Full text of "Tax credits to hire the disadvantaged : wasteful or effective : hearing before the Employment, Housing, and Aviation Subcommittee of the Committee on Government Operations, House of Representatives, One Hundred Third Congress, second session, September 20, 1994"

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TAX CREDITS TO HIRE THE DISADVANTAGED:
WASTEFUL OR EFFECTIVE

Y 4, G 74/7: T 19/21

Tax Credits to Hire the Disadvantag.. . _,

J(jr

BEFORE THE

EMPLOYMENT, HOUSING, AND AVIATION
SUBCOMMITTEE

OF THE

COMMITTEE ON

GOVERNMENT OPERATIONS

HOUSE OP REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS

SECOND SESSION

SEPTEMBER 20, 1994

Printed for the use of the Committee on Government Operations

OEC 16 1997

U.S. GOVERNMENT PRINTING OFFICE
85-818 WASHINGTON : 1997

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-055487-X

TAX CREDITS TO HIRE THE DISADVANTAGED:
WASTEFUL OR EFFECTIVE

Y 4. G 74/7: T 19/21

Tax Credits to Hire the Disadvantag. . . _,

JCjt

BEFORE THE

EMPLOYMENT, HOUSING, AND AVIATION
SUBCOMMITTEE

OF THE

COMMITTEE ON

GOVERNMENT OPERATIONS

HOUSE OP REPRESENTATR^S

ONE HUNDRED THIRD CONGRESS

SECOND SESSION

SEPTEMBER 20, 1994

Printed for the use of the Committee on Government Operations

DEC 1 6 1997

U.S. GOVERNMENT PRINTING OFFICE
85-818 WASHINGTON : 1997

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-055487-X

COMMITTEE ON GOVERNMENT OPERATIONS

JOHN CONYERS, Jr.

CARDISS COLLINS, IlUnois
HENRY A. WAXMAN, California
MIKE SYNAR, Oklahoma
STEPHEN L. NEAL, North Carolina
TOM LANTOS, California
MAJOR R. OWENS, New York
EDOLPHUS TOWNS, New York
JOHN M. SPRATT, Jr., South CaroUna
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
KAREN L. THURMAN, Florida
BOBBY L. RUSH, lUinois
CAROLYN B. MALONEY, New York
THOMAS M. BARRETT, Wisconsin
DONALD M. PAYNE, New Jersey
FLOYD H. FLAKE, New York
JAMES A. HAYES, Louisiana
CRAIG A. WASHINGTON, Texas
BARBARA-ROSE COLLINS, Michigan
CORRINE BROWN, Florida
MARJORIE MARGOLIES-MEZVINSKY,

Pennsylvania
LYNN C. WOOLSEY, California
GENE GREEN, Texas
BART STUPAK, Michigan

, Michigan, Chairman

WILLIAM F. CLINGER, Jr., Pennsylvania
AL McCANDLESS, California
J. DENNIS HASTERT, Illinois
JON L. KYL, Arizona
CHRISTOPHER SHAYS, Connecticut
STEVEN SCHIFF, New Mexico
CHRISTOPHER COX, California
CRAIG THOMAS, Wyoming
ILEANA ROS-LEHTINEN, Florida
DICK ZIMMER, New Jersey
WILLIAM H. ZELIFF, Jr., New Hampshire
JOHN M. McHUGH, New York
STEPHEN HORN, California
DEBORAH PRYCE, Ohio
JOHN L. MICA, Florida
ROB PORTMAN, Ohio
FRANK D. LUCAS, Oklahoma

BERNARD SANDERS, Vermont
(Independent)

Julian Epstein, Staff Director
Matthew R. Fletcher, Minority Staff Director

EMPLOYMENT, HOUSING, AND AVIATION SUBCOMMITTEE
COLLIN C. PETERSON, Minnesota, Chairman

TOM LANTOS, California
BOBBY L. RUSH, Illinois
FLOYD H. FLAKE, New York
KAREN L. THURMAN, Florida
BARBARA-ROSE COLLINS, Michigan

WILLIAM H. ZELIFF, JR., New Hampshire
CHRISTOPHER SHAYS, Connecticut
JOHN M. McHUGH, New York
FRANK D. LUCAS, Oklahoma

Ex Officio

JOHN CONYERS, JR., Michigan WILLIAM F. CLINGER, JR., Pennsylvania

Wendy Adler, Staff Director
' ••^■' Joy R. SmONSON, Professional Staff Member

June Saxton, Clerk
Judith A. Blanchard, Minority Deputy Staff Director

(II)

CONTENTS

Page

Hearing held on September 20, 1994 1

Statement of:

Carey, Ron, general president. International Brotherhood of Teamsters,
accompanied by Robert Currie, Pony Express Co., St. Louis, MO;
Charlean Jackson, deputy administrator, Texas Employment Commis-
sion, Austin, TX; Janet Tully, director, Community Employment and
Training Division, Marriott International, Washington, DC; Edward
Lorenz, Political Science Department, Alma CoUege, Alma, MI; and

Lori Sterner, Access to Employment, Minneapolis, MN 122

Ross, Douglas, Assistant Secretary of Labor, Employment and Training
Administration; Maurice Foley, Deputy Tax Legislation Counsel, U.S.
Department of Treasury; and Charles Masten, Inspector General, U.S.
Department of Labor, accompanied by Joseph Fisch, Assistant Inspec-
tor General for Audit 16

Letters, statements, etc., submitted for the record by:

Carey, Ron, general president, International Brotherhood of Teamsters,

prepared statement of 125

Foley, Maurice, Deputy Tax Legislation Counsel, U.S. Department of
Treasiiry:

Information concerning compliance efforts 116

Prepared statement of 32

Jackson, Charlean, deputy administrator, Texas Employment Commis-
sion, Austin, TX, prepared statement of 187

Lorenz, Edward, Political Science Department, Alma CoUege, Alma, MI,

prepared statement of 196

Masten, Charles, Inspector General, U.S. Department of Labor, prepared

statement of 42

Peterson, Hon. Collin C, a Representative in Congress from the State

of Minnesota:

Prepared statement of the National Commission on Employment Pol-
icy 12

Prepared statement of the Restaurant Association 9

Ross, Douglas, Assistant Secretary of Labor, Employment and Training

Administration, prepared statement of 20

Tully, Janet, director, Community Employment and Training Division,
Marriott International, Washington, DC:

Information concerning hiring at Marriott 206

Prepared statement of 181

ZeUff, Hon. William H., a Representative in Congress from the State
of New Hampshire 4

(in)

TAX CREDITS TO HIRE THE DISADVANTAGED:
WASTEFUL OR EFFECTIVE

TUESDAY, SEPTEMBER 20, 1994

House of Representatives,
Subcommittee on Employment,

Housing, and Aviation,
Committee on Government Operations,

Washington, DC.

The subcommittee met, pursuant to notice, at 9:36 a.m., in room
2247, Raybum House Omce Building, Hon. Collin C. Peterson
(chairman of the subcommittee) presiding.

Present: Representatives Peterson, Rush, Thurman, Zeliff, Shays,
McHugh, and Lucas.

Staff present: Wendy Adler, staff director; Joy R. Simonson, pro-
fessional staff member; June Saxton, clerk; and Judy Blanchard,
minority deputy staff director.

Mr. Peterson. The subcommittee will be in order. Today the
Emplojrment, Housing, and Aviation Subcommittee is holding a
hearing on one of the most controversial programs we have consid-
ered. The staff tells me they've been lobbied harder on this than
any issue that's come along for quite awhile, the Targeted Jobs Tax
Credit Program, or TJTC.

Let me say at the outset that I support the goals, I think most
of us support the goals of the TJTC, which is to encourage employ-
ers to reach out and hire people who are having a hard time find-
ing work. These target groups include economically disadvantaged
youth, ex-offenders, Vietnam era veterans, public assistance recipi-
ents, and vocational rehabilitation referrals.

The subcommittee's concerns are not with this mission, but with
the question of how effectively the TJTC Program is functioning.
The TJTC law was first enacted in 1978, and has been extended
and amended frequently. Sometimes it has even been extended
retroactively after its expiration. It is currently set to expire one
more time at the end of 1994.

It has been the subject of much criticism and of fervent support.
But never to my knowledge has there been as strong and as sweep-
ing a critique as the latest report of the IG of the Labor Depart-
ment. As we will hear this morning, the IG audited the program
in nine States, and found that 92 percent of the Targeted Jobs Tax
Credit workers would have been hired without the tax credit. Call-
ing this a clear windfall for employers, the IG states unequivocally,
"We are recommending that the TJTC Program be terminated on
December 31, 1994." The inspector general is far from alone in
viewing the Targeted Jobs Program as a windfall. Other studies re-

(1)

ported from 55 to 95 percent of workers were hired without regard
to the credit.

Of some half million of these workers in fiscal year 1992, the IG
reported that over 50 percent were disadvantaged youth, and 20
percent were on the AFDC welfare rolls. They were employed in
part-time, low-wage, and low-skill jobs, with few benefits. In other
words, the TJTC Program provided the same type of jobs that these
individuals were finding on their own, or through some of the other
154 Federal employment programs.

The Targeted Jobs Tax Credit Program allows an employer to
claim 40 percent of the first $6,000 in wages paid, up to an amount
of $2,400 per worker. He or she is required to retain the worker
for at least 90 days or 120 hours, but is not required to provide
training or other special services.

Congress has put no cap on the amount of tax credits employers
may claim. Turnover in these entry level jobs is extremely high.
For every success story of a McDonald's hamburger flipper who
rises through the ranks and becomes a compsmy executive, there
are uncounted thousands who leave one job without training or
skills and drift into other low-paid, unskilled jobs.

If the program provided incentives to employers to train, pro-
mote, and retain these eligible workers, that might justify the sub-
sidies given by the taxpayers, but the maximum credit of $2,400
per worker and the minimum required retention period do not, it
appears, lead to stable or upwardly mobile jobs in most cases.

Employers are free to hire a succession of workers and obtain a
$2,400 credit for each. And the IG found that only 24 percent of
the TJTC workers studied were with the same employer in the fifth
quarter after they were hired. And this is similar to a comparison
group. This program, we said, has been studied, analyzed, and re-
ported on repeatedly over the years.

There are both positive and negative anecdotal reports of how it
has affected individual workers or employers. We look forward to
hearing some of these stories today, but the subcommittee's respon-
sibility to Congress and to the disadvantaged workers and to the
American taxpayer is to seek answers to some basic questions.

What is the net cost-benefit ratio of the TJTC Program? Are we
paying employers to hire people that they would have hired any-
way? Are we paying them to substitute some disadvantaged indi-
viduals, for others in a similar category? Does the program lead to
increased employment and to better training and jobs for the target
groups? And finally, how could the program be improved?

I know that some will argue that even though the TJTC program
is an imperfect program, it does some good for the people that we
want to help. But for me, saying that something is better than
nothing is not enough, given the budget situation that we're in
today. We must decide whether the faults of this program can be
fixed, or whether we should end it and seek more effective solu-
tions to the employment problems of these needy workers. With
that, I will recognize the ranking minority member, the Honorable
Mr. Zeliff, from New Hampshire, and for his opening statement.

Mr. Zeliff. Thank you, Mr. Chairman. I appreciate your calling
this hearing to examine the Targeted Jobs Tax Credit or TJTC Pro-
gram. And we're all well aware that it is due to expire on January

1, and there are many questions of its merits and it's very timely
that we do this review.

The program, again, as you stated was started in 1978 with the
intention of encouraging employers to hire hard-to-employ individ-
uals such as economically disadvantaged youth, the handicapped,
and those on welfare. This is obviously a very worthy goal, but the
recent report by the Department of Labor's Office of the Inspector
General does cast doubt on whether the benefits of the program
outweigh its high cost to the Government. And I'm certainly a be-
liever that we need to review on a regular basis all of our programs
to make sure that we retain those that are working on either re-
vise, extend, or get rid of those that are not.

One of the principal findings of the OIG report was that very few
hiring decisions were made on the basis of the availability of a tax
credit. In other words, the tax credit was not the determining fac-
tor in the decision to hire the worker.

As a small businessman myself, I can testify from firsthand expe-
rience and I have participated in this program, and, again, I've
been involved in the Private Industry Council and some of the
things in New Hampshire that have managed some of these pro-
grams, and I basically have never made a hiring decision on the
basis of one factor only. Like most employers, I look at a number
of different factors when ev£duating a job applicant before making
a decision.

Perhaps we can conclude from the OIG report that the tax credit
was not the determining factor in the hiring decision in most cases.
However, if asked whether the tax credit was a factor in the hiring
decision, I would believe that most employers would respond, yes.
We need to cai3fully evaluate this and other questions over the
TJTC Program raised by the OIG report. This hearing will provide
the subcommittee with a forum for doing so.

I am looking forward to hearing testimony from our witnesses.
Again, I've had the experience of working with this program as an
employer, and hiring some of these individuals as an employer and
getting that tax credit.

I would also like, with your approval, Mr. Chairman, I ask unan-
imous consent to enter into the record a letter from the National
Restaurant Association that indicates, frankly, as they represent
730,000 food service establishments across the country, where they
strongly disagree with OIG's findings, and they support TJTC, and
in fact, urge its permanent extension. And, again, I want to keep
an open mind, as you are.

We will have lobbying on both sides of the issue, and certainly
if the program has gone astray and is not working and we have
Federal dollars at stake, we need to make sure they're effectively
used. So I appreciate the opportunity to hear the witnesses and I
thank you, Mr. Chairman.

[The prepared statement of Hon. William H. Zeliff follows:!

STATEMENT OF THE HONORABLE
WILLIAM H. ZELIFF
BEFORE THE SUBCOMMITTEE
ON EMPLOYMENT, HOUSING, AND AVIATION

HEARING ON THE
TARGETED JOBS TAX CREDIT

September 19, 1994

Mr. Chairman,

Thank you for calling the Subcommittee
together this morning to examine the
Targeted Jobs Tax Credit or TJTC program.
The program is scheduled to expire on
January 1st, and questions over its merits
make this hearing particularly timely.

The program was started in 1978 with the
intention of encouraging employers to hire
hard-to-employ individuals, such as
economically disadvantaged youth, the
handicapped, and those on welfare.

This is a very worthy goal, but the recent
report by the Department of Labor's Office
of the Inspector General casts doubt on
whether the benefits of the program outweigh
its high cost to the government.

One of the principle findings of the OIG
report was that very few hiring decisions
were made on the basis of the availability of
a tax credit. In other words, the tax credit
was not the determining factor in the decision
to hire the worker.

As a small businessman, I can testify from
firsthand experience that I have never made a
hiring decision on the basis of one factor
only. Like most employers, I look at a
number of different factors when evaluating a
job applicant before a making a decision.

Perhaps we could conclude from the OIG
report that the tax credit was not the
determining factor in the hiring decision in
most cases. However, if asked whether the
tax credit was a factor in the hiring decision,
I believe most employers would respond
affirmatively.

We need to carefully evaluate this and other
questions over the TJTC program raised by
the OIG report. This hearing will provide
the Subcommittee with a forum for doing so,
and I am looking forward to hearing the
testimony from our witnesses.

Thank you, Mr. Chairman.

Mr. Peterson. Thank you. Mr. McHugh from New York for an
opening statement.

Mr. McHuGH. Thank you, Mr. Chairman. I don't have an open-
ing statement, other than to express my appreciation to you for
convening this hearing and to welcome the witnesses. As has been
said here this morning already, this is a vitally important question,
one that is of no little controversy and I am looking forward to the
exchange of information about to occur.

Mr. Peterson. Welcome, Mr. Lucas. We will make the Res-
taurant Association testimony part of the record without objection.

[The information referred to follows:]

nOO SEVENTEEKIH SreEET. N.W_ IHASHINGIDN. DC 2D03fr3097 202/331-5900 FAX: lOZOT-Z*?? NATIONAL <^

RESTAURANT
ASSOCIATION

August 25. 1994

Ttie Honorable Bill ZelJff
224 Cannon Houae OflRce Building
United States Home of Representatives
Washington, D.C. 20515

Dear Representative Zeliff:

The Department of Labor's independent Office of Inspector General (OIG) recently issued a
report on the Targeted Jobs Tax Credit (TJTC), a federal tax credit that encourages
employers to hire &om among certain target groups, including economically-disadvantaged
youth, AFDC recipients, aixi people with disabilities. In short, the OIG report suggests that
the TJTC program be eliminated because it claims that many of the employees hired under
the TJTC program would have been hired even if employers did not have the benefit of the
tax credit

The National Restaurant Association, which represents over 730.000 foodservice
establishments across the couhIty. stmngly disagrees with the OIG's fin^^sTWa -snwpott
TJTC and, in fact, urge its permanent extension. Over TJTC's fifteen-year history,
foodservice operators have employed tnillions of TJTC-eligible individuals, most of whom
have had httle or no wbrlTexpcrience^iid tew basic'worilc skills. Over and over again, we
hive~seeD"QgrIIICeacourages employers to jajce a risjT^fl tolpend the extta resources
negedtogainjthese individuals^therebv givipg themjhe sldlls necessary to become ~~
productivcCTopbyees.

We take specific issue with the following findiiigs of the OIG:

■ Rather than asking employers whether TJTC was a factor in the hiring decision, the
OIG asked employers whether they had hired TJTC-cUgjble employees solely because
the employees qualified for the credit. Asking the question this way tmdoubtedly
understates TJTC's impact, since no businessperson hires employees based on just one
factor. Results would be more accurate if OIG had asked employers whether TJTC
was a &ctor in the hiring process — not whether it was the sole factor.

■ The OIG study found that, on average, TJTC employees stayed with their
employers longer than non^TTTC employees who earned similar wages. Bui the OIG
then questions TJTC's effectiveness because it says only 24% of TJTC employees are
still with their employer after 15 months on the job. This is only logical: TJTC's
objective is to provide targeted groups of workers with entry-level skills that will
allow them to move on to other jobs or higher education.

■ aESTAUK-^NT*

YEARS

■ 1 9 191 904B

^"•"^ KHTV^^V TAflf)

CiC? dfi 7.f\7. VVM CfCT fR.RT«;o

■ DouE Ross. DOL'8 Assistant Secretary for Employment and Traming, alluded to
oaSrprobkms with the OIG audrt. Ross said the OIG import was "not a sc.enufic
2y • and^oted that without "a carefully constructed methodology, it ,s impossible
S^Lr cotXm or refute claims made about the impact of TJTC on paxt>cipaung
individuals and firms," Ross said that the DOL is workmg with the Treasury
Sfpanmeat to strengthen the TJTC program and plans to conduct a "sctentif.c smdy
on the program's overall effectiveness."

The National Restaurant Association strongly supports the Targeted Jobs Tax Credit We
Se^at SUs extend TJTC permanently as part of the technical corrections legislation
now pending OI.R- 3419), before TJTC expires on December 31. 1994.

Sincerely,

Haine ZS-oraham

Senior Director, Government Affairs

Mr. Peterson. We also received a statement from the chairman
of the National Commission on Employment Policy, which will also
be included in the record without objection.

[The information referred to follows:]

statement on the Target Jobs Tax Credit by

ANTHONY P. CARNEVALE, Charr

NATIONAL COMMISSION FOR EMPLOYMENT POLICY

Thank you for this opportunity to submit for the record my own views and
those of the National Commission for Employment Policy (NCEP) on the Targeted
Jobs Tax Credit (TJTC). Although the Commission has not undertaken a recent
study of TJTC, in the 1 980s it sponsored two studies of the tax credit program
that were conducted by Professor Edward C. Lorenz. NCEP staff members
associated with those projects have sought to keep abreast of developments with
respect to this credit.

The Targeted Jobs Tax Credit was designed to provide an incentive for
private sector employers to hire certain classes of workers' that they might not
otherwise hire because of the presumed issues of lower productivity and perhaps
increased costs of bringing such workers up to accepted productivity levels. Most
of the evaluations and analyses we have examined indicate that the original
objective is not being met. Our Commission-sponsored studies, now several years
old, and the DOL Inspector General's study, now only several weeks old, draw
roughly the same conclusion: Employers are hiring workers they would ordinarily
employ and are receiving tax credits for employing some of them. Moreover, these
workers are being hired for low-wage, high turnover, jobs that offer no benefits.

In this brief paper, I will discuss two issues that seem to go to the heart of
the TJTC problem. They are the administration of TJTC vouchering and the general
lack of retention of employees for whom the credit is claimed.

TJTC was planned as a device (to increase employment opportunities for
disadvantaged workers) that would involve little bureaucracy. Workers' eligibility
would be determined by the Employment Service or other public employment
agency; eligible workers would be given vouchers - signifying the availability of the
tax credit for employing them -- to use in marketing themselves to employers; and
employers would be able to receive the credit at tax time. The worker with the
TJTC voucher was to be his/her own job developer.

This Idee of advance vouchering has not worked out in practice and a private
bureaucracy has emerged to fill part of the void. Since TJTC was passed Initially in
1 978, budgets for the Employment Service have been reduced substantially and the
resources simply have not been available for aggressive outreach and recruitment
for the program. Similarly, the other agencies with authority to determine initial
eligibility and to voucher job seekers have not had the resources to make

' Nine groups of disadvantaged workers arc listed in the law. The credit is
used most often for disadvantaged youth.

substantial use of the program.^ This lack of resources (and perhaps lack of
interest) in the public sector made possible the development of a new Industry:
The TJTC consultants.

The studies done for NCEP in the 1 9808 and the audits performed by the
DOL Inspector General point to the central role played by these consultants.
Employers who make use of the tax credit follow their normal recruiting methods
and procedures for selecting employees. Once the workers are selected and the
hiring decision is made, the worker's background is reviewed, frequently in a
telephone call using an 800 number, to determine whether she/he is eligible. If so,
the worker Is sent or taken to the Employment Service and a voucher is issued
retroactively. The voucher is returned to the employer who completes a brief form
which is returned to the ES which in turn sends a certificate to the employer; this
certificate entitles the employer to take the credit on its next tax return, If the
worker is not TJTC eligible, she/he usually Is sent on to work.

The process just described, shows how a windfall is made. It would not be
worth the elaborate process for a single worker. But for a large employer of low-
wage workers -- such as a large chain of retail stores or a chain of fast food
restaurants - taking advantage of the credit can amount to a considerable sum for
both the employers and their consultants.

If TJTC is to be retained for any substantial period, we recommend that the
vouchering process be returned to its original concept, i.e., vouchering in advance
by a public agency: the ES, local JTPA entities, local social service agencies
administering AFDC and JOBS, end state agencies serving persons with disabilities.
Returning to vouchering in advance would provide a greater opportunity for the
disadvantaged than appears to be the present case.

This suggestion for advance vouchering Is made with en awareness of earlier
studies suggesting that vouchers of this sort tend to stigmatize the bearer of the
voucher making him/her less attractive to employers. However, it ie not c\9bt that
there has been any concerted effort to use TJTC as a form of employment subsidy
in placing persons who are completing training programs or some other sequence of
services under JTPA or JOBS. We believe that an aggressive use of the credit
should increase the possibility that TJTC can be made to serve more disadvantaged
persons, the supposed beneficiaries of the credit.

The other issue is the matter of retention on the job for which the credit is
claimed. Lorenz found in 1 985 that TJTC workers who remained on their jobs for

One exception appears to be agencies that serve persons with disabilities.

at least 1 2 months 9xperienced a significant increase In their earnings while those
who stayed for only a few months did not have such an Increase. He and other
recommended at the time that the TJTC incentive be structured so as to encourage
the retention of workers for longer periods.

The Inspector General's report showed some increase in starting and ending
TJTC wages and a small Increase in post-TJTC job wages. However, only a
minority of workers were in their TJTC jobs for more than two quarters.

We recommend further that if TJTC if is to be retained, should be amended
to encourage retention of the employee for a longer rather than a shorter period of
time. The Tax Code should provide 'hat in order for the employer to claim and
receive the full tax credit under TJTC that the participant for whom the credit is
claimed muat have been with the employer for one year or more. This proposal
increases the amount of wages on which the credit could be claimed and provides a
sliding scale for credits for persons retained less than a full year: 20% of the first
$10,000 paid to the employee for the first 6 months of employment; 25% of
$10,000 for 6 to 12 months; and 40% of $10,000 for employment of one year or
more. This kind of scheme would encourage retention and would still provide the
employer with some credit for those who can not be retained for the full year.

We recommend that if TJTC is extended, that the Congress add a provision
to be effective during the next tax year requiring longer retention of the TJTC
participants and that a proviso be added to the effect that the program will expire
at the end of the next Congress unless:

- The legislation is revised to insure that there is advanced eligibility
determination and vouchering by a public agency; end

- There is a much clearer effort to tie the use of the credit to federal
purposes.

It may very well be that the time for TJTC has come and gone. Many
changes in the labor market have occurred since the New Jobs Tax Credit was
passed in the late 1 970s and later replaced by TJTC. Much of the low-skill work
has been moved from the cities where so many of the disadvantaged reside and
from rural areas as well. Many of the retailers who employ low-skill workers are
now in the suburbs instead of the central city. There is some evidence that the big
employer users of TJTC conduct their business in suburban locations ~ locations
that ara not easily accessible to the most disadvantaged youth.

The growth in the number of contingent workers is no doubt a factor in the
employment of young TJTC participants. Many young people just out of school

(and some just out of college) are having a difficult time finding permanent, full-
time jobe with benefits. It should not be surprising that the inspector General
found that substantial numbers of participants were in part-time jobs.

The organization of woric has changed so much that it is entirely possible
that the tax expenditures for TJTC would be better used if the credit were
transformed into a training tax credit - a credit to employers for structured training
that would add to participants sicills and thus position them to compete in the labor
market more effectively.

If the Congress decides to move In a new direction with the Targeted Jobs
Tax Credit, it will no doubt wish to have new information on the design of the
credit. The National Commission stands ready to assist in any way the
Subcommittee would deem useful.

Mr. Peterson. And the record will remain open for other sub-
missions for 1 week without objection.

Our first panel of witnesses today are Douglas Ross, who's once
again with us. We welcome you back to the committee, Assistant
Secretary of Labor, with the Emplojnnent and Training Adminis-
tration. We have Maurice Foley, Deputy Tax Legislation Counsel,
with the Department of Treasury, and Charles Masten, the Inspec-
tor General with the Department of Labor, who is accompanied by
Joseph Fisch, Assistant Inspector General for Audit.

It is the custom in the Grovemment Operations Committee inves-
tigative hearings to swear in all witnesses. Do you have any objec-
tion to being sworn in? If not, would you please rise and raise your
right hands?

[Witnesses sworn.]

Mr. Peterson. Thank you, please be seated. All of your written
statements will be entered into the record, so you're welcome to
summarize. I would like — the Treasury Department did not give us
their testimony until just now, right? Which is in violation of the
standing procedures, and written request and repeated staff calls.

I don't know exactly what the problem was, but it at least, to me,
is not acceptable to be in this kind of a situation. The members and
the staff have not had time to look at your statement when we're
preparing and to be able to discuss it with other witnesses and so
forth. So we, I guess, will take your statement as part of the
record, but — well, I don't know what we can do about it, but, hope-
fully, this will not happen again. I don't know what the problem
was, but it was something over in the White House or whatever,
I guess it was being reviewed or something.

Mr. Foley. Right, we had to get it approved. It had to go through
the regular review process.

Mr. Peterson. So if it's regular, are we going to always be in
such a situation?

Mr. Foley. We will definitely work to ensure that that doesn't
happen again.

Mr. Peterson. Well, I hope so. With that, Mr. Ross, again, wel-
come to the committee. We appreciate having you with us and look
forward to your testimony.

STATEMENTS OF DOUGLAS ROSS, ASSISTANT SECRETARY OF
LABOR, EMPLOYMENT AND TRAINING ADMINISTRATION;
MAURICE FOLEY, DEPUTY TAX LEGISLATION COUNSEL, U.S.
DEPARTMENT OF TREASURY; AND CHARLES MASTEN, IN-
SPECTOR GENERAL, U.S. DEPARTMENT OF LABOR, ACCOM-
PANIED BY JOSEPH FISCH, ASSISTANT INSPECTOR GEN-
ERAL FOR AUDIT

Mr. Ross. Thank you. Good morning, Mr. Chairman, members of
the subcommittee. I am, in fact, pleased to be here once again, this
time to talk about TJTC and the Office of the Inspector General's
report on it. I would like to, per your request, provide a summary
of the prepared statement that we have submitted.

As you mentioned, Mr. Chairman, the credit is scheduled to ex-
pire at the end of this calendar year. The administration has not
sought its extension and has proposed no administrative funding
for a TJTC extension in its fiscal 1995 budget.

Earlier this year, in fact before the OIG's report, Secretary Reich
cited the TJTC as a program that was not working well enough
and indicated his opposition to its extension in its current form.
Nothing since that January 27 statement has changed the Depart-
ment of Labor's position regarding the TJTC. We do not support
the extension of the Targeted Jobs Tax Credit in its present form,
period.

Although the current credit we think is flawed, its objective, to
improve the job prospects of the least advantaged, remains, if any-
thing, more important than ever.

In my prepared testimony, I attempted to cite a lot of the data
showing that the groups toward which this tax credit is targeted
in fact have not fared well since 1978. So the mission remains.
Since 1978 when TJTC was first enacted. Congress, as you know,
has repeatedly passed extensions of the program and legislation is
currently pending before this Congress that would further extend
the TJTC. We do not believe such an extension should be enacted
unless Congress is able to provide meaningful changes to the cur-
rent program that hold out the promise of increased effectiveness.
And we'd certainly be willing to participate in such a process with
Congress, given the urgent need to improve the employment pros-
pects among the disadvantaged.

Now, let me just briefly describe the evidence that we have re-
garding the current effectiveness of the program. In addition to the
study recently issued by the OIG, there have been 10 studies over
the years on TJTC. The numerous other publications on TJTC have
mostly reviewed the findings or data of these 10 studies. Now,
while there are some major limitations of these studies that I'll ref-
erence in a second, they do provide some general indication of the
program's effectiveness.

In genersd, the studies tend to reveal the following. First, there
is little evidence that the TJTC is being used extensively by eligible
employees or employers. For example, estimates of the proportion
of eligible, disadvantaged youth who even use the program ranges
from only 2.5 to 6.8 percent.

Second, there is evidence that the vast majority of the tax credits
are windfalls to employers who would have hired disadvantaged
target group members anjrway. Existing studies estimate that any-
where from 70 to 90 percent of TJTC certifications go to individuals
who would have found jobs even in the absence of the credit. And
third, TJTC jobs are often low-wage and short term, with little or
no lasting impact on productivity or earning power.

Now, I mentioned that although TJTC has been studied before,
there are a variety of limitations to these studies and I think it's
useful for the committee to know in its deliberations. Only 4 of the
10 studies actually try to estimate the overall impact of the tax
credit on the employment and earnings of the disadvantaged. And
all four of these impact studies rely on data from 1984 or earlier.
And all four, frankly, have methodological difficulties. Because of
the way it's designed, this is a tough program to rigorously evalu-
ate.

Researchers in the field that we've consulted agree that none of
the studies to date is a reliable estimate of the total impact of
TJTC on employment and earnings of the disadvantaged. In fact,

we contracted for a comprehensive literature review on this whole
subject in 1991 that concluded, and I quote, "because of unavoid-
able design difficulties, none of the studies to date answers defini-
tively the question of the net effects of the TJTC," end of quote.

Now, in addition to these outside studies, the TJTC Program has
been audited by the Department of Labor's OIG. And I want to say
clearly there's a good deal of useful information in the most recent
OIG report that we are here to talk about. Its estimates of program
costs and the average wages earned by TJTC participants are help-
ful additions to the dialog on the future of the program. However,
we do not believe the audit methodology used in the OIG's report
is a scientific means of determining the impact of TJTC, for rea-
sons that I lay out in my written testimony and which we can dis-
cuss.

Now, I want to be very clear on this. I raise these research issues
not because of any disagreement with the OIG over the desired fate
of the TJTC as currently constituted, or because we believe another
study is needed of the current program. We do not, a point that the
IG appears to have misunderstood. Rather, I raise these issues to
make clear that neither the OIG reports nor the other studies of
the program that occurred over the past 15 years have dem-
onstrated that employment tax credits are not a potentially effec-
tive approach to assist the disadvantaged.

In other words, I raise it because the IG has, while agreeing with
us that the program should not be extended in its current form,
has asserted that it is beyond reclamation, there is no way to make
it work. Our argument is there is nothing in the research to sup-
port that second position. So in this context we think it's extremely
important to recognize also that the TJTC was never intended to
be a program that had no employer windfall whatsoever.

Because the Government ends up funding less than 30 percent
of each new job created through TJTC, the program can be cost-
effective. Really the top issue you raise, Mr. Chairman, can be cost-
effective even if the great majority of TJTC voucher workers are
hired for jobs they would have obtained even without the credit. So
even with a 70-percent employer windfall, the TJTC would be a
cost-effective program.

Let me take 1 minute on this, because this sort of at first is
counterintuitive. Let's use a business analogy. Congressman, one
you would be familiar with. And you're, I believe, Mr. Chairman,
an accountant by trade, so you would also.

Businesses provide coupons as a way to bring in new business.
They give a coupon to everyone who purchases the product. They
know full well most of the people who purchase the product and
use the coupon would have purchased the product anyway. That's
not the issue. The issue is with the coupon can they get enough
new customers whose spending outweighs the cost of the coupon?
It's the same with this credit.

You give it to anybody who hires a disadvantaged person in this
category. Clearly, we know that a lot of people who hire disadvan-
taged people already will use it. The issue is, "In cost benefit
terms, do enough additional people hire low-income folks for these
jobs, such that the benefits outweigh the costs?"

At a 70-percent windfall level, which means 70 percent would
have hired them, it's quite cost-effective, it works. At 90 percent,
it isn't very cost-effective. It doesn't work. And I would hope that
you would ask Mr. Fisch, when you have a chance, at what level
he believes this program would be cost-effective and what evidence
does he have that no matter what we do to it, we can't get there.
We've not been able to find that out.

I for one would like to know the answer to that. We believe that
if Congress decides to pursue an extension of the TJTC, it should
consider changes to the program that address the shortcomings I've
addressed and discussed. Longstanding problem areas include the
credit's low take-up rate, its administrative burden, the excessive
windfall to employers who claim the credit without changing hiring
patterns, and the focus on low-quality, high-turnover jobs. And we
will be pleased to meet with the staff of this subcommittee and
with the authorizing committees to further discuss our ideas if it
appears that Congress is interested in exploring an extension.

Finally, we would recommend that if the program is extended by
Congress in a modified form, because, again, we don't support ex-
tending it in its current form. We think it should be temporarily
extended, rather than permanently reauthorized, and that a more
scientific study of its impact be undertaken in conjunction with
that.

