FY 2005 Performance Budget Justification

II. FY 2005 Performance Budget Justification

I. Introduction
The Appalachian Region is home to nearly 23 million people living in 410 counties within 13 eastern states. Congress, in 1965, acknowledged the profound economic and social problems in the Region that made it "a Region apart" from the rest of the nation. It authorized the creation and funding of the Appalachian Regional Commission (ARC) to provide leadership in identifying and tackling the root causes of those economic and social problems so that the Region could join the rest of the nation and contribute to the overall prosperity of the country rather than being a drag on its resources.

Congress directed ARC, as a partnership of the Federal Government and the 13 Governors of the Appalachian states, to tackle two major Regional barriers to success – its isolated geography and its other specific deficits that have historically inhibited economic and social progress. The two issues were not seen as independent—even if the isolation could be resolved by building major highways throughout the Region, the other deficits would continue to inhibit Regional progress. In fact, if Federal highway investments were not accompanied by corresponding investments in economic and social development, the highways could end up serving as an Appalachian "by-pass" that would exacerbate rather than remedy its problems.

Since 1965, through leadership, partnership, leveraging public and private funding, coordination, and careful utilization of its resources, ARC has made considerable progress. It has:

• Reduced the Region's isolation by constructing more than 2,400 miles of new highways, which represents approximately 80 percent of the Appalachian Development Highway System (ADHS) initiative. The ADHS replaces a network of worn, narrow, winding two-lane roads, snaking through narrow stream valleys or over high rugged mountains.


• Improved the Region's economic progress by improving the employability of the workforce (education, health care, skills training, school-to-work transition), improving living conditions (water and sewer and environmental quality), and strengthening the Region's basic infrastructure to support a growing workforce and encourage public and private sector organizations to locate in Appalachia.


• Promoted Appalachian entrepreneurship and business development, by providing technical assistance, financing, and support to the Region in marketing its unique cultural heritage and Appalachian products.

These strategic investments have produced positive outcomes for the Region. For example, ARC's efforts have helped the Region:

• decrease the number of severely distressed counties by almost 60 percent, from 223 to 91 counties (see Appendix B) (ARC uses a very conservative measure of severe economic distress. Distressed counties meet three criteria: 1) per capita market income is not greater than two-thirds of the U.S. average, 2) three year unemployment rate is 150 percent of the U.S. average or greater, and 3) poverty rate is at least 150 percent of the national average. Counties with at least twice the national poverty rate and meeting one other criterion for economic distress are also classified as distressed.);


• reduce the Region's poverty rate by one-half, from 31 percent to 13 percent;


• lessen the per capita income gap between Appalachia and the rest of the U.S from 22 percent below the national average to 18 percent;


• reduce the infant mortality rate by two-thirds and strengthen the rural health care infrastructure through the addition of over 400 rural health facilities;


• increase the percentage of adults with a high school diploma by over 70 percent; and


• increase the number of Appalachian households with drinking water and in-door sanitation facilities by 800,000.

Two independent studies found that ARC's coordinated investment strategy has paid off for the Region in ways that have not been evident in other parts of the country without a regional development approach. A study in 1995 funded by the National Science Foundation compared changes in Appalachian counties with their socioeconomic twin counties outside the Region over 26 years, from 1969 to 1991. This analysis, controlled for factors such as urbanization and industrial diversification, found that the Appalachian counties grew significantly faster than their economically matched counterparts outside Appalachia. A more recent similar analysis by East Carolina University compared Appalachian counties with matched non-Appalachian counties in the southeastern states, with similar findings.

Yet ARC's mission has not been completed. Over 90 counties and many more areas still are classified as severely distressed. Much work remains to leverage the Federal investment in the ADHS and to position the Region to achieve economic and social parity. This integrated budget and performance request for FY 2005 describes the outcomes that will be achieved, strategies for achieving them, and the funding necessary to do so. ARC will continue to provide leadership, analysis, and problem resolution approaches to make strategic investments in the Region. It will work closely with the State and community partners, building on existing public and private sector partnerships, and seeking new and innovative approaches for achieving desired results.

