FY 2005 Performance Budget Justification

The President's FY 2005 Budget requests $66 million (this amount includes funds for 11 Federal full-time equivalent positions and 48 non-Federal Commission full-time equivalent positions) in direct appropriations for the Appalachian Regional Commission (ARC) to address the requirements set forth by the Appalachian Regional Development Act Amendments of 2002, which reauthorized the Commission for five additional years. This funding is within the level authorized in the amended Act and is vital for positioning the Appalachian Region for vigorous, self-sustaining growth.

Because Appalachia's economic problems are widespread and generational, Congress directed ARC to address the needs of severely distressed areas of the Region and focus special attention on areas of greatest need. 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, as its economy is disproportionately dependent on extractive industries and manufacturing. Concentrated areas of high poverty, persistent unemployment, and low incomes—exacerbated by inadequate health care, educational disparities, and out-migration—still prevent many Appalachians from participating fully in the American economy. At the same time, the region possesses important assets: a rich cultural heritage, substantial natural resources, a spirit of independence, and a dedicated workforce. ARC seeks to capitalize on these assets.

ARC achieves its mission by promoting economic and community development through a framework of joint Federal and State initiative. This Federal-State partnership provides the mechanism to identify and address the most critical regional and local needs, enabling federal resources to be tailored to the unique needs of individual communities.

Improved transportation has been a longstanding strategy to help connect the Region to the rest of the country and stimulate economic growth. Congress provided significant funding to build highways throughout the Region but also placed particular emphasis on positioning the entire Appalachian Region to take advantage of the associated economic growth that would come with those highways.

ARC was explicitly directed to help generate a diversified regional economy through a broad range of responsibilities, such as fostering human resource development, enhancing the competitiveness of the region's industries, improving the skills of the Appalachian workforce, providing technical and financial resources for business development, and coordinating the economic development activities of other Federal agencies within the Region.

These responsibilities require the Commission to play a unique regional development role, studying the problems confronting Appalachia, partnering with State and local governments and communities to systematically address the major causal factors, providing one-time "seed money," and leveraging funds contributed by other public and private organizations. In fact, leveraging other public and private funds is foremost in our thinking at ARC. A recent study of Commission infrastructure projects demonstrated that for every dollar invested by ARC between 1990 and 1997, Appalachia gained 33 dollars in long-term benefits.

Because of its State partnership and flexible problem-solving approach, ARC is able to identify and help fund innovative grassroots initiatives that might otherwise languish as missed opportunities. In many cases, ARC functions as a predevelopment agency, providing modest amounts of initial funding that are unavailable from other sources. Successful initiatives, such as ARC's Appalachian Higher Education Network program, can be replicated across the Region. These funds jumpstart new projects that help communities develop regional economic development opportunities.

For example, ARC:

• Targets 50 percent of its funds to distressed counties and/or distressed areas;
• Funds small projects that would typically not meet the threshold of other Federal economic development agencies but are essential for addressing deeply rooted regional problems,
• Funds projects that use new and innovative approaches to tackle local problems;
• Provides the critical dollars for many initiatives so that they qualify for other public and private sources of funds; and
• Provides some funding to assist distressed communities in conducting feasibility studies for capitalizing on economic opportunities.

Through the years, ARC has effectively used its funds to help communities make better 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.

ARC is a performance-driven organization, evaluating progress and results on an ongoing basis and relying on clearly defined priorities and strategies for achieving them. Based on performance information, ARC adjusts its strategies, emphasizing what works and discontinuing what does not, in order to ensure maximum return for taxpayers. A new set of goals and strategies for tackling Appalachian economic problems has been designed and is presented in Table 1.

As Table 1 indicates, ARC focuses first and foremost on significantly reducing regional economic distress. It achieves this goal by focusing on the predominant inhibitors—regional isolation and preparedness for being economically competitive as the isolation problems are overcome. This logic specifically addresses Congress's mandate set out in the Appalachian Regional Development Act of 1965. It ensures that the large Federal highway investment in Appalachia does not result in a highway that is used to bypass the Region, but instead achieves Congress's original intent of using the highway as a regional development catalyst that benefits both the Region and the U.S. economy as a whole.

During FY 2005 ARC will devote its resources to programs that tie to and specifically support the strategic and supporting goals. Table 1 presents ARC's new performance framework. It represents a shift for ARC by emphasizing a macroeconomic framework for reducing regional economic distress. The two general goals are inter-related. Reducing isolation positions the Region to be more economically competitive, but other investments are essential to ensure that the Region will benefit as a result. The logic for this second important goal and accompanying set of critical strategies is included in the budget justification.

The Commission will continue to designate the most severely distressed counties and areas in the Region as a strategy for targeting resources to the greatest need and addressing the priority for funding those areas under its 2002 reauthorization statute. ARC recognizes the severely distressed designations as a way to identify the parts of the Region that have substantial pre-developmental needs and few resources to address them through traditional federal programs.

During FY 2005, ARC will achieve its goals by investing approximately $450 million from the Highway Trust Fund to build approximately 30 additional miles of highway, $5 million to improve telecommunications, $14 million to improve employability of the Appalachian workforce, $32 million to improve infrastructure, and $15 million to diversify the Appalachian economy. The Commission will work with its partners in Appalachian states and communities to identify specific local projects that fit the parameters of ARC goals and strategies. These investment areas will change over time as certain problems are solved and new issues and needs emerge.

Five major emphases will guide area development funding in FY05, enabling the Commission to address compelling needs in the Region and to build on its assets:

• Clean Water. Clean water is the most basic infrastructure requirement for health and economic growth. Few Americans realize that many distressed Appalachian communities still lack this basic infrastructure.
• Telecommunications. Creating access to high-speed telecommunications is critical to Appalachia's future. Without it, the Region's businesses and institutions will continue to lag behind the rest of the nation, and the potential for growth of technology-related industries will be impaired.
• Education. Achieving parity with the nation in educational attainment is key to enhancing the employability of the workforce in Appalachia. The largest remaining challenge is reducing the gap in college-going rates between Appalachia and the rest of the country. Additionally, efforts will focus on vocational training and moderate- to long-term on-the-job training.
• Health Care. Appalachia suffers from disproportionately high rates of chronic diseases such as cardiovascular disease, cancer, and diabetes. They have a significant adverse affect on the Region's workforce participation and productivity and impede the opportunity for economic growth.
• Cultural Heritage. The rich cultural heritage and natural beauty of the Region are unique assets that can and should be a basis for strategies to diversify the economy of Appalachia.

The Commission is also committed to implementing the President's Management Agenda. The ARC governance model is ideally suited for implementing it. Detailed discussion regarding progress is included as Appendix A.

Table 1: ARC Goals and FY 2005 Priorities
STRATEGIC GOAL: Significantly reduce regional economic distress

Table 2 summarizes the request for FY 2005. The attached budget justification explains and supports the Federal Co-Chair's request for resources to respond to this mandate.

Table 2: Summary of FY 2005 Request by Performance Goal
($ Millions)