We think using new techniques that have not been available to
previous researchers, we should be able to determine much more
definitively the total impact of the revised TJTC on improving the
employment prospects of the disadvantaged. Mr. Chairman, this
concludes the summary of my prepared remarks. And I, of course,
would be pleased to answer any questions.

[The prepared statement of Mr. Ross follows:]

TESTIMONY OF DOUGLAS ROSS

ASSISTANT SECRETARY OF LABOR

FOR EMPLOYMENT AND TRAINING

BEFORE THE

SUBCOMMITTEE ON EMPLOYMENT, HOUSING AND AVIATION

COMMITTEE ON GOVERNMENT OPERATIONS

U.S. HOUSE OF REPRESENTATIVES

September 20, 1994

Good morning, Mr. Chairman and Members of the Subcommittee.
I am pleased to once again have the opportunity to testify before
you, this time on the Targeted Jobs Tax Credit and the recent
audit report on the program by the Department of Labor's Office
of the Inspector General (GIG) .

The Targeted Jobs Tax Credit (TJTC) was enacted in 1978 to
help hard-to-employ individuals find employment in the private
for-profit sector. The credit is scheduled to expire at the end
of this calendar year. The Administration has not sought its
extension and proposed no administrative funding for a TJTC
extension in its FY 1995 budget.

Earlier this year. Secretary Reich cited TJTC as a program
that does not deliver, and indicated his opposition to its
extension in its current form. Nothing since that January 27
statement has changed the Department of Labor's position
regarding the TJTC. We do not support the extension of the
Targeted Jobs Tax Credit in its present form.

Although the current TJTC is flawed, its objective — to
improve the job prospects of the least advantaged — is vitally
important. We have seen a steady decline in the economic
prospects of less advantaged since the TJTC was enacted in 1978.
The groups targeted by the TJTC, including disadvantaged youth.

2
welfare recipients, and ex-convicts, are precisely the groups who
have suffered most from this decline. Unemployment rates among
young, out-of -school high school graduates have increased from
8.8 percent in 1978 to 13.3 percent in 1993 — and the situation
is even worse for high school dropouts. Even when the young can
find work, their wages are typically very low. The median income
of families (in constant dollars) led by young people aged 24 or
under has declined by over one-third since 1978, and in 1992 was
only $15,700 annually. And over 11 percent of the American
population received welfare payments in 1993 — a new record, up
from less than 8 percent in 1978. This increase in welfare use
has helped raise the problem of moving welfare recipients into
lasting jobs to the top of the national legislative agenda.

Since 1978 when TJTC was first enacted. Congress has
repeatedly passed extensions of the program and legislation is
currently pending before this Congress that would further extend
TJTC. We do not believe such an extension should be enacted
unless the Congress is able to provide meaningful changes to the
current program that hold out the promise of increased
effectiveness. We would certainly be willing to participate in
such a process with the Congress, given the urgent need to
improve employment prospects among the disadvantaged.

Let me briefly describe the program and the evidence we have
regarding its current effectiveness. TJTC is a nonrefundable tax
credit that is available to employers who hire the economically
disadvantaged, including youth aged 18-22; cooperative education

3
students 16-19 years old; ex-offenders; Vietnam-era veterans;
individuals receiving general assistance, Supplemental Security
Income, or Aid to Families with Dependent Children; or vocational
rehabilitation referrals. Economically disadvantaged summer
employees aged 16-17 are also included. The program allows for a
tax credit of up to 40 percent of any portion of the first $6,000
earned by a certified worker within a year of the hire, provided
the worker is employed for at least 90 days or works at least 120
hours. ••

By reducing the cost of hiring workers from these
disadvantaged groups relative to unsubsidized job seekers, TJTC
seeks to induce employers to employ workers from some high-risk
groups that they might not otherwise choose to hire. While there
is no explicit training requirement under the credit,
disadvantaged workers who receive jobs because of the credit may
have an opportunity to demonstrate their competence and build
work histories that will result in greater receipt of on-the-job
training. - ■•

Administration of the TJTC is a joint responsibility of the
Treasury Department's Internal Revenue Seirvice and the Federal-
State Employment Service system. The IRS is responsible for
administering the tax-related aspects of the program, while the
State Employment Service Agencies, funded by the Department of
Labor's Employment and Training Administration, are responsible
for documenting worker eligibility, vouchering and issuing
certifications to employers.

4
In addition to the studies recently issued by the OIG, there
have been ten studies of the results of the TJTC program
completed over the past 15 years. The numerous other
publications on the TJTC have mostly reviewed the findings or
data of these ten studies. While there are major limitations to
these studies that I will discuss shortly, they do provide some
general indication of the program's effectiveness. In general,
the studies and reports indicate the following:

1. There is little evidence that the TJTC is being used
extensivelv bv eligible employees or employers. Estimates of the
proportion of eligible disadvantaged youth who even use the
program ranges from 2.5 percent to 6.8 percent.

2 . There is evidence that the vast majority of the tax
credits are windfalls to employers who would have hired the
disadvantaged target group members anyway. While TJTC-eligible
groups do suffer from high rates of unemployment, a large
fraction of the eligible population does work — mostly in the
kinds of low-wage jobs subsidized by TJTC. Unless employers
claiming TJTC subsidies hire workers with more significant
barriers to productivity, or pay them more, retain them longer,
or invest more in their development than other employers,
participating firms collect a benefit with no corresponding gain
to the public. Existing studies estimate that from 70 percent to
90 percent of TJTC certifications go to individuals who would
have found jobs even in the absence of the credit. The most
recent Inspector General's report projects that employers would

5
have hired 92 percent of the individuals even if the credit had
not been available.

3 . TJTC jobs are often low-wage and short-term, with little
or no lasting impact on productivity or earning power. According
to the OIG's report on the Alabama program, most TJTC jobs were
low-skilled and entry-level, with an average hourly wage ranging
from $4.24 to $4.42. A 1991 GAO report did not find substantial
differences in earnings resulting from the TJTC work experience
when compared with the experience of other eligible workers. The
most frequent users of the TJTC program are retail stores and
restaurants, accounting for approximately two-thirds of the
certifications.

I mentioned that although TJTC has been studied before,
there are many limitations to these previous studies. Only four
of the ten studies actually attempt to estimate the overall
impact of the TJTC on the employment and earnings of the
disadvantaged. All four of these impact studies rely on data
from 1984 or earlier, and all four have methodological
difficulties. Because of its design, the TJTC is an extremely
difficult program to rigorously evaluate. Researchers in the
field agree that none of the studies to date is a reliable
estimate of the total impact of TJTC on employment and earnings
of the disadvantaged. A comprehensive literature review
conducted for the Department of Labor in 1991 concluded that
"because of (unavoidable) design difficulties, none of the
studies answers definitively the question of the net effects of

the TJTC."

In addition to outside studies, the TJTC program has been
audited by the Department of Labor's OIG. There is a good deal
of useful information in the most recent OIG report. Its
estimates of program costs and of average wages earned by TJTC
participants are helpful additions to the dialogue on the future
of the program.

However, we do not believe the audit methodology used in the
OIG's report is a scientific means of determining the impact of
TJTC. The report claims that 92 percent of TJTC employers would
have hired their TJTC employees even without the presence of a
tax credit. This figure was determined using audit questions
which asked employers to recall whether they would have hired
their employees without the presence of TJTC. These questions
were asked roughly a year and a half after the initial hiring
decision was made. The report assumes that these employer
responses are an accurate determination of the TJTC's effect on
employment. We disagree with this assumption. Experts in the
field of survey research consider retrospective recall of
motivations to be an unreliable methodology. Research has shown
that the reliability of this method declines even further if
there is a long time lapse between the event to be recalled and
the administration of a questionnaire about it. Again, it is
important to note that the OIG's employer audit took place a year
and a half after the hiring decision they were investigating.

Furthermore, response to the OIG audit questions — like all

such efforts — was extremely dependent on the phrasing of the
question. The OIG audit forced the respondent to choose between
two sharp choices — either the individual was hired because of
the tax credit or they were not. Employers tend to make hiring
decisions based on many reasons, and a tax credit is only one of
them. ',: i ■

Responses to an earlier Labor Department survey show the
difference that can be made by the design of a questionnaire. In
this earlier study, employers were asked whether they knew of the
possibility of TJTC eligibility for their applicants, and how
much this possibility affected their chance of hiring the worker.
Employers were then given a choice of four responses — "a great
deal", a "moderate amount", "not very much", or "not at all". '-■'--
Over 21 percent of employers stated that they knew their ' - ' " ■
applicants were likely to be eligible for the TJTC and that this
possibility affected their chance of hiring the worker by at •
least a moderate amount. This estimate is considerably higher
than the OIG's 7.8 percent estimate of the effect of the TJTC.

We also find that the OIG's focus on employer motivation as
the sole determinant of the TJTC's effect on hiring is misguided.
The important question is not the subjective reasons that the
employer hired a TJTC-eligible individual, but the actual impact
of the TJTC on the employment of the target groups. There are
several ways in which the TJTC could increase the employment of
target groups even if the employer does not hire the applicant
specifically because they are TJTC-eligible.

For example, the TJTC may change employer recruiting
practices, exposing employers to more disadvantaged job
applicants than they would otherwise encounter. Both a 1991 GAO
study and a previous Labor Department study have found that a
substantial number of large TJTC users change recruiting
practices in response to the program. Even if the employers then
hire disadvantaged applicants based mainly on their
qualifications, these applicants might never have come to the
attention of the employer without the recruiting efforts inspired
by the TJTC.

The OIG report also finds several positive impacts of the
TJTC, but surprisingly, does not take these impacts into account
in determining the costs and benefits of the program. For
example, the report finds that the TJTC is effective in
increasing worker tenure with an employer. In addition, the OIG
does not include the value of employer- provided fringe benefits
in determining benefits of the program. Taking these findings
into account would not change the OIG's conclusion that the
program in its current form is not cost-effective, but would show
the program to be considerably more effective than it is
portrayed as being in their report.

I raise these research issues not because of any
disagreement with the OIG over the desired fate of the TJTC as
currently constituted or because we believe another study is
needed of the current program. As I indicated earlier, we do not
believe the TJTC should be extended in its current form.

I raise these research issues to make clear that neither
the OIG reports nor other studies of the program have
demonstrated that employment tax credits are not a potentially
effective approach to assist the disadvantaged. I also want to
go on record as arguing that should the Congress decide to try
out a modified version of TJTC, a more effective impact
evaluation should be required.

In this context, it is extremely important to recognize that
the TJTC was never intended to be a program that had no employer
windfall whatsoever. Because the government ends up funding less
than 30 percent of each new job created through TJTC, the program
can be cost-effective even if the great majority of TJTC- •
vouchered workers are hired for jobs that they would have
obtained even without the credit. For example, if we use the
OIG's estimates of costs and benefits per TJTC certification, but
assume that 70 percent of employers would have hired their
workers without the credit, instead of the 92 percent estimated
by the OIG, we find that the program's benefits easily exceed its
costs. In this case — with 70 percent employer windfall — the
TJTC would in fact be a cost-effective program.

If the Congress decides to pursue an extension of the TJTC,
we believe it should consider changes to the program to address
the shortcomings I have discussed. We are analyzing possible '■
changes that would increase the credit's low take-up rate, reduce
its administrative burden, reduce the windfall to employers who "
claim the credit without changing hiring patterns, change the

10
focus away from low-quality, high-turnover jobs, and increase the
long-term effects of the credit on participants in the program.
We would be pleased to meet with the staff of this Subcommittee
and with the authorizing committees to further discuss our ideas
if it appears that the Congress is interested in exploring an
extension.

One caveat needs to be stated, though. Because of the
uncertainty surrounding the effectiveness of the TJTC, it is
extremely important that we do not cut other important programs
for the disadvantaged in order to fund a reauthorization of a
modified TJTC.

Finally, we would recommend that if the program is extended
in a modified form, that it be temporarily extended rather than
permanently reauthorized, and that a more scientific study of its
impact be undertaken. Using new techniques that have not been
available to previous researchers, we should be able to determine
much more definitively the total impact of the revised TJTC on
improving the employment prospects of the disadvantaged.

Mr. Chairman, this concludes my prepared statement. At this
time I would be pleased to answer any questions that you or other
Members of the Subcommittee may have.

85-818 0-97-2

Mr. Peterson. Thank you, Mr. Ross. Mr. Foley, let me give you
2 minutes to summarize what you said because you got to us late.

Mr. Foley. OK, all right. Mr. Chairman, and distinguished mem-
bers of the subcommittee, I am pleased to have this opportunity to
present the views of the Treasury Department with respect to the
Targeted Jobs Tax Credit. The Targeted Jobs Tax Credit is a tax
credit for employers which was enacted to promote private sector
hiring of workers with special barriers to employment.

The TJTC is jointly administered by the Treasury Department
through the Internal Revenue Service, and the Department of
Labor through its Employment Service. The IRS is responsible for
tax-related aspects of the program, and the emplo3rment — and the
Employment Service, through the network of State employment se-
curity agencies, is responsible for defining and documenting worker
eligibility.

I provided a table listing the estimated annual costs of the pro-
gram in terms of foregone tax revenue from fiscal 1986 through fis-
cal 1994. And it is attached to my statement.

My written testimony sets forth the legislative history and the
legislative history indicates that the TJTC was originally enacted
in 1981, and it has been extended numerous times. Under current
law, the TJTC is available to employers for up to 40 percent of the
first $6,000 of wages paid to a certified worker in the first years
of employment. This translates into a potential credit of $2,400 per
targeted worker.

Let me go right to the Treasury Department's position. And if
there are any questions about the structure of the credit or how the
rules actually work, then I'd be happy to answer those.

The employment of economically disadvantaged and disabled
workers is one of the administration's most pressing concerns. We
realize, however, that the current version of the TJTC may not be
the most efficient way to address this problem. The revenue loss
from a 1-year extension of the credit in its current form is approxi-
mately $336 million over 5 years, while a permanent extension of
the current law credit would lose approximately $1.4 billion over 5
years. Because we are very concerned about the efficient use of
Government resources, we believe that the problems undermining
the credit's effectiveness must be addressed before pursuing an ex-
tension of the credit.

The inspector general's report raises significant concerns regard-
ing the effectiveness of the credit. As a result of the problems iden-
tified in the report, we are engaged in a policy review of the credit
to determine whether legislative and regulatory modifications of
the credit may improve its effectiveness.

Over the next several months, we plan to continue our work with
the Labor Department. We also want to work with Congress to de-
velop proposals that will address in a cost-effective manner the em-
ployment problems of economically disadvantaged and disabled
workers.

In this process, we will be guided by the following principles, the
need to increase the credit's effectiveness, the need to encourage
the longer term employment so that the credit is an effective mech-
anism for enhancing basic job-related skills, and the need to accom-

pany any changes with a more systematic study of the TJTC's ef-
fectiveness and administration.

We plan to complete our analysis of this issue prior to submis-
sion of the administration's budget proposal for fiscal year 1996. If
we decide to support an extension of the credit, our recommenda-
tions will be reflected in that document. This concludes my re-
marks and I'd be happy to answer any questions.

[The prepared statement of Mr. Foley follows:]

For Release Upon Delivery
Expected at 9:30 a.m.
September 20, 1994

STATEMENT OF MAURICE B. FOLEY
DEPUTY TAX LEGISLATIVE COUNSEL (TAX LEGISLATION)

BEFORE THE
SUBCOMMITTEE ON EMPLOYMENT, HOUSING AND AVIATION
COMMITTEE ON GOVERNMENT OPERATIONS
UNITED STATES HOUSE OF REPRESENTATIVES

Mr. Chairman and distinguished Members of the Subcommittee:

I am pleased to have this opportunity to present the views
of the Treasury Department with respect to the targeted jobs tax
credit (TJTC) . The TJTC is a tax credit for employers which was
enacted to promote private-sector hiring of workers with special
barriers to employment.

The TJTC is jointly administered by the Treasury Department
through the Internal Revenue Service (IRS) and the Department of
Labor through its Employment Service. The IRS is responsible for
tax-related aspects of the program and the Employment Service,
through the network of State Employment Security Agencies, is
responsible for defining and documenting worker eligibility.

A table providing a listing of the estimated annual cost of
the program in terms of foregone tax revenues from Fiscal 1986
through Fiscal 1994, is attached to my statement.

I . Background

The TJTC was enacted by the Revenue Act of 1978 as a
substitute for what had been a broad-based new jobs tax credit.
Congress concluded that the unemployment rate had declined
sufficiently so that it was appropriate to focus employment
incentives on individuals with high unemployment rates and other
groups with special employment needs.

The credit initially was scheduled to expire on December 31,
1981 and applied to wages earned in the first and second years of
employment. The first-year credit was equal to 50 percent of the
first $6,000 earned by a TJTC-hire and the second-year credit was
25 percent of the first $6,000 earned.

The TJTC has been extended on a short-term basis numerous
times over the years. Revisions also have been made by a number
of tax laws to adjust the amount of the credit, close loopholes,
and alter the targeted groups of individuals covered by the
credit.

The TJTC was amended and extended for one year through
December 31, 1982 by the Economic Recovery Tax Act of 1981. This
Act eliminated retroactive certifications of worker eligibility.
Using retroactive certifications, an employer could claim credits
for TJTC-eligibles who already were on the firm's payroll,
resulting in no new job creation. The 1981 Act also required
that one targeted group -- cooperative education students — be
economically disadvantaged in order to be covered by the credit.
Without this constraint, employers were able to receive subsidies
for hiring individuals they likely would have hired in the
absence of the credit. The 1981 Act also increased the number of
targeted groups and reduced certain restrictions on eligibility
within existing categories.

The TJTC was extended for two more years through December
31, 1984 by the Tax Equity and Fiscal Responsibility Act of 1982.
This Act extended the credit to employers hiring economically
disadvantaged 16 and 17 year-olds for summer employment. The
1982 Act also deleted one of the targeted groups — former public
service employment participants under the Comprehensive
Employment and Training Act.

The Deficit Reduction Act of 1984 extended the TJTC for
another year through December 31, 198 5, after which it expired.
It was extended retroactively for three more years through
December 31, 1988 by the Tax Reform Act of 1986. The 1986 Act
reduced the amount of the credit to 40 percent of the first
$6,000 earned and eliminated the second-year credit. Employees
also were required to work for a minimum of 90 days or 120 hours
to be covered by the credit (14 days or 20 hours for summer
youths) . A minimum employment period was imposed to limit the
"churning" of employees by some employers. "Churning" involves
maximizing the amount of credit by rapidly turning over workforce
to hire additional targeted members.

The Omnibus Budget Reconciliation Act of 1987 eliminated the
credit for wages paid to individuals who perform duties similar
to those of workers who are participating in or are affected by a
strike or lockout. The Technical Corrections and Miscellaneous
Revenue Act of 1988 extended the credit for an additional year
through December 31, 1989; reduced the summer youth credit from
85 percent to 40 percent of the first $3,000 earned; and
eliminated 23 and 24 year-olds from the targeted group of
economically disadvantaged youths.

- 2

The TJTC was extended for nine more months through September
30, 1990 by the Omnibus Budget Reconciliation Act of 1989. This
Act also reduced the burden placed on local Employment Service
offices of verifying worker eligibility. The 1989 Act required
employers requesting certification of a job applicant for which
there had not been a written preliminary determination of
eligibility (a voucher) to specify at least one, but not more
than two, targeted groups to which the individual might belong.
The employer also had to certify that it had made a good faith
effort to determine the individual's eligibility. The prior
practice of asking local Employment Service offices to verify
TJTC-eligibility of all new hires burdened these offices without
creating new jobs. The employer firms already had decided to
hire the individuals, although the individuals had not yet been
put on the payroll.

The Omnibus Budget Reconciliation Act of 1990 retroactively
extended the TJTC for 15 months through December 31, 1991. The
conference agreement also clarified the definition of one of the
targeted groups. This group — "ex-convicts" — was defined to
include persons who are placed on probation by State courts
without a finding of guilty. The TJTC was further extended for
six months through June 30, 1992 by the Tax Extension Act of
1991.

Most recently, the credit was extended retroactively for 30
months by the Revenue Reconciliation Act of 1993. The 1993 Act
extended the TJTC to cover individuals who begin work for an
employer after June 30, 1992 and before January 1, 1995.

II. Current Law

Under current law, a TJTC is available to employers for up
to 40 percent of the first $6,000 of wages paid to a certified
worker in the first year of employment. This translates into a
potential credit of $2,400 per targeted worker. The worker must
be employed for at least 90 days or work at least 120 hours.
(The credit for summer youth is 40 percent of the first $3,000 of
wages, or $1,200, and these individuals must work for 14 days or
20 hours.) The employer's deduction for wages is reduced by the
amount of the TJTC.

Certified workers must be economically disadvantaged or
disabled individuals in one of nine targeted groups. These
groups are (1) youth 18-2 2 years old; (2) summer youth age 16-17;

(3) cooperative-education students age 16-19; (4) ex-offenders;

(5) Vietnam-era veterans; (6) vocational rehabilitation
referrals; and individuals receiving (7) general assistance, (8)
Supplemental Security Income, or (9) Aid to Families with
Dependent Children.

- 3

For purposes of the TJTC, a worker is economically
disadvantaged if the worker's family income is 70 percent or less
of the "lower living standard income level". This level is
revised periodically to account for changes in the Consumer Price
Index and varies by geographic and urban area.

To claim the credit for an employee, an employer must
receive a written certification that the employee is a targeted
group member. Certifications for employees are generally
provided by State Employment Security Agencies. The employer
must have received or filed a written request for a certification
on or before the date a targeted member begins work. If the
employer has received a written preliminary determination that
the employee is a member of a targeted group, the employer may
file a written certification request within five calendar days
after the targeted member begins work.

III. 1994 Report by the Labor Department's
Office of Inspector General

A recent report by the Labor Department's Office of
Inspector General identified a number of problems with the TJTC.
I will highlight some of these problems, but will leave most of
the discussion of the report (and other studies on the credit's
effectiveness) to Assistant Secretary Ross. The report
recommended that the Secretary of Labor discourage further
extensions of the credit.

The study examined the records of a sample of 1,150
individuals from 9 states who received eligibility certifications
from July 1, 1991 to June 30, 1992. Interviews were conducted
with both employers and participants. Employers were asked
whether or not their firm would have hired the individual if the
tax credit were not available. This question was the primary
method of determining the effect of the TJTC.

Although the report notes that the TJTC provides some
benefits, the report concludes that the TJTC provides a windfall
to employers, does not promote long-term productivity or earning
power, and is not cost effective. According to the report:

• Employers would have hired 92 percent of eligible workers
without the credit.

• In general, TJTC jobs were entry-level, low-paying, low-skilled
positions similar to jobs the individuals held both before and
after their TJTC employment.

• The benefits of the program (measured as the gross wages paid
to the 8 percent hired due to the credit plus estimated
reductions in social program payments) were only 37 percent of

- 4 -

the costs (measured as foregone tax revenues and administrative
costs of the Department of Labor) .

It is important to bear in mind, however, that the study was
commissioned as an audit, rather than a scientific, study.
Therefore, it cannot provide a definitive assessment of the
effectiveness of the TJTC program. The study was not scientific
in the sense that it did not compare results in its sample with
results in a control group of individuals with similar
characteristics who did not participate in the TJTC. The study
made comparisons to other low-wage workers but did not control
for differences in age, sex, type of industry, and other factors.

Other possible problems in methodology include the wording
of the question asked of study participants (would the employer
have hired the employee if there were no TJTC?) . This wording
may have biased results, since only yes or no answers were
solicited. Even if the TJTC did not directly control a hiring
decision, it may have indirectly influenced the hiring of TJTC
eligibles by, for example, altering recruiting practices.

In summary, this report is a useful component of the process
of monitoring the effectiveness of the TJTC. However, the
report's conclusions need to be weighed along with its
limitations before reaching a final determination as to the
overall effectiveness of the TJTC program.

IV. Administration's Position

The employment of economically disadvantaged and disabled
workers is one of the Administration's most pressing concerns.
We realize, however, that the current version of the TJTC may not
be the most efficient way to address this problem. The revenue
loss from a one-year extension of the credit in its current form
is approximately $336 million over 5 years, while a permanent
extension of the current law credit would lose approximately
$1,428 billion over 5 years. Because we are very concerned about
the efficient use of government revenues, we believe that the
problems undermining the credit's effectiveness must be addressed
before pursuing an extension of the credit.

The Inspector General's report raises significant concerns
regarding the effectiveness of the credit. As a result of the
problems identified in the report, we are engaged in a policy
review of the credit to determine whether legislative and
regulatory modifications of the credit may improve its
effectiveness .

Over the next several months we plan to continue our work
with the Labor Department. We also want to work with Congress to
develop proposals that will address, in a cost effective manner,
the employnient problems of economically disadvantaged and

- 5 -

37 \

disabled workers. In this process we will be guided by the
following principles: the need to increase the credit's
effectiveness, the need to encourage longer-term employment so
that the credit is an effective mechanism for enhancing basic
job-related skills, and the need to accompany any changes with a
more systematic study of the TJTC's effectiveness and
administration .

We plan to complete our analysis of this issue prior to
submission of the Administration's budget proposal for Fiscal
Year 1996. If we decide to support extension of the credit, our
recommendations will be reflected in that document.

This concludes my prepared remarks. I would be pleased to
respond to any questions you may have at the conclusion of Mr.
Ross' testimony.

- 6 -

Attachment 1: Revenue Cost of the Targeted Jobs Tax Credit, 1986-1994

(in millions of dollars)

Fiscal Year

1986

1987

1988

1989

1990

1991

1992

1993

1994

Tax

Revenue

Reduction*

259

197

244

273

253

261

265

208

243

Office of Tax Analysis
U.S. Treasury Department
September 14, 1994

* The estimates for FY 1994 are based on current law under which the
credit will expire on December 31, 1994.

Mr. Peterson. Thank you. And now we'll have Mr. Masten. Are
you going to testify for the IG, is that

Mr. Masten. Yes, sir.

Mr. Peterson. OK. We appreciate the work that you have done,
and your being with us today.

Mr. Masten. Thank you, Mr. Chairman. Good morning, Mr.
Chairman, and members of the subcommittee. Again, thank you for
inviting me to testify before you this morning as the Inspector Gen-
eral of the Department of Labor. As you stated earlier, I have sub-
mitted a written statement for the record. I will give you a sum-
mary of that statement now.

Seated to my right is Mr. Joseph Fisch, who is the Assistant In-
spector General for the Office of Audit. From the outset, I would
like to emphasize that any views expressed here today are mine as
the inspector general, and may not be the official position of the
U.S. Department of Labor. As you are aware, Mr. Chairman, the
Targeted Job Tsix Credit Program was created in 1978 to induce
employers to hire certain members of hard-to-employ target groups
in exchange for Federal tax credits.

In total, my office has conducted four audits on various aspects
of this program. The latest, a nationwide audit, was initiated fol-
lowing a pilot audit conducted in the State of Alabama. In that
audit, employers interviewed were mostly large nationwide cor-
porations, including fast food chains, discount retailers, hotel,
motel chains, Poultry processors and the like.

During that audit, employers acknowledged that they would have
hired 95 percent of the same individuals even if the tax credit had
not been available. The audit also found that employers typically
did not check for TJTC eligibility until after a hiring decision had
been made. The Alabama audit concluded that the program was a
windfall to employers in that State and of minimal value to partici-
pants.

These conclusions caused the OIG to launch its nationwide audit
to ascertain if the results in Alabama were characteristic of the
program nationwide. The nationwide audit sample covered a total
1,150 participants from nine States. The overall objective of the na-
tionwide audit was to determine whether the program is an effec-
tive, economical means of helping target group members who would
otherwise have difficulty finding employment.

The audit obtained answers to the following questions. First,
would employers have hired the applicant without the tax credit?,
second, what did the TJTC program cost and what were its benefits
during the audit period?, and third, what impact did the program
have upon target group members?

Does the TJTC Program work? Unfortunately, Mr. Chairman,
the OIG audit determined that the TJTC Program had virtually no
impact on the employer's decision to hire target group members.
Based upon responses of both employer and participants regarding
hiring procedures, the OIG projects that at least 92 percent of
TJTC employees would have been hired even without the tax cred-
it. That is, the tax credit caused the emplo3rment of members of the
targeted groups in only 8 percent of the cases.

Equally disturbing, Mr. Chairman, is the fact that employers ac-
knowledged they determine TJTC eligibility for 86 percent of the

participants in our sample after a job offer was made. The audit
found that in the majority of cases, following the hiring decision,
employers directed employees to call a broker who, through tele-
phone screening, made a preliminary TJTC eligibility determina-
tion for the employer. Employers then paid broker fees, based usu-
ally on the amount of the tax credit.

Ironically, my audit staff had some first hand experience with
this post-hiring, TJTC eligibility screening. On two separate occa-
sions, family members of two OIG audit employees were asked to
C£dl a TJTC screening broker after being hired for jobs at a major
grocery chain and a nationwide discount retailer. Both were as-
sured that the job was theirs and that in no way would the call
affect their emplo5rment status.

In a nutshell, the tax credit makes virtually no difference in who
gets hired. Since the effect of the tax credit is supposed to be the
hiring of target group members, I can only conclude that the tax
credit is a windfall for employers.

Is the TJTC Program worth its costs? The OIG audit estimates
that for every dollar in outlays, this program returns only 37 cents
in economic benefit; that is, wages and reduction in social transfer
payments such as welfare benefits. The OIG projects that the Pro-
gram costs about $374 million and that benefits total $140 million.
Thus, the program costs some $234 million more than the economic
benefits it generated.

Do participants benefit from the TJTC Program? The OIG audit
determined for the most part TJTC employment includes jobs as
fry cooks, order takers, waiters, waitresses, cashiers, retail clerks,
maids and janitors. We found that these are the same type of low-
wage, low-skill, high-turnover jobs that participants held before
and after their TJTC work experience and which, in a majority of
cases, offer no fringe benefits. Needless to say, this further compels
us to question the value of the TJTC Program and whether better
results should be expected of programs subsidized by the Govern-
ment.

Mr. Chairman, I wish I could tell that you this program is help-
ing members of the targeted groups as intended by Congress. I sim-
ply cannot.

For the most part, the only ones benefitting from this over $300
million a year program are the employers. After all, most employ-
ees would have been hired regardless of the tax credit, and most
employers make the decision to hire before TJTC eligibility is es-
tablished.

Mr. Chairman, I wholeheartedly believe that the Government
needs to have programs to help the disadvantaged. However, they
need to be programs that work, particularly in this era of budget
constraints and diminishing resources. I regret to say that this tax
credit program simply is not one of them. As a result, the OIG
audit recommends that the Secretary encourage Congress not to re-
authorize this program when it expires in December of this year.

I think it is important to stress that, while OIG audits usually
recommend corrective action to improve weak or ineffective pro-
grams, this is the first time the OIG has ever recommended that
a program be eliminated. Mr. Chairman, as is standard practice in
the OIG, ETA was given the opportunity to comment on the audit.

In its response, ETA acknowledged that even prior to our audit
there were disturbing indications that the effects of the program
fall short of its intentions. However, ETA stated that the OIG con-
ducted an audit and not a scientific study. It indicated that, "ways
to strengthen achievement under this program, including the com-
missioning of a scientific study of the program's overall effective-
ness," would continue to be examined.

I must say that I was both surprised and disappointed at ETA's
response that yet another study of the effectiveness of this program
is needed. We do not believe that this program needs further study.
This program has been repeatedly studied and its problems have
been widely documented.

Mr. Chairman, the Vice President's National Performance Re-
view seeks to root out and eliminate wasteful, ineffective programs.
Clearly, any program this ineffective has to be included on the list
of programs that need to be eliminated. I am of the opinion that
maintaining the TJTC Program would be inconsistent with the
principles of the NPR.

Mr. Chairman, this concludes my prepared statement. Mr. Fisch
and I would be pleased to answer any questions you or the sub-
committee members may have. Thank you.

[The prepared statement of Mr. Masten follows:]

STATEMENT OF CHARLES C. MASTEN

INSPECTOR GENERAL

U.S. DEPARTMEhTT OF LABOR

BEFORE THE EMPLOYMENT, HOUSING, AND AVIATION SUBCOMMFTTEE

COMMITTEE ON GOVERNMENT OPERATIONS

U.S. HOUSE OF REPRESENTATIVES

September 20, 1994

Good Morning Mr. Chairman and Members of the Subcommittee. Thank you
for inviting me to testify in my capacity as the Inspector General of the U.S.
Department of Labor. I am pleased to appear before you today to present the results
of the GIG'S recent nationwide audit of the Targeted Jobs Tax Credit Program. I am
accompanied by Mr. Joseph Fisch, Assistant Inspector General for Audit.

The GIG audit was conducted under the authority of the Inspector General Act

of 1978, as amended, and performed in accordance with Govemment Auditing

Standards issued by the Comptroller General. As you know, Mr. Chairman, Congress

created the Office of Inspector General (GIG) to:

...(1) conduct and supervise audits and investigations relating to the
programs and operations [of the Department] ... and (2) to provide
leadership and coordination and recommend policies for activities
designed (A) to promote economy, efficiency, and effectiveness in the
administration of, and (B) to prevent and detect fraud, waste, and abuse
in, such programs and operations...'

From the outset, I would like to emphasize that any views expressed today are

mine as Inspector General and may not be the official position of the U.S. Department

of Latxjr.

^Section 2, Inspector General Act ol 1978, PL-95-452.

BACKGROUND

By way of background, the Targeted Jobs Tax Credit (TJTC) Program was
created in 1978. The program was intended to encourage employers to hire certain
members of hard-to-employ target groups in exchange for Federal tax credits.
Currently, there are nine target groups including economically disadvantaged youth,
economically disadvantaged Vietnam-era veterans, ex-felons, persons with disabilities,
and public assistance recipients.^

Administration of the TJTC program is shared between Lat)or's Employment
and Training Administration (ETA) and Treasury's Internal Revenue Service (IRS).
ETA is responsible for administering the program through cost reimbursable grants to
State Employment Security Agencies, which review and certify employee eligibility for
the program. The IRS is responsible for monitoring the tax credits claimed by
employers.

Currently, the program allows employers to claim a tax credit of up to 40
percent of the first $6,000 in annual wages paid to an employee, for a maximum tax
credit of $2,400 per eligible employee. To claim this credit, the employer needs only
to retain the worker for the lesser of either 90 days or 120 hours of employment. For
disadvantaged summer youth, employers may claim 40 percent of the first $3,000 in
wages paid to an employee, for a maximum tax credit of $1,200. For these

'The targat groups and our pnsjactions of their reprssertfation in the total certifications issued
during our audK period are presented in Appendix 1.

individuals, the employer may claim the credit after retaining the employee for the
lesser of just 14 days or 20 hours of employment.

