State and Local Governments Can Use Various Types of Federal Programs as Business Incentives

We identified 17 large federal economic development programs that state  and local governments can use as incentives to attract and retain  businesses, based on a search of the CFDA database, Tax Expenditure  Compendium, and state economic development Web sites. Use of Federal Funds as Business Incentives Appears to Be More Limited Than Use of State and Local Funds

Although federal programs are marketed as business incentives, the  amount of federal funds used as incentives appears to be more limited  than the amount of state and local funds used. For these programs, third-party lenders, development  corporations, or the federal government decide which businesses receive  funds. All nine programs that we identified with statutory restrictions on  employer relocations use job loss in a relocating company’s original  location as the primary criterion for applying a nonrelocation provision,  but the job loss threshold varies by program. Extent to Which Federal Agencies Had Established and Implemented Procedures to Help Ensure Compliance with Nonrelocation Provisions Was Limited

Federal agencies administering the nine programs with nonrelocation  provisions used various procedures to help ensure that program recipients  complied with overall program goals and requirements, but the extent to  which these procedures specifically addressed nonrelocation provisions  was limited. In contrast, officials who administer grant programs we  reviewed noted inherent limitations in using screening mechanisms for  grant programs, given that program recipients (states and local  governments) do not always know at the time of application which  businesses later will apply for and obtain assistance through the program. Because of the inherent limitations of screening, the agencies  administering grant programs primarily relied on monitoring recipients  and subrecipients to help identify instances of potential noncompliance. However, only four of the nine programs—including both  loan guarantee programs—used screening mechanisms that specifically  addressed a relevant nonrelocation provision. All four agencies had procedures for reviewing applications or plans to  help ensure that applicants were eligible to receive funds under the  program. While Monitoring Is a Key Control for Helping to Ensure Compliance with Nonrelocation Provisions, Only One Grant Program Had Written Guidance Specific to the Provision

The Guide to Opportunities for Improving Grant Accountability states  that once grants are awarded, agencies need to ensure that grant funds are  used for intended purposes and in accordance with applicable laws and  regulations. The emphasis on screening rather monitoring seemed  appropriate for the two loan guarantee programs since the federal  agencies know which specific businesses are requesting funds and the  purposes for which the funds will be used. Although it is difficult to determine the  extent to which state and local governments use federal funds as business  incentives, 9 of 17 large federal economic development programs contain  statutory restrictions against using program funds to relocate jobs if the  use of such funds creates unemployment. Recommendations for Executive Action

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, we recommend that 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) 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.
Why GAO Did This Study

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.

What GAO Found

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.