II. Current Challenges Confronting Appalachia that Require ARC Attention
Despite recent progress, Appalachia still does not enjoy the same economic vitality and living conditions as the rest of the country. The Region continues to battle economic distress, concentrated areas of high poverty, unemployment, low income, poor health, educational disparities, and population out-migration that are among the worst in the nation.

Increased global competition and technological change have resulted in job losses and restructuring in many key Appalachian industries. Employment losses in non-durable goods and manufacturing and resource-based industries have been severe and disproportionately impacted much of the Region because of its manufacturing dependence. Some of these declines have been offset by employment growth in service sectors, but service sector average wages are considerably lower than those in the goods producing sectors. The Region's isolation and difficulty in adapting to changes over past decades and in retooling to be competitive are major factors contributing to the gap in living standards and economic achievement between the Region and the rest of the country.

The Region has been battered by structural economic shifts because of its disproportionate reliance on extractive industries and manufacturing. The Appalachian apparel industry has lost 100,000 jobs since 1991, and the textile industry has lost 23,000. Jobs lost in Appalachian-based steel and other primary metals businesses totaled over 24,000 in the last ten years. Over the last decade, one out of five jobs lost in textiles nationally occurred in Appalachia, and one out of three jobs lost in apparels occurred in Appalachia. An estimated one-third of the apparel losses and one-half of the textile losses are due to imports or plant relocations overseas. Appalachian coal-mining employment has fallen from 101,500 workers in 1987 to 58,600 in 1997.

The coming years are critical. Considerable investment has been made in reducing Regional isolation through the funding and development of the ADHS. When ARC was established, Congress found that economic growth in the Region would not be possible until the Region's isolation had been overcome. As the highway system progresses toward completion, the Region is positioning itself to take advantage of its newfound accessibility. However, it must overcome deficits in a number of areas in order to leverage the highway investment and the Region's cultural heritage in attracting businesses, development, and visitors to the area. Two of the key challenges are addressed in ARC's major goals, as discussed below.

Completion of the ADHS will permit the nation to realize the system-wide efficiencies of linking with the interstate highway system and the nation's intermodal transportation networks. Appalachia's strategic location between the eastern seaboard and the Midwest enhances the national value of the ADHS as a transportation asset to channel increasing domestic and international freight traffic between metropolitan centers and trade gateways. Forecasts of national freight demand over the next ten to twenty years by the U.S. Department of Transportation underscore the potential of the ADHS to help relieve congestion along major transportation routes and offer new and more efficient freight flows to trade gateways.

Technological isolation must be overcome, as demonstrated by Figure 1. While progress has been made in reducing geographic isolation, the information superhighway and the digital revolution have been slow in coming to Appalachia's businesses and 23 million residents. The Region lacks an adequate telecommunications infrastructure. Its people are less familiar with and therefore more easily intimidated by its complexity.

Communities across the Appalachian Region, especially those in rural areas, face serious challenges in using new information, computing, and telecommunications technologies (ICT) to expand their economic development horizons. The telecommunications infrastructure in the Region is underdeveloped, and compares negatively to national averages on various indicators. In addition, the capacities to use these technologies to improve performance in public and private sector institutions are often not as developed as in urban centers. A recent study found that the lack of advanced telecommunications services at prices affordable to local businesses and public organizations is a significant barrier to economic and social development in parts of the Appalachian Region. (Links to the Future: The Role of Information and Telecommunications Technology in Appalachian Economic Development, Michael Oden and Sharon Strover, June 2002.) For example, tech-related job growth in the Region's rural areas from 1996–2000 was 21 percent versus the national average of 53 percent.

Many rural Appalachian communities lack even the most basic services, with over 30 percent of households not being connected to centralized waste water treatment, particularly in central Appalachia, and other communities that rely on private septic systems. In addition, at least 15 percent of households in central Appalachia lack both public water and wastewater services, with the lack of service posing serious environmental problems such as "straight piping" of wastewater into streams. Also, reliance on private well water systems that are poorly regulated presents serious environmental problems for communities, particularly because these systems are not currently reported in EPA's needs assessments for safe drinking water requirements. Preliminary investment requirements for wastewater infrastructure and for safe drinking water systems in Appalachia are estimated at $10 billion and $8.4 billion, respectively. These estimates may understate the magnitude of problems; Kentucky estimates that in the Appalachian portion of the State the total 20-year gap for drinking water and wastewater treatment requires an investment of over $1.9 billion.

