on October 27, 2005. 

As agreed with the committees of jurisdiction, because the authorities 
came into effect on October 1, 2005--too recently to allow for a full 
assessment--we limited our initial analysis to interviews with agency 
officials and a review of the legislative history, appropriate budget 
documents, and proposed regulations. We conducted our review from June 
2005 through November 2005 in Washington, D.C., in accordance with 
generally accepted government auditing standards. 

This report (1) discusses EDA's authority to reinvest excess funds and 
provides information on the portion of these funds EDA has had to 
return to the U.S. Treasury and (2) describes the status of the 
performance award system and identifies some steps EDA could take to 
develop a useful performance award system. 

Background: 

EDA provides two types of funding for construction projects: public 
works and economic adjustment grants. Public works grants are designed 
to help distressed communities attract new industry; encourage business 
expansion; diversify their economies; and generate long-term, private 
sector jobs. Economic adjustment grants help areas develop and 
implement strategies to address structural economic problems resulting 
from sudden and severe economic dislocation, natural disasters, and 
spending reductions related to the closure of defense installations and 
military bases. In addition to providing direct assistance, both types 
of grants are intended to leverage local and private sector matching 
funds, sometimes as much as 50 percent of the total project costs. Of 
EDA's $292 million in budget obligations for 2005, just under three- 
fourths ($212 million) were for construction grants funded under the 
public works and economic adjustment assistance programs. 

EDA published an interim final rule in the Federal Register on August 
11, 2005, that included the two authorities. The rule, which went into 
effect on October 1, 2005, gives Commerce's Assistant Secretary for 
Economic Development the discretion to use excess funds and performance 
awards to increase EDA's investment rate for projects to up to 100 
percent of cost, in some cases eliminating the need for matching funds. 
EDA has not yet published a final rule and is in the process of 
incorporating revisions from Congress on certain provisions of the 
interim final rule. According to EDA officials, these revisions to the 
provisions are not applicable to the two authorities. All changes to 
the provisions will be reflected in the final rule. 

EDA Has Been Able to Reinvest Excess Funds since Fiscal Year 2000: 

Before the EDA Reform Act of 1998, EDA, which was funded with annual 
funds, was required to return to the U.S. Treasury all funds from 
construction projects that were constructed for less than the projected 
cost (cost underruns). The EDA Reform Act of 1998 modified EDA's 
authorizing legislation (the Public Works and Economic Development Act 
of 1965, as amended) to permit EDA to retain funds recovered from 
projects constructed under cost to improve the project, and not return 
those particular funds, even though they were annual funds, to the U.S. 
Treasury. Cost underrun funds that could not be used to improve the 
project had to be returned. 

Beginning in fiscal year 2000, appropriations language permitted EDA to 
retain all program funds until the money was expended--that is, no-year 
funding. However, according to EDA officials, after the agency started 
receiving no-year funding, the agency's 1998 authorization legislation 
had the unintended consequence of requiring EDA to return to the U.S. 
Treasury cost underrun funds that could not be used to improve the 
specific construction project, even though the funds were no-year 
funds. The 2004 authorizing legislation corrected this unintended 
consequence, and EDA may now retain all cost underrun funding and use 
the funds for other projects. 

EDA officials stated that between fiscal years 2000 and 2004 about 
$127.2 million of excess funds was reinvested. Of this amount, about 
$79.3 million (62 percent) was used to improve existing projects and 
about $47.9 million (38 percent) was reinvested in new projects. EDA 
officials also said that between fiscal years 2000 and 2005, the agency 
returned about $5.7 million of excess funds to the U.S. Treasury--$3.8 
million in fiscal year 2004 and $1.9 million in fiscal year 2005. In 
addition, EDA returned about $6.7 million to the U.S. Treasury that was 
rescinded in fiscal year 2004 as part of an across-the-board cut in 
nondefense spending. 

EDA Does Not Plan to Implement the Performance Award System in the Near 
Future: 

EDA officials told us that the agency has not yet issued any 
performance awards but was developing policy and procedures that would 
allow the agency to offer such incentives. But the officials added that 
they did not foresee the agency issuing any awards in the near future. 
They said that the agency needed more time to refine the general 
criteria set out in the interim final rule and noted that any changes 
would be reflected in the final rule. 

Under the new interim final rule, as amended, to qualify for a 
performance award a grant recipient must be rated as meeting or 
exceeding certain standards.[Footnote 2] That is, recipients' projects 
must generate at least the number of jobs and the amount of private 
investment that was initially estimated and must meet the initial 
target dates that were set for starting and completing the projects. 
The new rule gives Commerce's Assistant Secretary for Economic 
Development discretion in determining other performance 
characteristics. Performance awards would be issued after the projects 
were closed out, which is a process that takes, on average, about 3 
years, and the amounts awarded could not exceed 10 percent of the 
original project costs. As part of previous analyses, we found 
difficulties in estimating jobs and private investments both before and 
after the projects were closed out. Some of these difficulties had to 
do with limited data being available to measure the impact of 
construction projects and inconsistencies on the part of some EDA 
officials in verifying and reconciling initial estimates of projected 
jobs and private investments with reported results.[Footnote 3] Clearly 
defined and supportable criteria could improve the basis for granting 
performance awards, as well as utilizing independent sources to verify 
estimates. 

Agency Comments: 

We provided a draft of our briefing slides to EDA for review and 
comment. They generally agreed with the briefing slides and provided 
technical comments. We have incorporated their comments in this report 
where appropriate. 

Copies of this report are being sent to the Assistant Secretary of 
Commerce for Economic Development; the Director, Office of Management 
and Budget; and other interested parties. We will also make copies 
available upon request. In addition, the report will be available at no 
charge in GAO's Web site at http://www.gao.gov. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-4325 or at shearw@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. Andy Finkel, Assistance Director; 
Roberto Piņero; Emily Chalmers; and Tania Calhoun made key 
contributions to this report. 

Signed by: 

William B. Shear: 
Director, Financial Markets and Community Investment: 

Enclosure: 

(250246): 

FOOTNOTES 

[1] Pub. L. No. 1808-373 (2004). The act directed us to report no later 
than 1 year after the date that this subsection was enacted, or no 
later than October 27, 2005. As agreed, we fulfilled this requirement 
by providing the enclosed briefing slides to you by that date. 

[2] On December 15, 2005, EDA published certain amendments to the 
interim final rule in the Federal Register. 

[3] GAO, Economic Development Administration: Remediation Activities 
Account for a Small Percentage of Total Brownfield Grant Funding, GAO-
06-7 (Washington, D.C.: Oct. 27, 2005); Economic Development: Limited 
Information Exists on the Impact of Assistance Provided by Three 
Agencies, GAO/RCED-96-103 (Washington D.C.: Apr. 3, 1996); and Economic 
Development: Observations Regarding the Economic Development 
Administration's May 1998 Final Report on Its Public Works Program, 
GAO/RCED-99-11R: Mar. 23, 1999).