The Joint Committee on Taxation estimates that this program results in annual
revenue losses to the Treasury of about $300 million.

THE OIG NATIONWIDE AUDIT

In total, the OIG has conducted four audits on various aspects of this program.
The latest, a nationwide audit, was initiated following a pilot audit conducted in the
State of Alabama. Employers interviewed in the Alat^ama audit were mostly large,
nationwide corporations, including fast food chains, discount retailers, hotel/motel
chains, poultry processors and the like. During that audit, employers acknowledged
that they would have hired 95 percent of the same individuals, even if the credit had
not been available. The audit also found that employers typically did not check for
TJTC eligibility until after a hiring decision had been made.

The Alabama audit concluded that the TJTC program was a windfall to
employers in that state and of minimal value to participants. These conclusions
caused the OIG to launch its nationwide audit to ascertain if the results in Alabama
were characteristic of the program nationwide.

Oblective

The overall objective of the OIG nationwide audit was to determine whether the
TJTC Program is an effective, economical means of helping target group memtiers
who, without the tax incentive given to employers to hire them, would have difficulty
finding employment.

Focusing mainly on activities for the period July 1. 1991 through June 30, 1992,
we obtained answers to the following questions:

1) Would employers have hired the applicants without a tax
credit?

2) What did the TJTC program cost and what were its benefits
during the audit period?

3) What impact did the program have upon target group
members?

Methodology

The audit sample was carefully constructed to allow us to project the sample
results to the universe of TJTC certifications for the audit period and to project the
program's costs and benefits nationwide.' The audit sample included a total of 1,150
participants. The audit process consisted of inten/iews with staff, participants, and

^e us«d a stratified, two-stag« statistical sanrpiing design. First, we ranked all states according
to the nutrtow ot TJTC certifications in each state. The states were then placed into 3 strata, with each
stratum corrprised ot approximately equal number of cartiCicaliorw. We tt>en randomly selected 3 states
from each o( the 3 strata: CaWomia, FkxWa. Illinois, Maine. Michigan, Missouri. New Hampshire.
Texas, and Virginia. Second, we drew random samptee of 125 individuals from each state (150 in
Illinois) who had been certifted for TJTC durir>g the audit period.

local employers; and reviews and analyses of documents, including TJTC participant
records and Unemployment Insurance claim and wage files.

During the course of the audit, participants artd their employers were asked
questions about:

♦ How and when participants' eiigit)ility for TJTC tax credits
was determined;

♦ Whether employers would have hired the participants had
the credit not been available; and

♦ What wage participants were paid, number of hours
participants worked, and what benefits were offered.

In determining the program's impact upon participants, the OIG also collected
and compared information from sampled employees regarding their TJTC jobs and the
jobs they held immediately before and after their TJTC employment.

Program Effectiveness: Does the TJTC Program Work?

Unfortunately, Mr. Chairman, the OIG audit determined that the TJTC program
had virtually no impact on employers' decisions to hire target group members. Based
upon responses of both employers and participants regarding hiring procedures, the
OIG projects that at least 92 percent of TJTC employees would have been hired even
without the tax credit - that is, the tax credit caused the employment of members of
these targeted groups in only 8 percent of the cases.

Equally disturbing, Mr. Chairman, is the fact that employers we contacted
acknowledged they detemiined TJTC eligibility for 86 percent of the participants in our
sample after a job offer was made. The audit found that in the majority of the cases,
following the hiring decision, employers directed employees to call a broker, who,
through telephone screening, made a preliminary TJTC eligibility determination for the
employer. Employers then paid brokers a fee, based usually on the amount of the tax
credit.

Ironically, my audit staff had some first-hand experience with this post-hiring,
TJTC eligibility screening. On two separate occasions, family members of two OIG
audit employees were asked to call a TJTC-screening broker after being hired for jobs
at a major grocery store chain and at a nationwide discount retailer. Both were
assured that the job was theirs and that in no way would the call affect their
employment status.

Based on the OIG audit findings, I can only conclude that the tax credit is a
windfall for employers since the program is inconsequential in encouraging the
employment of target group members. In a nutshell, TJTC makes virtually
no difference regarding who gets hired.

Program Costs vs Benefits: Is the TJTC Program Worth Its Cost?

In addition to the ineffectiveness of the TJTC program, the OIG audit estimates
that for every dollar in outlays, this program returned only about 37 cents in economic
benefit ~ that is, wages and reductions in social transfer payments, such as welfare

and Supplementary Security Income (SSI) t)enefits. Nationally, for the 1-year audit
period, the OIG projected that the program cost about $374 million and that t^enefits
totaled $140 million. Thus, the program cost some $234 million more than the
economic benefits it gerrarated.

Program Impact: Do Participants Benefit from TJTC?

The OIG audit also examined the program's impact upon target group members
by comparing information on individuals' TJTC jobs with jobs they held immediately
before and after their TJTC employment. Information evaluated included: hourly
wages paid, weekly hours of employment, fringe benefits offered employees, types of
jobs, and length of time participants remained in the job.

The OIG audit determined that, for the most part, TJTC employment included
jobs as fry cooks, order takers, waiters/waitresses, cashiers, retail clerks, and
maids/janitors. We found that these are the same type of low-paying, low-skill, high-
turnover jobs that participants held before and after their TJTC work experience. '

Several disturbing facts disclosed by the audit included that:

♦ 37% of the employees in our sample were paid no more
than the minimum wage;

♦ 61% of thte employees worked only part-time;

V, ''l J..'

♦ 65% of the employees were offered no fringe benefits;

♦ Little vocatior^al education or formal skills training was
offered by employers; and

4 TJTC employees' average annual earnings were just above
the Federal poverty level.

The audit found that 5 quarters after being hired, only 24 percent of workers in
TJTC-covered positions were still with their TJTC employer. Furthermore, they were
somewhat worse off than those who were no longer with their TJTC employer since
the average wage of the TJTC job was, in fact, less th£ui the average wage
employees earned in subsequent non-TJTC employment.

Needless to say, these results further compel us to question the value of the
TJTC program and whether better results should be expected of programs subsidized
by the Government.

OIG Audit Conclusion: The Program Is a Windfall to Employers

Mr. Chairman, I wish I could tell you that this program is helping members of
the targeted groups, as intended by Congress. I simply cannot. For the most part,
the only ones benefitting from this $300 million a year program are the employers.

After all:

(1) Most employees would have been hired regardless of
the tax credit (Clearly, the applicant pool for the marginal
jobs on which credits are being claimed does not change.
These are the same people who have typically worked, arid
will continue to work, in these k>w-wage, k>w-skill, high-
turnover jobs that offer no benefits); and

(2) Most employers make the decision to hire before TJTC
eligibility is established. (This further confirms that, in
most cases, the tax credit does not cause the employment

of these individuals.) ■.-.-'--'

OIG Recommendation: The TJTC Program Should be Eliminated

Mr. Chairman, I wholeheartedly believe that the Government needs to have
programs to help the disadvantaged. However, they need to be programs that work,
particularly in this era of budget constraints and diminishing resources. I regret to say
that this tax credit program simply is not one of them. As a result, the OIG audit
recommends that the Secretary encourage Congress not to reauthorize this program
when it expires in December of this year.

I think it is important to stress that, while OIG audits usually recommend
corrective action to improve weak or ineffective programs, this is the first time the OIG
has ever recommended that a program be eliminated.

The Employment and Training Administration (ETA) Response

Mr. Chairman, as is standard practice in the OIG, we held an exit conference

with ETA, the agency which administers the program at the Department of l-atx>r, to

present the OIG audit findings. ETA was then given the opportunity to comment on

the draft report. In its response to the OIG audit, ETA acknowledged that:

Even prior to the OIG's examination, there were disturbing indications
that TJTC's effects fall short of its intentiof>s. The [OIG] draft report adds
to those indications and deeper^ our concern about the program's
current design.

However, ETA stated that the OIG conducted an audit and not 'a scientific
study.' It indicated that "ways to strengthen achievement under the program,
including the commissioning of a scientific study on the program's overall
effectiveness" would continue to be examined.

I must say that I was both surprised and disappointed at ETA's response that
yet another study of the effectiveness of the program is needed. We do not t>elieve
that the progremn needs further study. This program has t>een repeatedly studied and
its problems have t)een widely documented.*

'See Appendix 2 fora list of studies o( the TJTC prografn.

Conclusion

Mr. Chairman, the Vice President's National Performance Review (NPR) seel(S
to root out and eliminate wasteful, ineffective programs. Clearty, any program that is
as ineffective as the TJTC program is, has to be included on the list of programs that
need to be eliminated. I am of the opinion that maintaining such a program would be
inconsistent with the principles of the NPR. Mr. Chairman, this concludes my
prepared statement. Mr. Fisch and I would be pleased to answer any questions you
or the other Members of the Subcommittee may have.

V -■<■'■: i li,^' ---i V

TARGET GROUP REPRESENTATION

APPENDIX 1

This graph depicts eight o( the nine target groups and our projectiortt of their representation to the total
certifications which were issued during our audit period.' As evident from this chart, econonvcally
disadvantaged youth ages 18-22 years o( age ware the predotnirtant target group certified. AFDC
participants were also weU represented. In contrast, the disabled, ex-felor>s, Vietranrvera veterans, and
SSI recipients constituted or>ty small percentages o( the total certifications.

^Economtcaiiy disadvantaged youth ages 16-19, who participate in a cooperative education
program, were excluded from our sample since their certifications are dor>e by the Department of
Education and ncA the SESAs.

APPENDIX 2
TJTC PROGRAM STUDIES

THE TARGETED JOBS TAX CREDIT: AN ASSESSMENT, by Edward Lorenz. National Commission
for Employment Policy, August 1085

THE TARGETED JOBS TAX CREDIT IN ItMRYLAND AND MISSOURI: 1982-1987,
By Edward C. Lorenz, for NatioruJ Commission for Employnrwnt Policy, November 1988

DOES THE TARGETED JOBS TAX CREDIT CREATE JOBS AT SUBSIDIZED RRMS7 By John H.
Bishop and Mark Montgonwry, Industrial Relations, Vol. 32, No. 3, Fall/1993

TARGETED JOBS TAX CREDIT: RNDINGS I^OM EMPLOYER SURVEYS, by John Bishop and Kevin
Hollenbedc. National Center for Research in Vocational Education, Ohio State University, May 1985

TJTC: EMPLOYER ACTIONS TO RECRUIT, HIRE, AND RETAIN ELIGIBLE
WORKERS VARY, General Accounting Office (GAO), February 1991

APPLYING FOR ENTITLEMENTS: EMPLOYERS AND THE TARGETED JOBS TAX CREDIT,
Abstract, by John H. Bishop and Suk Kang, Journal of Policy Arwivsis and Management. Vol. 10,
Winter, 1991

IMPROVING THE EFFECTIVENESS OF THE EMPLOYMENT SERVICE: DEFINING TWE ISSUES, by
Robert G. Ainsworth, National Commission for Empk>yment Policy, October, 1991

FINAL PROCESS ANALYSIS REPORT ON THE IMPLEMENTATION AND USE OF THE TARGETED
JOBS TAX CREDIT PROGRAM. Macro Systems. Inc. May 7. 1985

FINAL REPORT ON THE SHORT-TERM NET IMPACT OF THE TARGETED JOBS TAX CREDIT
(TJTC) PROGRAM ON DISADVANTAGED POPULATIONS Macro Systems. Inc. July 1986

FINAL REPORT ON THE AGGREGATE EMPLOYMENT EFFECTS OF THE TARGETED JOBS TAX
CREDIT PROGRAM, Macro Systenv, Inc., September 1986

IMPACT STUDY OF THE IMPLEMENTATK)N OF THE TARGETED JOBS TAX CREDIT PROGRAM:
OVERVIEW AND SUMMARY, Macro Systems, Inc., July 1986

A STUDY OF THE IMPLEMENTATION AND USE OF THE TARGETED JOBS TAX CREDIT: FINAL
REPORT ON THE ADMINISTRATIVE COST-EFFECTIVENESS OF TJTC AS A PLACEMENT TOOL
FOR THE EMPLOYMENT SERVICE, Macro Systems, Inc., July 1986

FINAL REPORT ON THE EFFECTS OF THE TJTC PROGRAM ON EMPLOYERS, Macro Systems,
Inc., July 1986

ARE TARGETED WAGE SUBSIDIES HARMFUL? EVIDENCE FROM A WAGE VOUCHER
EXPERIMENT, by Gary BuHless, Industrial and Labor Relations Review. October 1985

THE USE OF TAX SUBSIDIES FOR EMPLOYMENT. A REPORT TO CONGRESS BY THE U.S.
DEPARTMENTS OF LABOR AND TREASURY, May 1986

CRS COMPARES COSTS OF TWE TARGETED JOBS TAX CREDIT, Congressional Reports, Tax
Notes. March 18, 1985

EMPLOYMEhfT TAX CREDIT PROGRAMS: THE EFFECTS OF SOCIOECONOMIC TARGETING
PROVISIONS, by Dave ONeM, U.S. Census Bureau, The Journal lor Human Resources. 1982

REPORT ON THE VERIFICATION AUDITS OF TJTC CERTIFICATIONS, by DOL Secretary Lynn
Martin, to Uoyd Bentsen, Chairman, Senate Finance Committee, August 16. 1991

TJTC: WHO DOES IT BENEFIT? Complied by Jennifer A. Wells. TJTC Research Intern. New
Hampshire Department o( Employment Security, 1900

TARGETED JOBS TAX CREDIT PROGRAM, STATE OF ALABAMA.

OfTice of Audit. Office of Inspector General. U.S. Department of Labor, August 20, 1993

FINAL SURVEY REPORT. TARGETED JOBS TAX CREDIT PROGRAM, STATE OF TENNESSEE.
U.S. Department of Labor, Office of Inspector General, September 30. 1992

REVIEW OF THE TARGETED JOBS TAX CREDIT PARTICIPANT ELIGIBILITY PROCEDURES. Office
of Audit. Office of Inspector General. U.S. Department of Labor, March 28, 1986

Office of Inspector General

U^. DcfMitmeat of Labor
Omce of Audit

TARGETED JOBS TAX CREDIT PROGRAM:

EMnX>YMENT INDUCEMITilT

OR EMPLOYER WINDFALL?

Report No.: •4-944121-03-320
Date Issued: AUG 1 6 1994

U.S. Department of Labor

JUJG 1 8 1994

Oftic* ol Inspector General
Washington, DC 20210

Reply 10 the Aneniion of:

MEMORANDUM FOR:

FROM:

DOUGLAS ROSS
Assistant Secretary

fr Employment and Training

SUBJECT:

W. PETERSON
Assistant Inspector General
for Audit

Targeted Jobs Tax Credit Program:
Employment Inducement or Employer Windfall
Final Audit Report No. 04-94-021-03-320

The attached audit report contains the results of our audit of
the Targeted Jobs Tauc Credit (TJTC) program. The audit included
program activities which occurred during the period July 1, 1991
through June 30, 1992, and was performed in seven ETA regional
offices and nine states.

We found that the program is not an effective and economical
means of helping target group members obtain jobs.

The program:

did not induce employers to hire members of target
groups they might not otherwise have hired. We project
that employers would have hired 92 percent of the
individuals, even if the credit had not been available.

was not cost effective. For our audit period, we
estimate that the TJTC program returned only about 37
cents of economic benefits for each dollar of taix
credits and administrative costs.

provided the majority of participants entry-level, low-
paying, low-skilled, part-time positions which do not
offer benefits.

Consequently, we have recommended the Secretary of Labor
discourage Congress from reauthorizing the TJTC program when it
expires December 31, 1994.

We would appreciate your response to the findings and
recommendation within 60 days.

Attachment

Working for America's Workforce

Targeted Jobs Tax Credit Program - Table of Contents

TABLE OF CONTENTS

PAGE

ABBREVIATIONS iv

EXECUTIVE SUMMARY 1

INTRODUCTION AND BACKGROUND 5

OBJECTIVES, SCOPE, AND METHODOLOGY 11

STUDY AND EVALUATION OF INTERNAL CONTROLS 14

RESULTS OF AUDIT 16

I. PROGRAM EFFECTIVENESS: WOULD EMPLOYERS

HAVE HIRED THE APPLICANTS WITHOUT A TAX CREDIT? 16

II. PROGRAM ECONOMY: WHAT DID THE TJTC PROGRAM
COST AND WHAT WERE ITS BENEFITS DURING THE
AUDIT PERIOD? 19

m. PROGRAM RESULTS: WHAT IMPACT DID THE

PROGRAM HAVE UPON TARGET GROUP MEMBERS? 21

A. HOW MUCH WERE EMPLOYEES PAID,

AND HOW DID THEIR TJTC WAGES COMPARE TO THOSE

OF PREVIOUS AND SUBSEQUENT JOBS? 23

B. HOW MANY HOURS PER WEEK DID TARGET
GROUP MEMBERS WORK, AND HOW DID THESE HOURS
COMPARE TO JOBS BOTH BEFORE AND AFTER TJTC
EMPLOYMENT? 24

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program • Table of Contents

PAGE

C. WERE FRINGE BENEFITS OFFERED WITH THE TJTC
JOBS, AND IF SO, HOW DID THEY COMPARE WITH THOSE

BEFORE AND AFTER TJTC EMPLOYMENT? 25

D. WHAT WERE THE OCCUPATIONAL AND
INDUSTRIAL CATEGORIES REPRESENTED BY THE
TJTC JOBS? HOW DID THESE CATEGORIES
COMPARE TO THOSE BEFORE AND AFTER TJTC

EMPLOYMENT? 27

E. DID TJTC APPLICANTS STAY WITH THE SAME
EMPLOYER LONGER THAN EMPLOYEES IN THE

COMPARISON GROUP? 30

CONCLUSION 33

RECOMMENDATION 34

ETA'S RESPONSE 35

OIG'S CONCLUSION 36

EXHIBITS

A SAMPLING DESIGN AND PROCEDURES 38

B COMPUTATION OF TJTC PROGRAM COSTS

AND BENEFITS, JULY I, 1991 - JUNE 30, 1992 40

C ETA'S COMPLETE RESPONSE TO THE DRAFT

AUDIT REPORT 43

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Cndil Program - Abbreviations

ABBREVIATIONS

AFDC Aid to Families with Dq)endent Children

CFR Code of Federal Regulations

CY Calendar Year

DOL Department of Labor

DOT Dictionary of Occupational Titles

ES Employment Service

ETA Employment and Training Administration

FY Fiscal Year

IRC Internal Revenue Code

IRS Internal Revenue Service

LLSIL Lower Living Standard Income Level

LOR Letter of Request for Certification

OIG Office of Inspector General

SESA State Employment Security Agency

SSI Supplemental Security Income

SSN Social Security Number

TJTC Targeted Jobs Tax Credit

UI Unemployment Insurance

VR Vocational Rehabilitation

WIC Women, Infants, and Children Services

U.S. Department of Labor ' Office of Inspector General

Targeted Jobs Tax Credit Program - Executive Summary

EXECUTIVE SUMMARY

The Targeted Jobs Tax Credit (TJTC) program was enacted in 1978 as a means of
helping certain individuals find employment. In 1994, the TJTC program will cost
taxpayers nearly $300 million.' For that outlay, it is intended the program will entice
businesses into hiring members of hard-to-employ target groups-predominantly the
economically disadvantaged~in exchange for Federal tax credits.

Our audit focused upon whether the TJTC program is an effective and economical
means of helping target group members obtain jobs.

It is not. Consequently, we have recommended the Secretary encourage Congress to
discontinue the program when it expires on December 31, 1994.

In arriving at our conclusion, we completed field work in nine states. A sample of 1,150
individuals was evaluated, upon whom employers had requested and received TJTC
eligibility certifications during the period July 1, 1991 through June 30, 1992. We also
analyzed TJTC program and unemployment insurance wage history data maintained by
the states.

We asked and obtained answers to the following questions:

Would Employers Have Hired the Applicants Without a Tax Credit?

TJTC did not induce employers to hire members of target groups they might not
otherwise have offered jobs. Nationally, we project that employers, for whom we could
make a determination, would have hired 92 percent of the individuals even if the credit
had not been available.

What Did the Program Cost and What Were Its Benefits During the Audit Period?

The costs of the TJTC program far exceeds its benefits. Nationally, for the period July
1, 1991 through June 30, 1992, we estimate that the costs of the TJTC program exceeded

^ Based upon the Joint Committee on Taxation's estimates of lost federal tax revenue which totals
$282 million and nearly $16 million in U.S Department of Labor funds granted to states for them to
administer the program.

U.S. Department of Labor - Office of Inspector General

85-818 0-97-3

Targeted Jobs Tax Credit Program - Executive Summary

its benefits by over $234 million. That is, only about 37 cents of economic benefits were
returned for each dollar in tax credits and administrative costs.

What Impact Did the Program Have Upon Target Group Members?

Overall, TJTC jobs were similar to jobs individuals held both before and after their
TJTC employment - that is, entry-level, part-time, low-paying, low-skilled positions.
TJTC particip)ants' starting hourly wages averaged only $4.96, while one of three
employees was paid the minimum allowed by law. Two of three employees worked part-
time. Similarly, two of three employees were not offered any fringe benefits, such as
health and life insurance, or participation in a retirement plan.

TJTC employees remained with their employers longer than employees in a comparison
group with similar wages. Although somewhat better than the general work force, five
quarters after being hired, only 24 percent of TJTC employees were still with their TJTC
employers.

We also reviewed the program's administrative controls and identified weaknesses in
eligibility verification procedures employed by the states. Also, quarterly reports of
program activities, submitted by states to the Federal Government, contained
inaccuracies. Our evaluation of the program's administration has been communicated to
each state and is discussed in the section of this report titled, "Study and Evaluation of
Internal Controls."

ETA 's Response

ETA acknowledged that past studies had cast doubts on the TJTC program's
effectiveness. ETA stated that OlG's report "deepens our concern about the program's
design." However, ETA did not believe the OIG audit was sufficient and that a
"scientific study" with a "carefully constructed methodology" is necessary to determine the
program's long-term impact. ETA will continue to find ways to improve program
administration and will commission a scientific study on the program's overall
effectiveness.

We have included ETA's complete response to the draft report as Exhibit C.

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program - Executive Summary

OIG's Conclusion

We are disappointed by ETA's response. We believe continuing the program while
funding another study of this extensively studied program wiU only add to its
considerable expense, delay corrective action, and frustrates the objectives of the Vice
President's National Performance Review.

Fewer than one person in ten owed their employment to the tax credits employers
received. Since the program subsidizes hiring activities which occur regardless of the
credit, we believe further study on long-term employment impact would be
inconsequential and wasteful.

We reviewed the literature on TJTC and noted nearly 30 reports on the program.
Conclusions in several of the past studies were consistent with those in our report.
Recently, Secretary Reich cited the results of a study:'

. . .according to recera studies by Cornell University's John Bishop and Grinnel
College's Mark Montgomery, at least 70% of these workers would have been
hired even without their employers receiving a tax break.

. . . This is a disturbing list. Investing scarce resources in programs that don 't
deliver cheats workers who require results and taxpayers who finance failure.

So here is what we 're going to do:

We 're going to recommend against renewing the targeted jobs tax credit.

At a White House briefing, on February 2, 1994, the Secretary affirmed that past
investigations have demonstrated the TJTC program is not working:

. . .all of the evidence shows thai employers would have - in almost every case
- employed those people [TJTC participants] anyway and, therefore, get a
windfall.

Over the psist several years, numerous changes have been made to the program in
unsuccessful attempts to correct its shortcomings. We believe the program should be

' The Secretary's speech before the Center for National Policy, on January 27, 1994. titled
'Getting America to Work: What's Working and not Working in Workforce Policy."

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program - Executive Summary

ended and continue to recommend the Secretary of Labor encourage Congress to
discontinue the TJTC program when its authorization expires on December 31, 1994.

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program - Introduction and Background

INTRODUCTION AND BACKGROUND

^^^^^^■^^^^^^™ SESAs operate the TJTC Program. TfTC is one of several

INTRODUCTION Federal programs enacted to reduce unemployment,
^mi^tmi^^i^mm^^mam^^ Stimulate economic growth, and provide job opportunities

for groups needing special assistance. TJTC allows
employers, engaged in a trade or business, to receive a Federal income tax credit for
hiring and retaining individuals from specific target groups.

During 1993, Congress passed the Omnibus Budget Reconciliation Act of 1993, which
extended the program through December 31, 1994. The Act also made tax credits
retroactive on all eligible individuals whose employment start date was on or after July 1,
1992.

^^^^^^^^^^^^^^■■" TJTC began under the Revenue Act of 1978, as an

BACKGROUND amendment to Section 5 1 of the Internal Revenue Code of

^^^^—^^^^^^■M 1954. TJTC replaced the New Jobs Tax Credit (NJTC)

program created by the Tax Reduction and Simplification
Act of 1977. According to the Revenue Act of 1978, Part I., Summary, Congress made
the changes from NJTC to TJTC because of improved economic conditions:

. . . the unemployment rate has declined sufficiently so that it is appropriate to
focus employment incentives on those individuals who have high
unemployment rates, even when the national unemployment rate is low, and
on other groups with special employment needs.

. . . The groups have been defined on the basis of their low income or because
their employment should be encouraged. . . . As a result of increasing
employment among these groups, the committee hopes to lower outlays for
these programs.

Thus, TJTC focused upon specific target groups, in contrast to the NJTC, which focused
upon creation of new jobs.

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program - Introduction and Background

Since 1978, Congress has rep)eatedly amended program requirements through provisions
of the:

Technical Conections Act of 1979,

— Economic Recovery Act of 1981.

Tax Equity and Fiscal Responsibility Act of 1982,
Technical Corrections Act of 1982,
Deficit Reduction Act of 1984,

- Tax Reform Act of 1986,

Technical and Miscellaneous Reveruie Act of 1988,
Omnibus Budget Reconciliation Act of 1989,
Omnibus Budget Reconciliation Act of 1990,
Tax Extension Act of 1991, and
~ Omnibus Budget Reconciliation Act of 1993.

All participating parlies must also follow the Internal Revenue Code of 1986, as amended.
The changes resulting from the amendments relate primarily to groups which are
targeted, minimum length of employment, amount of wages which are covered, eligibility
determination procedures, and extensions of the program's duration.

The Employment and Training Administration, within the U.S. Department of Labor,
administers the program through cost reimbursable grants to the SESAs. The U.S.
Treasury Department, through the Internal Revenue Service (IRS), monitors the tax
credits claimed by employers. ETA and the IRS have a "memorandum of understanding"
concerning their individual and shared responsibilities.

■■■^^^^^■"■■■^■^^^^" ETA administers the TJTC program following the

PRINCIPAL CRITERIA guidelines in ET Handbook 377, Targeted Jobs Tax Credit

^^^^^■^H^^^^^^^^B Program, 5th Edition, August 1991. This Handbook

rescinded an earlier edition, dated July 1988. ETA
states that the Handbook provides "general guidelines" for those administering the TJTC
program. ;; - . ' .

Currently, the tax credit allows employers to claim 40 percent of the first $6,000 in
annual wages paid an employee or a maximum tax credit of $2,400. The employer must
retain the worker for a minimum of 90 days or employ the worker for at least 120 hours
before the credit can be claimed. For disadvantaged summer youth, TJTC allows a
credit which is 40 percent of the first $3,000 in wages paid the employee or a maxinmm

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program - Introduction and Background

tax credit of $1,200. Summer youth must work a minimum of 14 days or be employed at
least 20 hours before a credit is available. Tax credits may be claimed for the wages
described over a total period of 1 year, except for summer youth who are limited to the
period of May 1 through September 15.

The targeted population consists of nine groups for which employers may claim the tax
credit. The groups are as follows:

1. Persons with disabilities referred from state vocational rehabilitation or
Department of Veterans' Affairs programs.

2. Economically disadvantaged youth, 18 - 22 years old.

3. Economically disadvantaged Vietnam-Era veterans.

4. Recipients of Federal Supplemental Security Income (SSI) benefits within
the last 60 days preceding the hire date.

5. Recipients of state and local General Assistance for 30 days or more within
the last 60 days preceding the hire date.

6. Economically disadvantaged youth, aged 16 through 19, who participate in
a qualified cooperative education program and have not graduated from a
high school or vocational school.'

7. Economically disadvantaged ex-offenders hired no later than 5 years from
date of their prison release or their felony conviction.

8. Recipients of Aid to Families with Dependent Children (AFDC), who are
eligible for AFDC at the date hired and who received AFDC payments
continuously for the past 90 days or more.

9. Economically disadvantaged summer youth, 16 and 17 years old, employed
between May 1 and September 15, and who have not previously worked for
the employer.

* Since the SESAs' only responsibility for this group is economic eligibility determination, the
SESAs do not track certifications done by the Department of Education. Therefore, none from this
group were included in our sample.

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program - Introduction and Background

The "lower living standard income level" (LLSIL) determines whether an individual is
"economically disadvantaged." The LLSEL is based upon the Consumer Price Index and
varies by geographic area. Family income cannot exceed 70 percent of LLSIL, for those
target groups whose eligibility is based upon "disadvantaged" status.

Employers may make a preliminary determination of an iq)plicant's eligibility. However,
the SESA or cooperating agency must make the final determination and the SESA must
certify the same. The SESA or cooperating agency may provide individuals a "voucher"
of eligibility determination, which may assist applicants when searching for a job.

Generally, the participant's start date must not precede the employer's request for
certification. However, the start date may precede the request for certification date by
up to 5 days, for persons already vouchered by the SESA or cooperating agency. A
Qualified Cooperative Education program, such as those conducted in vocational schools,
must certify that the applicant is eligible.

According to ETA's guidelines, the SESA should try to obtain documentation of each
individual's eligibility. However, ETA allows the SESA to accept only the job applicant's
attestations when his or her eligibility is unusually difficult to document. The SESA's
determination of economically disadvantaged status is generally good for 45 days.

As a part of internal control, the SESAs must conduct "audits," involving in-depth testing
to "establish the credibility and reliability of the eligibility determination and certification
process." The SESA must retain records of eligible individuals for 5 years and records of
individuals determined ineligible for 1 year. Other TJTC program requirements are
periodically issued by ETA and contained in Federal regulation."

^^^^^^^^^^^^^^^^^^" Economically disadvantaged youth were the
PROGRAM predominant target group certified. AFDC

PHARAfmilSTTPS participants were also well represented. The target

groups and our projections of their representation to

^^^^^^^^^^^^^^ the total certifications which were issued during our

audit period are presented in the graph in Figure 1.

* Additional criteria are contained in Field Memorandum No. 97-90, Change 1, dated January 3.
1991, which refers to the Wagner-Peyser Act, Section 7 (c) and the Code of Federal Regulations, Title
29, Parts 93, 97 and 98.

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program - Introduction and Background

Figure 1

Participants In Each Target Group

aor

• M

<»'

4^* -s?

Little recruitment of these groups was done by the SESAs. In our sample, the SESAs
assisted few TJTC applicants in obtaining employment.

For those TJTC employees on whom we could obtain the information, we determined:

• 8 percent found their jobs through the assistance of the SESA.

• 65 percent found their jobs "on their own."

• 27 percent found their jobs through the assistance of others, such as friends
and relatives.

U.S. Department of Labor ■ Office of Inspector General

Targeted Jobs Tax Credit Program - Introduction and Background

Typically, the SESAs' activities were limited to reviewing eligibility certification requests
sent them by employers or contractors and completing other administrative activities
related to the certification process.

We project employers used management consulting contractors, to make TJTC eligibility
determinations and to assist them with other administrative requirements, for 67 percent
of the certifications.

^^^^^^■^^^^^^^^^^ From 1980 to 1990, employers have claimed tax credits

PROGRAM COSTS estimated at over $4.5 billion. The IRS estimated
■i^^^Hi^Hi^^HHaMHiH^H rcvcnuc losses due to TJTC of $180 million in FY 1992

and $160 million in FY 1993. Based on the current
design of the program, the Joint Committee on Taxation has projected the following
losses:

FY 1994 $282 million

FY 1995 $303 million

FY 1996 $357 million

FY 1997 $403 million

FY 1998 $444 million

DOL's appropriation was $19,518,000for TJTC administration in FY 1991 and $20
million in FY 1992.

U.S. Department of Labor - Office of Inspector General j i 10

Targeted Jobs Tax Cndit Program - Objectives, Scope, and Methodology

OBJECTIVES, SCOPE, AND METHODOLOGY

^■^^^^■■"■^^^^^^■■^^^ Our objective was to determine whether TJTC is an
OVERAUL OBJECTIVE effective, economical means of Helping target group
■■^■■■■■■■■■■■■^■■■■ii^^^ members, who would otherwise have difficulty

finding employment.

■■■■■^^■^^■■■■■^^ To satisfy our primary objective, we considered a number of
SUBOBJECTTVES subobjectives involving the program's operation. We designed

■■^■■■^■^■^^■■■■M procedures to answer the following questions:

Would employers have hired the applicants without a tax credit?

What did the TJTC program cost and what were its benefits during the
audit period?

What impact did the program have upon target group members?

How well was the program administered?

^^^■^^^^ Our audit focused on activities for the period July 1, 1991 through June

SCOPE 30, 1992--Program Year (PY) 1991. However, we reviewed program

■■^^BBB^M operations and supporting information for jjeriods before and after these
dates, when necessary, to complete our audit objectives.

Audit procedures included staff, participant, and local employer interviews, review of
documents, evaluation of TJTC participant records, and analyses of UI claim and wage
files. Hiring decisions were made by local employers. For this reason, our interviews
were directed to these employers.

We also matched TJTC participant files with UI wage files, UI claim files, and SESA
applicant files. The matches allowed us to confirm TJTC participants' employment,
previous or subsequent involvement with the same employer, length of employment,
wages earned, and UI claims activity.

U.S. Department of Labor - Office of Inspector General 1 1

Targeted Jobs Tax Credit Program - Objectives, Scope, and Methodology

We followed requirements for performance audits set forth in Government Auditing
Standards. 1988 Revision, issued by the Comptroller General of the United States. Work
was completed in seven ETA Regional Offices and in nine states: California, Florida,
Illinois, Maine, Michigan, Missouri, New Hampshire, Texas and Virginia. In eight states,
we selected a random sample of 125 certifications which had been issued during PY
1991. The sample size in Illinois was 150. (See Exhibit A.) Consequently, we reviewed a
sample of 1,150 individuals from a universe of 505,418 TJTC certifications reported to
ETA during our audit period. We identified the employees associated with the
certifications, employers who hired the individuals and related contractors hired by
employers to assist in TJTC program functions.

