Trade Adjustment: Funding Status of Commerce's Trade Adjustment Assistance Program

Published by the Government Accountability Office on 1990-09-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                      United   States   General   Accounting   Office
                                                                                            .’ _.
  GAO                 Report to the Honorable
                      John Heinz, U.S. Senate

  September   1990
                      Funding Status of
                      Commerce’s Trade
                      Adjustment Assistance

                         RJ!23TR1m ---Not      to be released outside the
                         General Accounting Ofl’ice unless specifically
                         apprvved by the OfIke of Congressional             ‘.
                         Relations.                                              . ‘. : :

$. &A@'NSIAD-90-247
                   United States
                   General Accounting  Office
                   Washington, D.C. 20548

                   National Security and
                   International Affairs Division


                   September 6,199O

                   The Honorable John Heinz
                   1Jnited States Senate

                   Dear Senator Heinz:

                   As you requested, we have evaluated certain aspects of the Department
                   of Commerce’s Trade Adjustment Assistance Program.

                   This program, through its 12 Trade Adjustment Assistance Centers
                   located throughout the United States, provides technical assistance to
                   1J.S. firms that have been injured by import competition. You expressed
                   concern that the centers might not receive adequate operating funds in
                   fiscal year 1990 and that reported funding shortfalls would affect the
                   centers’ ability to provide effective and timely services to firms seeking

                   In an attempt to clarify the adequacy of program funding, the Depart-
                   ment of Commerce was directed to prepare a report to Congress’ speci-
                   fying the sources and amounts of Trade Adjustment Assistance Program
                   funds during fiscal year 1990. The objectives of our review were to
                   (1) evaluate the adequacy of the funding for the Trade Adjustment
                   Assistance Centers, (2) assess the accuracy and usefulness of Com-
                   merce’s February 22, 1990, report to Congress, (3) determine whether
                   the report complied with the requirements of the conference report, and
                   (4) identify the operational constraints besetting the program during
                   fiscal years 1989 and 1990.

                   Disagreement exists over whether the 12 Trade Adjustment Assistance
Results in Brief   Centers received adequate funding for fiscal year 1990. On the one
                   hand, Trade Adjustment Assistance Program officials maintained that
                   the $4.6 million initially appropriated to the Trade Adjustment Assis-
                   tance Program in fiscal year 1990 was not sufficient to meet the demand
                   for program services. On the other hand, Commerce budget officials con-
                   tended that this appropriation,    combined with carryovers, deobliga-
                   tions, and reserves accumulated from prior years, exceeded historical

                   ‘Conference Report No. 101-299 Making Appropriations      for the Lkpatments  of Commerce, Justice,
                   and State, the Judiciary and Related Agencies for the Fiscal Year Ending September 30,1990, and for
                   Other Purposes, October 20,19S9.

                    Page 1                                                    GAO/‘NSIAB9%247       Trade Adjustment

                                                                the type of assistance the firm should receive from the program. Once
                                                                the program office approves the proposed plan, the firm is then pro-
                                                                vided with the appropriate technical assistance, such as help in formu-
                                                                lating a new business plan or devising a new marketing strategy.

                                                                Since 1982, the administration    has repeatedly attempted to eliminate
                                                                the Trade Adjustment Assistance Program on the basis that it is not
                                                                cost-effective. Commerce officials argue that the program interferes
                                                                with free market forces because it is designed to help “industrial
                                                                losers.” During his June 7, 1989, confirmation hearing before the Senate
                                                                Finance Committee, the ITA Under Secretary summarized the Depart
                                                                ment’s view of the program by stating that “the number of firms we
                                                                help with this program is infinitesimal. We feel the net outcome in dol-
                                                                lars expended does not warrant the outlays going into the program.”
                                                                Commerce’s lack of support for the Trade Adjustment Assistance Pro
                                                                gram is best demonstrated by the fact that the Department has not
                                                                requested any appropriations     for the program for fiscal years 1982
                                                                through 1991.

                                                                Despite numerous recommendations from the administration       to discon-
                                                                tinue funding for the Trade Adjustment Assistance Program, Congress
                                                                has continued to support it and has authorized it to operate t,hrough
                                                                September 1993. However, the level of appropriations for the program
                                                                has been reduced by almost 85 percent since 1982 (see table 1).