In Appalachia, smaller, rural systems face relatively higher investment costs to meet increasing environmental requirements, especially for those communities experiencing declining customer bases and low household incomes. Affordable rate increases to meet these investment needs is likely to be a challenge for 331 counties in the Region where average household income was two-thirds or less of the national average, according to the 2000 Census. These communities need additional technical, managerial, and financial assistance to meet their future needs.

Appalachia has other environmental problems that inhibit economic development. For example, in addition to inadequate water and sewer services, the Region has many tracts of land known as Brownfields, properties that have been developed for industrial or commercial purposes, polluted, and then abandoned or underused. These properties are also some of the best in the Region for economic development purposes, but restoring them to productive use requires considerable effort and resources.

For example, closing the job gap in telecommunications and information services industries will require an additional 200,000 information technology workers over the next seven years. The current education and technical skill level of the Regional workforce cannot meet this need. Appalachia's higher education attainment gap with the rest of the nation has widened in the last decade for those with a college degree or graduate degree. In 1990 the difference between the Region and the nation's share of adults with college degrees was 6.0 percentage points, but in 2000 the gap widened to 6.7 percentage points.

As evidenced by Figure 3, access to quality health care is also lacking, which makes Appalachia a less desirable place to live and work. Appalachia suffers from disproportionately high rates of chronic diseases such as cardiovascular disease, cancer, and diabetes. Although the Region has improved its health care infrastructure in recent years, it still needs to attract more physicians and medical facilities in order to be on par with the rest of the Nation. Over two-thirds of the Region's counties are fully or partially designated by HPSA as areas having a health care professional shortage. Most Appalachian counties have had difficulty attracting basic services such as dentistry, outpatient alcohol treatment, outpatient drug treatment, and outpatient mental health services.

Appalachia's economic vitality and stability require a more diversified regional economy. In addition to attracting new industry and retaining and expanding existing businesses, the Region needs to nurture home-grown firms and encourage innovation and risk-taking, as well as foster greater private sector investment. Appalachia's rich cultural heritage, which includes the Region's natural beauty, products, and crafts, must be better harnessed to provide local economic opportunities.

The Region also faces entrepreneurial shortcomings that stem from Appalachia's longstanding dependence on extractive industries and branch plant manufacturing, and the presence of absentee landlords who, in some cases, have siphoned off value from the Region. Furthermore, the culture of entrepreneurship is neither broad nor deep and research findings indicate that there are many gaps in the infrastructure for supporting entrepreneurship, ranging from technical assistance to development finance.

III. Past Performance

ARC's Unique Regional Development Role and Contribution
ARC is congressionally mandated to address the unusual economic and quality of life issues facing the people in Appalachia by partnering with public and private entities to evaluate, coordinate, and implement efforts to improve the Region.

Although resources from various public and private organizations contribute to addressing these issues, the partnership between the Appalachian states and the Federal government is key. It should be noted that the States pay one-half of ARC staff costs and are therefore fully and actively involved in ARC initiatives. By using a "bottom up" approach, ARC seeks input and solutions from local, regional, and state bodies. ARC provides funds to communities that cannot afford to meet other federal or state agency requirements. (The Commission is a partnership composed of the governors of the 13 Appalachian states and a presidential appointee representing the federal government. Grassroots participation is provided through 72 local development districts—multi-county organizations with boards made up of elected officials, businesspeople, and other local leaders.) In so many cases, ARC is the predevelopment agency—it provides seed money unavailable elsewhere to stimulate activities that ultimately allow a community to seek additional public funding.

Through the years, ARC has effectively used its funds to help communities make use of limited resources from other federal agencies. These Federal funds combined with state, local, and private money provide a broad program of assistance to the Region. Historically, every ARC dollar is leveraged five times with matching funds from other public and private sources. In short, ARC grants often serve as the "glue" that helps initiate or keep together projects that may not be viable otherwise. ARC leadership, coordination, and advocacy help local communities in Appalachia leverage other resources.