Our sample design allowed us to project the sample results to the population of
individuals with TJTC certifications during the audit f>eriod. Our sample also allowed us
to project the program's costs and benefits to the nation. Our sampling methodology is
presented in Exhibit A of this report.

Field work continued from October 25, 1993, through March 31, 1994. Field work was
followed by verification, evaluation, and statistical projection of the data we had
collected. Typically, we were able to obtain complete files from the SESAs'
headquarters locations. Consequently, our field work was usually completed at the
SESAs' central offices. However, we visited many locations throughout each of the nine
states in order to interview those individuals we could not contact by other means.

Audit findings related to each state's activities have been communicated in separate
correspondence. Comments received from the states were considered in preparing this
report.

^"■^^^^^^"■^■^■^■^ To determine the tax credit's effectiveness in encouraging
METHODOLOGY ^^ employment of individuals who would not otherwise
■■■^^^^^^■■■■■■■■M have found a job, we evaluated responses solicited from

our sample.

The information was obtained by contacting participants and the related employers. We
asked how and when participants' eligibility for TJTC tax credits was determined, and
whether employers would have hired the participants had the credit not been available.
We also obtained information on wages paid participants, benefits they were offered,
hours worked, and other information germane to our audit objectives.

U.S. Department of Labor • O/Jice of Inspector General 12

Targeted Jobs Tax Credit Program • Objectives, Scope, and Methodology

In detennining costs of the TJTC program, we included Federal appropriations for
DOL's administration of the TJTC program and revenues lost due to tax credits. For
Federal tax purposes, employers must reduce deductible wage expenses by the amount of
the TJTC credits taken. Consequently, we reduced costs by an amount which represents
the tax effect of the credits.

As benefits, we used the gross wages of those persons whom we concluded would not
have been hired without the credit. Where identified, we also added savings to Federal,
state and local governments from reductions in social transfer payments, such as public
assistance.

We then compared costs and benefits. Our calculations included TJTC program
administrative costs, eligible tax credits, tax deductions employers forfeited because they
claimed credits, and financial benefits. Our computations were based upwn sample
projections. As with other components used in our calculations, projections relate only
to PY 1991. Our methodology is discussed, at length, in Exhibit B of this report.

In determining the program's impact upon participants, we collected and compared
information from sampled employees and their employers regarding their TJTC jobs and
jobs they held before and after their TJTC employment. The information included
employees' pay rates, number of hours they typically worked per week and the fringe
benefits they were offered. We also compared the length of time individuals in our
sample remained in TJTC jobs (retention) to that of a like population. The comparable
population consisted of individuals in the work force whom we identified in the SESAs'
employment data bases. We selected individuals who started jobs during our audit
period and whose earnings were within two standard deviations of the mean earnings of
individuals in our TJTC sample. Retention rates of individuals in our sample were
compared to retention rates of the comparable population.

To determine if the program was being properly administered, we evaluated the
existence, adequacy and functioning of internal control procedures for determining TJTC
applicants' eligibility and reporting program activities. We evaluated procedures SESA
staff applied in determining the eligibility of those individuals in our sample. We also
reviewal documentation to determine whether other TJTC quality review procedures,
mandated by ETA, were being completed. Finally, we evaluated the accuracy of
quarterly reports, submitted by the SESAs to ETA. Our findings on the states'
administration of the "program are included in the following section of this report titled,
"Study and Evaluation of Internal Controls."

U.S. Department of Labor - Office of Inspector General 13

Targeted Jobs Tax Credit Program - Study and Evaluation of Internal Controls

STUDY AND EVALUATION OF INTERNAL CONTROLS

We evaluated the existence and effectiveness of the states' internal controls for verifying
TJTC applicants' eligibility and for reporting the results of their activities.

■■^^^■^^^"^^^^^^^^^ Control procedures prescribed by ETA' to ensure
CONTROL PROCEDURES o"'y eligible applicants are certified include:

"Quality review," which involves an independent review of forms and other
documentation that support the certification of eligibility. Reviews are to
be performed at several points in the eligibility determination and
certification process and are to be completed within 48 hours of the receipt
or completion of key documentation.

"Audit, "which involves quarterly, post-issuance examinations of a random
sample of certifications and the supporting documentation.

^^^^^^^^^^^^^^^^^^^^^^ We reviewed 1,150 TJTC participant files to

PROCEDURAL WEAKNESSES determine whether a quality review was

^^■^^■■■"■■""■i™"^^^^^^^^ performed. ETA requires that SESAs test the

validity of all certifications issued, including
vouchers and other documentation which results in certifications. Quality reviews and
audits are individual parts of the verification process. Verification should be done by
someone other than the person who originally processed the actions.

We were often unable to determine if quality reviews had occurred because most key
documents contained no evidence that a review had taken place. For example, 90
percent of the certification documents contained no information that suggested a review
had been completed. We determined that seven of the nine SESAs did not document
any quality reviews. Two of the SESAs' methodologies for selecting quarterly audit
samples were not in accordance with the ET Handbook because items were not
randomly selected.

' Requirements are contained in ET Handbook No. 377, Targeted Jobs Tax Credit Program. 5th
Edit/on, August 1991.

U .S. Departmeru of Labor - Office of Inspector General 14

Targeted Jobs Tax Credit Program - Study and Evaluation of Internal Controls

We did not develop specific procedures to identily ineligible individuals. " However,
through other data analyses, which included automated computer applications, we
identified 39 ineligible participants. In 16 of the 39 instances, participants had previously
worked for the employer not as a certified TJTC employee, and, according to the
Internal Revenue Code, a tax credit should not have been claimed. In other instances,
various program requirements were not met. We believe these problems were largely
due to a lack of quality review.

^^^^^^^^^^^^^^^^^^^^ We found some states submitted inaccurate reports

REPORTING WEAKNESSES to ETA identifying program activity. In seven of

^^^^^^^^^^^^^^^^^^^^ nine states, repwrted certifications did not agree

with the records we reviewed at the SESAs. In
most instances, the differences were minor; however, the State of Michigan materially
overstated the number of vouchers and certifications in its reports, and the Illinois SESA
had reporting problems in some local offices.

During PY 1991, the Michigan Employment Security Commission (MESC) reported
processing 54,706 TJTC vouchers and 49,890 certifications. Based on our analyses of the
TJTC data base, the correct numbers of vouchers and certifications were 21,101 and
18,907, respectively.

The errors resulted from Michigan reporting cumulative year-to-date totals on its
quarterly reports. ETA instructions indicate quarterly reports should only reflect that
period's activity. The overstatement could have resulted in ETA overfunding the state's
TJTC activities since TJTC administrative funds are distributed by a formula based in
part on numbers of vouchers and certifications.

We also identified reporting problems in Illinois. We reviewed certifications at ten local
office's in the State of Illinois and found differences in seven. One local office
significantly overstated total certifications. We were told the overstatement was largely
due to misfiling by volunteer workers. The volunteers filed PY 1990 certifications with
PY 1991 certifications. Another contributing factor was failure to observe requirements
for proper separation of duties. At least four individuals were signing as the TJTC
certifying official. This practice resulted in the creation of duplicate files. We identified
one participant for whom four files existed.

U.S. Department of Labor - Office of Inspector General 15

Targeted Jobs Tax Credit Program - Results of Audit

RESULTS OF AUDIT

PROGRAM EFFECTIVENESS: WOULD EMPLOYERS HAVE HIRED THE
APPLICANTS WITHOUT A TAX CREDIT?

92 Percent of TfTC Employees
Would Have Been Hired
Without Tax Credits

We evaluated the TJTC program's influence
on target group members' employment by
determining if employers would have hired
the applicants without TJTC incentives. We
found the TJTC program had little impact on
employers' hiring decisions.

Figure 2

EFFECT OF TAX CREDIT
ON HIRING

HIRED EVEN

WITHOUT

CREDIT

HIRED

ONLY WITH

CREDIT

7.8%

U.S. Department of Labor - Office of Inspector General

Targeudjobs Tax Credit Program - Results of Audit

Nationally, for our audit period, we project 92 percent of participants, for whom
we could make a determination from our sample (908 of 983), would have been
hired regardless of whether the tax credit was available. Conversely, only 8
percent of the participants were hired because of the credit. See Figure 2 on the
previous page. Our conclusions were based upon the responses of both employers
and participants regarding hiring procedures.

In some instances, employers told us they would have hired applicants without the
tax credit, although applicants stated their eligibility was checked before they were
hiried. In other instances, employers affirmed they would not have hired the
applicants without the tax craiit, although applicants stated that eligibility was
determined after they were hired. Regardless, in all such circumstances, we
accepted the employers' representations. If we could not obtain a response from
an employer, we accepted the applicant's answer regarding whether his or her'
TJTC eligibility was determined before or after a hiring commitment was made.*

Little variation occurred among industries or among large or small firms in their
hiring practices. In those cases where we could obtain the information, 86 percent
of employers said they determined TJTC eligibility after a job offer was made. In
77 percent of instances, employers indicated that they routinely completed TJTC
eligibility determinations on all newly hired employees.

Following the hiring decision, employers either completed a preliminary eligibility
determination or, more often, referred employees to a contractor. Typically, the
employees were given a telephone number and directed to call the contractor.
Through telephone consultation, contractors then made a preliminary TJTC
eligibility determination.^

* We assumed that the employer would not have hired the applicant without a tax credit if. in the
absence of the employer's answer, the applicant said the employer checked for eligibility before
offering the applicant a job. Consequently, we believe our estimate, of those hired regardless of the
credit, is conservative. If we could obtain neither the employer's nor applicant's answer, we dropped
the applicant from this procedure. Therefore, numbers and percentages in Figure 2 only reflect
projected data on those TJTC applicants for whom we could obtain answers related to the decision
to hire.

' Large regional, national, and intemational firms represented two out of three employers who
obtained certifications allowing them to claim a tax credit. As previously discussed, contractors were
typically hired by the employers to assist in eligibility screening and other program activities.

U.S. Department of Labor - Office of Inspector General 17

Targeted Jobs Tax Credit Program • Results of Audit

Our findings indicate that most of the individuals certified for TJTC would have
been hired even without the incentive. Consequently, the program is a windfall
for employers who hire participants they would have employed in the absence of
TJTC.

U.S. Department of Labor - Office of Inspector General 18

Targeted Jobs Tax CrtdU Program - Results of Audit

n. PROGRAM ECONOMY: WHAT DID THE TJTC PROGRAM COST AND
WHAT WERE ITS BENEFFTS DURING THE AUDIT PERIOD?

Program Costs: $374 Minion

Program Benefits: $140 Million
Net Loss: $234 MiUion

$ .37 in Benefits Per $1.00 Spent

We have estimated tl e TJTC program's
costs and benefits. V e found that for
every dollar of outlav ., the program
returned only about >7 cents.
Nationally, for our a dit period, we
project the program cost about $374
million and benefits were $140 million.

Consequently, the program cost some $234 million more than it generated in
economic benefit.

Rgure 3

Cost vs Benefits

Total Costs $374,017,181

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program - Results of Audit

We projected our sample results to the nation. We counted as "benefits" about
$125 million in projected gross annual wages of those individuals who would not
have been hired without the tax credit. We added to the benefits $15 million of
projected reductions in social transfer payments resulting from the TJTC covered
employment. Thus, total projected benefits were $140 million.

As costs, we projected a total of $537 million in tax credits could have been taken
on employees who worked the minimum time required to qualify for a credit.
Employers must reduce deductible wages by the amount of the tax credit claimed.
Consequently, the total was reduced by 34 percent (the maximum corporate tax
rate) to $354 million.

Finally, we added $20 million in DOL appropriations for TJTC during our audit
period. Consequently, projected total costs were $374 million.

Combining the totals, we find the TJTC program's costs exceeded its benefits by
$234 million. More specifics regarding our calculations may be found in Exhibit B
of this report.

U.S. Department of Labor - Office of Inspector General 20

Targeted Jobs Tax Credit Program - Results of Audit

in. PROGRAM RESULTS: WHAT IMPACT DID THE PROGRAM HAVE UPON
TARGET GROUP MEMBERS?

To evaluate the program's impact upon employees, we compared information on
individuals' TJTC jobs with jobs they held before and after their TJTC
employment. The information was obtained from employee interviews and
questionnaires. We also determined the length of time TJTC employees
remained in their jobs. We compared this measure with retention rates for a
similar group of individuals in the general work force.

We asked how did TJTC employment compare to other jobs they had held
regarding:

A. hourly wages paid,

B. weekly hours of employment,

C. fringe benefits offered employees,

D. types of jobs, and

E. length of time they remained in the job?

Five quarters after being hired, 24 percent of workers in TJTC-covered positions
were still with their TJTC employer, while in the comparison group, only 16
percent remained with the same employer.

However, by other measures employees in TJTC-covered employment were
somewhat worse off. For example, the average beginning wage for TJTC jobs
($4.96) was less than either the ending wage employees earned in the previous job
($5.22) or the beginning wage in their subsequent job ($5.52).

TJTC-covered employment was the first job for only 13 percent of the individuals
we sampled. While variations existed among the jobs, the measures revealed
more similarities than differences. The TJTC employment mirrored other low-
paying, low-skilled positions in the employee's work history.

U.S. Department of Labor - Office of Inspector General 21

Targeted Jobs Tax Credit Program • Results of Audit

The TJTC program's legislative history does not indicate the Congress intended
the program would improve individuals' wages, long-term employment prospects,
or any of the other factors we have measured. However, data regarding jobs on
which tax credits are being allowed cause us to question the value of the program.
For TJTC jobs about:

• One of three employees (37%) was paid at or below the minimum
wage prescribed by law; for all TJTC jobs in our sample, starting
wages averaged $4.96.

• Two of three employees (61%) worked part-time.

• Two of three employees (65%) were offered no fringe benefits.

• One of four employees (25%) worked in eating and drinking
establishments, often as counter help, fry cooks, waiters/waitresses,
and order takers.

• Three of four employees (76%) were no longer with the TJTC
employer five quarters after being hired.

TJTC employees' average annual earnings were %1, 17)% {$4. 96 average hourly wage
X 30 average hours per week X 52 weeks). That amount is only $928 more than
the annual Federal poverty level guidelines of $6,810' for a family of one. We
question whether better results should be expected of activities subsidized with
public funds.

The sections on the following pages contain the comparisons and our conclusions
regarding each measure.

'According to the U.S. Department of Health and Human Services Poverty Guidelines, published
in the Federal Register, February 14, 1992, pagu 5456, which were applicable to the latter period of
our audit.

U.S. DeparPnent of Labor - Office of Inspector General avW .r- 22

Targeted Jobs Tax Credit Program - Results of Audit

A. How Much Were Employees Paid and How Did Their TJTC Wages
Compare to Those of Previous and Subsequent Jobs?

Average Pre-TJTC Wage: $5^
Average Starting TJTC Wage $4.96
Average Ending TJTC Wage: $5.36
Average Post-TJTC Wage: $5J2

On average, the program did not
improve individuals' earnings. The
beginning pay for TJTC jobs was lower
than pay of jobs that persons held
before TJTC. Small gains did occur for
those who obtained work after their
TJTC employment.

Beginning wages for TJTC jobs averaged only $4.96 per hour. From our sample,
we project 37 percent of the individuals started at or below the minimum wage
prescribed by law.

For those who had jobs in the year prior to TJTC, the average ending wage of the
previous job was $5.22.' We compared this wage to the beginning hourly wage
for TJTC of $4.96. We also compared the average ending hourly wage of TJTC
employment ($5.36) to the average beginning hourly wage of the job obtained
after TJTC ($5.52).

The comparison of average hourly wages of individuals before, during, and after
TJTC are shown in Figure 4 below:

Figure 4

KENDING WAGE9

JIbefore TJTql

{BpINNIN^WAi^

JKL^ WAGE|MM|||||

EEGmTlNGWAGqB
IHP^FTER TJTCJJHHl

||e'nd'ing'''wagm^

$5.22

$4.96

$5.36

$5.52

*We project that 38 percent of the individuals did not have wages in the year prior to TJTC.

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program - Results of Audit

B. How Many Hours Per Week Did Target Group Members Work, and How
Did These Hours Compare to Jobs Both Before and After TJTC Employment?

Ave. Pre-TJTC HrsAVk -
Ave. TJTC Beg. Hrs/Wk -
Ave. Ending TJTC Hrs/Wk -
Ave. Post-TJTC Hrs/Wk -

^^" TJTC did not improve upon the number of
32 hours individuals worked in a week. Most

30 individuals worked nearly the same

31 number of hours in their TJTC-covered
34 employment as in their past job.

^^M Individuals worked slightly more hours in
their subsequent jobs. The data indicates
that in 61 percent of the hires, employment was part-time (less than 40 hours per
week).

We determined the average number of weekly hours participants worked who had
a job within one year prior to their TJTC employment. We also determined the
average number of hours they worked when they started and when they left their
TJTC employment. Finally, we determined the average beginning hours worked
in their subsequent jobs. Figure 5 presents a comparison of the averages.

Figure 5

AVERAGE HOURS PER WEEf^^^

lENblNG HOURSgBEGINNING HOURSMENDING HOUR^BEG INNING HOURSl

3EF0RE T JTCMBWiillll^ JTC^MMMI'M'^i^ ■ ' '^'^^IMiiilillBllii* ^""^^ TJTC

The chart represents a continuum of hours worked by the individuals we
evaluated. As shown, the averages are significantly less than a full-time 40-hour
week.

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program - Results 0/ Audit

C. Were Fringe Benents Offered With the TJTC Jobs, and If So, How Did
They Compare With Those Before and After TJTC Employment?

^^^^^^^^^^^^^^^^^^^^ No fringe benefits were c ffered by two out
No Fringes, Pre-TJTC - 79% of three employers under TJTC. The same
No Fringes^ TJTC - 65% ^^ true for the job obtained after TJTC

No Fringes, Post-TJTC - 65% employment. These numoers reflect
^^^^^^^^^^^^^^^^^^^^^ improvement over the joos held before

TJTC, of which 79 percent provided no job
benefits. A higher proportion of TJTC jobs
offered health insurance, life insurance, retirement (other than social security), or
paid vacations than jobs individuals held before TJTC. Jobs individuals held after
TJTC enjoyed a slight advantage in retirement and health insurance. A
comparison of fringe benefits offered employees in their TJTC jobs and in
previous and subsequent jobs is presented in Figure 6.

The "Other Benefits" category includes a wide range of perks, such as dental
coverage, dining privileges, parking and paid leave.

We also gathered information on other job benefits such as pay raises, promotions
and training. We project that 37 percent of TJTC participants received a pay
raise or promotion in their TJTC -covered job, although average TJTC beginning
and ending wages differed by only 40 cents.

Also, we project that 21 percent of the participants received training other than
that obtained by doing tasks on-the-job (OJT). However, employer responses
indicate much of the training was of a short-term nature, described as
"orientation" which all new hires received. OJT aside, we were able to identify
little formal skills training, vocational education or higher education training
which was offered by employers.

It can be argued that the TJTC program helps those who are structurally
unemployed because they lack the basic work skills or discipline to do such things
as dress properly, follow instructions, or show up at work on time. However, the
argument is not convincing. Arguably, any job exposes an individual to certain
employment requirements. Some job requirements, such as a dress code, may
help teach an employee useful information - for example, what attire is
appropriate in a business setting. However, we believe TJTC applicants, like

U.S. Department 0/ Labor - Office 0/ Inspector General 25

TargeUdJobs Tax Credit Program - Results of Audit

Other employees, either coofiMined to an employer's expectations, or they were
dismissed. Moreover, as noted earlier, TTTC was the first job for only 13 percent
of the individuals we sanqded.

Figur**

FRINGE BENEFITS
PROVIDED TJTC PARTICIPANTS

Ojos after

NUkUN UP!

MSMRANCC MMV

BENEFITS

6S%

NO
BENEFITS

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program - Results of Audit

D. What Were the Occupational and Industrial Categories Represented By
the TJTC Jobs? How Did These Categories Compare to Those Before and After
TJTC Employment?

^^^^^^^^^^^^^^^^^^" Employees' job histories typically consisted of
TJTC Jobs Inchided Fast ^"^ level positions with minimum pay, low
Foods, Fyy Cooks, Other skills, and limited, part-time work hours.
Service Jobs, Low-Skilled Management and professional jobs were in low
Clerical and Sales, Few supply. Clerical jobs were often retail
Managers/Professionals cashier/checker occupations; and service

i^^H^^^H^MMMHHH^iH^^BHa occupatlons oftcn consisted of grocery clerks,

nurses aides, fry cooks, food cashier/order

takers, restaurant waiter/ waitresses, and hotel or other corporate janitorial

housekeepers.

As shown in Figure 7, Professional, Technical, Managerial jobs under TJTC
decreased from the jobs before but increased in the jobs after TJTC employment.
Clerical and Sales jobs increased sharply under TJTC, then dropped sharply
afterwards to near pre-TJTC levels. Service occupations joined Clerical/Sales in
dominating TJTC employment, as was true for jobs both before and after TJTC.
Figure 7 shows national projections from our sample of individuals who we could
determine had jobs before, during, or after TJTC. The statistics are presented by
broad Dictionary of Occupational Titles (DOT) categories.

Figure 8 illustrates the narrow range of predominant occupational categories
which were accompanied by an equally limited range of predominant industry
categories. Although all broad industry categories had some representation,
Wholesale/Retail comprised two out of three TJTC jobs, followed by Services
Industries with near one job in six, based on industry types in the Standard
Industrial Classification Manual. Eating and drinking places comprised 25 percent
of the employers in our participant sample. Department stores were a distant 18
percent in second place, followed by grocery stores, nursing and personal care,
hotels/motels, and employment agencies.

U.S. Department of Labor - Office of Inspector General 27

Targeted Jobs Tax Credit Program - Results of Audit

Figure 7

|CAT . JCATJSGORI EJ

j^pO^BEFO^

Hip'jTctHni

0/1

liiiiB^

23,974

13,777

5.8%

3,2%

9.6%

Clerical/
Sales

181/672

69,493

69,230

29.3%

38.5%

27.8%

Service
Occups.

177,514

88,386

97,818

41.4%

S7.6%

35.4%

Ag/ Forest/
Fishery

748

4,851

5,326

2.3%

0.2%

1.9%

Processing
Occups.

11,742

7,509

4,979

2.1%

2.5%

3.0%

Machine
Trades

15,054

8,290

4,914

2.1%

3.2%

3.3%

Benchwork
Occups .

22,613

11,544

9,460

4.0%

4.8%

4.6%

Structural
Occups.

13,628

14,602

11,418

4.8%

2.9%

5.8%

Miscellan.
Occups.

34,213

21,247

19,099

8.1%

7.2%

8.5%

Totals

472,307

249,896

236,02]

. 100%

100%

Figure 8 presents the projection of individuals by the SIC code group of the job
held before, during, or after TJTC.

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program - Results of Audit

Figure 8

1 ,.^,,, ll

nnnn

^^^

HP9

^Bo^AFT^3|

isi^BINOUSTRYa

|divjH|namesI

■KjoB BJ

Ag/ Forest/
Fishing

4,404

1.8%

1,969

0.4%

6,405

2.4%

Mining/
Construct.

9,813

3.9%

5,799

1.2%

10,688

4.0%

2/3

Manufact.

20,224

8.1%

50,903

10.9%

14,936

5.6%

Transp/
Commun . Etc

6,085

2.4%

12,215

2.6%

22,846

8.5%

Wholesale/
Retail

137,301

54-9%

310,344

66.4%

110,903

41,3%

Finan. /Ins
Real Estat

2,322

0,9%

4,081

0.9%

6,883

2.6%

7/8

Services
Industries

637iB$

25.2%

l2,0iS5

17,5%

§<i,mi

33.5%

Public
Admin/Misc

7,034

2.8%

262

0.1%

5,809

2.2%

Totals

250,622

100%

467,638

100%

268,542

100%

Individuals employed after leaving their TJTC jobs were employed in a wider
variety of jobs than represented by TJTC employment. The data indicates TJTC
employment is largely directed towards employment in jobs for which no special
qualifications are needed or applicants already possess requisite skills.

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program • Results of Audit

E. Did TJTC Applicants Stay with the Same Employer Longer than
Employees in the Comparison Group?

TJTC applicants stayed with the same employer longer than a population of
individuals with similar earnings.'" However turnover for both TJTC participants
and the "comparison group" was high. For TJTC participants, 76 percent were no
longer with the same employer five quarters after being hired. For the
comparison group, the figure was 84 percent.

In calculating the percentages, we compared the retention rates for TJTC
employees to that of all persons in the UI wage files of the states we audited,
(1) with employment starts during our audit period, and (2) whose annual wages,
with one employer, were within two standard deviations of the average annual
wage of TJTC participants in our sample.

The length of employment for each group, with the same employer, by quarter, is
presented in Figure 5.

Regarding those individuals on whom we could make a determination, we
identified the following reasons they left their TJTC employment:

• 75 percent voluntarily quit their TJTC job,

• 12 percent were laid off, and

• 13 percent were fired.

'" Information which was available allowed us to determine the percentage of individuals in each
group that remained in jobs with the same employer. The reader is cautioned that the data does not
Infer members of either group, who left their jobs, became unemployed. It is likely many left for other
positions.

U.S. Department of Labor - Office of Inspector General 30

Targeted Jobs Tax Credit Program - Results of Audit

Figure 9

Length Of Employment

with The Same Employer

TJTC V8 Comparison Group

o
a.

100
80
60
40
20

Quarters

U.S. Department of Labor - Office of Inspector General

Targeted Jobs Tax Credit Program - Results of Audit

We also attempted to learn the employment status of those in our sample at the
time we were completing field work. From those on whom we could make a
determination, we project:

• 65 percent were employed (including those employed and in school),
and

• 35 percent were not employed (6 percent in school)

The 35 percent of individuals not currently working compares to 38 percent who
had not worked during the year prior to TJTC employment.

This data raises questions of whether TJTC employment improved individuals'
long-term employment prospects. It is of particular concern that youth represent
over 50 percent of the target population on which tax credits are taken.

U.S. Department of Labor - Office of Inspector Genemt - 32

Targeted Jobs Tax Credit Program - Conclusion

CONCLUSION

Congress created the TJTC program to provide employers incentives to hire individuals
from groups who typically experience high unemployment and who may receive public
benefit payments. Although tax credits were to provide incentives for employers to hire
members of the targeted groups, employers would have hired most of the participants,
regardless of the tax credit.

The TJTC jobs were usually near minimum wage, low-skilled, and often part-time work.
Only about one job in three offered any fringe benefits to the employee.

Although Congress designated nine target groups, the TJTC program was heavily
dominated by economically disadvantaged youth. Because of their age and inexperience,
the applicants are among the most heavily represented TJTC target groups. They are
usually candidates for employment which requires few job skills and little education or
experience. We found employers did not need financial incentives for hiring these
individuals.

The TJTC program's costs are hidden, because little Federal money is spent on the
program. Rather, a majority of the program's costs are the result of lost tax revenue.
Nonetheless, the program's costs are substantial and have the same financial impact as
programs requiring Federal appropriations. We estimate that for every dollar in
program cost, 63 cents is lost. Nationally, we estimate the program resulted in a loss of
nearly $234 million during our audit period.

The Revenue Act of 1978, 1. Summary, indicated that Congress wanted the program to:

■ focus employment incentives on those individuals who have high
unemployment rates... andon other groups with special employment needs....

We do not believe the program has met this objective. In most cases, the tax credit was
not the incentive which caused employers to hire members of the targeted groups.
Rather, we believe target group members were hired because there was a match between
the employers' needs for inexpensive labor in high-turnover occupations, and willing
individuals - who are often members of the target groups - to work for low wages in jobs
which require little education or skill. Consequently, employers seldom targeted TJTC
group members because it was unnecessary.

U.S. Department of Labor • Office of Injector General 33

Targeted Jobs Tax Credit Program - Recommendation

RECOMMENDATION

The TJTC program wiU expire on December 31, 1994. We recommend the Secretary
encourage Congress to not continue the program when it expires.

U.S. Department of Labor - Office of Inspector General 34

Targeted Jobs Tax Credit Frogram - ETA 's Response

ETA'S RESPONSE

On August 5, 1994, ETA responded to our report. ETA commented that past studies
have cast doubt on the TJTC program's effectiveness and that this aildit report, "... adds
to those indications and deepens our concern about the program's current design." ETA
also advised they shared OIG's concern that the program "does not effectively provide
incentives for employers to hire individuals in the target groups" and will "continue to
examine ways to strengthen achievement. "

However, ETA suggests the audit is insufficient and a "scientific study" with a "carefully
constructed methodology" is necessary to determine the program's long-term impact.'

U.S. Department of Labor - Office of Inspector General 35

Targeted Jobs Tax Credit Program - OlG's Conclusion

OIG'S CONCLUSION

We are disappointed by ETA's response. We believe continuing the program while
funding another study of this extensively studied program will only add to its
considerable expense, delay corrective action, and frustrate the objectives of the Vice
President's National Performance Review.

We do not believe a study of the program's long-term impact would be illuminating. As
we previously discussed, most TJTC employment is of a short-term nature. We found
fewer than one person in ten owed their employment to the tax credits employers
received. Again we emphasize, the program subsidizes hiring activities which occur
regardless of the credit. Consequently, the long-term impact of employment that would
have occurred without a tax subsidy is inconsequential.

A multitude of studies, analyses, audits and surveys of TJTC program activities has been
completed. In preparing for the audit, we reviewed the literature and identified nearly
30 reports on the program completed by a number of credible sources.

Conclusions in several of the past studies were consistent with those in our report. For
example, a 1991 report" concluded:

Because employers find it relatively cheap to certify afterthe fact eligible new
employees who would have been hired anyway, this passive mode of
participating in TJTC predominates. . . .

In summary, the evidence clearly indicates that the predominant mode of
participation in TJTC is passive, and therefore that the windfall element of the
program is probably quite large.

Our audit revealed that employers' decisions to hire are based on tax credit incentives in
only a minuscule number of cases. The decision to continue TJTC subsidies while
spending additional funds on further studies is inconsistent with the objectives of the
National Performance Review.

" John H. Bishop and Suk Kang, Applying for EnVtlefnant: Employers and the Targeted Jobs Tax
Credit, Journal of Policy Analysis and Management, Winter, 1991,

U.S. Department of Labor - Office of Inspector General 36

Targeted Jobs Tax Credit Program - OIG's Conclusion

Recently, Secretary Reich cited the TJTC as a program that did not work. His speech
before the Center for National Policy, on January 27, 1994, titled "Getting America to
Work: What's Working and not Working in Workforce Policy, "descrii>ed the program's
failings:

. . .according to recent studies by Cornell University'sJohn Bishop and Grinnel
College's Mark Morugomery, at least 70% of these workers would have been
hired even without their employers receiving a tax break.

. . . This is a disturbing list. Investing scarce resources in programs that don 't
deliver cheats workers who require results and taxpayers who finance failure.

So here is what we're going to do:

We 're going to recommend against renewing the targeted jobs tax credit.

The Secretary echoed the same thoughts in a White House briefing on February 2, 1994:

. . .all of the evidence shows that employers would have - in
almost every case - employed those people [TJTC participants]
anyway and, therefore, get a windfall.

A number of amendments have unsuccessfully attempted to "fix" the program since its
inception 16 years ago. During that time it has been "business as usual." We believe the
program should be ended and continue to recommend the Secretary of Labor encourage
Congress to discontinue the TJTC program when it expires on December 31, 1994.

U.S. Department of Labor - Office of Inspector General 37

Targeted Jobs Tax Credit Program - Exhibits

EXHffilTA

(Page 1 of 2)

SAMPLING DESIGN AND PROCEDURES

The sample design used was a stratified (three strata), two-stage design. Stage one was
the selection of the states within the three strata.

STRATA

STATES &

CERTIFICATIONS

STATES

CERTS

TRUSTS

SELECTED

161,027

375

155,937

400

188,454

375

TOTALS

505,418

1150'^

The states were ranked according to the number of TJTC certifications in each, with
approximately equal number of certifications per stratum. The table above shows the
overall sample design.

The states within the strata were selected probability proportional to size and the
variable determining the size was certifications within each state of the strata. Stratum 1
States included in our sample were Maine, Missouri, and New Hampshire. Stratum 2
States were Florida, Illinois, and Virginia. Stratum 3 States were California, Michigan,
and Texas.

We drew random samples of 125 individuals from each State who were certified for
TJTC employment during the period of July 1, 1991, through June 30, 1992, with the
exception of Illinois. In Illinois, a sample of 150 participants was selected.
Extensive efforts were made to locate and ir.terview sampled participants and the related
employers. Our success rate was over 75 percent. The non-responses are assumed to be
comparable to the responses obtained.

^' For Illinois, procedures were slightly altered because the State's TJTC files were maintained in
local offices rather than in a central location. The local offices were selected after the State's
selection, then the certifications were selected within the local offices. Ten local offices were selected
and 15 certifications were chosen in each office. In total, 150 certifications were selected for Illinois,
resulting in a national sample of 1,150 certifications.

U.S. Department of Labor - Office of inspector General 38

Targeted Jobs Tax Credit Program - Exhibits

EXHIBIT A

(Page 2 of 2)

The major statistics for this report have a sampling error of 15 percent for the variables
estimates and 3 percent for the attributes estimates, based upon a 90 percent confidence
level. The projections in this report are point estimates.

U.S. Department of Labor - Office of Inspector General 39

100

Targeted Jobs Tax Credit Program - Exhibits

EXHIBIT B

(Page 1 of 3)

COMPUTATION OF TJTC PROGRAM COSTS AND BENEFITS
■lULY 1.1991 -TUNE 30. 1992
Program Costs

We determined the costs of the TJTC program by:

Calculating DOL's appropriations" for the audit period;

Estimating costs to the U.S. Treasury resulting from employers taking tax
credits; and

Estimating the savings to the U.S. Treasury from tax deductions foregone
by employers who could have taken tax credits instead.

Our computations were as follows:

Administration

FY 1991 TJTC Appropriation ($19,518,000) X .25

(July - September 1991) (FM No. 97-90, Change 1) $4,879,500

FY 1992 TJTC Appropriation ($20,000,000) X .75

(October, 1991 - June 1992) (FM No. 88-91) 15,000,000

Total Administration ' $19,879,500

Tax Credit Revenue Losses to U.S. Treasury

Eligible Tax Credits on Projected 386.087 indvs.

for Whom Employer Could Claim Tax Credit $536,572,244

'We were told that the Treasury Department does not charge administrative costs to the program.