Table 1: Trade Adjustment                Assistance        Program Appropriations
Dollars   m mllllons,     fiscal years
                                                1982             1983              1984                  1985              1986           1987              1988       1989        1990a
TechnIcal    assistance                         $13 0            $130              $155                 $165               $139          $139               $139        $3 9         $4 9
Flnance     assistance                            12.i             125                   75                   6 5”                0             0                  0       0              0
Admrlstratlve      costs                              20            20                   20                   20              19             19                19        19           12
Total                                           $27.5            $27.5            $25.0                 $25.0              $15.8         $15.8             $15.8       $5.8         $6.1
                                                                “Includes    a supplemental          appropnat~on      of $1 445 mllllon made       INI May 1990

                                                                “Congress      allowed        the Financial    Assstance     Program   to lapse I” 1986
                                                                Source      Department         of Commerce

                                                                 Page 3                                                                             GAO/NSIADW-247     Trade Adjustment

                                        In trying to judge the validity of these statements, we found that no
                                        uniform definition of “committed funds” is used among the centers
                                        when compiling quarterly financial reports. Hence, unliquidated obliga-
                                        tions and close-out costs may be reported inconsistently by the various
                                        centers. Supporting this view, a February 1990 Commerce Inspector
                                        General audit of one of the centers found that the center was not
                                        recording its unliquidated obligations correctly, giving the impression
                                        that the center had more funds available than actually was the case.
                                        Program officials agreed that adequate guidance on how to preparc
                                        their financial reports has not been provided to the centers to ensure
                                        that unliquidated obligations and close-out reserves are uniformly and
                                        properly recorded and reported. Without this guidance, reports will con-
                                        tinue to be prepared in an inconsistent manner.

Report to Congress Adds                 The report to Congress was requested to clarify the sources and
                                        amounts of funds available for the Trade Adjustment Assistance Pro-
Further Confusion
                                        gram during fiscal year 1990. Our review indicated that rather than
                                        removing some of the confusion surrounding the program’s funding
                                        status, the report added to the confusion because of the manner in
                                        which the information was presented.

                                        The conference report, directed Commerce to identify the amounts avail-
                                        able from ITA carryovers and deobligations as well as the “unexpended”
                                        balances held by the centers. It also allowed the Trade Adjustment
                                        Assistance Centers to use, for programmatic purposes, reserves previ-
                                        ously held for potential close-out costs.

                                        In response to this directive, Commerce submitted a report to Congress
                                        on February 22, 1990, identifying the sources and amounts of program
                                        funds. Table 2 shows the total funds Commerce reported available for
                                        the program for fiscal year 1990.

Table 2: Total Funds Commerce
Reported Available for the Trade        Dollars   In mtlllons
Adjustment Assistance Program (Fiscal   Flscal year 1990 appropnatlon                                                                  $4 6Oj
year 1990)                                 mws Gramm~Rudman-Hollmgs                sequestratcon                                         ( ‘332)
                                                                                                                                        4 543
                                        Unobligated      carryover                                                                         737
                                        Prior or current     year deobllgatlorrs                                                          774
                                        Unexpended         balance   held by Trade Adjustment      Assistance   Centers                  7018
                                        Total funds available                                                                        $13.072
                                        Source Department of Commerce

                                         Pagr5                                                            GAO/NSIAIHO-247   Trade Adjustment

                      report to Congress. The deleted material would have indicated that the
                      amount of funds made available to the centers in fiscal year 1990
                      affected center operations by making it difficult for the centers to imple-
                      ment previously approved ad.justment proposals. The footnotes also
                      would have alerted Congress that the centers would have to cut costs by
                      terminating some staff employment and limiting firm assistance and, in
                      some cases, beginning close-out, operations. Some centers have experi-
                      enced all of these problems in fiscal year 1990.

                      Delays in releasing 1989 and 1990 appropriated funds by Commerce
Delays in Releasing   caused service disruptions at some of the Trade Adjustment Assistance
Appropriated Funds    Centers. As a result, several centers were forced to terminate technical
Caused Operating      assistance agreements and lay off staff. Several center directors
                      expressed concern that the lack of predictable and sufficient funding
Problems              lowered their credibility in the business community and impaired their
                      ability to provide quality service to firms seeking assistance.

                      In fiscal year 1989, the Trade Adjustment Assistance Program received
                      an appropriation of $5.8 million, a reduction of $10 million from the
                      $15.8 million appropriated in each of the 3 previous fiscal years. Of the
                      $5.8 million, $3.9 million was earmarked for the Trade Adjustment
                      Assistance Centers. Program officials planned to make the first award of
                      that fiscal year appropriation to the centers by May 31, 1989. Funding
                      requests had already been submitted by the centers, and proposed
                      awards had been approved and processed, when ITA officials chose not
                      to release the funds. The>program office received no advance notifica-
                      tion of this decision.