Another important ARC distinction is its long-standing focus on results. As stated previously, specific emphasis is placed on providing assistance to severely distressed counties and areas where over 50% of ARC funds are expended. The ARC strategic plan is used as a planning framework and a decision making tool. Individual projects must demonstrate how they support the goals and strategies in the ARC strategic plan. In addition, grant applications must include a description of the benefits to be derived from the project with particular emphasis on the extent to which the benefits will be realized on a continuing rather than a temporary basis. Specific output, outcome and efficiency measures must be included in the application. The results of each individual funding initiative are reviewed to determine if the investment met its objectives.

From a strategic perspective, macro indicators are reviewed to evaluate progress in improving the standard of living within the region. The number of distressed counties is evaluated along with key indicators such as poverty, per capita income, and unemployment levels. In addition, needs assessments, program evaluations, and look-back studies are endemic to ARC's operations. Reviews of program initiatives are conducted every 5 years on a rotating basis. These studies are used to plan future projects, evaluate the results of ARC's programs, and adjust and develop new strategies for tackling difficult and in most cases generational, long-standing problems.

ARC's Return on Investment
Because of its close ties to the local community and ability to help communities leverage both public and private resources, ARC is uniquely positioned to make or facilitate investments that promote the development of the Region and the well-being of its the citizens. ARC provides seed money for local investments that leverages other federal, state and local funds as well as private funds. For example, for public works projects completed during the 1990's, each dollar provided by ARC helped to make possible a package of $2.61 in other public funding and every dollar of public funding brought in $16.65 of private investment (See Figure 4.) (Evaluation of the Appalachian Regional Commission's Infrastructure and Public Works Program Projects, the Brandow Company and Economic Development Research Group, June 2000.)

In addition to helping communities leverage other funds, ARC's investments focus on improving the economic vitality of the Region in terms of jobs, income, educational attainment, and quality of life. ARC's achievements are summarized below.

Results from Recent Program Evaluations

A. Finishing the ADHS
An independent study has documented the benefits of the completed portions of the Appalachian Development Highway System (ADHS.) An extensive independent study found that the benefits and impacts of the completed portions of the ADHS include:

• A net increase of 16,000 jobs that would not have existed without the completed portions of the ADHS; the study estimates that these twelve corridors will, by the year 2015, have created a net increase of 42,000 Appalachian jobs, and will rise to 52,000 by 2025.
• Travel efficiencies valued at $4.89 billion over the 1965–2025 period.
• Efficiency benefits of $1.18 for each $1 invested; and economic development benefits of $1.32 for each $1 invested. (Appalachian Development Highways Economic Impact Studies, Wilbur Smith Associates, July 1998. [Note: This study was unique in that the results of the investments in public highways are rarely examined to determine if original stated objectives were met.])
• Crash and injury rates drop as much as 60 percent, with fatality rates reduced over 40 percent, when a two-lane highway is replaced with a four-lane divided controlled access highway.

Table 3 and Figure 5 below illustrate the progress made on the Appalachian Development Highway System in each state through the end of FY 2002.

B. Telecommunications Capacity
There are 240, or 59 percent, of the counties in the Appalachian Region that are underserved by Internet services. An ARC report, Program Evaluation of the Appalachian Regional Commission's Telecommunications Projects (2003), examined 70 projects that were started and completed between 1995 and 2001. Investments involving information technology based training, e-learning/distance learning, e-commerce, telemedicine, network and infrastructure initiatives, and community access centers were among the projects evaluated. The study measured the extent to which the projects enhanced access to telecommunication services and improved the use of these services to meet communities' needs. Also, the study assessed the degree to which projects involved and served community stakeholders.

Most projects reported fulfilling their goals to the same or greater extent than projected. For example, for projects involving:

C. Ensuring that the Region Has Basic Running Water and Sewage Services
ARC nonhighway infrastructure projects, which typically include infrastructure investments such as the development of industrial parks and sites, water and sewer systems, access roads, and business incubators, have been highly successful. A recent study of ninety-nine projects initiated and completed between 1990 and 1997, found a 33:1 return for every ARC dollar invested in terms of income from jobs created. For a one-time public investment in these economic development projects, there was approximately $9 of annual recurring personal income per public dollar invested (Evaluation of the Appalachian Regional Commission's Infrastructure and Public Works Program Projects, The Brandow Company and Economic Development Research Group, June 2000.)