U.S. Department of Labor - Office of Inspector General 40

101

Targeted Jobs Tax Credit Program - Exhibits

EXHIBIT B

(Page 2 of 3)

COMPUTATION OF TTTC PROGRAM COSTS AND BENEFITS
■lULY 1. 1991 - TUNE 30. 1992

Tax Deductions on Wage Expenses Foregone by

Employers Because of Tax Credit Option (34%)'* < 182,434,563 >

Total Adjusted Revenue Losses from Tax Credit $354,137,681

Total Program Costs $374,017,181

Program Benefits

Gross Wages of Individuals Hired Because of TJTC

Projected Wages of Persons Employers Said

Would Not Have Been Hired Without Tax Credit; in

the Absence of Employers' Answers, the Employers

Who Said They Checked Applicant Eligibility Before

the Hiring Decision; in the Absence of Employer

Response, Employees Who Said Employer Checked

Their Eligibility Before They Were Hired [Projected

Number of Individuals -31, 809 out of 406,812

(7.8%)] $110,925,823

Projected Wages of Persons for Whom We Could

Not Obtain an Answer From Either Employer or

Applicant as to Whether or Not the Employer

Would Have Hired the Applicant Without TJTC.

These Wages Were Prorated at the Same 7.8%

Rate Cited Above X $182,151,334 Earned by

59,577 Projected Individuals 14,207,804

Total Relevant Employee Wage Benefits $125,133,627

^*The estimate of tax deductions foregone is generous because 34 percent was the iiiaxaium
corporate income tax rate.

U.S. Department of Labor - Office of Inspector General 41

102

Targeted Jobs Tax Credit Program - Exhibits

EXHIBIT B

(Page 3 of 3)
COMPUTATION OF TTTC PROGRAM COSTS AND BENEFITS
■TULY 1. 1991 - lUNE 30. 1992

Savings to Federal and NonFederal Governmental
Entities Resulting From TJTC Employment

Social Agency Transfer Payments Reduced or

Eliminated Because of TJTC Employment of Persons

Employers Would Not Have Hired Without TJTC

(Including 7.8 Percent of Those on Whom We Could

Not Obtain Answers as to Motives for Hiring) $14,615,311

Total Relevant Transfer Payment Savings $14,615,311

Total Program Benefits $139,748,938

Total Costs Versus Program Benefits

Program Lx>ss (Costs - Benefits) < $234,268,243 >

Program Benefits Per Dollar Spent

$139.748.938 (Benefits)

$374,017,181 (Costs) = $.37

Note: We measured payment eliminations or reductions in the following programs:
Unemployment Insurance (UI); Women, Infants, and Children Services O^IC); Aid to
Families with Dependent Children (AFDC); General Assistance (GA); Food Stamps
(FS); Supplemental Security Income (SSI); and Vocational Rehabilitation (VR).

We were able to obtain all payment savings pertaining to UI, all but Texas and part of
California relating to FS and AFDC, and information on GA except part from
California. We obtained no VR data from Michigan and only part from California. SSI
data was received from all States except Florida, Maine, and Michigan. We determined
that WIC payments would have been virtually unaffected by TJTC employment. Because
of these limitations, program benefits may be understated. However, we do not believe
the amount of understatement is significant.

U.S. Department of Labor - Office of Inspector General 42

103

EXHIBIT C

U.S. Department of Labor Assistant secretary lor

Emplo/meni and Training
Washington. DC 20210

AUG 5 1994

MEMORANDUM FOR: GERALD W. PETERSON

Assistant Inspector General
for Audit

FROM: DOUG ROSS <^'^

Assistant Secretary

for Employment and Training

SUBJECT: Office of Inspector General Draft Report:

Targeted Jobs Tax Credit Program: Employment
Inducement or Employer Windfall

We have reviewed the subject draft report issued on July 13 as
Report Number 04-94-021-03-320.

The issuance of the report is timely because it coincides with
consideration to extend the Targeted Jobs Tax Cre<^it (TJTC)
program after December 31, 1994. I particularly appreciate the
diligence the Office of the Inspector General (OIG) has displayed
in its audit of the TJTC program in selected States. Even prior
to the OIG's examination, there were disturbing indications that
TJTC's effects fall short of its intentions. The draft report
adds to those indications and deepens our concern about the
program's current design.

It is important to note, however, that the OIG — in keeping with
its mandate and its expertise — has undertaken an audit, and not
a scientific study. Without a carefully constructed methodology
it is Impossible to either confirm or refute claims made about
the impact of TJTC on participating individuals and firms.

This type of study is outside the mission of the OIG, yet
critical to any decision to pursue reforms in the TJTC program.
Clearly, more information on the progreun's long-term effects
would be helpful to us as policy-makers in pursuing necessary re-
structuring of the progrzuB, since the employment of citizens who
face the greatest barriers to full participation in the workforce
must be a continuing objective for the Department's employment
and training programs.

The specific reporting problems cited in the draft report have
been addressed and amended reports have been submitted for the
periods in question and to date. States have taken appropriate
corrective action to strengthen the administration of the program
and these actions have been verified by regional office staff.

104

Regarding the OIG's recommendation, the Employment and Training
Administration shares the concern expressed in the draft report
that the present TJTC progreun does not effectively provide
incentives for employers to hire individuals in the target
groups. The Departments of LeUsor and Treasury continue to
examine ways to strengthen achievement under the progreun,
including the commissioning of a scientific study on the
program's overall effectiveness.

105

Mr. Peterson. Thank you very much. We appreciate your testi-
mony. Mr. Rush, did you have a statement for the record?

Mr. Rush. Mr. Chairman, not at the present time.

Mr. Peterson. OK. We're going to abide by the 5-minute rule
here for questions, £ind we'll take more rounds if we need them.

First of all, Mr. Ross, apparently the administration initially took
the position that this should be eliminated, the program. Now I
hear you saying that it should be eliminated unless it's modified.
Is that a change in position or what?

Mr. Ross. No change in position. What was said in Jgmuary by
the Secretary was that as it existed, this program does not justify
continuing it as it exists.

Mr. Peterson. Now, here we sit, it's September 20th or what-
ever it is, and we're going to be out of here in 2 weeks. And I don't
see in your testimony or any place what you're recommending we
do to fix this. So how are we going to decide if we're going to ex-
tend this program? I mean if we don't extend it before we leave,
then we're going to be in the next year, the program is going to be
eliminated, employers are going to be making decisions without
knowing whether it's there or not. It's going to be even less effec-
tive.

Mr. Ross. It won't exist, so it simply won't exist.

Mr. Peterson. Yeah, but I mean people are out there making de-
cisions thinking that we are going to extend it, because we always
have. Why, if you think it should be improved, how come you don't
have a plan to improve it?

Mr. Ross. I'm not arguing. All I have said very clearly are the
following. No. 1, the existing program should not be continued, pe-
riod. There has been interest, there are bills before Congress right
now currently to extend it.

Mr. Peterson. Right. Would you oppose those bills?

Mr. Ross. No, my position — to extend it in its existing form.

Mr. Peterson. You oppose the bills then.

Mr. Ross. I don't believe any of them — actually, I'm not totally
familiar with all of them. I said we would oppose extending it in
its existing form.

Mr. Peterson. But isn't that what the bill does?

Mr. Ross. Actually, no, they provide modifications, at least the
ones I have seen. But whether or not those would be satisfactory,
I couldn't say. That's a different issue. So — ^there appears to be an
interest or may be an interest on the part of Congress in terms of
taking up the issue of extending TJTC.

Again, if the idea is to extend it in its existing form, our position
is clear, we don't favor it. We did not put any money in our 1995
budget proposals to administer an extension. If, on the other hand.
Congress is interested in pursuing ways to significantly improve it,
then I believe as an administration we would be most interested
in participating in those discussions, to see if, in fact, we can agree
on a way that offers some promise of improving the impact for dis-
advantaged workers.

Mr. Peterson. Following up this analogy you had here about
how this is effective, if only 30 percent use it, and Mr. Masten says
that this program doesn't return as much benefit as it costs, so
there's apparently a difference of opinion here. I guess my question

106

is, your argument might hold water, but how do you answer the
question about whether these people are taking jobs that are going
to be available to the people in the same category that just didn't
figure out that this program was there?

I mean 6.5 percent of the people are using it. I would guess that
the folks that you would be displacing — ^these aren't necessarily
new jobs — the people you'd be displacing are probably people that
would have qualified. They just didn't know about the program. So
I guess it's hard for me to understand how you can say this is cost-
effective when that is the effect of it.

Mr. Ross. No, you misunderstood, and I apologize. We are not ar-
guing that there is evidence that the current program is cost-effec-
tive. We are saying, however, there is nothing in the research that
has been done by others or by the IG that would enable us to deter-
mine that there would be no way to make it effective.

Let me give you a couple of examples. As we said, we go back
to our coupon analogy, if 30 percent of the jobs were offered to low-
income people who would not have been able to work, would not
have gotten them without it, that's the equivalent of 30 percent of
the buyers who come in are new.

Mr. Peterson. But are these jobs new?

Mr. Ross. Well, remember that the purpose of the credit was to
give disadvantaged folks

Mr. Peterson. The ones that figured out how to work the Gov-
ernment bureaucracy.

Mr. Ross. They don't really have to work a Government bureauc-
racy. They have to present themselves as disadvantaged. The thing
we're talking about is, at what point would it be cost-effective? Be-
cause you're quite right, the first question on your list of questions
to be answered is does this return more benefits to the taxpayers
than it costs? Where do we need to get to be at that point?

We think 25 or 30 percent new people who wouldn't have gotten
those jobs fills the bill. And the question is, is there a way to get
there? Our answer is, nothing in the research tells us in advance
that we can or we can't. There are also some real problems with
the OIG methodology about the 92 percent who said they would
have hired the person otherwise. If it's appropriate now, I'd be
happy to take a minute and walk through those, because that's
been the basis of their testimony. And while, again, I want to em-
phasize, we don't want to continue the present program. They've
not proved that another approach couldn't work. That's all we're
talking about.

Mr. Peterson. Well, my time is up, and I think I understand the
question about the 92 percent. But I still have a question about you
say these 30 percent that wouldn't have gotten these jobs other-
wise. The question that hasn't been answered is what about the
jobs that are displaced by those 30 percent?

Mr. Ross. They would have been from people who were not dis-
advantaged. Remember, this was never primarily a job

Mr. Peterson. But we don't have any of that information. I don't
think anybody can tell us that these jobs are being taken by dis-
advantaged people, away from people that are not disadvantaged.

Mr. Ross. Exactly. An audit, which is what has been done, can't
give you that information.

107

Mr. Peterson. Why not?

Mr. Ross. Well, because — I'll give you an example, let me quick-
ly. The audit approach goes in and says to an employer, would you
have hired this person or not because of the credit? Well, there are
two problems there. First of all, it assumes that the motivation of
the employer is the only issue that matters in terms of impact.

Let me give an example. Let's say this was a credit only for vet-
erans. And let's say, honestly, I didn't care whether a person was
a veteran or not in terms of my hiring. But I placed all my help
wanted ads, because I knew about this, in the American Legion
and DAV papers. So I changed my recruiting practices, which the
GAO says, in fact, many have done.

So now suddenly I am getting a lot more veterans, even though
I didn't make a decision. Second, let me give you another analogy.
Let's try civil rights analogy. Remember, they asked these ques-
tions a year and a half after the decisions were made. Sir, did you
hire this person because of a civil rights law that says you may not
discriminate, or because this was a sort of a good solid person who
met your requirements?

I daresay almost everybody would say, because this is a good
solid person who met all of my requirements, that doesn't mean the
civil rights law had no impact. The only way to do it is to try and
figure out what happened when there was no civil rights law and
compare it with what happened when there was a civil rights law
and then you begin to see impact. I have to say to the IG, respect-
fully, I think they're very good auditors, but if they go into the so-
cial science research business, I think they stumble. And I think
this is a good case of it.

Mr. Peterson. Well, I'll take another round when I have more
time the next time. Mr. ZelifF.

Mr. Zeliff. Thank you, Mr. Chairman. Mr. Ross, you've been
here before, on on-the-job training portion of your responsibilities,
and you know that 154, 155 programs, many of which are not effec-
tive. And I guess the question going to your coupon idea, you know,
what we've done here is we — coupon is very effective. You target
to get the consumer to do something that they would not normally
do. In this case, the employer is the consumer. He would, may or
may not offer that job to a person that is economically disadvan-
taged or is handicapped, and you're forcing him or her to do that.

Mr. Ross. Encouraging them, they're giving them an incentive,
not forcing.

Mr. Zeliff. Well, incentive encourages or forces, whatever. But
they, obviously, have the decision on their own whether to take ad-
vantage of it or not. Then they take advantage of it, and they fol-
low through. We call it a windfall. I just find that amusing, almost
like there's something dirty about taking advantage of the incen-
tive that the Department of Labor has offered them, giving them
the job, and now it's a windfall. But having said that, I think this
has got something in common with the other areas of responsibility
you have in some of the job training areas. You know, what is it
that we really want to accomplish? We want to try to get handi-
capped and disadvantaged — economically disadvantaged people a
job, so that they can get off AFDC, they can get — be a part of the
community. And I guess — and I'm not sure, in terms of the audit

108

here, I mean are we asking the right questions and are we — do we
have a system set up that we know for sure in an effective way
that we are or are not getting those people those jobs?

And then the question is whether we, you know, can do it a dif-
ferent way. And the question I'll ask you is are we combining this
program wi^h some job training so that they can move up and be
more effective? Just any comment on

Mr. Ross. Well, your point about integrating more of these dif-
ferent efforts is extremely well taken. That's something we've been
trying to figure out, for example, how to link our apprenticeship
programs, let's say with Job Corps, or with some of our JTPA pro-
grams, so that as you prepare people to be more employable, you
have a path that can take them strongly into the middle class.

I would think that one of the things a Targeted Jobs Tax Credit
could be linked with to make it more effective would be title II
training programs. I remember your background with JTPA and
certainly on a PIC, I believe, so you were pretty familiar with all
of this. Using it as a particular aid in increasing placement rates
for Job Corps, there are a variety of ways it might be done.

Up until now, to the best of my knowledge, it's been mainly han-
dled in a vacuum and not connected with training. So the ability
to make sure that people not only can get a job, but can begin to
move up a career ladder, would certainly be one area to look at,
were there an inclination in Congress to rethink this and where we
wanted to go with it.

Mr. Zeliff. And again, we're trying to provide an incentive to get
people, employers to hire people that are hard to employ.

Mr. Ross. That's correct.

Mr. Zeliff. So the question is, how much do we spend to do
that?

Mr. Ross. We should not spend more. First, we've got to get more
benefits back in terms of people who otherwise would not have
been employed, being employed, reducing social service costs, in-
creasing their taxes and so forth, than the cost. It needs to have
a positive cost-benefit ratio. And second, we then need to compare
it with our other programs for helping the disadvantaged get jobs.
Like Job Corps and parts of JTPA.

Mr. Zeliff. In Treasury, I heard your comments. Is the adminis-
tration solidly behind this recommendation at this point, to get rid
of this program?

Mr. Foley. We haven't said that we ought to get rid of the pro-
gram. We've stated that the program has some problems and that
we are looking at ways to resolve those problems, so that there
may be modifications that can be made to the credit that will turn
it into a credit that

Mr. Zeliff. Do you have any recommendations or will you be
doing that later?

Mr. Foley. We are in the process of doing that now, and our rec-
ommendations will be reflected in our budget when we finally put
that together. And we will be more than happy, as I stated in my
testimony, to work with Congress to develop those modifications.

Mr. Zeliff. Mr. Masten, do you have any data on New Hamp-
shire at all? You mentioned Alabama, but

Mr. Masten. Yes.

109

Mr. Zeliff. Did that track the same thing as Alabama or

Mr. FiSCH. We don't have any specific data here, but we could
provide you data.

Mr. Zeliff. I'd like to have that, if I could. And you both feel
very comfortable, then, in terms of terminating, the recommenda-
tion to terminate this program, as being ineffective; that the right
criteria, the right questions were asked, and you just don't feel that
this is a good use of taxpayer money, I take it?

Mr. Masten. That's correct on all terms, sir. We do not feel that
we could support this program, period. It's very ineffective. We
asked the right questions. We were there to see if this program in-
duced the employer to hire the disadvantaged. We found it did not.
Therefore, it's ineffective and we recommend that it be eliminated.

Mr. Zeliff. I see the red light on. Mr. Chairman, I would
hope

Mr. Peterson. We're going to go another round.

Mr. Zeliff. Just ask a question, will we at some point have em-
ployers who dealt with this?

Mr. Peterson. We are going to have some, next panel. We've got
people on the next panel that favor this and are against it, so we'll
have a good

Mr. Zeliff. Thank you.

Mr. Peterson. Mr. Rush.

Mr. Rush. Thank you, Mr. Chairman. I gather from some of the
testimony or all of the testimony, most of the testimony, that most
of the panelists here, and I might be incorrect in this, but most of
the panelists who are present before us right now are opposed to
the extension of the credit. Am I — am I correct?

Mr. Ross. I would say again, in its existing form, sir. Not nec-
essarily, the notion of a tax credit to help increase the hiring of the
disadvantaged, we don't believe there's research sufficient to aban-
don that as an approach. We think the program as presently con-
stituted doesn't warrant extension.

Mr. Rush. Well, I am glad that you answered the question there,
Mr. Ross, because my next question is directed specifically at the
Department. What have you proposed to replace the program with?
I mean — or do you intend to replace the program?

Mr. Ross. Well, we have been trying to shift resources, because
of their obvious limitation, away from programs that are working
less well, toward those that are working better. The same speech
in January where Secretary Reich talked about the fact that the
TJTC in its present form did not seem to be working well, he cited
the fact that we continued to have positive cost-benefit analysis re-
lating to the Job Corps as a program that works, that returns more
benefits to us than it costs. He cited a study that was completed
that showed low incentive for adults. That the JTPA Program
yielded more benefits in terms of their earnings, taxes they could
pay, reduced social service costs, than the cost to us.

Unfortunately, that same study showed that our programs with
out-of-school youth were not terribly effective, and in fact we had
shifted some resource out of that into the adult programs and to-
ward Job Corps. So I think the constant emphasis in the Depart-
ment now is find what's working and try and get more resource to
it, and when you have an important problem like the employment

110

of the disadvantaged, don't necessarily keep spending money on
something that isn't working, but put a lot of effort into trying to
find other things that either are working better or experiment with
ways to find things that do.

Mr. Rush. Well, I — I basically agree with the general approach.
But as the chairman indicated earlier, you have us here caught be-
tween a rock and a hard place. You're opposed to the extension of
the deadline, but yet still labor has not come up with any alter-
natives. So for me and others on the committee who are absolutely
committed to trying to provide jobs for disadvantaged Americans,
we're in — we're caught up in a situation where if we allow the
deadline to take place, don't extend it, then we have a problem
that — where we are not trying — we're — the perception is that we
aren't trying to do our job in terms of trying to provide jobs for low-
income or more disadvantaged Americans.

And it seems to me that I've heard at an earlier hearing, I heard
basically the same argument from Labor, and I'm just astounded
that here we are two weeks before adjournment, and Labor is say-
ing basically the same thing that it said months ago, but yet still
we don't have any kind of specific product from Labor that says
this is what we want to engage the Congress in, this is what we
want to replace the JTPA Program with.

And it really, you know, Mr. Chairman, I just think that, you
know, I'm not sure what's going on, but it seems to be some kind
of political maneuvers or some kind of a subterfuge is going on
here. Because I would certainly expect to have Labor's, and I know
I have the utmost respect for the staff at the Department of Labor
and for Mr. Reich, and I certainly would have — quite frankly, I'm
very disappointed that here we are this morning, 2 weeks before
adjournment, conducting this hearing, and the Department of
Labor is still giving us this gibberish about why the program is not
effective.

But yet still the Department of Labor, with all its talent and
abilities and skill, and I believe its deep-seated commitment, we
have not come up with a product that we can entertain here in the
Congress. So we're going to allow this, if we follow your train of
thought and what I perceive as being your wishes and the way you
seem to be headed, we allow the program to — we don't extend the
deadline, in effect kill the program. We wear the jacket as Mem-
bers of Congress for doing that, and the Labor gets what it — ^you
know, achieves its goal, but yet still don't have a product, don't
have any kind of alternatives, don't wear the jacket for killing the
program but you accomplish what you wanted to do in the first
place, which is to kill the program.

Mr. Ross. I can understand how it may look or how you may
feel. Congressman. I, respectfully, would argue there is no subter-
fuge. To the best of my knowledge, Labor has not been asked to
testify on this issue either before this committee or this Congress
prior to today. I certainly have never been asked to testify on it.

Mr. Rush. I remember specifically at an earlier meeting asking
about JTPA.

Mr. Ross. Yes, and that's correct.

Mr. Rush. And about Labor's position on JTPA.

Ill

Mr. Ross. Yes, I agree. But with all due respect, this is the Tar-
geted Jobs Tax Credit, which was not part of the JTPA.

Mr. Rush. OK, it's the same, excuse me, the same thing.

Mr. Ross. The other thing is, there have, as you well know, been
bills to deal with this before the Congress going back as early, I
believe, as January 1993. And I think our position is that if there
appears to be a strong interest on the part of Congress to deal with
an extension, we are ready and willing and we hope able to gather
Treasury and the rest of the administration to sit down and explore
ways where we might improve it to the point where we think it has
a promise to be effective.

We all agree that if it's not effective, wasting money in a good
cause is not good policy. So I would only say to you, as I said in
my prepared testimony, we are ready and willing to sit down with
members of this subcommittee, with members of the authorizing
committees, quickly, to talk about what, if anything, could make
this an effective program to improve the employment prospects of
the disadvantaged. We share that goal with you.

Mr. Peterson. Mr. McHugh.

Mr. McHuGH. Thank you, Mr. Chairman. Mr. Masten, you heard
this morning some of the comments, criticisms, about your meth-
odology, particularly how you posed the question to the employer.
Would you employ this person were it not for the job tax credit pro-
gram? How would you respond specifically to those criticisms? Why
do you think, as you said earlier, that your methodology was good?

Mr. Masten. For one thing, Congressman, we used a two-stage
stratified scientific sampling methodology to select statistical sam-
pling of the States and the certifications within those States. We
consulted with the Bureau of Labor Statistics in designing our sur-
vey— our questionnaires. We obtained responses from the employ-
ers regarding their motivation in selecting the TJTC participants,
and from both employers and participants regarding the employer's
hiring practices. The responses we received from the employers,
were largely confirmed by the participants. So we feel that our
methodology, (the questions that we asked) was relative to deter-
mining whether or not this program induced the employer to hire
the disadvantaged, as it was intended. And the results are that it
did not.

Mr. McHuGH. Sounded like you were ready for that question.

Mr. Masten. One other statement we would like to make. We
are not — we are not social scientists, but we are dam good audi-
tors.

Mr. Ross. I would agree with both of those statements.

Mr. McHuGH. I'd like the record to show you and I have never
discussed this issue before. Let me draw it down more specifically.
There have been comments that the question you asked specifi-
cally, would you have hired this person or did you hire this person
solely because of the job tax credit program, that seems, to me, to
be a rather narrow approach to the issue. How would you defend
that single question as being at least a primary determiner of your
evaluative analysis?

Mr. Masten. Congressman, I would defer that response to Mr.
Fisch.

112

Mr. FiSCH. We felt that the question was straightforward and
above board. But, we didn't just stop with that question. In addi-
tion to asking the question about the tax credit, we also looked at
the hiring procedures of the employers and the policies that they
used in hiring the individuals.

Mr. McHuGH. Mr. Masten, again, at the risk of sounding like I'm
picking on you, on page 7, you noted one of the disclosures that
your audit included was that 37 percent of the employees in the
sample were paid no more than minimum wage. I went into politics
because I wasn't a math major, but I think that means about 63
percent were paid above minimum wage.

What would you have determined to be a fair figure there? If not
37 percent, 35, 30? Where should we be targeting that kind of, that
kind of result? Sixty-three percent doesn't sound too bad to me.

Mr. Masten. Congressman, let me just give a breakdown of the
wages before, during, and after the TJTC program. Before TJTC we
determined that the wages were $5.22 an hour. During the pro-
gram, during the time the participant was in the TJTC program,
they earned, average, $4.96 an hour. After they left that program,
their average earning was $5.52 an hour. It is my opinion that if
the Government is subsidizing a program, the participants should
be making more than minimum wages. So to give you a percentage
of what is fair and what is not, I'm of the opinion that it should
be a lot higher than this.

Mr. McHuGH. Mr. Ross, you seem to have a different opinion.

Would you like to respond to that?

Mr. Ross. Yes. And, again, I always have to preface this by say-
ing, we are not arguing to extend this program as it is. We are ar-
guing with the notion that it has no potential or possibility. The
principal test of whether this program makes sense is the extent
to which it returns benefits that are greater than the costs.

I could imagine a situation in which it led to the hiring of people
who had never worked before, and in fact a decent portion of these
had never worked before. And that if, in fact, they all earned mini-
mum wage, that could be a very significant step forward. So you
can't arbitrarily say this wage, this number.

It is a question of having to do an impact study which enables
you to determine what kind of benefits were generated compared
to the costs. And that's why I think while audit investigations can
be of real benefit and contribute to this discussion, they're not real-
ly impact studies. And without impact studies, you can't be defini-
tive.

You might say, well, then why are you against extending this
program in its current form if you don't have any persuasive im-
pact studies, and I guess the answer is to spend money that's in
scarce supply even for important causes, the burden of proof ought
to be on showing that there is a positive cost-benefit analysis, not
simply the inability to prove that there isn't one.

So I just want to emphasize that seeing these questions in this
way is not a wholly reliable way to determine what the impact is.
I will give you another. These — the people questioned here were
questioned a year and a half after the decision was made.

By the study's own admission, a huge number of these employee
decisions are made by very large corporations, restaurant chains

113

and others. Even knowing for sure who exactly made the decision
about this person or that person, I think is methodologically very
difficult. There is a whole body of social science research which
says asking people their motivations, especially a year and a half
after the fact, is not very reliable because, A, people don't remem-
ber very well, and B, there are all kinds of bias. People are trying
to figure out what should I be saying.

And I think were I an employer and you came to me and said
you've been hiring a lot of disadvantaged folks, do you do this sole-
ly because of this tax credit or not? Which is, in fact, the way es-
sentially the question was put, and I would say, well, no, I mean
we look at people's qualifications. We have a whole process.

Now, if you had said to me, did this help influence where you
looked, did this play some role, actually we have earlier studies
that show different figures when you ask the question that way,
than really saying is this why you hired the person or this why you
didn't.

So my only point in raising all of this is not to argue about exten-
sion as it is, but the IG went beyond that and said forget the idea
of a tax credit helping low-income folks get work. And we simply
are mystified, saying where in the research is there anything that
would allow you to reach that kind of conclusion?

We can't find it. We went to our chief economist and other folks,
no one can find that. That's the place and the only place really
we're differing with the IG. We think they're going beyond the ca-
pability of their audit information to inform the future.

Mr. McHuGH. All right. I see my time is up.

Mr. Peterson. Yeah. The witnesses are getting — when the red
light comes on, whoever is talking, kind of wrap it up so we can
get through this. We have another panel that is pretty interesting,
I want to make sure we get to that. So, Mr. Shays, you're on.

Mr. Shays. Thank you, Mr. Chairman. There is an opportunity
cost in everything we do. If we do this, we don't do something else.
So I look at this in terms of opportunity cost. The Department of
Labor is not doing a very good job in arguing that this program
should be continued. There was a report earlier, I will try to get
my fingers on. There was an earlier report that wasn't too land.

Mr. Masten. That was the one in Alabama that caused us to
launch the nationwide to see if results were the same nationwide.

Mr. Shays. So the Department of Labor had some indication that
there were problems with this program; is that correct?

Mr. Masten. That is correct.

Mr. Shays. What I'm wrestling with is we are basically saying
there is a net cost of $234 billion. So we're not talking about small
dollars here. I mean, we're talking about — and this is an annual
cost, correct?

Mr. Masten. That is correct. It is million, though, Congressman,
not billion.

Mr. Shays. Why should I be content as a Member of Congress
with your response that you are ready to sit down with this com-
mittee and the authorizing committee to make the program work?
Why shouldn't I expect that you will come with specific responses
and specific proposals?

114

Mr. Ross. I guess, sir, because we, too, are in the process, having
gotten this final report in August, of carrying on discussions with
Labor, Treasury, the folks at the White House to explore various
avenues, as well. These are not simple issues, coming up with de-
termining whether there are persuasive ways to improve this pro-
gram to make it worth Congress' while is an open question.

Mr. Shays. Would it be unreasonable for me to say the program
should have to justify its benefits rather than the IG have to justify
that it is not working? Shouldn't that be the way we approach it?
In other words, we have to show it works rather than show it
doesn't work.

Mr. Ross. That's why we don't believe, given the present pro-
gram, we can show it works, which is the reason we have come out
clearly for not extending the current program.

Mr. Shays. Is it logical to make an assumption that if we make
a program retroactive, we really haven't caused new action? If we
make a program retroactive, we are basically — we are asking peo-
ple to do something that they would have done anyway had we not
made it retroactive. I don't have a hard time understanding that,
in that case, we haven't

Mr. Ross. And we would not support it, making it retroactive.

Mr. Shays. Right.

Mr. Ross. If it expires and then there is a decision subsequently
to enact a new version of it, it would not be our position that it
ought to be retroactive because I quite agree.

Mr. Shays. The cost of administering the program, is that taken
out of appropriations expenditures?

Mr. Ross. Yes.

Mr. Shays. The benefit is an entitlement?

Mr. Ross. The benefit is an entitlement, that's correct.

Mr. Shays. So this to me is an example of — entitlements are
more than 50 percent of our budget, our total authorizing money
is about a third. This is to me, Mr. Chairman, is an example of
how, if we had to put this along with appropriated expenditures,
we might make a determination there is a better way to do it.

Intuitively we should be able to do this without a lot of cost. And
I like the idea that we're helping employers make decisions. And
I don't mind the incentives.

So intuitively, the program seems to make sense for me. But, Mr.
Masten, I'm pretty convinced based on what I read that your report
was done in a thorough way and now the ball's in the Department
of Labor's court and in our court to come up with an alternative.

But there is no way we should refund this program if we don't
come up with an alternative. Your going on like this does not sat-
isfy me. This is something that should have been dealt with sooner,
with all due respect. This is not new information.

And we have an inclination that this was a troubled program
and it is a program that you're working on. It goes out — and just
as, Mr. McHugh mentioned and others here with the 150 job pro-
grams that we have, I mean, these programs could work well and
they could do good things. So I'm very happy, Mr. Chairman, that
you've called this hearing. I'm looking forward to hearing from the
employers.

Mr. Peterson. Mr. Masten.

115

Mr. Masten. Mr. Chairman, to correct the record about the IG
being opposed to a tax credit incentive to hire the disadvantaged,
I just want to make it perfectly clear that we have never looked
at the effectiveness of utilizing employment tax credits to increase
employment for the disadvantaged. As a result, we haven't claimed
that employment tax credits in general are not good. That is not
our position. I want to make that absolutely clear.

Mr. Shays. You're taking this position on this program.

Mr. Masten. In this specific program. Very clearly, based on our
audits, this program is ineffective and our recommendation stands.

Mr. Shays. Thank you.

Mr. Peterson. Mr. Foley, you folks are ostensibly, as I under-
stand it, in charge of making sure that the eligibility and all that
is met in order so these people qualify for these credits; is that cor-
rect?

Mr. Foley. Well, we-

Mr. Peterson. I mean, audit the tax

Mr. Foley. We audit the taxpayers.

Mr. Peterson. What do you do? What do you do to make sure
that there is compliance?

Mr. Foley. Well, a corporation or a business that receives the
targeted jobs tax credit goes through the regular audit procedure
that all others

Mr. Peterson. You pick them out and they happen to have the
tax credit, you will check it out. You have no program specifically
to look at the targeted tax credit?

Mr. Foley. I'm not sure on that.

Mr. Peterson. How many violations have you detected of this —
have you found anybody, say in the last 5 years, that have not met
the criteria and the/ve had their credits?

Mr. Foley. Taken away?

Mr. Peterson. Yes.

Mr. Foley. I don't have that information.

Mr. Peterson. Could you get that for me?

Mr. Foley. I could get that information for you.

[The information referred to follows:]

116

DEPARTMENT OF THE TREASURY

WASHINGTON. DC 20220

OCT 21 1994

The Honorable Collin C. Peterson
U.S. House of Representatives
Washington, D.C. 20515-2307

Dear Mr. Peterson:

This letter is in response to a question you raised at the
hearings before the Subcommittee on Employment, Housing and
Aviation of the Committee on Government Operations on the
Targeted Jobs Tax Credit (TJTC) on September 20, 1994. You
asked about Internal Revenue Service (IRS) compliance efforts
and information on audit results with respect to the TJTC.

The IRS does not have a compliance program directed specifically
at the TJTC. However, if a taxpayer has been selected for audit,
the TJTC may become an issue. In the large case file of over
1200 corporations, the IRS Corporate Examinations Office
identified only a few cases of adjustment to the TJTC, including
a case where the credit allowed was increased. For smaller
firms, the IRS does not track audit adjustments for the TJTC
separately from other tax credit adjustments.

Additional information on compliance is available from the IRS
Corporate Taxpayer Compliance Management Program (TCMP) in which
corporate tax returns are rigorously audited. In the 1988 study,
only about four percent of the corporations claiming the
TJTC credit had their credit reduced or disallowed. While
taxpayers are required to reduce wages deducted by the amount
of the credit, corporations neglected to make this adjustment
in one percent of the cases.

Overall, compliance with the TJTC does not appear to be a major
problem, reflecting the fact that the credit is currently claimed
by only about 6,000 corporations and 24,000 non-corporate
businesses.

Sincerely,

^■■i^/:^^

Maurice B. 'Foley
Deputy Tax Legislative Counsel
(Tax Legislation)

117

Mr. Peterson. Mr. Masten, you say that this program only gen-
erates $140 miUion worth of benefits, right?

Mr. Masten. That's correct, sir.

Mr. Peterson. How did you determine that?

Mr. Masten. If I may defer that to Mr. Fisch.

Mr. FisCH. We considered the wages earned by the individuals
hired because of the program and the reduction in transfer pay-
ments that they would have received.

Mr. Peterson. I guess I still don't understand. I mean, these
people are getting — they're getting a credit of 40 percent so — of the
wages

Mr. FisCH. Up to 40 percent.

Mr. Peterson [continuing]. Of $6,000. And the amount is $250
million, or whatever it was, $300 million, whatever the amount is.

Mr. FisCH. And we counted as benefits about $125 million in pro-
jected gross annual wages of those individuals who would not have
been hired without the tax credit.

Mr. Peterson. So that's not all of them, then.

Mr. Fisch. No.

Mr. Peterson. That's only the 8 percent. Is that how you came
up with that figure? You're figuring that only 8 percent would not
have been hired?

Mr. Fisch. Correct. It is only on the 8 percent.