                      ITA officials determined. through analysis by the Office of Finance and
                      Federal Assistance and the Commerce budget office, that the centers
                      had sufficient funds remaining from the 1988 appropriation to continue
                      operations through the remainder of the fiscal year. Although the cen-
                      ters’ funding requests included detailed information on their current
                      financial status, the analysis was based on information from 2-month-
                      old financial statements and current Treasury cash balances to reach
                      the conclusion that the centers did not need additional funding at that
                      time. Treasury cash balances reflect both unobligated funds as well as
                      obligations not paid for

                      Despite the objections of the program office, the cooperative agreements
                      between the centers and WA were allowed to expire on May 31, 1989,
                      Because this action cut off their authority to operate, the centers had no

                      Payr7                                        GAO/NSIAl+90-247   Trade Adjustment

                    the centers spent $3 million in the first quarter of the fiscal year
                    utilizing residual fiscal year 1989 funds. By early January 1990, it
                    became apparent that unless additional funds were made available,
                    some of the centers would have to begin close-down procedures and stop
                    providing services as early as April 30. 1990.

                    The program office prepared a report for the I’rA IJnder Secretary on
                    March 16, 1990, showing that 11 of the 12 centers had insufficient
                    funds to meet the demand for program services and would run short of
                    program funds before thca end of the fiscal year. Center directors com-
                    plained about having to cancel current and projected contracts, lay off
                    experienced personnel, and ask remaining personnel to take cuts in pay
                    or assume additional dut its.

                    In contrast, officials from IW’S Office of Administration  prepared a
                    report on March 26, 1990, showing that the centers had sufficient funds
                    to operate through the, end of the fiscal year. Their conclusion was
                    based on an analysis of historical spending rates, which included periods
                    when the centers were cutting costs and preparing to cease operations.
                    The analysis in this 11‘>\rrport was repudiated 1 month later by a subse-
                    quent analysis by the same office showing that the centers needed an
                    additional $1.445 million to remain open through September 30, 1990.
                    Consequently, Congress approved a supplemental appropriation of
                    $1.445 million in May 1090 to ensure the same level of operations
                    through September 30. 1990.

Funding Confusion   Commerce’s February 22. 1RHO.report to Congress indicated that a total
                    of $13.072 million was made available to the program. This amount
Corrected           exceeded the $10.877 million maximum allowed by the 1990 Appropria-
                    tions Act. In response to yuestions we raised about this overage, Com-
                    merce officials said the rr’port was prepared in accordance with the
                    language of the October 1989 conference report, which required that a
                    minimum of d 10.877 million be made available for the program. These
                    officials said they did not realize that the language had been changed in
                    the appropriations   act to ctstablish a ceiling, as opposed to a minimum
                    amount. The inconsistcnt*J, was resolved by language incorporated in the
                    May 1990 supplemental al)propriations         act that removed the $10.877
                    million ceiling.

                     Page 9                                     GAO/NSIAD-90-247   Trade Adjustment

           Please contact me at (202) 275-4812 if you or your staff have any ques-
           tions concerning this report. Major contributors to this report were John
           Watson, Assistant Director; Stephen Lord, Evaluator-in-Charge;    and Sui-
           Ying Gantt, Evaluator.

           Sincerely yours,

           Allan I. Mendelowitz, Director
           Trade, Energy, and Finance Issues

(483560)   Page 11                                      GAO/NSIADSO-247   Trade Adjustment
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                    To improve the administration    of the Trade Adjustment Assistance Pro-
Recommendations     gram, we recommend that the Secretary of Commerce direct the [Jnder
                    Secretary of the ITA to do the following:

                  . Provide the Trade Adjustment Assistance Centers with additional gui-
                    dance on how to preparc their financial reports to ensure that unliqui-
                    dated obligations and reserves for contingencies are properly recorded
                    and reported, and
                  . Separately itemize in any future reports to Congress on the status of
                    Trade Adjustment Assistance Program funds the amount of unliqui-
                    dated obligations and reserves being held for close-out purposes.

                    We interviewed Commerce officials, including representatives of the
Scope and           Trade Adjustment Assistance Program, the Trade Adjustment Assis-
Methodology         tance Centers, and the Office of Administration.   We also analyzed the
                    centers’ financial reports for fiscal year 1989 and 1990 and reviewed
                    pertinent program office documents and guidance, including estimates
                    of the centers’ unliquidated obligations and directions for recording
                    unliquidated obligations. We compared the program office estimates of
                    unliquidated obligations to those reported to Congress. We performed
                    our review between April and ,Junc 1990 in accordance with generally
                    accepted government auditing standards.

