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Statement of William C. Shelton, April 2003

April 2003

Statement of William C. Shelton,
Director, Virginia Department of Housing and Community Development
and Alternate for Governor Mark Warner to the
Appalachian Regional Commission Program

To the House Committee on Transportation and Infrastructure
April 9, 2003
Rayburn House Office Building
Washington, D.C.

Mr. Chairman and Members of the Committee:

Thank you for the opportunity to address you this afternoon on our views with respect to economic development programs. I am substituting today for our States' Co-Chairman, Governor Mark Warner of Virginia, whose schedule did not permit him to be here this afternoon. On behalf of the 13 governors of the Appalachian states and the more than 21 million citizens of our 410 Appalachian counties, let me express my appreciation for your interest in our Region. Let me also express my appreciation to our new Federal Co-Chair Anne Pope for her leadership and commitment to working together with the governors to maximize the resources Congress makes available to us in promoting development in Appalachia.

We believe that since its inception the experience of the Appalachian Regional Commission offers excellent insights into the kind of collaborative efforts that lead to success in economic development.

Mr. Chairman, let me provide you with a brief overview of our program and what makes it unique.

1. Origins and Mandate
The Appalachian Regional Commission is the oldest continuing state and federal economic development partnership. Its origins lie in the desperate economic and social conditions facing the people of Appalachia. These conditions marked it as a region apart from the rest of America. As "A Report to Congress" from the Appalachian governors in 1981 noted, from the beginning of the twentieth century Appalachia was "isolated from the rest of the country, suffering the ravages of floods, prone to erratic swings in the coal industry, and subject to more severe economic and population shifts than the rest of the nation."

Moved by the depth of the poverty he saw in the Appalachian state of West Virginia during the 1960 Presidential campaign, Senator John Kennedy vowed that he would do something about it if elected President. That pledge led to the creation in 1963 of the President's Appalachian Regional Commission (PARC), with the mandate to "prepare a comprehensive action program for the economic development of the Appalachian Region."

In view of the "unique tangle" of the Region's problems, PARC called for an entirely new approach to deal with them since "neither the states alone nor the federal government alone are adequate to this challenge which involves them both so closely." What was needed was a "uniquely tailored program," stated the report, in which the, "Federal, state, and local governments act in concert." The Appalachian Regional Development Act (ARDA) passed by Congress in 1965 then spelled out the outlines of a new development agency, the Appalachian Regional Commission (ARC). It represented a novel form of cooperation between these three branches of government, melding federal, state, and local leadership and resources into a cooperative regional approach to addressing economic distress.

2. Jurisdiction
The ARC's jurisdiction originally included 373 counties with a population of nearly 17 million in 12 states. It extended from the hills and plateaus of southern New York through the central mountain country at the heart of Appalachia, down to the highlands of northern Alabama. In 1967, the state of Mississippi and 20 of its counties—along with two counties from Alabama, one from New York, and one from Tennessee—were added, bringing the total of states to 13 and the number of counties to 397. Since then 13 more counties have been added, bringing the total in the year 2002 to 410.

3. Organizational Structure

With its staff headquarters located in Washington, D.C., a federal co-chair and the governors of the 13 Appalachian states govern the Commission. This arrangement gives the governors a direct voice in the allocation of federal funds for development projects in their respective states. Decisions require a majority vote of the governors plus the vote of the federal co-chair, a presidential appointee. Each governor appoints an alternate to represent the state at ARC meetings and to assist in developing a strategic development plan.

The Commission determines the formula by which the annual appropriation from Congress is distributed among the states, and it approves each state's development plan. The ARC staff, headed by an executive director, serves the Commission in implementing its programs and policies. It distributes funding to the states, reviews projects, and provides a broad range of technical expertise to communities in their developmental efforts.