Mr. Peterson. So that's how you came up with that number?

Mr. Fisch. Yes.

Mr. Peterson. OK So then we get into the whole question about
whether you ask the question right and whether that 8 percent is
right and all that, I understand.

Mr. Ross, I am not happy, either, that you haven't come up with
a plan.

So let's see, one of the issues that have been raised to me is that
there is a lot of turnover and that actually the program might
cause churning and people might actually hire people and let them
go so they can keep getting the credit. So what is your position
about lengthening the required retention period? Would you be in
favor of that, yes or no?

Mr. Ross. I really can't answer. It has been one of the kinds of
things that are being talked about. Again, I cited a whole series.

Mr. Peterson. You don't have a position? Do you think the pro-
gram would be more effective if the employers were required to
claim the tax credit?

Mr. Ross. Couldn't say for sure.

Mr. Peterson. You have no position on that?

Mr. Ross. You are going to find that is fairly

Mr. Peterson. I ask these questions

Mr. Ross. I don't get to make these decisions unilaterally. I get
to participate in them.

Mr. Peterson. When do you think you will know?

Mr. Ross. When will I know? I think relatively soon, and I think
a lot will be dependent on the pace that Congress sets, is there any
interest organized, active interest in Congress to extend this?

As I say, there are a variety of bills in a variety of committees.
To the best of my knowledge, there has been no movement there.

118

Mr. Peterson, You know there is going to be interest. They are
going to do this in the dark of night when nobody is watching. If
you don't get ahead of this, it is going to get extended. I will guar-
antee you this is how this happens.

Mr. Ross. Mr. Chairman, this is your institution, not mine.

Mr. Peterson. It isn't always mine. I just happen to be here
sometimes. But you know, I think that you have some responsibil-
ity for providing some leadership. And I would hope that you would
get at that sooner rather than later.

I still have a real question about whether these people are being
placed in jobs that would have gone to people that have the same
exact qualifications — and I think that they can audit for that. I
mean, you can ask people, go back and find out who has been
hired, using the credit and without using the credit, and find out
whether these people fit in these categories. You could find that out
if you wanted to.

Mr. FiSCH. Yes, sir. One thing that we did find out is that ap-
proximately 87 percent of the employers hired the people first and
then went and asked for the tax credit.

Mr. Peterson. When it first started, when I was doing tax re-
turns, I can tell you that my clients came in and at that time, there
were no criteria. All you had to do was just, however amount of
wages, you got some percentage of whatever the increase was when
it first started. And nobody had a clue.

I mean, they thought this was like manna from heaven. The only
reason they knew about it is because I told them. And so that's
how it worked and then they did tighten it up. Apparently it hasn't
changed their action a whole lot.

Mr. Ross.

Mr. Ross. Quickly, there have been several studies on the ques-
tion you raised about displacement. In other words, do disadvan-
taged people who were hired as a result of the credit simply dis-
place other people who would have been equally disadvantaged, in
which case you would say, gee, that doesn't seem to be any kind
of net gain.

There are two studies, one by Bishop and Montgomery in 1993,
another by Holden Burke in 1986, which we'll be happy to get to
the committee. They indicate in fact there has been very little dis-
placement; that the people who got those jobs in the vets got them
instead of nondisadvantaged folks, which was the intent.

And the other question, about the 86 percent who claimed that
they checked to see whether a person qualified after the hiring de-
cision, again, the question you have to ask is, did their recruiting
practices change — as a result of it?

I use the vets example. If you only recruited through veterans'
newspapers, would you have significantly changed who you got.
And so without answering those questions, GAO in fact did a study
which showed that a lot of the large employers changed their re-
cruitment practices.

Mr. Peterson. Mr. Zeliff.

Mr. Zeliff. Thank, Mr. Chairman. Mr. Masten, I heard — I think
I heard you right by saying you made a comment relative to the
tax credit and you — I think you indicated that you didn't think that

119

they should get the tax credit if they are only paying minimum
wage.

Did I hear that right?

Mr. Hasten. You heard me say I think if it is a Grovemment-
subsidized program, it should generate more than just the mini-
mum wage for the employees.

Mr. Zeliff. And your audit, was that affected by that philosophy
in any way?

Mr. Hasten. Based on the wages before, during, and after, it
hovers right around the minimum wage. In view of the way cor-
porations are using this program, they are basically paying mini-
mum wages to many of their employees.

Mr. Zeliff. I guess my only comment was it is one goal to have
more than minimum wage. It is another goal to get people who are
economically disadvantaged and hard to employ a job, keep it at
minimum wage. It would seem to me if I was going to do an audit,
I would have to separate those philosophies.

Hr. Hasten. This is a randomly selected group of individuals. I
might point out that 87 percent of the participants — correct me if
I'm wrong, were at least second-time employed people. Only 13 per-
cent were first-time jobs. And of this group, 50 percent were young
people. So that if you look at the chart in my prepared statement,
you will see that it did not have a whole lot of effect on the real
targeted groups.

Hr. Zeliff. I'm not trying to put you on the spot or degrade in
any way the audit. I think you're doing a good job in terms of try-
ing to get rid of ineffective programs. But I just hope that we don't
philosophize to a point beyond what the original mission is.

Another question, I wonder, do we take a look at and try and
track how much it cost the Government, do we also look at how
much savings we have in AFDC payments and other things that
they would normally get? I would assume you probably did.

Hr. FISCH. We included that figure.

Hr. Zeliff. That's what you included?

Hr. FisCH. We couldn't get it in all cases. Where we could, we
did include it.

Hr. Zeliff. I guess in terms — ^you all feel this is kind of a feed-
ing trough, and there are a lot of management consultants out
there that also get involved in this process. And I am just wonder-
ing in terms of placing employees, shouldn't — should the Depart-
ment of Labor be fulfilling that responsibility or is there an oppor-
tunity here for outside consultants and intermediaries, and how
does that work and what is the percentage of people who, you
know, are in the business to line up people to get the

Hr. FisCH. I don't know if I have a figure on the total number
of people that are in the business of doing it. But to turn around
and increase the Department's responsibilities for doing all this
work, it's going to require quite an administrative dollar to do it.
I think it's gone down from $20 million, to about $14 million. To
put this type of burden on the Department — I don't think the De-
partment, that is, the ES as setup right now could handle it, fund-
ing wise.

Hr. Zeliff. Who pays the consultants to line up the

120

Mr. FiSCH. The consultants go through the employers. They are
paid by the employers.

Mr. Zeliff. Paid by the employer. All right. I guess my comment,
Mr. Ross, has been mentioned earlier, too. Here we are, you know,
we've run out of time, and as we have found in the job training ef-
fort, as well, we're finding that as far as the Department of Labor
is concerned, we sure have an awful lot of work, a long way to go
in establishing goals, effective management tools in terms of meas-
uring performance and results, and you know, we seem to talk a
lot about it, but — and you've been in it long enough at this point
that I'm sure it is a high priority.

How do we get so that we come on the cutting edge, we don't run
out of time? And what are you doing to provide that kind of leader-
ship?

Mr. Ross. We've been focusing very much on operational goals
for the job training programs in effect now, title III, JTPA, which
is for laid-off workers. We have now begun to set not only entering
employment goals, jobs placement goals, but also customer satisfac-
tion goals. We've got to begin thinking of our people like customers.

Mr. Zeliff. Right.

Mr. Ross. Same for title II adult and youth. In fact, with a lot
of help from the IG, we've been developing more and more concrete
goals and standards — ^we would like more authority to enforce them
even tougher. The goals are specific. Same with Job Corps.

We keep working on improving a whole set of measurable out-
comes in terms of placement. If it's education they get, to make
sure it's meaningful. At this point, with the exception of the em-
plojrment service — for which we still do not have any acceptable
outcome measures of any sort, we're trying to focus very heavily on
outcomes.

Mr. Zeliff. Thank you very much.

Mr. Peterson. Mr. Rush.

Mr. Rush. Mr. Chairman, I'm going to make sure that I get the
right program here. Mr. Masten, earlier you — or at least Mr. Ross
indicated that you were not social scientists so therefore you were
prohibited from, I guess, making some judgment regarding this
particular program.

I don't necessarily agree that you have to be a social scientist in
order to have some ideas about how programs can be corrected or
how they can be improved upon. Have you had occasions to have
any discussions with members of your staff about recommendation
in testimonies of how this program can be improved upon?

Mr. Masten. Yes, we had a number of discussions. As I pointed
out in my summary and in my prepared statement, this is the first
time we have not put corrective recommendations in the report and
simply recommended that it be eliminated. This is because it is in-
effective in regard to what it was intended for. So we had numer-
ous discussions before this audit was finalized and just could not
come up with any recommendations for corrective action.

Mr. Rush. So it is your opinion that — and I guess this is you said
it in more ways than — some of us are hard of hearing. In your
opinion, you don't think that there's any type of saving methods
that we could utilize in order to prevent this program from just be-

121

coming a figment of our imagination or a figment of the past or —
you want it dead.

Mr. Masten. I agree with you.

Mr. Rush. All right. Mr. Ross, I want to get back to some other
specific line of questioning that we have been engaged in this
morning, and have you or your agency had any discussions with
any other interested parties about what their recommendations are
or where to improve the program? I mean

Mr. Ross. Most of the discussions, sir, that I've been involved in
have been with other parts of the Federal Government, officials
from Treasury, officials from the White House in terms of trying
to figure out how or if a tax credit to influence employer behavior
could be effective.

And I thought it was significant that the inspector general did
say they are not sa3dng that a tax credit, after all, the targeted jobs
tax credit is a tax credit, could not be effective in helping disadvan-
taged workers. They're simply saying, as we are, the existing one,
the way it works, doesn't. So to answer your question, we have
mainly been talking to others within the administration for ideas.

Mr. Rush. Do you have a list of recommended improvements that
you are at this point entertaining relative to this program?

Mr. Ross. We have internally generated a whole variety of ideas
and possibilities. Actually, I just got a note that we are going to
be meeting with some employers who are interested, I think as
early as tomorrow.

So yes, we have generated a variety of ideas that have been dis-
cussed. My guess is should Congress look like it is interested in
moving ahead? We would be prepared to sit down very quickly to
discuss options, receive ideas that interested Congresspersons
might have, and if we can agree on something that makes sense,
if we can find such a thing, move ahead.

Mr. Rush. So it's your position, if Members of the Congress voice
and express some desire to extend the deadline, then the Depart-
ment of Labor would come in with some of their recommended im-
provements?

Mr. Ross. Certainly ideas, yes.

Mr. Rush. Or recommendations?

Mr. Ross. Maybe recommendations. But at the minimum, ideas.
We don't claim to have all truth on this, but we do have ideas we
would be willing to share.

Mr. Rush. Mr. Chairman, I just want to conclude by really com-
mending the Department of Labor on this political adroitness. I
really see the game plan right now. It has become real clear to me
what is going on, the Masters.

Mr. Peterson. Any other questions? I want to thank you all.

Mr. Foley.

Mr. Foley. I wanted to correct my statement. I said the jobs tax
credit was enacted in 1981. It was enacted in 1978.

Mr. Peterson. Thank you very much. We may submit more
questions to you. In fact, we probably will, so you can expect that.

Mr. Foley. Thank you.

122

STATEMENTS OF RON CAREY, GENERAL PRESIDENT, INTER-
NATIONAL BROTHERHOOD OF TEAMSTERS, ACCOMPANIED
BY HOBERT CURRIE, PONY EXPRESS CO., ST. LOUIS, MO;
CHARLEAN JACKSON, DEPUTY ADMINISTRATOR, TEXAS EM-
PLOYMENT COMMISSION, AUSTIN, TX; JANET TULLY, DIREC-
TOR, COMMUNITY EMPLOYMENT AND TRAINING DIVISION,
MARRIOTT INTERNATIONAL, WASHINGTON, DC; EDWARD
LORENZ, POLITICAL SCIENCE DEPARTMENT, ALMA COL-
LEGE, ALMA, MI; AND LORI STERNER, ACCESS TO EMPLOY-
MENT, MINNEAPOLIS, MN

Mr. Peterson. We'll call the final panel today. We are very
pleased to have some good people here with us that I think will
help us understand this better. Mr. Ron Carey, the general presi-
dent of the International Brotherhood of Teamsters, who is accom-
panied by Robert Currie of the Pony Express Co. in St. Louis, MO.

We have a traffic jam going on here. We have Charlean Jackson.
I see she made her way up to the table. She is the deputy adminis-
trator of the Texas Employment Commission in Austin, TX. Janet
Tully, director of community emplojrment training for Marriott
International, Edward Lorenz, who is with the political science de-
partment of Alma College in Alma, MI, and Lori Sterner with Ac-
cess to Employment in Minneapolis, MN.

Mr. Currie, I see you made it up here. It is the custom to swear
in all witnesses so we don't prejudice any previous witnesses. Any
of you have any objections to being sworn?

So if you would please stand and raise your right hand, we'll
swear everybody in.

[Witnesses sworn.]

Mr. Peterson. Thank you very much. The written statements
will all be entered as part of the record, so you may summarize
them, if you wish. Again, we appreciate you all being patient and
being willing to come and spend some time with us today. And we
will start off with Mr. Carey. He is the president of the Teamsters.
I welcome you and your compatriot there.

Mr. Carey. Thank you and good morning. Mr. Chairman, mem-
bers of the subcommittee, the Teamster Union appreciates the op-
portunity to offer its views and opinions on targeted jobs and tax
credit.

As I sat or stood in the back of the room, the one thing that came
across to me very loud and clear was, well, what about ways and
means to fix it? We are not here today arguing the case for dis-
mantlement. We are arguing to fix what is broken. We are offering
suggestions in writing, in my written statement, that deal with the
fundamental problems of this program.

The Teamster Union represents 1.4 million working men and
women in a wide variety of occupations throughout the United
States and Canada, from nurses to doctors, to law clerks, pilots,
flight attendants. Some of those members work for Pony Express.
They are here today. Pony Express, which is the Nation's largest
ground courier company, makes extensive use of the TJTC pro-
gram. I'd like to ask with your patience that all Pony Express driv-
ers in this room kindly stand up. I just wanted you to see who they
are.

123

Here with me is Hobert Currie, a driver from St. Louis. He will
tell you in a few minutes about his experience with this program.
The Teamsters support the goals of the TJTC recruitment, train-
ing, and continuing emplo3nTient of people who have been locked
out of the job market.

What we know from experience is there is wide spread abuse of
this program. Companies like Pony Express take the tax breaks
under the program but do not recruit properly. They do not invest
in training. They provide low-wage, no-benefit, dead-end jobs. In
fact, they offer such poor working conditions that they promote
high turnover, and the more turnover, the more tax subsidies they
receive.

Under the TJTC after an employee has been on the payroll long
enough to earn $6,000, the employer gets 40 percent back as a tax
credit. If that employee then leaves, the employer gets the tax cred-
it again for another employee or replacement.

And so the musical chair continues. The turnover rate at Pony
Express Couriers for this year was 69 percent. Now, the program
was originally designed to create the great American dream, to give
disadvantaged folks an opportunity to be able to purchase a home,
have a car, raise a family.

Well, 69 percent is a terrible record. We don't know how many
of these workers who left Pony were covered by the TJTC program,
but we do know that Pony Express screens new hires on their eligi-
bility for the TJTC program. And we know the Borg- Warner family
of companies, which includes Pony Express, says it is one of the
most active employers in utilizing this tax credit.

In 1989, 16 percent of all Borg-Warner employees were TJTC
qualified. The current program allows Pony Express to do business
in a way that violates the goals of the concept of TJTC, and it un-
dermines the broader national employment goals.

We have heard often enough about the President talking about
good American jobs. With that kind of turnover and with the tax-
payer paying for it and no future for these workers, jobs at Pony
Express certainly are missing the goal by miles. Pony Express does
not use the TJTC to find other people and hire people who would
not otherwise have been hired.

Pony Express screens applicants who come to them to see if they
are eligible for the program. The screening is often done after em-
ployees have already been hired — and affidavits to support this are
in the written text, and our members have made those affidavits.
Working conditions at Pony Express are so bad that they contrib-
ute to the high turnover which undermines the whole purpose of
the program.

We have included our report on these conditions titled "What is
Pony Express Delivering?" Drivers tell us about conditions that
should not be subsidized by the American taxpayer: poorly main-
tained vehicles that release toxic fumes into passenger compart-
ments, bald test tires that offer no traction on rainy and icy roads.
What does bald test tires means? It means that Pony Express en-
tered into an agreement with a tire company that would give them
the opportunity to test the tires and to see at what point accidents
happen.

124

Wages are so low that some workers have to live in their cars.
They transport toxic chemicals and hazardous medical samples of
blood, urine, and other materials without proper training or pack-
aging. Drivers are being forced to drive dangerously long hours,
more than 24 consecutive hours in at least one case, and then fired
for getting into an accident.

Pony Express is now faced with over 220 charges of violations of
Federal labor laws

Mr. Shays. Mr. Chairman, let me ask a question. Is Pony Ex-
press going to be able to defend themselves and is this related to
the issue of the tax credit?

Mr. Carey. It certainly is.

Mr. Shays. I mean, it just seems to me like you are using this
as a forum to go after a company that's not here to defend itself,

Mr. Carey. Well, we are here testifying about the abuses in the
program and how the program should work with respect to how it's
working for one employer.

Mr. Shays. I hope, with due respect, you would stay on the sub-
ject a bit.

Mr. Carey. I think I am on the subject. Our written testimony
recommends specific reforms to address problems like these.

As it now exists, the targeted jobs tax credit is all carrot and no
stick. Either new enforcement mechanisms should be added to stop
rewarding bad employers or the program should be ended. Presi-
dent Clinton has said many times that a strong economy must be
based upon good jobs, good wages, and we agree with that and I'm
sure you do. Reforming the targeted jobs tax credit would be one
step toward achieving that goal.

Thank you very much.

[The prepared statement of Mr. Carey follows:]

125

Reforming the Targeted Jobs Tax Credit

Testimony of

Ron Carey

General President

International Brotherhood of Teamsters

House Government Operations

Subcommittee on Employment

September 20, 1994

Mr. Chairman, members of the subcommittee, the International
Brotherhood of Teamsters appreciates the opportunity to offer our
views on the Targeted Jobs Tax Credit here today.

The IBT represents 1.4 million working men and women in
virtually all occupations throughout the United States and
Canada. Naturally, we pay careful attention to government
programs designed to promote employment.

We support the goals of TJTC, which we believe are to
recruit, train and retain economically or otherwise disadvantaged
applicants. However, we know that there is widespread abuse of
the program by companies that are using it not to promote these
goals but solely to improve their bottom line. These are
companies like Borg-Warner, which takes extensive advantage of
the tax breaks available under TJTC, but which does not recruit
extensively, does not train adequately, which provides dead end
jobs, turns over its workforce systematically, and is rewarded
for doing so with a tax subsidy.

Unless TJTC is significantly reformed, so that the benefits
employers can receive are tied to business practices that
actually promote the program's goals, it should not be renewed.
Without these reforms TJTC will continue simply to reward
employers for creating bad jobs.

TJTC and Job Promotion

On the surface, the Targeted Jobs Tax Credit promises to move
applicants who meet certain criteria of need out of chroni'c
unemployment and into productive work. The qualified applicants
include those who have lived on welfare, who have suffered
unemployment, and who have served in our military but encountered
difficulty entering the job market.

TJTC - IBT/ Page 1

126

TJTC - IBT/Page 2

The sponsors of this tax credit envisioned that a company
would locate qualified hirees by advertising job openings in
places designed to attract qualified applicants. These would
include veterans organizations, various agencies working with
low-income people, public employment offices, and so on. These
applicants would then contact the employer. During the hiring
process, the employer would ascertain whether or not the
applicant qualified under the TJTC. When faced with a decision
between hiring two otherwise equally suitable applicants, the
TJTC would motivate the company to favor the TJTC-qualif ied
applicant. After hiring, the tax credit would help defray the
cost of training and benefits that the employer might not
ordinarily provide within its budget. The idea is to give both
parties something of value: the employee gets a good job, and
the company gets a good employee.

As with all expenditures of tax money, the program would be
accountable for results, with measurable results that would
enable Congress to fine-tune the program over time.'

Borg-Warner: Case study

How TJTC is applied for and its benefits utilized within Borg-
Warner Security Corporation shows how the program's good
intentions can be corrupted. Borg-Warner, based in Chicago,
describes itself in its annual report as the world's largest
security company. It provides guard, armored truck and alarm
services through its subsidiaries Wells Fargo, Burns and Globe.
Borg-Warner also owns the nation's largest courier service. Pony
Express Courier Corporation. Borg-Warner is a large recipient of
TJTC benefits. In 1987, Borg-Warner Protective Services
represented 1.5 percent of all TJTC certifications issued
nationally. At that time, 16 percent of Borg-Warner's workforce
had been hired under TJTC. By the company's own account in
testimony before Congress, "Few, if any, major employers are as
active in recruiting and retaining TJTC-eligible workers."^

' While the program does not involve a direct payment by the
federal government, the credit counts as a tax expenditure, that
is, taxes foregone. This is as if the company had made an
appropriate tax payment ancl the federal government had sent a
portion of it back.

^ Testimony of Dr. Joseph W. Arwady, Director of Performance
Management for Borg-Warner Protective Services, before the House
Subcommittee on Select Revenue Measures of the Ways and Means
Committee, 1988.

127

TJTC - IBT/Page 3

Borg-Warner serves as a good case study for two further
reasons. First, the Teamsters Union represents roughly 4,000
employees of Pony Express, one of several Borg-Warner entities
that take advantage of the program. Many Pony Express employees
qualify under TJTC, and many more were required to take a TJTC
phone qualification examination by the company. Our relationship
with these employees, as their collective bargaining
representative, has enabled us to construct a detailed profile of
how TJTC is used and its goals implemented— or not
implemented— within the Borg-Warner family of companies. And
second, Borg-Warner has itself examined its use of the TJTC. The
Teamster members' experience and Borg-Warner 's study provide
interesting insight into the difference between what you may hear
from companies whose profit levels are tied to continuation of
the TJTC tax breaks and the day-to-day reality experienced by
employees who were to benefit from jobs created under the
program.

Achieving the TJTC's goal of providing jobs for people who
would not otherwise be hired requires active recruitment as
outlined above. However, if Pony Express recruits, it does a
good job of hiding this from the employees that applied for jobs
with whom we have spoken. Instead, our members find out about
job openings at Pony Express through normal channels— from
relatives, neighbors, friends, or others in their community. The
vast majority found out about the job openings through classified
advertisements in newspapers.

Pony Express follows a hiring sequence in which TJTC
screening is carried out either simultaneously with or after the
hiring decision. This sequence is clear in the "Pony Express
Employment Fact Sheet" which is appended to this testimony. The
fact sheet states that after an applicant's driving record has
been checked, after an application has been submitted and after a
quick screening, the applicant may be called in for an interview.
If the applicant passes the interview and a driving test, then
the next step is:

A telephone interview with an employment specialist.
This has no bearing on your job status; however, should
you meet certain criteria, we may ask you to make a

stop at Job Service. This interview is for a

Federal program called Targeted Jobs Tax Credit in
which PECC is involved.

After they are hired, many employees are then asked to call
a toll free number and answer questions about their personal
financial background. Many of our members were told at the end
of their phone interview with the consultant that they did not
qualify for the program, and yet they were still hired. The
timing of these calls varied considerably. Some report that they
were asked to make the call immediately after being hired; others

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TJTC - IBT/Page 4

told us that they were not asked to do so until some time later.
For Pony Express driver Burton Ray of St. Louis, TJTC screening
was clearly an afterthought. He explains:

Approximately one week after I began working, someone
in the office asked me if I was a veteran. When I said
yes they asked me to come to the office and talk to
someone over the phone. The person on the other end of
the phone verified all of my personal information and
asked about the length of time that I served in the
military service and my service number. The person
told me that I did not qualify for the program.

The TJTC program's goal is "encouraging people to hire needy
youths, and disabled SSI beneficiaries and other categories of
people who frequently have difficulty finding jobs."' However,
at Pony Express, that goal is not being met because TJTC-
qualified applicants are neither recruited nor referred by state
or other employment services, and are not favored by Pony Express
in the applicant pool. As far as we can tell, they would have
been hired anyway. This experience squares with findings of the
Department of Labor's Inspector General, who found that only 8
percent find their job with the help of an employment agency;
that in 86 percent of the cases employers determine the TJTC
eligibility after a job offer has been made, and in 92 percent of
the cases, the people hired would have gotten the job anyway."
Since the Pony Express does not know at hiring time whether an
applicant might qualify, the prospect of being favored cannot
apply.

Once on the job at Pony Express, the poor quality of the
jobs is a major factor undercutting the TJTC goal of enabling
needy job applicants to work their way into a long-term place in
the workforce. Pony Express employees receive little or no
training, face adverse working conditions and receive poor wages
and few benefits.

These poor working conditions are relevant to an evaluation
of TJTC for two reasons: first, they illustrate the kind of
employment conditions favored by at least some TJTC companies;
and second, these poor working conditions promote high turnover
which is a key structural defect in TJTC. Attached affidavits
tell of the drivers' experiences with TJTC and the working

3 M

Legislative History," P.L. 95-600, p. 131.

■• Report, "Targeted Jobs Tax Credit Program: Employment
Inducement or Employer Windfall," Aug. 18, 1994, U.S. Department
of Labor, Office of Inspector General.

129

TJTC - IBT/Page 5

conditions they faced after hiring.

Workers report "garbage working conditions," "atrocious" vehicle
maintenance, being "forced to drive in winter with bald tires,
no chains, and with hazardous cargo" such as "petri dishes that
break, urine and blood samples that break and begin to stink."
Training is minimal or nonexistent, and employees report that the
only instruction they receive on handling hazardous materials
consists of a take-home test they are handed, along with a set of
answers, to fill out. Some workers at some locations report that
they were instructed by their supervisors to sign a paper saying
that they had received training, even though no training had been
provided. The attached report What is Pony Express Delivering?
details these and other problems reported to us by Pony Express
couriers across the country.'

Pony Express' Employment Fact Sheet makes no pretense that
employment conditions are anything but bare bones: "There are no
medical benefits, paid holidays, vacation days or sick days." It
comes as no surprise that the company's low wages, little or no
training, and little prospect for wage increases or promotion
produce extremely high turnover. According to Borg-Warner's
figures, turnover at Pony Express during the first six months of
this year was 69 percent.*

Under TJTC, employers receive the 4 0 percent tax credit on
the first $6,000 paid to qualified employees who are employed for
a minimum of 90 days or 120 hours. Other things being equal, this
formula ultimately yields greater rewards for companies with the
highest employee turnover. To illustrate, let's say that an
employer— Employer A— hires 100 qualified individuals who remain
employed by the company for several years. Employer A would
receive a one-time tax credit in the first year of $240,000.

A second employer-^^mployer B— also starts out by hiring 100
qualified individuals and receives the same $240,000 in tax
credits once the workers have been employed for 90 days or 120
hours and have reached $6,000 in earnings. But in our
hypothetical case. Employer B pays its workforce only $5.00 an
hour and creates such poor working conditions that half of the
workers leave soon after the employer has reaped the benefit of
hiring them. Employer B then hires another 50 qualified
employees and starts the clock running on those employees,
eventually receiving another $120,000 when they pass 90 days or

' What Is Ponv Express Delivering?. International
Brotherhood of Teamsters, Summer 1994.

* Pony Express Courier Corp, 12-month Turnover Report, by
district, month ending: June, 1994.

130

TJTC - IBT/Page 6

120 hours and $6,000 in earnings. With each new cycle. Employer
B gets more tax relief as the reward for creating marginal,
throwaway jobs that drive a high percentage of workers out.

The examples are hypothetical, but the numbers are not
entirely fictional. The turnover at Employer B is a reasonable
parallel to Pony Express' actual turnover rate of 69 percent for
the first six months of 1994.

The TJTC tax relief that goes to a good employer like
Employer A seems to be a worthwhile investment; these workers are
off the unemployment rolls and building a long-term place in the
workforce.

The investment in Employer B, however, is a very different
matter. The more workers that Employer B can turn over, the
greater the tax benefit. If Employer B also happens to be a
competitor of Employer A, the damage is even worse. In that
case. Employer A is under pressure to cut costs by paring away
wages and benefits. The net result can be erosion of good jobs
and wages for the whole industry.

Because of the lack of accountability in this program, we do
not know the precise dollar total of the tax breaks that are
flowing to Pony Express and other Borg-Warner entities. We do
know that Pony Express screens extensively for TJTC and that many
of our members who are employed at Pony Express fit the profile
of those who are meant to be served by the program. We also know
that Pony Express business practices, including its
extraordinarily high turnover, fly in the face of the program's
goals and of the nation's interest in spurring the creation of
good jobs for its people.

The company that Pony Express workers have described to
us— and which receives federal tax breaks through the TJTC
program— could fairly be characterized as a sweat shop without
walls.

Borg-Warner 's Claims

In 1989 Dr. Joseph W. Arwady, Borg-Warner's Director of
Performance Management, testified before the House Subcommittee
on Select Revenue Measures of the Ways and Means Committee,
calling for permanent extension of TJTC. He drew his
recommendations from his lengthy report. Wage Subsidies and Jobs
for the Disadvantaged: Applying the Targeted Jobs Tax Credit in
an Operating Environment, which he described as the only study
done in a single employer setting up to that time. On the basis
of our study of the same employer at a later time, we urge that
the program either be substantially reformed or eliminated. This
comparison illuminates a wide gap between company and employee
perspectives.

131

TJTC - IBT/Page 7

For example, in his 1989 testimony, Borg-Warner's Arwady
asserted: "We pay TJTC workers very well."' In fact, Pony
Express workers average a little more than $5.00 an hour. Many
are required as a condition of employment to use their own
vehicles or to enter into expensive leasing arrangements in a
scheme that nets them less than the minimum wage, when
under-compensated automobile expenses are factored in.

Borg-Warner also testified: "...the people that we put a
uniform on have to look sharp, be there on time, and execute
without mistakes, or we lose accounts. So we are very rigorous in
the way we train and counsel these people, as well as in the
selection process."' But Pony driver Ron Bloom, who routinely
delivers caustic and toxic substances such as bleach, cleaning
solutions and degreasers, says "I did not receive training on how
to transport these materials."'

Borg-Warner claims that TJTC "is also a retention program."
In Wage Subsidies Arwady devotes considerable attention to this
topic. He writes, "The best way to retain workers is to
accommodate their interests by providing opportunities to earn
overtime pay, periodic pay increases, and convenient work
locations and hours."

We do not dispute that such practices would go a long way
toward encouraging retention. Unfortunately, none of these
principles are practiced at Borg-Warner's Pony Express
subsidiary. The drivers are denied overtime pay; even though many
of them regularly work 50, 60, or more hours per week, all of
those hours are compensated only at straight time pay averaging
$5.50 per hour. Hobert Currie has worked at Pony Express for 11
years with no pay increase. Drivers in Chicago have actually had
their pay rates cut over the past several years. Nor do Pony
Express drivers have "convenient" working hours. This spring
Robert McCabe was sent out of Pittsburgh on a 340 mile
delivery— after he had already worked for 24 hours straight. He
fell asleep at the wheel, careening over a 40 foot embankment.
Pony Express suspended McCabe for five days for getting into an
accident and later fired him.

'"Targeted Jobs Tax Credit," hearing before the subcommittee
on select revenue measures, House Ways and Means Committee,
Serial 101-51.

'"Targeted Jobs Tax Credit," hearing before the subcommittee
on select revenue measures. House Ways and Means Committee,
Serial 101-51.

'Affidavit, attached to this testimony.

132

TJTC - IBT/Page 8

As already noted, TJTC serves to discourage employee
retention. Does TJTC cause this turnover? Does Borg-Warner
attempt to churn employees through poor working conditions and
low wages in order to maximize its tax credit? Is there
deliberate abuse of this program? Certainly this hypothesis
cannot be ignored and the company must be held accountable.

Driver Burton Ray voices a view shared by many drivers from
across the country when he says, "There is a lot of turnover at
Pony Express because management has made it clear that they do
not care about their employees." Another driver, who
participated in a strike to protest the company's unfair labor
practices, asked a Pony Express manager, "How do you expect us to
earn a living on these wages?" The manager replied, "We don't
expect you to earn a living."

Several agencies are currently trying to hold Pony Express
accountable in other areas of its operating practices:

* House Banking Committee Chairman Henry Gonzalez and other
members of Congress asked the Federal Reserve to investigate
the security standards Pony Express applies in its handling
of checks and other financial documents.

* The Federal Reserve Inspector General in Washington is
personally supervising the investigation.

* The Department of Labor is looking into possible
violations of the Service Contract Act as it applies to
Federal Reserve contracts with Pony Express.

* The National Labor Relations Board filed a nationwide
complaint against Pony Express and is currently prosecuting
220 separate charges of unfair labor practices against the
courier company.

Otber Miscarriages of TJTC

This testimony draws chiefly from our knowledge of Borg-Warner 's
Pony Express subsidiary, but there is no reason to believe that
this corruption of TJTC's goals is an isolated example. Our
members' experience with TJTC at Pony Express is echoed by other
labor organizations' experiences with the program elsewhere.

For example, the Service Employees International Union
reports that the program was used in tandem with a state tax
incentive program to create poorly paid, marginal jobs which
replaced good jobs in Pennsylvania. The state's Department of
Public Welfare developed a plan requiring contractors to make a
good faith effort to fill at least 25 percent of new or vacant
jobs with qualified public assistance recipients. In exchange.

133

TJTC - IBT/Page 9

contractors could receive up to $6,000 in state and federal tax
credits over three years for each public assistance recipient
hired. Tax credits were provided through TJTC and Section 1701a
of the Pennsylvania Tax Reform Code of 1971.

Under this program, contract cleaning service workers at
Haverford State Hospital, represented by SEIU Local 36, were
replaced by workers recruited from the welfare rolls. Local 36
had successfully negotiated a contract with Service Master to
perform the cleaning services at the state hospital. These SEIU
members had worked under this contract for three years, during
which time they had won wage and benefit increases.

When the contract came up for renewal, a nonunion company
named Associated Cleaning Consultants and Services, hired public
assistance recipients off the welfare rolls and, with the help of
the government-provided tax credits, underbid the union
contractor. Twenty SEIU members lost their jobs as a result.

Since the contract was up for renewal, the positions were
considered "new or vacant jobs," even though union members had
been performing these services for three years. Those 20 SEIU
members were clearly displaced from their jobs, but the
non-displacement provisions of the law could do nothing to
protect them.'"