                    As requested, we did not obtain formal agency comments on this report,
                    however, we disc,lisscld it with appropriate Commerce Department offi-
                    cials and incorporattxd their comments where appropriate.

                    As arranged with your office, we plan no further distribution of this
                    report until 30 days from the date it is issued, unless you publicly
                    announce its contents earlier. At t,hat time, we will send copies to the
                    Secretary of Commerce and appropriate congressional committees. We
                    will also make topics available to other interested parties upon request.

                     Page 10                                    GAO/NSIAIKX-247   Trade Adjustment

guarantee that costs incurred after this date would be reimbursed. Con-
sequently, some centers began terminating all business in progress.
Although authority to resume operations with no new funds was
granted by means of a “no-cost extension” letter dated June 6, 1989,
some center contracts had already been canceled and operations discon-
tinued. Although center directors welcomed the authority to resume
operations, several ob,jected strongly to not receiving additional funds.

We were unable to obtain an explanation from Commerce as to why the
cooperative agreements with the centers were not renewed in time to
avoid this disruption of service. In addition, our review indicated that
the decision to grant the “no-cost extension” was reached without
advance notice to the centers or program office and was not approved
by the senior manager for the program, the Deputy Assistant Secretary.
The June 6, 1989, letter that was subsequently distributed to the centers
informing them that no new funds would be immediately forthcoming
was signed by an ITA acting assistant secretary who had no previous
involvement with the program. The Deputy Assistant Secretary told us
he refused to sign the letter because he considered it an intentional vio-
lation of a congressional directive to fund the centers.

 In July 1989, part of the $3.9 million was released to those centers
judged in most need of funds; however, several of the centers continued
 to report acute financial difficulties. In August 1989, faced with the pos-
 sible close-down of several of the centers, the Office of Finance and Fed-
 eral Assistance, at WA'S request, released the remainder of the
  1989 appropriation.   By this time, several of the centers had been forced
 to curtail expenditures, cut back on services, and lay off staff.

In fiscal year 1990. the Trade Adjustment Assistance Program received
an appropriation of $4.6 million. Of the $4.6 million, Commerce desig-
nated $3.4 million for the centers and $1.2 million for the program’s
administrative   costs. The fiscal year 1990 Appropriations  Act was
signed on November 21, 1989. The Office of Management and Budget
apportioned the funds on December 19, 1989. The appropriation for the
centers was disbursed on December 29, 1989, 2 days before the centers
would have lost the authority to operate. Once again, the centers were
faced with the possibility of having to terminate business transactions.

According to program officials and center representatives, the $3.4 mil-
lion was insufficient to maintain a normal level of operations. This
funding was supposed to last the centers through September 30, 1990.
Despite the fact that fiscal year 1990 funds had not yet been provided,

 Page 8                                      GAO/NSIAD-W-247   Trade Adjustment

Based on our independent review of the centers’ financial reports that
are submitted quarterly to Commerce’s Office of Finance and Federal
Assistance, about $4.6 million of the $7.018 million reported as
“unexpended balance held by Trade Adjustment Assistance Centers”
was actually unliquidated obligations and close-out reserves. Commerce
was specifically directed in the conference report to include unliqui-
dated obligations and close-out reserves in the unexpended balance.
However, the extent of unliquidated obligations and reserves was not
made clear in the Commerce report because ITA officials deleted the
explanatory footnotes included in the draft report prepared by the pro-
gram office. The footnotes showed that, of the $7.018 million in the
unexpended balance, $1.048 million was already committed to signed
contracts; $1.946 million was being held in reserve by the centers for
potential close-down expenses; and $3 million was committed to center
expenses that had accrued during the first quarter of fiscal year 1990.

In sum, the deleted footnotes indicated that only $1.024 million of the
$7.018 million reported was actually available for new program
spending. By not clarifying the amounts of the unliquidated obligations
and reserves, the report made the centers appear to have more funds
available for program activities than was the case.

Although allowed to do so by Public Law 101-162 of November 1989
(the 1990 Appropriations    Act) many center directors have resisted
using their close-out reserves for programmatic purposes in 1990
because of the funding uncertainty the program has faced over the last
several years. Close-out reserves are funds the centers set aside to cover
costs they would be held liable for once a close-down began. Such closc-
out costs include rents, employee severance and annual leave pay, and
equipment maintenance contracts.

lJsing close-out reserves for programmatic purposes is of particular con-
cern to those centers not linked to universities or parent companies
because the board of directors for these centers could be held personally
liable for costs incurred. Program officials said that the centers would
use close-out reserves for programmatic purposes only if the Depart-
ment of Commerce agreed that sufficient, additional funds would be
made available immediately to fully cover close-out, costs.