4. Strategy
As called for by the original PARC report, the Commission's strategy for bringing Appalachia into the nation's economic mainstream is based on partnership not only between the federal government and the states but also with local communities. From its inception, the Commission was to be a focal point for planning, coordinating resources, and providing technical assistance without usurping communities' discretion to determine their own development agenda. There are currently 72 Local Development Districts (LDDs) administratively supported in part by the Commission. They consist of local government officials and community leaders who serve as its partners in establishing priorities for development projects. The LDDs' participation in the ARC process ensures a close working relationship between the states and the Appalachian communities.

The LDDs provide a critical resource in allowing Appalachian communities to access a wide range of funding resources at the state and federal levels. Their role extends far beyond planning. They serve as catalysts and problem solvers, and they sometimes take on the responsibility for administering and implementing grant projects once they have been funded. Without these important resources, Appalachian communities' capacity to access and carry out development activities would be significantly diminished.

ARC investments are carefully targeted. Each ARC project must be linked to the achievement of one of five goals identified in the ARC strategic plan. These goals include: education and workforce training; basic infrastructure improvements; civic capacity and leadership development; business development; and health care. To enhance ARC's effectiveness, special initiatives in support of the goals have been undertaken by ARC in cooperation with the states and local leadership. These special initiatives have been in the areas of telecommunications; export trade promotion, and leadership and civic development.

ARC is uniquely configured to allow for flexibility and collaborative funding approaches. Each Appalachian state tailors its own development plan, in accordance with the established ARC goals, and the needs and circumstances specific to its own economic situation. Unlike some other funding programs, ARC is simply not a case of one size fits all. Each governor can assess the evolving needs of that state's Appalachian area and then respond to it within the ARC framework.

While the Appalachian region has identified issues and difficulties that impact the entire region, these areas of concern are affected differently by the economic conditions within each of the 13 Appalachian states. The flexibility provided by the ARC Program allows governors to incorporate the ARC development plan into the overall state economic development strategy. This is a unique feature that allows ARC resources to be used in close collaboration with each individual state's economic development resources.

This flexibility and collaboration are not limited to state economic development efforts. ARC funds are frequently used in conjunction with Economic Development Administration (EDA) and Rural Development Administration (RDA) resources. Perhaps one of the most integrated funding relationships is between ARC and states' administration of the non-entitlement portion of the Department of Housing and Urban Development's (HUD) Community Development Block Grants (CDBG).

The key role that states play in both CDBG and ARC allows for unparalleled coordination in pivotal projects. Many key projects exceed the funding capacity of either CDBG or ARC. Because the states are integrally involved in both programs, communities can rely upon the states to coordinate these critical resources, thereby developing viable funding packages in scenarios where one or two resources alone are simply inadequate. Each program can leverage the other with results that neither could achieve alone.

5. Building Highways
The Appalachian governors and the PARC report viewed the creation of a modern highway system for the Region as crucial to Appalachia's economic and social development and its integration into the national economy.

The Appalachian Regional Development Act of 1965 recognized this imperative by authorizing the Appalachian Development Highway System (ADHS), which was to become a 3,025-mile network of highways to be constructed under the oversight of the Commission. It is the only federally funded economic development highway system in the nation and was envisioned not simply to meet existing demand but to create economic opportunity by overcoming the region's isolation. ARC has now overseen the building of over 2,500 miles of modern highways in the Region, with approximately 500 miles remaining to be built in some of the most difficult terrain in Appalachia.

6. Non-highway Projects
Through advocacy and more than 22,000 grants, since its creation ARC has assisted in the creation of over 1.6 million jobs, in addition to 766,000 jobs generated by the Appalachian Development Highway System. It has also provided much needed clean water and sanitary sewer services to more than 800,000 households and built more than 400 rural health facilities.

In the Commonwealth of Virginia, ARC-funded projects have created 1,304 new jobs and retained an additional 556 since 1999. In the past five years, over 4,400 families have received safe, clean, reliable drinking water because of the regional water systems in which ARC has invested. Workforce development services have opened new employment opportunities for more than 6,000 Virginia residents in the Appalachian region of the state. Three new medical clinics have been funded since 1999 that will offer telemedicine facilities that will bring new medical resources to the residents of our most isolated communities.