As indicated earlier, preliminary estimates of investment requirements are $10 billion for wastewater infrastructure in Appalachia, and $8.4 billion for safe drinking water systems. These estimates may understate the magnitude of problems, since Kentucky estimates that in the Appalachian portion of the state the drinking water and wastewater treatment requires an investment of over $1.9 billion.

D. Improving Employability
A 2000 study of the results of 84 ARC education projects funded during the 1990's found that most of the projects in the study reached those segments of Appalachia that are most economically disadvantaged or geographically isolated and that the projects were successful in achieving the outcomes they set forth in their original requests for ARC support (Evaluation of ARC's Educational Projects, Westat Corporation, 2000). Case studies provided convincing evidence that the sample projects resulted in a broad range of educational, economic, and social gains. Moreover, the study found that 67 percent of these education projects reported that they would never have been implemented without their ARC award.

E. Diversifying the Appalachian Economy
Expanding entrepreneurship and supporting business development is essential to improving the viability and diversity of the Region's economy. A study issued in March 2001 of ARC's entrepreneurship program found that the program has leveraged funds from other sources, helping businesses develop new products, expanding new businesses and creating jobs (An Early Stage Evaluation of ARC's Entrepreneurship, Regional Technology Strategies, March 2001).

The study found that three-quarters of the projects had assisted firms to develop new products or upgrade new technologies. In addition, half of the projects reported starting new businesses that led to the creation of 304 new firms—46 new firms with employees and 258 firms that were sole proprietors. There were 377 new jobs created according to the survey, with 69 jobs in new firms, 50 in existing firms, and 258 through self-employment. Furthermore, there were 74 jobs saved by project interventions.

Since the 1980's the Commission has supported business development and assisted communities in the creation of over 60,000 jobs in Appalachia. A key component of this business development effort has been the 30 plus Appalachian revolving loan funds that received ARC support. In addition to revolving loan funds, ARC has invested in international trade and market expansion for Appalachian companies; provided funds for downtown renewal and business incubators; supported tourism initiatives and industrial park development; and sponsored conferences on business issues.

IV. FY 2005 Budget and Performance

ARC Priorities in FY 2005
ARC's FY 2005 priorities are designed to help it achieve its long-term goals. At the highest level, ARC is determined to significantly reduce economic distress within the Appalachian Region and target the neediest areas. Doing so requires successful achievement of two inter-related long-term goals, as shown in Figure 6. The first is to reduce the Region's isolation and the second is to position the Region, as it becomes more accessible, to take advantage of that achievement and be prepared to be economically vibrant and competitive.

ARC general and performance goals for FY 2005 are summarized on the following pages. Strategies for achieving the goals are summarized below and presented in more detail within the respective program budget descriptions. The linkage between ARC's strategic goals, general goals, performance goals and annual goals is shown in Table 5 on page 24.

General Goal 1: Reduce Appalachian isolation so that it can fully participate in and benefit from the strong and vibrant U.S economy.
The complexity and difficulty of resolving the causes of isolation make this goal long-term. Nevertheless, building blocks toward this goal will continue to be put in place during FY 2005. In order to reduce Regional isolation, ARC will continue to build highways and will also focus on improving Appalachia's participation in the "electronic highway."

Strategies to Reduce Appalachian Isolation

Strategy 1.2: Expand the telecommunications and broadband infrastructure within the Region and ensure its full utilization

In FY 2005, ARC will:

• Focus on small-business access to the Internet, ensuring that the Region develops telecommunications plans, creates "aggregation of demand" projects, and installs necessary infrastructure in distressed areas.
• Receive maximum benefit from Internet access by funding e-commerce training programs, developing joint planning strategies with various agencies and organizations such as the Small Business Administration and National Business Incubator Association, supplementing the work of other federal programs, facilitating technology ownership in the home, funding community learning/technology access centers, and assisting in providing enhanced telecommunication services to facilitate smart parks and IT incubator development opportunities.