Although the format of the report technically complied with the require-
ments of the conference report, we believe that some of the confusion
surrounding the funding status of the program could have been avoided
if the accompanying footnotes had not been deleted from the final

Page 6                                       GAO/NSIALMO-247   Trade Adjustment

                      A fundamental disagreement exists between Commerce’s program office
Disagreement Within   staff and other ITA officials over the adequacy of program funding. Pro-
Commerce Over         gram officials cont,end that appropriations for fiscal years 1989 and
Adequacy of Program   1990 were inadequate to allow the centers to meet the demands for their
                      services and provide a normal level of operations. In contrast, I'IA offi-
Funding               cials said that the amount of funds given t.o the program was greater
                      than anticipated when adding prior year carryovers and recoveries to
                      appropriated funds. These officials also said that because the centers
                      were aware of the program’s funding situation early in the year,
                      spending rates should have been managed accordingly. These officials
                      insisted that the supplemental appropriation made for the program in
                      May 1990 would not have been necessary if the centers had spent at a
                      more conservative rate early in the fiscal year.

                      Program officials contend that other ITA officials have consistently over-
                      stated the amount of funds available to the centers. Program officials
                      believe these balances are overstated because they include unliquidatcd
                      obligations. According to program officials, ITA bases its statements of
                       funding on Treasury reports reflecting thtb program’s withdrawals and
                      cash balances but not the outstanding debts. Also, because there is typi-
                      cally a time lag of several months between certification and actual
                       implementation of an assistance plan, funds that are set aside for pro-
                      jected needs, and consultant fees for executed contracts, are not
                       reflected in the Treasury account balances.

                      Furthermore, program officials are critical of the methodology used to
                      forecast the centers’ future funding needs because the methodology is
                      based solely on historical spending averages and not on the future
                      demand for program services. IJsing only historical spending rates to
                      project funding needs can result in inaccurate projections. Inaccuracies
                      occur when demand for services changes significantly or when past
                      spending had been subject to spending constraints. Furthermore, basing
                      future spending ntbeds on past historical spending rates allows neither
                      for inflation nor for increases in case loads.

                      From the opposite perspective, ITA officials believe that the centers arti-
                      ficially inflate their obligated balances by including unwarranted
                      charges, such as proj~~cted rental expenses and anticipated consultant
                      services that have not yet been contracted and awarded. These officials
                      also say that the centers arc experiencing funding shortages because the
                      centers have been too responsive to the increasing demands for their

                      Page 4                                       GAO/NSIALXW247   Trade Adjustment

             spending levels and was adequate to meet program needs. The disagree-
             ment within Commerce was not resolved and resulted in confusion over
             the adequacy of program funding.

             Commerce’s February 22, 1990, report to Congress detailing the funds
             made available to the program further added to the confusion. Although
             the report complied with the conference report request, the implications
             of the information for the program were not made clear, in that almost
             one-half of the reported “total funds available” consisted of unliqui-
             dated obligations-funds    already committed but not disbursed-and
             contingency reserves held by the centers to meet one time costs to close
             the centers down. Footnotes explaining that these balances should not
             be considered available for programmatic purposes appeared in the orig-
             inal draft report prepared by the program office but were deleted by
             Commerce’s International Trade Administ.ration (ITA) officials before the
             final version was submitted to Congress.

             We also found that     centers were inconsistent in the way they reported
             “committed funds”       when compiling quarterly budget reports. Program
             officials attributed   these inconsistencies to a lack of adequate guidance
             on how to properly      record and report unliquidated obligations and close-
             out reserves.

             Various operational constraints continue to affect the centers’ ability to
             provide timely and effective technical assistance to firms that qualify
             for program assistance. Among the most prevalent constraints are inad-
             equate and delayed funding and lapses in the centers’ authority to incur
             additional costs.

             The Trade Adjustment Assistance Program was established in 1962.
Background   Within the Department of Commerce, the ITA’S Office of Trade Adjust-
             ment Assistance administers the program. This office oversees the oper-
             ations of the 12 Trade Adjustment Assistance Centers that work directly
             with eligible firms in their geographical areas. These centers are not fed-
             eral agencies, but receive federal funds through cooperative agreements
             with the Department of Commerce.

             Before certifying a firm’s eligibility for assistance under the Trade
             Adjustment Assistance Program, program officials must conduct a diag-
             nostic survey that determines the extent of the firm’s problems and
             assesses the chances of the firm’s recovery. If a recovery appears viable,
             an adjustment proposal is prepared outlining the recovery strategy and

             Page 2                                         GAO/NSIAD-90.247   Trade Adjustment