7. A Focus on Systematic Distress
ARC's mission is broader than that of other economic development programs, focusing not on cyclical economic downturns but on long-term, systematic regional and rural distress.

With the introduction of its Distressed Counties Program in 1983, ARC began earmarking 20 percent of its project funding for those counties categorized as distressed based on income levels substantially below the national average and unemployment, poverty, and infant mortality rates that were substantially above the national average. In fiscal year 1996, the Commission increased the funding to be set aside for distressed counties projects to 30 percent. In fiscal year 2002, Congress mandated that 50 percent of ARC's non-highway funding benefit distressed counties and areas. For the last five years (1998–2002), 65% of ARC's annual allocation from Congress was invested in projects benefiting distressed counties.

In October of 2002, ARC's Federal Co-Chair and States' Co-Chair announced that the number of distressed counties was projected to fall once again. In 1960, 223 counties met our current distress criteria. Based on 2000 census data, 91 counties are identified as distressed for fiscal year 2004. They cited ARC programs targeted to these distressed areas as helping to achieve this reduction. Clearly the targeted investments made through ARC, along with funding resources it has helped to leverage, have made a positive difference in Appalachia. While much has been accomplished, Appalachia still lags behind the nation in economic prosperity and remains uniquely vulnerable to the effect of cyclical downturns.

8. ARC As a Catalyst and a Complement
ARC differs from other economic development programs in distinct ways. ARC is often the lever that has allowed other funding sources, such as EDA, to fund projects in localities suffering severe fiscal distress. By offsetting some of the cost of "local share" participation, ARC has permitted these communities to participate in EDA and other economic development programs that might otherwise be beyond their reach. In the most distressed counties, ARC can fund up to 80 percent of the total project cost.

In other cases, when funding for a development project would entail a loan as well as grants, it is often difficult for local governments to carry the resulting debt service. ARC is able to supplement other federal grant programs, bringing the federal grant share of a project up to 80 percent, thereby making it feasible for an economically disadvantaged community to carry out critically needed development activities.

Maximum funding caps are a reality of all grant and loan programs. It is also a reality that significant development projects usually exceed the funding caps of any single resource. The complexity and cost associated with such projects demand multiple funding resources that can be packaged together in a coordinated manner. The additional funding that ARC provides often allows these projects to come to fruition that otherwise would have to be abandoned.

EDA, even with increased funding, simply cannot address the full range of economic development needs in Appalachia. The development needs in Appalachia call for the kind of projects which go beyond what are often seen as traditional economic development activities.

ARC funding has allowed regional water systems to begin construction and steadily reach across our Appalachian counties, connecting water sources and communities in a way that will facilitate development. In Virginia, ARC support in building efficient regional water systems that exploit multiple water sources is indispensable for the economic future of areas that do not have adequate physical infrastructure. These water systems must be in place before development can take place, and they often require the additional funding ARC can provide.

Few, if any, other federal funding resources are available to provide the kind of large-scale development strategies necessary to make Appalachia economically competitive. ARC has taken steps to prepare Appalachian communities for development that are not possible for other funding agencies.

Workforce development that will prepare Appalachian workers for jobs in a rapidly changing economy is an essential component to this region's economic future. ARC has recognized this need and taken concrete steps to energize workforce development in counties from New York to Mississippi.

ARC has also recognized that economic development is not limited to industrial parks and recruiting large new enterprises. Small businesses are no less the backbone of Appalachia's economy than the rest of the nation. The reality of the terrain in Appalachia imposes limitations on the availability of the large tracts of relatively flat land usually needed for large-scale industrial development. Small business and self-employment must therefore be significant components of any successful economic development strategy for the Region. ARC's flexibility permits it to respond to a range of economic development approaches, including large-scale ventures and those in support of small business. In Virginia, ARC funds have helped develop large regional industrial parks, where they are feasible, but its funding has also supported smaller eco-tourism and entrepreneurship projects as viable economic development options.