The AFL-CIO has taken a stand in favor of terminating TJTC.
According to AFL-CIO congressional testimony : ". . . the TJTC
has failed at its primary mission and has benefited a handful of
employers at the expense of the Treasury and American workers."
In 1985 the AFL-CIO testified before the Senate Finance Committee
Subcommittee on Savings, Pensions and Investments, urging that
the program be allowed to expire. They listed their concerns as,
"the windfall tax gain provided to employers who would have hired
a targeted employee without the credit and yet obtained the tax
savings, the displacement of nontargeted but no less needy
workers and the loss of revenue to the Treasury of $500 million a
year in a time of soaring deficits and savage budget cuts in
domestic programs.""

Policy Recommendations

The TJTC program's goal of encouraging decent, stable employment
for underprivileged groups is one we all should support, but the

'" Analysis provided by Peggy Kelly, Policy Department,
SEIU, Sept. 15, 1994.

" Statement of AFL-CIO before the Senate Finance subcommittee
on savings, pensions and investment on S. 1250.

134

TJTC - IBT/Page 10

program, as currently structured, is failing to carry out this
goal. Unless the program is substantially reformed in a way that
makes the employers who reap its benefits accountable, the
program must be ended. As currently constituted and operated,
TJTC is little more than a welfare program for the worst
employers that actually discourages the creation of good jobs
with a future.

We believe that the program should only be retained if the
following five problems are adequately addressed:

PROBLEM #1: The TJTC Program does not craata amploymant for
individuals who would not otherwisa ba hirad.

Our members' experience provides supporting evidence to the
Department of Labor Inspector General's audit finding that TJTC
hires would have been hired anyway. Again, many are tested for
TJTC qualifications only after they are hired. This testing is
often done by a consultant, much the same way that a good tax
accountant will try to find tax breaks for an individual after
the tax year has ended.

RECOMMENDATION: Post-hiring voucher requests must ba prohibited,
with enforcement to ensure such post-hiring certification is
eliminated completely from the prograun. This prohibition should
be coupled with a requirement that companies applying for the tax
credit provide evidence that they have carried out appropriate
recruiting to identify qualified applicants.

The tax credits that would be lost would be those that
should never have been granted in the first place.

PROBLEM #2: The TJTC encourages high employee turnover.

Pony Express employee turn-over from January to June of 1994 of
69 percent cannot be justified under any circumstance. In fact,
the TJTC discourages employee retention.

RECOMMENDATION: The hired time requirement for TJTC should be
changed to one year or 520 hours.

While employers may contend that the kind of person served
by this program is disinclined to work at any job for that period
of time, we believe that the problem involves the quality of the
jobs. Rather than blaming the victim, employers should be
encouraged to create jobs that will attract and keep workers. In
his 1989 testimony Arwady spoke of the company's success at
responding to a change in requirements. He said, "We were able
to manage that [change in requirements]. We were able to build
rapport and hold on to people longer in order to get the

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TJTC - IBT/Page 11

certification . . . ."'^ We believe that if it were to the
company's financial advantage to do so, they would again manage
to encourage retention. Employers should be rewarded for
retaining employees, not turning them over and out.

PROBLEM #3: The kind of jobs that gain this credit are low-
wage positions that offer few or no benefits.

The companies using this credit read like a Who's Who of dead end
employment. The DOL audit notes that the TJTC "provided the
majority of participants entry-level, low-paying, low-skilled
part-time jobs which do not offer benefits."

RECOMMENDATION: Raise the base salary requirements, while
lowering the percentage rate; for example, rather than offering
the credit of 40 percent on the first $6,000 of earnings, offer
24 percent of the first $10,000.

This change would not effect the amount of the credit, which
would remain. $2 ,400. However, it would encourage employers to
hire eligible employees at a higher wage.

RECOMMENDATION: TJTC should only be made available for jobs that
offer full medical benefits.

PROBLEM #4: Lack of oversight and accountability.

The Department of Labor, through its State Employment Security
Agencies, certifies whether particular individuals are qualified
candidates for TJTC credits. The Internal Revenue Service grants
particular companies large tax subsidies. However, there is
virtually no oversight of a particular company's use of the TJTC,
barring an IRS audit, which even then would be unlikely to turn
up such potential problems such as whether a company may
intentionally create turnover in order to gain more credit.

Because the TJTC is a tax program, the records of the
company are confidential IRS records. Interested parties,
whether they be concerned nonprofits, labor unions, employees, or
taxpayer groups, cannot gain access to these records. This
confidentiality and lack of oversight provide an informational
black hole which works to the advantage of employers who may be
abusing the program and to the detriment of workers and taxpayer
advocates wishing to make the company accountable for how it uses
the subsidy.

12 "Targeted Jobs Tax Credit," hearing before the
subcommittee on select revenue measures, House Ways and Means
Committee, Serial 101-51.

136

TJTC - IBT/Page 12

RECOMMENDATION: A specific Office should be created within the
Department of Labor Employment Training Administration to monitor
TJTC use and determine the company's eligibility to receive the
benefit of this program. Violations of EEO, OSHA and other
applicable federal laws can be grounds for denial or revocation
of a company's eligibility for progrtun benefits.

This would constitute a kind of "good employer" test to
build in incentives for employers to further the stated goals of
the program and operate within federal laws and regulations.
This tax credit should be available for good employers that
demonstrate commitment to the program's goals through meaningful
training, decent wages and benefits, and lawful operations. It
should not be available for continued misuse by bad employers
that subvert its purposes and even exploit the very people whom
the program was designed to help.

Conclusion

We all recognize that good jobs are the foundation of a healthy
economy. Labor Secretary Robert Reich has used his position as
an advocate to articulate the concern that is shared by working
people and business people alike that we build a future of high
skill, high wage work.

Some people argue that a bad job is better than no job at
all, and that companies like Pony Express would go out of
business if not for the help of programs like TJTC or if they
were forced to pay better wages or provide training for workers.
Pony Express jobs pay low wages because they are low-skill jobs,
the argument goes .

We believe that the example of UPS contradicts this kind of
thinking. Like Pony Express, UPS delivers time-sensitive
packages. UPS invests in its workforce with good wages, good
benefits, and training. UPS has grown to be the largest
overnight package delivery service in the world. Pony Express is
part of a multi-million dollar corporation, Borg-Warner, and is
itself the largest courier company in the country. There is no
reason to believe that jobs at Pony Express could not be good
jobs. And if they cannot become good jobs, there is no reason to
believe that it would be in the nation's interest to reward Pony
Express for creating bad jobs. Our tax resources would be better
invested with companies that have the will and the ability to
create the good jobs on which our nation's future depends.-

Good jobs do not come from nowhere. They do not come about by
accident and we cannot rely solely on the goodwill of employers
to make them happen. We can, through creative use of incentives
and enforcement build a system of incentives that makes creating
decent jobs in an employer's self-interest. The current Targeted
Jobs Tax Credit is all carrot and no stick, and without drastic

137

TJTC - IBT/Page 13

change to make employers accountable for their use of this
benefit, it will continue to fail those it is meant to help.

If we cannot build in such accountability, we must dismantle the
program. For we will never in a million years create good jobs
for our nation's future until we stop rewarding employers for
creating bad ones.

138

Pony Express Courier Corp.

232J S.E. IClh Slreel. Portliftd. 0-«sor, 972U
(503) 238-2943

gMPtOVMEyr FACT SHEET

XharX you. io\ vou,\ ■LnttAtit in tmploi^t'^J^ opf>o>UuiuXisj> aX. Pony txp\Cii Coaiitu Cc\p,
(PECC). Cue is ihi piciUa/uUXa.U oi ca\ optAoXXoru, ttvU JacX ihiU htu btzn pMpan.id
iOA. youA InioAjniJtlon p>uOA to McvLving an ApptLcAticti,

J, PECC doti not /jUtUiUy hlu iuU-Um c-nptoytu. HCC kl\u (jnptcyiu

to vxn.\j^^2__^50 hou/ui ^jj^eiJL.- • ^oiUW t'Ai.^ ^-tr.n iouA bio* ^ civjin hawu a
da.y, Hcnd£.y~ifiMa2h fi.lday. T'ni.\z ij> LiiruXid w.'ee&cjid uoKk atuciaWe. ^htit
opvu-n^i e.it, io\ catM-iw $ua.\j[U -uwatyj-Lr^ pickup, (AJUnpof-XiXMin, dnd itLiviAy
oi iti.T4 ion. MguZ&A. cjiiiomva. UfU^j/wu OAi \)t.KicIci «e pAu}vidtd.

Z. -TkeAt OAt no mtdiaU. bvMiJM, pcJjL hotitLiyi, vicJLtissn <hyi, o\ iich
dayi .

3. Thl ^.tO/Vtoig vagi ii $$,$} pox hcu/u. J^ittA 9C dayi ii.OC, thtA cittA l/ *
a /I5 day M'^lixn, '4.25, It Lit &. ifjUz tmn ioA "Coo^t'./Gu&ti'i" to fct K^
fxJJ A-zg^UoA pay evct 43 )rawu Kxthix tha.n t!M na/unaZ tire-arji-ft-fci^j,

4. Zrr.'^ot^zi Ve.lu.tle. ita.it SpocMitUt^ti - PECC hu cpznb^qi f^9\ aurpcjvj tinptcyid

A,ncU\i IdurXi, Thtii piopci ItAit thtiA. Ci'M vtKlctt to ivivici Orti oi 9ax

-asaCci. The iaXc o^ pay it dttv.-niMd kij tkt hoa/is, rrjj.ti, tupt cl vcfuiie

twei. Tkt /uvije ■u fSOO to i4S0 piA wztx. 7

-- .

5. Gced d'-J.s/ir.i ifUUi eAt a miut. A \oad tt^ -U Mq^xUid biioit you can fee -j
kinzi. CiLtAintiy, we axt nut imjiioyin^ anycm who tOAnot d^e 4 panit van. -

■*, VoiL moi-C poittJii thi zahibiUXy ol tiiClng and tawying up to 75 tbi. So.ne
^tmi (tie bulky and diiiioiU to rAndit.

7, GiAiMl A.outJj\g kneviltdat oi tht Vaijjjxnd imJ^o OAiA It nicuuiA.y. VziAitid
knoMtidgt. -U betCM.

I. .MucA oi tht uaikday taXti pt&tt away ^A^m di/teci tupeA^iiJUn- If <J0\i VLt

a AUpoAiibtt orA iiX^-motbJotli <ndJ.\jJ.d.iif , you wouLd tnj'oy bzlng a PECC
touJUtA/GuoAd.

9. tRz MOA.h ii intiAtitCn§, vCAj.td and viAy ptopti'O'Uzi'Xid. Vi. <wt lootUng
io\ tmpioyiti u.'ho lUit iit.\titep and inairXaJM a pLiMOi^t Kapponi wcCh tkt
aiitomzM .

10, Blzau^t oi tht tijni.-itni<ti\/i mXuAt oi out. bu-iinw*. we aAe lodUng io\
Ind^vtduiUi uilth A p<ut we-t* tUito\y o^ no tOAdintit, and a vviy to\>i AAtt
0^ cLbiiAtlvUm, •

II. ThtAi ■it no p^Aional timi oU g\tntvi duAing ''•» 90-daii p\obatwrjiA.u pvUod,
J<ittA iJil pfifibiLtlontAy.pVU.od, pM^e»iX(XoW« oi^ can oidLy.U AVuingtd one
month in cJ\iancz [by uiitttA mtmo]', ' Kpp\e\jil/duapp'La'jel ii boAti oi\
optAoXionat coM-idtAotion. Beca;.ue oi thl intie^i^td tju^tsmiA co'mitnitAtt ,
thiAl ii no turn oii qiumtid d'dAing tht hotiday ttoion (,Vouimb«.\ 15th-3amoAy
Zlit], EvtAyoni. hoi TfJnkigivin^ Day. ChAiitnoi Vay and New ViOAi day eU.

' '^ A Biker Indutiriii Con-ptxif OO

rz.

139

Ti ii the. pctLcy a^ Pony Ix.p'iiM CcuaJ-ia Co-tp. i£ ruAt piJipli Mko <im n

I J. ie.ioit ycuA anptomtnt can cowntnci, ycm mLLL be M.quJji.id to qhit the. companij
yowi. cc-i^f^ to /leijutif a. c/iecfe oi youA d^viftg Xiccid. Tovu ^oa. thii imc
avtUlablt fl-t titnz oi h^xe.. PcCC uiLU thzA iCAutoilzz tht MfR ojui compaxi.
iX to youA. tjnploymtnt applicAtinn. li tiit -Ot^o/imitujrt-pttienied jj, cOAAiiX
£.Ad AiC!.pta.t>il, thin yowt ccntiruid inplo yz/nnt viith tkii company mUZ bting
Vsu maii fiizarX i \jaLid CHEOCH ivcueAi tictme..

M. Cnze. yean. cppLiaition (loi btzn tuAnid in, you. may i.t.czi\)t a. quick ioie-tiujig .
yea viUU. be not^iLid by phom ihx)utd we haue xoutzi opvUng up and an
intfiMizu! uKuZd St ichzdulzd tkin. Should you ptiii thi JMti/wiiMi, thz
nvU iiZipi go cu IoUomh

X. A dAj.vii^ tiJit viill be adm*jUj>ttxzd.

8. A tzZzphcm JjvtiAMiZMi Mith on znploymznt ipzdLaJLiiit. Thli

hij no btsjiing en ycu job itatiu, houizviA, ihjiit.rl you mzit cvito^n
<i.'Jjtij-uo., u;e may <uk you mafee a i,top at VcitZ^fvi Job Se^u^ce. T'rUji
J.ntz.ivizx Lh '^ck a FzizAjU p\cQX£jn cAJLLzd TARGETED JOSS TAX CREDIT
jjn vikith VIZC li ■imclMzd.

C. UMi^simi uUIl be iMuzd and you uiLU. be ■LmttucXzd urfiea to izpoit

to MOAk.

. V. ?auchzciii OAi ^iiaed on fuday, ^oa. the. p^zviooi -MZtki pay.

X^cUr, Z'rAnk ycu ion. you,\ intt.\z.kt in ?ECC. A^-teA. hOLv^ng Mod tht afaoue ihauZd
ycu iti^.e to ^pply icA. vnptoymznt '.Uth PcCC, pizmz iign bzZou.

1 aikr.O'Mtedgz thoJt I havi MAd and andSAStajrid thz above inioAjnation.

^jAJ^E.■ gATE;

5^rtfl-taA.e oi Apptcaxnt

140

CoTinty ot All9gh«ny
state pf Pennsylvania

Affidavit of RonaM C. Bloom

X. I itate that ay nane is Ronald C. Bloom. I have bean enployad
ae a Pony Exprasa Courier since January 1, 1992. I work 55 hours
par we«lc on the Bverai?*.

2. I answered an advertisement in the newspaper and went to Pony
Express to fill out an apciication. Approximately six months later
Pony Express called to hire me. X went to the Pony Express office
and watched an orientation film, «tc. After tha orientation, I was
handed the phone and told to answar tha quastions asked. The
parson who handed me the phone told me that I had the job but that
the questions were necessary anyway. I answered the questions.

3. in January 1994, I slipped and fell on the ice in the
company's parking lot. I was lying there for 20 minutas calling

for help. Finally, aiU5Zh»g- driver he]pe4-ce-get up and Qyf-gf-iha- f^C?. /^
J,«^T— Pony Express had been warned of potholss and of tha
conditions in the parking lot. The occupational Safety and Health
Administration (OSHA) had warned Pony Express twice. Pony Express
paid all of my health costs relating to the accident, even though
I tachnically do not receive benefits as an employee.

4. In June 1994, on a hot day I bagan to sweat. As Z bent over
to lift a heavy box at work, my glasses fall off of my face and
broke. The company refused to pay for tho cost of my nsw glassss.

5. I use my own vehicle to make deliveries. Z did not recsive
training before Z started working.

6. X transport "Zep" and other cleaning products. They are
transported in plastic drums which somstimes leak. These products
contain bleach and ether cleaning solutions. Sometimes I am asked
to transport degreasere to butcher shops. These solutions have
many chemicals in them. Z did not rscaive training on how to
transport these natarialc.

I state that the foregoing is true and correct to tha best of ay
knowledge.

Signature of Affiant

X DiD a3oT ^g-x Up

ori- irkc [Cm.

rCr.,.(?ril^^W'

Oaj ,/\ Bc)f%Acl ^ PoT

f B'Zf/p Zii -000003000 ; ft7'60:S : :S-99-l : IZOi JfiTdo;3|8i xoj3X;AS INaS

iO d iZ::Z t^S'fl das Z212 389 -cm -,31

141

AffaSavit of
John Elotebaugh.

Wilkinsburg, Pa.

I've worked for Pony Expreaa for fix and a half years. I found out
about the job from a friend. I didn't hear about it at an
einploy:iient office, or Bueh thing. I heard about the jobs tax. credit
whan Z was hired. I was told to call this telephone n\mb»r and they
asked me questions such as if I'd been on welfare. The coapany
basiofclly hired me at the same tiae they had me make this
talephopne call.

I wor)C very long hours. I carry cheoke between banks and the
Federal Reserve. X also carry harazdous material, often at the eane
tine.

The company has shoddy vehicle maintenanove. Venichles come back

from the garage with th« Bane problem they went in with.

signed

John klot/ba-uglf

lj.a\arized by

judrt-. K Sjsttr, Na»y Pv«e

142

County of Cook
S^ata of Illinois

Affidavit of Fallcia LaCour

1. X atata that my nana la Faliota LaCour. X as aapioyad aa a
oooriar by Pony Ixpraaa in Chicago, lllinela.

2. At th« and of DaotBbar 1993, I wtnt to the Pony Sxpraaa ofrica
to fill out an amploymant application. A« part of tha application,
Pony Bxpraaa took a photeoopy of oy MVR and ny CCL. Ko jobs vera
aval labia at tha tina but ths par ton in tha offioa invitsd ma to
call bade in a fav months.

3. In April 1994, I ocntactad Pony Bxprass about a job and thay
aakad m» to coma into tha office for an interviaw. ^andy Maynia
intarvlawad me and aakad ins to go dovnatairs to fill out a fav
foma. While I vas dcvnataira Wendy, a Pony Expreae worker, told
ma that she waa dialing an 800 phona nianber and that tha paraon on
tha other and would be asking ma a fav questioni. Wendy alao told
ma that I had to be approved before I eould b« hired.

4. The woman on tha other and of the SCO phona call was named
Bvalyn. She asked me if I had ever served in tha military or
received public asaistance, or if I was currently receiving public
acaistanca. After I answered her ^[uestiens she told me that I did
not qualify for the tax credit.

5. Z told Wendy that I did not qualify for tha tax cradlt. She
told ae that I was hired and aha gave ma a uniform shirt. I began
work the n«xt day.

I Stat* that tha foregoing is true and aorract to tha bast of my
knovladgs.

(ijM

signature of Affiant ^ .

jBignature of Notary

cfHCIALflBAi -''\.

BONNOC EDWAKOt #

NOTAKY PUBLIC SMTR OP nXINBHit
MY OQMMHMQW gp.. aUCL l!^5gf

143

County of Kanawha
State of West Virginia

Affidavit of Jeff Naylor

I state that my name is Jeff Naylor. I have been employed as
a pony Express courier since January 1994-

I filled out an application and was hired. I watched a
training film and filled out other paperwork. I was handed
the phone and answered questions from the person on the other
end, which I did. I began work later that week.

I state that the foregoing is true and correct to the best of ray
knowledge.

gna<u?eopAffTan^

Signature of Notary Public

|WMMMM»<»^^»<»<»0*»^^»»M»»»»»^»»^i

144

Affidavit of Jeff Maylor
County of Xanavha
Stats of West Virginia

1. Z state that ay naae la Jeff Nay lor.
Pony Express since January, 1994.

I h ave been eaployed by

2. As a Pony driver, I carry a range of naterlal, including
biohazardous vasts, drugs, financial docuoents including checks,
stc. I drive to banXs and the Federal Reserve. Sometimes there are
spills. The company does not supply the proper equipment to keep
everything settled down.

3. I also served in the Army as a cosznunlcations naintainer. i
served in the Persian Gulf war. I met Gen. Schwarzkopf at King Faud
International Airport. We called it Camp Eagle II. He seemed like
a pretty good guy, someone concerned with the soldiers.

4. I like working for Pony, because I think it would be a good
career. I like driving. But the company doesn't treat us very well.
I make $4.75 an hour with no benefits. I work between 20 hours and
55 hours a week. I don't think ths company is run correctly. The
company doean't care about us. I'm not so s\ire about cen.
Schwarzkopf anymore.

I state that the foregoing is true and correct to the best of sy
knowledge.

Signature of Notary Public

«M*WM««WMNAA#*M#Mk««nMMMAMMM^

NOTARY PUBLIC
8TkTE OF weST VWQIM*
KEaJES.8HAMBUN

TIM«TW« tOCM. tit

CHWusTTjN. «^ saw

Wy ConMUian E«*M H>r tz S

145

County of Clearfield
State of Pennsylvania

Affidavit of FredericK Painter

1. I state that ny naae ie Frederick Painter. I have been
employed by Pony Expreee as a courier since June 1992.

2. I found out about Pony Expreea through ny friend who was a
lead driver. I filled out an application in May 1992. in June
1992, my friend called the Pony Expreee office and put ne on the
phone. The person on the other end asked me for some information
to identify myself and then atked me about my financial background
and Whether I had ever received public aesistance or served in the
military. I answered the questions and started work a couple of
days later.

3. The pay is terrible. In 1992 I started working for $9.2S per
hour. Two years later Z am earning $5.75 per hour.

4. The vans are in poor condition. Many have no heat or air
condition. Xlso, the company doesn't train the drivers.

z state that the foregoing is true and correct tc the best of my
knowledge .

signs tur«u<rf JWTilant

Signature of Notary Public

146

county at St. Louie
State of Miaaouri

Affidavit of Burton Ray

1. I state that ny nawe ie Burton Ray. I was hired ae a courior
by Pony Express in June 1990.

2. For two years prior to joining Pony Exprees I was employed as
a janitor by a church. When the church laid me off due to
cutbacks, a church member suggested I contact Pony Express for
emplojTDent. Soneone told me that I needed my chauffeurs license
ror Birployment with Pony Expreae bo I obtained it before I went to
fill out an application with the company.

3. 1 want to the Pony Ejcprese office and filled out an
application. I was handed a quiz on driving. The quiz appeared to
be a federal fonri from the U.S. Dspiirtment of Transportation and
had approxircateiy eiifty-slx questions on it. The people in the
office aleo gave me a copy of a book that contained the answers to
all of the (jucatione. I completed the quiz there.

4. I was hired and began work the following week.

5. Approximately one week after I began working, someone in the
office asked me if I was a veteran. When I said yes they asked roe
to come to the office and talk to someone over the phone. The
person on the other £nd of the phone verified all of my personal
information and asked about the length of time that I served in the
military service and my service number. The person told me that I
did not qualify for tne program.

6. The working conditions are terrible at Pony Expreae. There is
no safety eq^aipment. If you have to lift something that requires
a forklift or other machinery, you must do it without the equipment
or lose your job. Nothing is available for the vehicles — not
even an ice scraper.

7. You never know what you're carrying at Pony. The packages do
not contain labeling. Sometimes the packages are marked,
"Hazardous" but we are never told what they contain that makes them
"Hazardous." Sometimes the packages leak but you can't be sure
what i5 leaking. Sometimes when the packages are unloaded in
Kansas city, thoy have an odor which becomes irritating to drivers.

8 . There is a lot of turnover at Pony Expreso because ttanagarcent
has made it clear that they do not care about their employees. Pony
Express couriers are paid by the hour and the company has stated
that no courier may work more than sixty hours per week. The
exception ia when a job comes up unexpectedly. Then, Pony
management will allow co-oriers to go over sixty hours. There has
always been noro concern for the package and the delivery than

147

there is for the pereon. Also, there are no pay inoreasaa at Pony
Express. When I wae hired in October 1990, I wae making $6-25 per
hour. After ninety days I made $6.75 per hour. Today, nearly four
years later, i am still making $6.7 5 per hour. I am told from the
men and women recently hired that they are paying new couriers
S6.00 per hour. The company ia trying to replace ua with people
who they can pay lees .

I state that the foregoing is true and correct to the best of my
knowledge.

ha 1 ^ re

signature of Affij
Subscribed and svom to before ne this 13th day of September, 1994.

Signature of Notary Public

HELEN L FIELDS Notary Public

ST'ii r OF J'iLiOUfil OTY O^ST. (,OUIi
MY COM^ilSilOt) HPIJFS ^/b/

148

county of Alloghency
stata of Pennaylvania

Affidavit of Tony silva^ni

1. I state that my name is Tony Silvagni. I was first hired by
Pony Ejcpress in Kay of 1993. I ijuit at th« end of August in 1993
when roy hours increased at a better job at the University of
Pittsburgh Medicai Center. Then a raonth later my hours were
decreased again, so I want back on 11/16/93. I went to Pony the
first time beoausa I saw an ad In the newspaper.

2. My first interview was very laid back, not too many questions.
They wanted to know about prior driving experienoe, and I didn't
have any. I explained about the job at the hospital. There was a
position open for six weeks while someone was on disability.

3. After I was hired, on my first day of work, they told me to
coma in en hour early. My supervisor dialed a number and I talked
to a wos\en. She asked me my social security number ^ age, name,
address, whether I was a veteran, was Z ever on welfase, did I ever
get ansaplo>nnent compensation. I thought that was strange, that's
why I rentember. She asked me about my other job and what the
salary was, I told her I was making $8.50 an hour, and she said,
"Oh, that much." She asked if I was single or had dependents. I
thought it was somebody in Pony Express in Charlotte that needed
something for payroll information. After I was done I gave the
phone back to my supervisor and he talked for a minute.

4. There was a lot of turnover in Pittsburgh before we voted in
the union; now people sees to be staying to see whether we're going
to get a good contract. The low pay is the biggest factor. The
ten and twelve hour routes are very long and difficult - with 40
of 50 stops on them. The vehicle equipment wasn't good at all, and
it wac hard to find parking. It was very disorganized. The
dispatchers gave the cold shoulder to the new people. Your first
month there they didn't really want to deal with you.

5. I've transported blood, urine and other materials from a
pathology lab. Wa had no training on handling these materials.
When I worked at the medical center we got training on this every
six months. At Pony there was no orientation.

I state that the foregoing is true and correct to the best of my
knowledge.

signature of Affiarit

■■ "1 ' ' / (' ..^
Signature of Notary Public

NotartaiSeal

JuAh A. Susar. Nowy Public

P«BMgh„ AUsgfany Carty

My CormiMcfi Ejq*« f«b 3, 1987

149

County of Allegrheny
Stat* of PfcnnBylvanift

AFIDAVTT Of Dean Sladick

1. I state that my nams Is Dean SIadlc]c. I'va been vorKin? at
Pony, aa a courier and in the warehouse, for two years and two
raontns. l found out about the ^ob through an ad in thepaper.

2. I filled out an application, and about two weeks later they
called and I went in ofr ftn interview. Then I was hired and
watched the training tape. Then they called ■ number and a lady on
the other end asked a couple of ouestions, I can't recall exactly
what they were. There was something about whether Z was a veteran,
and if I was ever getting any kind of asBistanae,

3. There's a lot of turnover at Fony because the pay is so low,
the average is only about $5.50 to start. Some of the older
vehicles weren't in ^pvd shape.

I state that the foregoing Is true and correct to the best of my
knowledge.

Signature of Affiant

Signature of Notary Public

NoumalSwi
judlH A. Sustar Nc«y Pi«

My Conmisaor ei»««P«b^MW7^

150

county of Clegrviaw
state of Pennaylvftnla

ArrKJBvlt of Orey Thuiayao:!

1. I fftatfi -chat my nai»» i« Greg Thompson. I have b«ftn dinployed
by I'ony Eiipi"*** ■ *» * uvuxi^t icr ■pp'-nv1ml8^».^y ^ y«ijra.

^ //cyy>7^ CP/^W y^>^>^^ c.ai6.>e/>^2.,^y^fe40C) ("(It)

2. I found out aboutlth* company through a p«if«3n^ho used to
worX there. I w«nt tc t{.im Putii|!_Jtepragl_of:ii!;» and filled cut an
application. Aftar checking ay driving rssord the ccnpany callad
m« a couple of week* later to tell me that I was hired. Wliii« I
was on the phone with them I was connected to a person in Atlanta,
who asked me questions relating to whether I had ever received
public assistance. I spent three or four minutes on the phone,
answering the person's cTuestions.

3. There is a lot of turnover at Pony Express. Drivers are fired
for petty things.

4. Pony doesn't take good care of their %'ans. In one of the vans
I was given to drive, I could see rhe ground through the bottoas of
the van. The tires are poor. I was assigned a van that had not
been inspected for some time. when the police f topped ir.e I
explained to their, that it was e company van and th«y aant s
citation and fine to Pony Express for failure to have the vehicle
inspected .

I state that the foregoing is true and correct to the beat of my
knowledge.

Signatura of Notary Public

-'C'd IZ-.Zc r--.:'Pl d^c -c^^ -:v.:, -,.,.] 13^

151

County of Cook
State of Illinois

Affidavit of Lanont Wallace

1. I etate that my nana is Lament Wallace. I have been employed
as a courier by Pony Express for approximately one year.

2. Approximately one year ago, I went to Pony's offices and
filled out an application for employment. I went home and waited
for Pony to check ny driving record. The people at the Pony office
misplaced ny application so they asked me to come back and fill out
another application. I did so. They asked me to call them back in
one week to check on the status of my application.

3. I called them back one week later and they told me I was
hired. They told me to come in for orientation and to discuss
topics such as starting pay.

4. When X returned to the office I watched a 45 minute
orientation tape. At the tape's conclusion, I was asked to diel an
800 phone number. The woman on the other end asked me questions
relating to my financial background and to ny potential veterans
status. After answering the gueationa, she told me that I did not
qualify for the program.

5. I started work as a Pony Express courier the next day.

I state that the foregoing is true and correct to the best of my
knowledge.

Signature of Affiant

152

County of Alleghany
Brat* ot pennsyiv&nlB

Arridavit ©C Robert Valentin*

1. I atat« that ny nana i» Robert valentine. I have bean
employed as a pony Express courier since June 1993.

2. ■ 1 went to th» Pony Express office to fill out an application.
I vat hired. I was then asked to call an 800 phone nuinber and
answer tne questions on the other end. The gusEtions dealt with
Whether I was on welfare; had a medical disability; take
meaicatier.e; and »y raoe. I answered the questions and the person
on the other end of the phone told ne X vac not qualified. I was
hired anyvay.

3. After I worked 90 days I beoana a full-tlaa eaployee and
received full benefits.

4. I an 7iven the Saturday route often, on these days z del i vet-
to and froa hospitale and laboratoriBs and drive approximately 330
miles during the course of a 13 hour shift. I did net receive any
training on bow to handle materials picked up at the hospital.
Instead, I was given a pamphlet and asked to sign a piece ef paper.
Also, the hospital does not provide instructions on how to handle
their sanples.

5. When X go to hospitals to transport materials I am given blood
and urine eanplee which are not paokaged. They are placed in
vials, which are then placed in legal eize envelopes that are not
sealed, on rare pooaoiono, tho hscpital puts same of the samplAC
in plastic baggies with haeard signs on than.

6. On one occasion the urine sample popped open and spilled on ny
shoes as well as on the floor of the van.

7. On ny roUC* kC Kaursk&n'S i aa lorcea zo transport soxeu anu
other ir.aterlals found behind the store. The store nAlntalna a
cafeteria and dumps its grease on the loading dock where materials
are ploked up and dropped off by Pony Express couriers such as
myself. I twice warned ay supervisor, Richard Kerr, that the
loading dock waa a hazardous area. On October 4, 1993, I slipped
on cooking grease. On January 31, 1994, Z had sur9ery as a result
of the accident. My supervisor foroed me to work against ay
doctor's orders. If you refuse to work you get sent hone and are
eventually fired.

8. I am currently receiving workmen's compensation for having
picked up a box of 160 lbs. The company haa a verbal policy that
no worker lifts more than 125 lbs. I got hurt lifting a box that
weighed approximately i60 lbs.

3 1 In ?\*nB 1993, Kvi Bhasf, a PTny »vp,-i»«« ..«i«rAn^ mun^^.r, was

153

tOi.a Dy aont worxcro that) t>noro wuk h rwnMhM b*aMK w^blt »* bvuhAaf
Mr. Sharp sent at driver out with th« truck ond told him to use the
•aer^ency brake. Thr*« hours later the driver hit a hillside
l/uuAUse ha had no brakes. Pony Express fired hisi

I~. \l.oC:<Ivj:an ^ ort..'«»>;'irirth*company ' %^ --parklja^-x loC (in<C reoeircd
M //WjorkJB^Ifr's Goa^^rfeiBH^ibn ." T^Mfcoapisys wa» warn«a that ii-had to plow
^-^^the.'pai'Hin^ip*- Bnd^Ttx-the'-pottjpliK^.- A'^ ^ — "" ~^'

I'l. On two separate days this past winter, the Governor declared
1 state of emergency due to the condition of the roads. Pony
Express forced its drivers to go out and drive those days.

I state that the foregoing is true and correct to the best of my
knowledge.

\6/Ji

^^1 P

Sl^ature of Notary Public

NExanaiSsal
JudRi A. Suesr. Noary PLtlc

kV Cc^rtsftoo Ei^ms Feb 3, 19B7

^./Ulr^

yT-Lc

U/Ua^ ^i2^tJ!JL^^-^ aZ ^'<-^^.^

-'i»»T

154

County of Cook
State of Illinois

Affidavit of Darryl Mallear

1. I atatft that ny name ie Darryl Nalker. 1 was hired ae a
courier by Pony Express on Friday, August 12, 1994.

2. I went to Pony Express' offices on August 12, to fill out an
employment application. After filling out the application, I was
given a safety guiz. The topics asked about included driving
questions and proper techniques for lifting heavy objects.

3 . After the quiz I was informed of the starting salary and other
work-related items.

4. I was hired.

5. I was asked to go downstairs. When I went downstairs Mr.
Cornell Morgan asked me to dial an 800 phone number that he
provided me with. The person on the other end of the phone asked
me questions about my job history, military background, and
financial background. After answering all of the questions, the
person told me that I did not qualify for the program.

6. I was given a uniform. I began vork on Monday, August 15,
1994.

I state that the foregoing is true and correct to the best of my
knowledge.

A signa^\^e of Affiant

Signature of Notary Public

BONNIE EDWAROe
NOTARY PUBLIC SUVTC OF RiDMOKi
MY COMMBSION EXP. AUr \^i£r\

■-^•i.

