-* United States General Accounting Office b .’ _. GAO Report to the Honorable John Heinz, U.S. Senate September 1990 TRADE ADJUSTMENT Funding Status of Commerce’s Trade Adjustment Assistance Program 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 H-207169 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 assistance. 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 B-207169 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 8207169 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 B207169 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 K207169 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 IN!07169 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 ,.,.,.., . ._ . .,, ,, -~ i ? . Ordering Information The flit five copies of each GAO report are free. Additional copies are $2 each. Orders should be sent to the following address, accom- panled by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.!3. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20877 Orders may also be placed by calling (202) 275-6241. i B.207169 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 R20716Y 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 B-207169 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 B207169 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 services. Page 4 GAO/NSIALXW247 Trade Adjustment 8207169 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
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)