Strategies to Position the Region to Be Economically Competitive

Strategy 2.1 - Ensure that the Region has basic infrastructure and services

It is hard for most Americans to fathom that in the 21st century basic water and sewer problems remain a critical issue, but this is true for many smaller, poorer communities of Appalachia. And without the basics, business and industry simply are not interested in locating in the Region. A fundamental feature of the Commission since its creation has been to coordinate with and make best use of all public and private resources to assist Appalachian community development.

ARC has collaborated with federal agencies to support water resource management and cooperative solutions among providers; promote multi-county approaches and private sector partnerships to manage solid waste disposal, water, and wastewater treatment; support waste recycling and new disposal technologies; ensure that remote rural area needs are represented in infrastructure policy formulation and funding; and identify innovative ways to address unmet needs in Appalachian communities and sub-regions.

Currently, the Economic Development Administration, Rural Development, the Department of Housing and Urban Development, and the Tennessee Valley Authority are administering active projects under the supplemental grant provisions of the Appalachian Regional Development Act. Agreements are also still in place with other agencies that have conducted substantial program activities with ARC in the past, including the Federal Aviation Administration, the Federal Railway Administration, the Environmental Protection Agency, the Natural Resources Conservation Service, the Army Corps of Engineers, and the National Park Service. Appalachia will also work to make developable prime sites that have not been available due to environmental problems such as pollution.

Strategy 2.2 - Increase workforce employability

ARC will work with the Region to improve educational capabilities and achievement. In partnership, it will upgrade the Region's education climate, as a whole, improving educational capabilities and providing re-entry programs, school-to-work transition programs, and skills training for specific employers located in or moving into the Region. The Department of Education and the Public Health Service have longstanding agreements in place with the Commission to support projects in the Region.

In FY 2005 ARC will:

• work to increase the college-going rate in Appalachia;
• work with States to start or expand worker skills programs;
• continue its Department of Energy alliance to provide summer math, science, and technology workshops;
• partner with the Appalachian Rural Systemic Initiative to improve student math and science scores in distressed counties;
• identify and duplicate exemplary educational models throughout the Region; and
• identify opportunities for school readiness, adult literacy, dropout prevention, GED, and school-to-work programs and targeting resources to these areas.

ARC will also improve workforce employability by strengthening Regional health care capabilities. It will increase the supply of health professionals in underserved communities and support telemedicine as a means of universal access to comprehensive health care. ARC will identify and address health care delivery gaps and, through continuing partnerships with the Centers for Disease Control and Prevention (CDC) and various medical centers/health care organizations, institute screening, prevention, and control programs in distressed counties. The CDC and the National Cancer Institute (NCI) have committed funds to special initiatives in Appalachia in recent years as a result of ARC advocacy. ARC intends to continue developing its relationships with the CDC and NCI to focus on chronic diseases such as diabetes, cancer, and heart disease. Other ARC activities have been jointly funded or administered by the Economic Development Administration and the Tennessee Valley Authority.

Strategy 2.3 - Promote diversity of the Appalachian economy

As indicated earlier, Appalachia's economic vitality and stability require a more diversified regional economy. Diversified regions are associated with economic growth. In addition to attracting new industry and retaining and expanding existing businesses, the Region needs to nurture home-grown firms and encourage innovation and risk-taking, as well as foster greater private sector investment. Appalachia's rich cultural heritage, which includes the Region's natural beauty, products, and crafts, must be better harnessed to provide local economic opportunities.

ARC has jointly funded many business development projects over the years with federal agencies, and has vigorously reached out to both public and private partners in recent years to promote entrepreneurship in the Region. The Commission launched a Regional entrepreneurship initiative in 1997 to foster homegrown businesses. The Regional strategy involves cooperating with the Federal Reserve, SBA, EDA, TVA and the National Endowment for the Arts to educate current and future entrepreneurs, both youth and adults; improve access to capital for local businesses; strengthen local economies by capitalizing on strategic sectors such as Regional cultural heritage products; and nurture new and expanding businesses by providing technical assistance and creating and supporting rural business incubators and multi-tenant facilities.