ARC has provided unprecedented leadership in bringing broadband telecommunications infrastructure to Appalachia. In an area with severe geophysical limitations, telecommunications is critical to the region's economic future. At this point many private providers, seeing little likelihood of significant profit, have not yet stepped forward to serve the isolated rural communities throughout Appalachia. ARC has taken the initiative to work with communities to explore alternative ways of providing the telecommunications access necessary for businesses to thrive.

ARC has provided a development foundation on which other funding agencies can continue to build. Without this essential foundation, however, the further work needed to bring Appalachia into the American mainstream can never take place.

9. Getting Results
Since ARC's inception in 1965, poverty rates in the Region have been cut in half; the high school graduation rate in Appalachia is now slightly above the national average; the infant mortality rate is below the national average; thousands of jobs have been created, and Appalachia as a whole has recovered from population hemorrhaging. In fiscal year 2002 alone, ARC projects resulted in 29,000 jobs being created or retained.

Each ARC dollar spent goes a long way. In fiscal year 2002, the $72 million ARC expended to fund 500 projects boosting its five strategic goals was matched in turn by over $229 million from other public sources. An additional $115 million was leveraged in private investment.

10. Looking Ahead
In the 1990s the Commission recognized that Appalachia would have to make greater strides in developing its business and technology sectors if it was to compete successfully in the information and knowledge based economies of the future. To this end, the Commission launched a multi-year $23 million entrepreneurship initiative in 1997 that promotes entrepreneurial economies across the Region and encourages private investment and innovation. Complementing this initiative was the introduction of a regional telecommunications initiative by the Commission in the year 2001, which is to help the Region build the modern information highway demanded for integration into the national and global economy.

11. ARC's Budget At Risk
For most of its existence, the Commission has enjoyed strong congressional support. In the 1980s, ARC was excluded from the White House's annual budget submissions to Congress, but Congress continued to appropriate funds for the Commission, though at a level about half of previous years. During the 1990's, annual non-highway funding stayed level at $66,000,000. Then, in 2002, President George W. Bush signed into law the Commission's first five-year reauthorization. This legislation provided an authorization level of $88 million per annum in non-highway funding for fiscal years 2003 through 2004.

The Administration's non-highway budget request for ARC in fiscal year 2004 shows a dramatic reduction from its fiscal year 2003 level of $70.8 million to a fiscal year 2004 level of $33 million. This is in stark contrast to ARC's authorized level for fiscal year 2004 of $88.5 million. While we support the reauthorization of EDA and look forward to a cooperative and productive relationship, we, the State partner at ARC, request that the Congress preserve the ARC model and provide the funding at the level authorized.

12. Consequences
A cut in ARC's funding of the magnitude proposed in the 2004 budget would seriously impair the Commission's ability to promote economic development in Appalachia's poorest areas since diminished resources, by necessity, translate into fewer development projects. Although economic development resources may be transferred to other federal agencies, the focused attention on the Appalachian region is what has resulted in the progress seen to date. Shifting this sharp implementation focus to a planning orientation will undermine the development momentum that has been building since ARC's inception. If ARC becomes primarily a planning agency, its credibility as a development agency among its stakeholders, states, local governments, and the private sector would be seriously compromised as well.

An ARC without its capacity to fund projects on a significant scale would no longer play an effective role in alleviating economic distress, or in the remediation of natural disasters. ARC's success and outstanding reputation as an economic development agency is largely owed to its fusing the planning component of projects and their funding components into one efficient, seamless operation.

Spinning off the funding component from ARC would invite bureaucratic complications and inefficiency. Significant delays would result in implementing projects. Funds for any planned development would need to be located and then approved by other agencies, adding layers of bureaucratic vetting and cost in justification and administration. Restoring ARC's funding and preserving its program model can easily avoid all of these complications and inefficiencies.

Thank you.

I will be pleased to respond to any questions.