Economic Development:

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

GAO-06-308R: Published: Dec 21, 2005. Publicly Released: Dec 21, 2005.

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The Department of Commerce's (Commerce) Economic Development Administration (EDA) Reauthorization Act of 2004 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 (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.

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 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. 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. Clearly defined and supportable criteria could improve the basis for granting performance awards, as well as utilizing independent sources to verify estimates.

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