ARC has provided a forum for stakeholders and forged alliances with major financial institutions to pursue this strategy. Partner organizations include banking institutions, including the Federal Home Loan Banks in Atlanta and Cincinnati, the Federal Reserve Banks in Cleveland and Richmond, the Federal Deposit Insurance Corporation in Atlanta, and Wachovia/First Union Bank; and national foundations, including the Ford, Kauffman, Bennedum, and Kellogg foundations, community colleges and local development organizations. The National Commission on Entrepreneurship, National Business Incubator Association, Distributive Education Clubs of America, and Future Farmers of America have also joined with the Commission in supporting Appalachian initiatives.

Table 6 presents ARC's summary of its performance and resource levels for FY 2005. Additional detail and discussion is included below.

* Funding for the Appalachian Development Highway System is included in the Federal Highway Trust Fund and therefore is not included in the total requested FY 2005 appropriation.
**The amount includes a $5 million earmark to construct a child development center in Alabama.
*** After rescission
¹⁰ Estimated based on grant applications to be submitted

The allocation of requested funds across program areas for FY 2005 is displayed in the pie chart in Figure 7.

Performance Challenges

ARC can effectively and efficiently implement its FY 2005 strategies and achieve its performance targets, assuming that it obtains sufficient resources and is able to carry out its planned activities. However, several external and a few internal factors might affect ARC's ability to achieve its goals. These risks are discussed below.

External Challenges

Economic downturns could adversely impact ARC performance goal achievement. Economic down turns are felt earlier in the Appalachian Region. They hit deeper and last longer. This may have an impact on what ARC is able to accomplish in the Region.

Success is very dependent on both State and Regional cooperation and having flexibility to shift funds when new and promising projects are identified. ARC works in partnership with 13 states and 72 local development districts. While for the most part, these partnerships have functioned smoothly; ARC does not have full control over funds or projects funded. ARC may plan that funding will be used for one particular purpose and the states may use those funds to meet what they perceive to be a more pressing need.

Seventy-two local development districts (LDD) serving the Appalachian Region work closely with the states and ARC in developing project packages. These LDDs receive ARC funding to support their operations. ARC plans to maintain LDD funding at $5.4 million.

Sustained funding levels consistent with amounts authorized by Congress are essential for ARC's strategies to be effective. Any significant reduction in funding could have an impact on the willingness of the states to cooperate and partner with the ARC. Although ARC achieves a 5 to 1 leverage ratio of the funds it invests in the Region, the seed money must be sufficient to make cooperative efforts worthwhile.

Government regulations and policies could counteract ARC efforts to reduce distress in Appalachia. In spite of their benefits, environmental law/regulation and trade policy have had a negative effect on the Region. Examples include the impact on the apparel/textiles and coal industries. The Appalachian apparel industry has lost 100,000 jobs since 1991, and the textile industry has lost 23,000. Over the last decade, one out of five jobs lost in textiles nationally occurred in Appalachia, and one out of three jobs lost in apparels occurred in Appalachia. An estimated one-third of the apparel losses and one-half of the textile losses are due to imports or plant relocations overseas. Appalachian coal-mining employment has fallen from 101,500 workers in 1987 to 58,600 in 1997. The Energy Information Administration has projected that over the next decade mining jobs in Appalachia could fall to between 49,000 and 22,000, or even lower, depending on economic and environmental assumptions that are made.

Internal Challenges

ARC is a small streamlined organization and therefore faces challenges in preparing staff to succeed current leadership. ARC has a streamlined organizational structure. There are 11 Federal employees and 48 FTE non-Federal trust fund employees. Although this means that ARC is able to operate efficiently, with extremely modest administrative costs, it also means that key ARC staff members have no "back ups"—in sports parlance, "no bench." This creates potential challenges when considering succession planning and even in more mundane matters such as vacation time and juggling workload.

Early or forced retirements or poor market performance could substantially accelerate the requirement for contributions to the Commission's retirement fund from the Federal Appropriation or from member States to keep the fund actuarially sound. ARC is under a separate retirement system that is not fully funded. A large number of retirements could impair the financial health of the system. Additionally, should a reduction in funding necessitate a reduction in staff size, ARC would not have sufficient monies to fund severance benefits.

Limited money for administrative/IT expenses creates challenges in keeping pace with government-wide requirements and initiatives. Implementing e-government initiatives can be an expensive undertaking for small agencies with very limited resources. ARC will need to integrate with the e-grants system and the e-travel system.