155

CcuTity of Spukane
AffidBvit of Jltt MslocUs

1. I state jay naae ie Jla Malocbe. I aa aaiplpysd by Pony Bxpr«s«.
I have }cnovrXe<lg« that Pony usas tires that are onderslz*! for the
volght o£ the vehicle and these tires are part of an experlmantal
prolan sponaord hy the tire cospany. xt is sy experience that
tbesb tires are creating a safety hasard and that they o£ten throw
the speeoonexez- oft by a£>out ten mllea par hour.

AUGUST 18, 1994

signatiire of notary fmhiac

rjv. ■■'-

.*/

156

County of Bexar
State of T^XAe

Affidavit of Lula Kcralse

1. I stftta that ny nans Ifl I.ula MoraXoe. I have l>a9n aiaployad aa
a courlar by Pony Express for six years.

2. I vent to tho Pony Exprsas offlcs and filled out an
application. A parson from tt^ie office ealled se bac)c vlthin tvo
d«y8 and hired me. The ccnupany had retrieved ay driving record
from A\istin.

i. At our branch i;here is an 6 5% turnover rate. I received a
starting salary cf 94.50 per hour. I worked for Pony for four
years before 2 receivec! a paid vacation. Aside fren the pay and
benefits/ the turnover is large becauee the company has no concern
for the worJcers and there is obvioua favoritism — certain people
car. get away with having long hair and certain people cannot, for
example.

4. The vans are in poor condition. Many of the vans have at
least 40^,&CQ qilee or. then. Soir.etises the hems don't work. The
tiroc are alweya vary worn. The doors don't lock and eone don't
shut cottpietely. The ccoopany has four routes thmt deliver in town.
The r«8t oC the routes go out of town. Vans that appear unaafa
stay on the routes working in town, so they don't break down far
from the office. Vans that are in reasonably qood condition are
sent on out-of-town routes. The compeny also receives test
vehicles, for which the company dossn't pay.

5. In san Antonio it is abeoluteiy necessary that oars have air
condition. There has not been air oonaitior on any van for the
past tvo years. That means that dust, etc. flies into the vans
whilft driving. Zt also maans that when the vane arc stopped
sonewhere and the windows are kept open for ventilation purpoeen,
the vans are completely unseoursd.

6. I regularly pick up radioactive materials. There is never any
paperwork •<— just a packing slip. Our vehicles are umoarked and do
not tell the public we ar« carrying hazardcue materials. I aa
often asked to carry blood and urine sanples that are contained in
a cardboard box. The people I take the njiterlals fron are clothed
in gloves and masks. They place the containern with hazardous
lutariaiB into lead containers. I sa not provided with gloves or
masks and have to reach into theca lead containers to retrieve the
packages. At on army hospital on ny route, I put a pac)cage down
next to a Geigar counter and the countsr started to tick. The
radioactive materials that are driven from Dallae and Houston to
San Antonio are placed in the niddle of the truck no that if the
driver is stopped, the police cannot sea that the driver is
carrying hazardous materials.

157

7. There ie no wortaaan's oompensation available to Pony Ixpreee
couriers In san Antonio. The oeupany Imlenented its own plan with
Its own doctors and ite o%m rules. Th9 ceopany also aaked all
couri*ra to eigrn a waiver atatin? that we would not eue the
eoapany.

I state that the foregoing is true and aorreot to the best of «y
Jcnowledge .

Signature

'v^/tc re (A

•€-

Signature of Notary Public

% ^^^ ESMERALDA ROSS |

S»re oi T«M 't

Commission ExQirBS 08/7B/9S y

SUBSCRIBED AND SWCRN TO DEFCKE ME

TKIS

1994.

DAY OF

C^JA^Y^y*^

-^/n^^y^^ t-^:

Esmeralda Ross

MY COMMISSION' EXPIRES 8-28-95

158

County of St. Louts
State of Kissc'jri

Affidavit o£ Angela 5ur.le

1. I state my nane ia Angela Burle, i aw er^ploycfl as t driver fo>-
Fony Expres&, I was denied a sick day I requested during my
pregnancy. I a^ often assigned to unload nackagfts in excess of 150
po'jnds, although I am midway through iny pregnancy.

• ignatSre cf Affiant

Signa

Hi-LEN I frELOS. Notftry "ijtlte

159

County cf St. Loyi«
stattt of MisuGuri

AffioAVlt Of Jim Sylvaat«r

1, I stat€ ny nsTie is Jir* Sylvester. I am employed as a driver at
Pony Exprees. The ?0 gallon garbacc bags filled with bundled )^aper
worX ftnd Checv.s from this Federal ^ftaerve and the Boatman's Sank are
poorly tied and constantly fly open during delivery. I have had to
retrieve these dccun-ents frcs the. street after this has happened.

2, I have knowledge that Merrill Raybcrn, another longtime St.
Louis Pony driver, saw his hours cut from 58 to 17 in one week in
•Che conpanlec effort to hire more part time workers.

3, I have knowledeie that. Pony sxpreas never paid Oary Bruce for
about 130 hours that h* ►.•crkod. Bruce was orderad by Pony to punch
ort the clocK ana wait tor a aeiivery trom cnicago wnion ne then
had to deliver.

i. As an EVL driver, ' arr. rtiquired to lease or purchase my own
v«J:iiji* <»j;d yay uhe t;cffixierciol ragist ration, auto insurance, ana y
cur aaintenajice and repair bills.. My compensation is $^. 50/hour and-/^
$.17/ttiXe. A bOoXkeepsr, I as>:ed to caiculete it cut for me, said
that my euto expenses ate sip 3C% of ay wages.

Sitiiriature of Affiant

.5t'^tc -Tf Missjur.i.

5-:.b5criix-d and ?M:r:: tc befoi-e nj ^is iOth o.ay of August. 199-i.

^^— W-C^^V ■'7\ -■: /Z£L^^Cr2y STATE O.^MISSCUn. WTror 51 LOUIS

Signature cf : Notary p--bl it it C0Mif,ssi0.N awnEs -^/S/^''?

160

County of Denver
State of Colorado

Affidavit of Joeeph Palumbo

1. I state that my nane ia Joseph Palunbo. Z have been employed
by Pony Express as a courier for the last five years. I work
between 55-60 hours per week.

2. I aa currently receiving workman's compensation due to a job-
related injury. Pony Express owns pushcarts that are in need of
maintenance. Many of these carts have wheels falling off of them.
In my route that takes me to the Federal Reserve Bank I use these
pushcarts to cart canceled checks into my vehicle. I have told my
supervisors that these carts need repair. On June 17, 1994, while
using ono of these pushcarts with a loose wheel, I pushed the cart
and the wheel jammed. The cart stopped and I injured my knee as a
result. I had surgery on my knee on July 29, 1994.

3. Pony Express transports materials to and from the United
States Postal service. Pony Express does some work which requires
use of DSPS tubs and pushcarts. Pony Express has stolen these tubs
and pushcarts for use during non-USPS routes. For example, one
courier who regularly delivers library books to and from schools on
a library exchange program, claims that USPS equipment is used for
these deliveries, even though USPS work is not involved. . At Pony
Express' branch office there are USPS carts with >dfll>tf^ £oUtfe numbers
written on them that are used for Pony Express work on routes other
than USPS.

4. Pony Express pays me $8 per hour because I use my -own vehicle.
When my vehicle is being repaired and I use a Pony Express van, the
company pays me $5 per hour. Temporary employees are paid more
than $8 per hour for the same work.

5. This past winter (1993-94) Pony Express employed John Benoit
to drive the route to Grand Junction (approximately 260 miles) .
During one blizzard, Hr. Benoit started to drive but the weather
made driving hazardous. Mr. Benoit called the office to tell them
of the conditions and to tell them he did not want to continue
driving. The office threatened to fire him or diacipllne him if he
disoontinued the route. Mr. Benoit continued driving and
subsequently slid off of the road, hit an embankment, and dented
the back biunper. Two weeks later the cosq^any's supervisor asked
him to sign an accident report. Kr. Benoit refused to sign the
report so the company fired him.

X state that the foregoing is true and correct to the best of my
knowledge.

161

S^gnatttr* Of Affiant

-^2^ y^/W.

signature of Notary mibllc

5/5-//

''"^™*'«"&»TOA(a,31,

J poo

162

County of Allegheny
State of Pennsylvania

Affidavit of William J. Rak

1. I stata that my nawe i» William J. RaJc. I have bean employed
by Pony Express as a courier approximately one year and five
raonthe. I was told at the time I was hired that my pna-ltion would
become a full-time position within 90 days. I am not yet a full-
time employee. I do not receive benefits or vacation pay. I do
not recevie compensation at the rate of time and a half for all
hours worked past forty. I work approximately 60 hours per week.

2. The vans that Pony Express has given ue to drive around in are
not in good condition. Some vans have over 300,000 miles on them.
One day in the middle of my route the back doors of the van flew
open and checks that I was carting from a Federal Reserve bank flew
everywhere. I had to collect them from the ground.

3. In May 1994, Pony Express employed Robert McCabe as a courier.
Mr. McCabe was a relief driver and drove the night shift. After
two assignments where he drove nearly two days straight, his
supervisor called him back in after dismissing him. The supervisor
asked him to make another run of 340 miles. Mr. McCabe explained
how tired he was, but the supervisor would not listen. Mr. McCabe
fell asleep at the wheel and went over a forty foot embankment.
Pony Express usually terminates employees for such accidents,
however the company acknowledged it was their mistake for sending
Mr. McCabe out. The company forced Mr. McCabe to sign
documentation relieving them of any liability. Later, the company
fired Mr. McCabe.

The foregoing is true and correct to the best of my knowledge.

i:\

'/ '/ ' . -- \ V

signature of Affiant

signature of Notary P^lic

iviidr.xr, F'ijnnsv".a"-

163

V\/HAT IS

PONY EXPRESS

DELIVERING?

International Brotherhood off Teamsters

1«4

WHAT IS
PONY EXPRESS
DELIVERING?

For its corporate image, Pony Express Courier Corporation borrows from history,
playing on our memory of an adventurous enterprise running on the barest essentials:
mail to deliver, strong horses, and young, wiry riders.

But reality is far less romantic. Today's Pony Express is a cog in a corporate wheel ~
a wholly owned subsidiary of Borg-Wamer Security Corporation, which is 47% owned
by the giant investment ttank Merrill Lynch & Co, and affiliated companies.

And for the neariy 5,000 drivers and other workers who do the work at today's Pony
Express, reality is anything ^ romantic.

■ Deliveries today include hazardous biomedical materials along with toxic
chemicals and time-sensitive financial documents. Hazardous cargo is routinely
mixed with regular packages, including financial documents such as Federal
Reserve Checks and even, in at least one reported incident, candy deliveries.

■ For their horses, the workers are given decrepit, and often unsafe, company
vans - or are forced to pay out of their meager paychecks to lease a vehicle, a
system which keeps many of them below the poverty line while they work 50,
60, and more hours a week.

■■'■ ■ Today's "riders" are workers like any others in their communities struggling to
make ends meet and hoping for what every worker wants -- decent wages, a
job with a future, health care, safe working conditions, and respect for their
, . rights on the job.

165

What Pony Express workers face daily is a company that mistreats workers and
customers through:

■ Inadequate security

■ Exposing employees and cargo to hazardous material

■ Violating federal labor laws and safety and health regulations

■ Failing to train couriers properly

■ Poverty wages

■ Little or no health insurance

■ Dangerously long hours on the road, often without rest between shifts and with
nothing but straight time pay for hours that routinely run to 50, 60, and more
per week.

During the past two years, nearly 4,000 Pony Express workers have voted to join the
Teamsters Union to begin to make their hopes a reality by negotiating a contract. But
Pony Express is doing everything in its power to delay those negotiations, hoping that
the workers will lose heart and abandon their efforts to improve wages and working
conditions. The company harasses and fires workers who speak out and stand up for
their rights.

Pony Express workers in many cities are out on strike over the company's unfair labor
practices, and workers in many other cities are making strike preparations. The
workers are taking their case to the people in the community at rallies and leafleting
locations throughout the community, where they are asking for support in their struggle
to rein in a company that is trampling not only on its workers, but also on its
customers and the general public.

Adopted images are as unreliable for taking the measure of companies as they are for
sizing up people. Companies, like individuals, should be evaluated on their actions.
And in action. Pony Express today is an outlaw company that puts profits before its
workers' basic rights and before public safety.

This paper recounts some of the stories that Pony Express drivers tell about the
terrible and unsafe working conditions they have united to try to change. Their
struggle to rein in this company's excesses is a fight in which everyone in their
communities has a stake.

166

Pony Express Delivers...
Risk on the Road

Pony Express drivers carry everything from cancelled checks and payroll documents
to hazardous biomedical lab samples and chemicals to heavy equipments parts.
Some drivers tell of being required to handle hazardous materials and to clean it up
when it spills with little or no training or protective gear. Others are forced to lift
heavy, bulky cargo weighing as much as 200 pounds without any assistance or lifting
equipment. Many drive company vehicles that are so worn and decrepit as to pose
what the Oregon Occupational Safety and Health Administration has called a serious
highway safety risk. Drivers complain that they are compelled to drive under extremes
of fatigue and weather conditions that further multiply the risk factors for them and
others who share the road with them.

Radioactive Cargo

Georgia. Some Pony Express Drivers in Atlanta claim that they are ordered to carry
boxes of blood samples, urine samples, and radioactive substances to area hospitals
and laboratories — with their bare hands.

When Pony drivers drop off hazardous packages — including boxes marked
"radioactive" — they are received by hospital personnel wearing protective face masks
and proper clothing. Pony Express doesn't even give its drivers a pair of gloves.
Pony driver Melvin Banks and his co-workers say they have never received training
from the company on how to safely handle these or any other hazardous materials.

Texas. Pony Express tells its Houston drivers to hide boxes of radioactive substances
in the middle of their vans and pile other packages around them, explains Houston
Pony driver Wilma Jackson, because the company doesn't want to get caught by a
Department of Transportation inspection.

"It's illegal what they are doing," Jackson says. "Pony doesn't mark its vans
properiy to Indicate that hazardous materials are on board, so they have us hide the
hazardous packages."

Herman Greer, another of the Houston Pony drivers who delivers radioactive
pharmaceutical supplies, says that the company has never trained him on how to
handle radioactive material, or what to do in the case of a spill.

Blood, Toxic Chemicals and Illegally Transported Explosives

Pittsburgh. Pony driver Robert Valentine delivers blood and urine samples for disease
testing to hospitals and laboratories. One of his co-workers delivers leaky five-gallon
plastic drums ftHed with chemical agents and toxic degreasers to butcher shops. But
Pony has not trained either of them on how to safely handle hazardous materials.
The company hasn't even given Ihem rubber gloves.

167

Blood, Toxic Chemicals and Illegally Transported Explosives continued

Oregon. Pony drivers say that the company forces them to worl< in a minefield of
hazardous materials--from leaky drums of toxic chemical cleaners to flimsy packages
of blood and urine. They also complain that the company provides no protective gear
or comprehensive training to its employees.

Hazardous cargo is often poorly packaged. Just a few months ago, Salem Pony
driver Bob Hawiey was assigned a delivery that included plastic vials of urine packed
in zip lock bags. Phil Berg-Rempel, another Salem driver, has transported vials of
blood packed in paper envelopes.

Pony Express left a blood spill on the floor of its courier room in Salem, even
though some blood-borne diseases such as hepatitis can live in dried blood, until a
state safety inspector saw it three weeks later.

In Oregon, as elsewhere around the country. Pony drivers say that they deliver
drugs from pharmaceutical companies and toxic chemical solvents in unmarked plastic
totes. When the hazardous substances leak out into the vans, drivers must dean up
the spills themselves without knowing what they are.

Several years ago, Berg-Rempel watched a spill of concentrated car wash solvent
turn from green to orange when it hit the metal of his Pony van.

West Virginia. Jerry Darquenne of Fort Nutter had a spill in his van that ate the rubber
weather seal off the bottom of the door and part of the metal below that. A few days
later he says he got some kind of liquid from one of the packages on his pants that
ate right through them.

Illegally Transported Explosives

Tennessee. Knoxville Pony driver Claude Bates knows that he could jeopardize his
livelihood as a driver if the Department of Transportation caught him transporting
Freon-a Class A explosive-without the proper papers, vehicle markings, or
endorsement on his license. Yet that is exactly what Pony Express expects him to do.

Pony knows that it is illegal for its drivers to carry the explosive materials without
proper licensing and paperwork. Bates says, so the company doesn't hassle him when
he refuses to pick up the shipments in Chattanooga. Yet Pony eventually makes the
delivery anyway, as not all of its employees are as knowledgeable about DOT
regulations as Bates. Bates says Pony doesn't provide sufficient hazardous materials
training for its drivers.

168

Deficient Training

Several drivers have signed affidavits stating that when they v^^ere given the hazardous
materials test they vjere also given the answers. Al Wilman says, "We didn't receive
proper training, just the answers to the test. We were given a book that is supposed
to tell us what to do with hazardous materials, but no information or instructions on
how to use the book. It takes a lawyer to figure out."

R/sAry Business on the Road— "Test" Tires and Tired Drivers

Texas. The tires on many Houston Pony vans are so worn that the wire radials are
showing, but Pony still won't change them, according to its Houston drivers. The tires
are "test tires" which Pony gets for free in exchange for a promise to push the tires as
far as possible to test their durability for tire companies, and the drivers end up as the
guinea pigs. To Pony Express, free tires are worth more than people's safety on the
road, Wilma Jackson says.

Washington. Drivers on Pony's northern routes often ask the company to put snow
tires or new tires on its vans during the icy winter months, but Pony says it can't
change the worn "test" tires. Seattle Pony driver John Flansaas says there have been
numerous accidents that could have been prevented if Pony used safer tires.

In Spokane, Pony driver Jim Meloche says that the free tires Pony gets from tire
companies are actually undersized for the weight of its vehicles — even before they are
loaded. Employees say that the undersized tires throw the speedometer off by about
ten miles per hour.

Too Many Hours

Pony's apparent practice of sending drivers out on deliveries when they are already
fatigued from one or more consecutive shifts illustrates how Pony Express puts profits
before the safety of workers and the driving public.

Pennsylvania. When a Pony Express supervisor sent Robert McCabe on a 340 mile
delivery — after he had already worked for 24 hours straight— McCabe fell asleep at the
wheel and careened over a 40 foot embankment.

McCabe knew he was too tired to drive, but feared he would lose his job if he
refused to make the delivery. "It'll be amazing if I don't fall asleep at the wheel," he
told co-workers before he left. Pony Express suspended McCabe for five days for
getting into an accident and later fired him.

Coiorado. As a relief courier in Denver, Christopher Rudd has no set hours - he's at
the company's mercy. After driving a long night shift. Pony told Rudd to take the next
day shift as well. He got just a few hours of sleep. The next day, Rudd fell asleep at
the wheel and ran into a sign post. Pony fired him for getting into a "preventable
accident."

169

Decrepit Delivery Vans, Extreme Weather Conditions

Texas. Houston Pony driver Charles Turner barely made it back to Pony offices after
his company van filled with gas fumes, contaminating the already blistering air inside.
When Wilma Jackson looked at the van afterwards, she found near the dashboard the
remains of a gas credit card that had completely melted down. Even the dash itself
had started to melt from the combination of heat and fumes. Like most of Pony's
vans, this one did not have air conditioning.

Pony driver Herman Greer says that most of the vans in Houston have over
200,000 miles on them. In many, the brakes are worn down to metal on metal. Two
weeks ago, one Pony van rear-ended another when its brakes failed just two blocks
from the branch office, crashing the second van into another vehicle, according to
Greer.

On another occasion, the front wheel flew off a Pony van while a courier was
driving. Pony supervisors have sent out vans with caved-in sides from previous
accidents that have never been repaired.

Pennsylvania. Pittsburgh Pony employee Anthony Didolce says he often has to drive
a delivery van with no speedometer or emergency brake.

While most delivery companies have communications radios in their vans. Pony
generally does not. This means that drivers are forced to hunt for pay phones to keep
in contact. Veteran Harry Stubenvort says that using a pay phone late at night in
northside Pittsburgh reminds him of his days in Beirut. He adds, "One of my
coworkers died of a heart attack in his vehicle and was only discovered after a
customer called to complain that his delivery hadn't arrived. I keep thinking that this
poor fellow may have lived if he'd been able to radio for help."

Another Pittsburgh driver, Bobby Valentine, once wrote up a vehicle as unsafe.
But when he got back to the hub he found out that instead of repairing it, Pony had
just assigned it to someone else.

Colorado. By the time Pony driver John Benoit got to Vail, the storm his supervisor
had sent him out in had become a severe blizzard. When he phoned in to the Pony
office to let the supervisor know that conditions were unsafe for driving. Pony
threatened to fire him or discipline him if he stopped. To save his job, Benoit kept
driving. His vehicle hit an icy patch on the road and slipped into an embankment,
denting the back bumper. A couple of weeks later, Pony asked him to sign a form
stating that the accident was "preventable" and would count on his record.

West Virginia. Fred Anderson, a Charleston driver, had a 12:30 a.m. run in an ice
storm that was so bad that police warned all motorists to stay off the road. But
Anderson's supervisor insisted that he make the delivery. The trip took much "longer
than normal, and when he arrived at his first customer, they took him to a hotel for the
night.

Another employee, Ralph Fouty, initially refused to go out in that same storm,
citing police warnings, but was ordered out anyway. He wrecked his vehicle and was
fired.

170

Back-Breaking Work

In Oregon, Pony Express is limited to 75 pounds per package by the state law.
However, the company routinely requires its workers to lift packages weighing twice
that maximum and more.

Oregon. In Salem, driver Phil Berg-Rempel injured himself lifting a 132 pound
package that the company required him to deliver. After he filed an OSHA complaint
with the state. The agency investigated further, turning up 269 violations by Pony
Express. The comapny was fined $26,900.

Missouri. St. Louis driver Angela Burle delivers some of Pony's heaviest packages.
On Friday nights, Burie -- who is in the second trimester of her pregnancy -- unloads
heavy John Deere tractor parts by herself. She says that a tractor rim she moved
recently weighed more than 150 pounds.

West Virginia. In Charieston, West Virginia, Jim Cavender can usually get help
loading his heaviest freight — including car parts that weigh over 100 pounds — but
Pony Express leaves him to unload the parts himself at the delivery site without the
help of a hand truck or lifting device.

Indiana. In Clarksville, Indiana, Pony driver Dennis Hobbes had to unload a 170
pound John Deere tractor gas tank by himself.

Missouri. In St. Louis, as in other Pony locations, cancelled checks are transported by
Pony Express between banks and the Federal Reserve as part of the check clearing
process. The checks are bundled and stuffed into trash bags that often weigh as
much as 150 pounds. Jim Sylvester says that he and the other drivers who handle
these routes are expected to hoist these unwieldy, overweight bundles of financial
documents unaided.

Pony Express Delivers...

Crushing Blows to Workers' Efforts to Improve their Lives

In 58 cities across the country, Pony Express workers organized into a union to
improve their miserable wages and working conditions. But Pony Express is doing
everything it can to stop them — threatening and firing workers, cutfing hours, changing
work routes, and trying to thwart employees' efforts to win better on-the-job conditions
by delaying negotiations.

The National Labor Relations Board issued a complaint alleging over 120 violations of
federal labor law and is currently holding hearings on these charges.

Meanwhile Pony Express is continues its efforts to weaken workers' resolve and erode
confidence in their union.

171

Want a Better Life? You're Fired..

Georgia. In Statesboro, Pony Express fired or forced out all but five of its 18
employees who tried to organize to improve their poverty-level wages and miserable
working conditions. When Pony couldn't find an excuse to fire a worker, the company
simply stopped assigning the driver deliveries and refused to let them punch-in on the
time clock. The dhvers were forced to quit.

Kentucky. The supervisors at Pony Express* Lexington terminal got tired of Dennis
Arvin's efforts to organize his co-workers to improve their poverty-level wages and
miserable working conditions. So they stopped assigning deliveries to him, he says.

With a wife and two children to provide for, Arvin couldn't afford to stand by while
Pony kept him waiting for assignments that never came. He was finally forced to quit
and find another job.

Racism

Missouri. Hobart Currie, a Vietnam vet and a Pony Express driver for 1 1 years, is
paid $7.25 per hour, and works a schedule that puts the hardest workers to shame.
During the week ending August 5 his pay stub showed 80 hours - all at straight time.
He has worked as much as 100 hours a week repeatedly. As a senior driver he trains
other drivers, maps out routes, sets up, or acts as dispatcher.

He is put in charge on weekends often because, as he says, "managers like to be
home on weekends."

Currie has trained his own supervisors, who have been promoted while he is
passed over. The people Currie trains to become his supervisors are white, while he
is black. He writes to General Schwarzkopf: "I thought equality was for everybody. I
practiced what you preached in the service, but it took my return to civilian life to see
what racism is, and equality isn't."

All Work— and Some for No Pay

Missouri. Pony Express has never paid Gary Bruce for some 130 hours he has spent
at work. When his route ends at 1:30 a.m. in St. Louis, Pony makes Bruce punch off
the time clock, even though he then has to wait — sometimes until 4:00 a.m. — for the
arrival of a delivery from Chicago which he must take home with him to Poplar Bluff.

172

Georgia. In Atlanta, Melvin Banks said he and a co-worker have never been paid for
the dispatch work they did for Pony one weekend. Most of the dnvers have to work
60-hour weeks just to take home a check that can cover the bills. Pony doesn't offer
its drivers full benefits until they have been working for two years. Even then, some
workers still don't get benefits if the company doesn't feel like awarding them. When
Banks and 14 other drivers went on sthke to protest their intolerable conditions, Pony
fired three of them outhght.

The company couldn't find an excuse to fire Banks, but they cut his pay by 75
cents an hour when he returned to work— down to $6.25 an hour. Since then. Pony
has done everything it can to try to harass Banks. "They'll wnte you up for any little
thing, suspend you, try to discredit you in every way they can," Banks said.

Pony's Working Poor

Oregon. In Portland, Pony Express paid Lynn Curtis and Joyce Moon only $6.50 an
hour. Five months ago, Curtis had to find another home for her son because she
could no longer support him on her income. She has no health insurance or benefits.

When Pony Express cut Joyce Moon's hours, she could no longer afford her rent
and had to find homes for her children. Moon drove for Pony during the day and slept
in her car at night.

Kentucky. When Pony Express first hired Mike LeMaster in 1986 in Ashland, the
company paid him $4.35 an hour. Today— after eight years of service to the
company— Mike is still waiting for his first raise. His pay is still only paid $4.35 an
hour.

In January of 1993, during the fuel crisis. Pony levied a 3% surcharge on its
customers to offset the increased prices. But drivers like Nicholasville's Al Williams
who lease their vehicles to Pony got no relief because the company wouldn't increase
their mileage rates. Williams and the other drivers continued to be paid only $4.35 an
hour and fifteen cents a mile. •<;--• ■ < -

Dodging Benefits with More Part-Timers *

Pony Express wori<ers wages are so low that the vast majority of them have to work
well over 40 hours to scratch out a subsistence level living for their families. Now
Pony has added a new wrinkle. Pony Express is cutting hours for its full-time
employees, workers believe, to avoid paying for benefits.

Missouri. The company recently cut six-year employee Eari Getes' 10- to 11 -hour
route down to 7 and a half or 8 hours. But Pony hasn't stopped delivering to his old
stops. Instead, it has hired a new part-time worker to take up the difference.

173

Merrill Rayborn, another long-time St. Louis Pony driver, saw his hours cut from 58
down to 17 in one week. A brand new part-timer delivered to Rayborn's old stops.

"They're trying to get it down so that everyone is part-time so they don't have to
pay any benefits," said another St. Louis driver, Jim Sylvester. "As it is, you don't get
vacation until you work three years for the company. And no paid sick leave ever."

Pony' Spells Poverty: EVL

Many Pony drivers do not dhve company vehides, but use their own cars under
Pony's Employee Vehicle Leasing (EVL) plan. Under this [^an, the employee is
required to lease a vehicle and the company pays a small amount, allegedly to cover
the costs. In reality, the company's payments do r\ot begin to cover the actually costs
of leasing, operating, and maintaining these leased vehides, and the drivers are stuck
in a constant struggle to stay afloat.

MissourL As an EVL driver, Jim Sylvester is required to lease or purchase a vehicle
and pay his own commercial registration, auto insurance, car maintenance, and repair
bills. Pony Express pays him $5.50 an hour plus $.17 per mile. A t>ookkeeper who
Sylvester asked to calculate it out for him says his auto expenses ate up 30% of his
wages last year, leaving him only $3.86 per hour to pay for housing, food, and other
necessities.

West Virginia. In Charleston, EVL driver Cavender is required to lease or purchase a
vehicle and pay his own commercial registration, auto insurance, and car maintenance
and repair bills-all on $5.00 an hour, with no overtime.

Last year. Pony told Cavender that the Escort wagon he was driving westoo small.
His supervisor threatened to switch him to a shorter route with fewtff hours and less
pay unless he leased or purchased a new, full-sized vehicJe.

Now, to meet payments on his new Ford van and stiR provide for his two children,
Cavender has had to take a second job on weekends to stay out <^i}ar4fruptcy.

174

Firing ttie Victims

Texas. Houston driver Laveta Hayes' ball point pen almost killed her. Hayes" Pony
Express van was broad-sided by a reckless driver who ran a red light, forcing her to
veer into a pole. The pen she always carries in her shirt pocket punctured straight
through her jaw.

At the hospital, the Pony supervisor asked how soon she could return to work. But
just a few days after her return, Pony Express fired Hayes for getting into a
"preventable" accident. The police had not even given her a ticket.

Forcing a Choice Between a Job and Health

Missouri. St. Louis driver Angela Burle was afraid that her pregnancy was going to
miscarry. After her doctor recommended that she take a week off work, the four-year
driver for Pony Express called in to ask for just one night off to recover. But her
supervisor threatened to fire her if she didn't show up for work.

"When I'm sick, I'd like to be able to take a day off and not worry about losing my
job," Burle said.

Burle's doctor also told her not to work more than 35 hours a week But at $6.75
an hour, Burle says she has to work at least 50 hours a week just to pay her bills and
eat the healthy diet her doctor recommends. She is now about midway through her
pregnancy.

Washington. When one Seattle Pony driver showed up to work complaining of being
ill, his supervisor told him that there was no one to cover his route — he would have to
go out. The dhver collapsed and died of a heart attack in Everett.

Workers report that Pony dispatchers, concerned about getting his route back on
schedule, instructed another driver to get the van keys out of his pocket, even while
emergency medical personnel were still trying to resuscitate him.

Pony Express Delivers...

Less than Customers Bargained For

Beat-Up Vehicles, Lax Procedures Breach Security

Pennsylvania. William Rak spent 45 minutes one day picking up Federal Reserve
checks off the Pittsburgh street when they flew out the broken back door of his Pony
Express van. The door locks had never been fixed because Pony had fired its only
mechanic.

Missouri. Rounding up loose Federal Reserve and Boatman's Bank checks that have
flown out onto the street is a routine part of Pony dhver Jim Sylvester's work day. He
says that the 30 gallon garbage bags stuffed with bundled paperwork and checks are
poorly tied and constantly fly open duhng delivery.

175

Beat-Up Vehicles, Lax Procedures Breach Security continued

Washington. Seattle Pony Express driver John Flansaas would never have known
that the packages he delivered to University Hospital contained samples of monkey
blood infected with the AIDS virus if he hadn't finally asked a hospital nurse himself.
There were no markings on the boxes at all, which were loaded side-by-side with
packages of Easter candy and Halloween sweets.

Flansaas says that Pony Express never trained him on how to handle biological
materials and never told him what the boxes contained. He says that Pony's
hazardous materials training consists of a five minute session in which a Pony
supervisor gives employees the answers to a multiple choice quiz.

Colorado. Pony Express transports materials to and from the United States Postal
Service in Denver, but the company is hauling away more than the USPS thinks.
Pony supervisors tell their drivers to steal the USPS push carts, says Joe Palumbo, a
five-year Pony employee, "because Pony's carts are falling apart and there are not
enough of them to go around."

Oregon. A few months ago at the Portland terminal, a Pony driver came to his
supervisor holding a bloody package he had found in a bag of bank work. The
supervisor told him to dig through the shipment and find the leaky package of blood.

Who's Riding Herd on Pony Express

U.S. House Banking Committee & the Federal Reserve

Congressman Henry Gonzalez, who chairs the House Banking Committee, has called
on the Federal Reserve to investigate Pony Express' contractual relationships with the
Federal Reserve and its branches.

The Inspector General has agreed to carry out a thorough investigation and has
committed to personally oversee the investigation. Particular security concerns
include:

■ Background checks have failed to screen out security risks. In Oregon, for
example a driver was hired while he was on parole, a fact that was not
discovered until the Portland police arrested him for allegedly robbing a bank.

176

U.S. House Banking Committee & the Federal Reserve continued

■ The indiscriminate mixing of hazardous cargo with other material, raises
security and public health questions. The lack of training for hazardous
materials handling has led to OSHA citations. OSHA has also found safety
violations at some terminals and has declared some equipment unsafe.

■ Lax security in delivery procedures. In Wisconsin, for example, an individual
whose work put him in contact with Pony Express couriers reported that
vehicles were routinely left unlocked with the tailgate wide open while the driver
delivered other cargo inside the building.

In addition, there is reason to believe that at least some Federal Reserve
contracts with Pony Express may violate the federal Service Contract Act, which
requires that contractors must be paid wages that meet certain minimum standards.
Pony's rock-bottom wages are so low that some Pony families are actually below the
poverty line.

In Oregon, for example, the Department of Labor's Wage Determination
Numbers for package carriers calls for a minimum hourly wage of approximately
$8.00. But Portland Pony Express drivers are paid wages as low as $4.50 per hour.

National Labor Relations Board

The NLRB has issued a nationwide complaint including over 120 specific charges of
labor law violations against Pony Express. These charges are currently the subject of
hearings across the country.

177

Mr. Peterson. Mr. Currie, did you have a statement or

Mr. Currie. A brief one, Mr. Chairman. Good morning to you.

Mr. Peterson. Welcome to the committee.

Mr. Currie. Members of the subcommittee, thank you for invit-
ing us and having us, giving us a chance to speak our minds.

My name is, once again, Hobert Currie. I am from St. Louis. I
have been with Pony Express for 11 years. I was hired through this
TJTC program. It benefited the company, true enough, but it didn't
benefit the employees.

Once our time period was up for this to kick in, then they made
working conditions so horrific and so horrible that you had no
choice but to leave. And they tell you straight out from the begin-
ning, we want a revolving door policy because of this program.

A revolving door policy means once they have benefited from us,
then they'll turn around and hire another person qualifying for the
same TJTC tax credit. When I first started 11 years ago, the com-
pany was called Gelco. Pony Express bought them out. I was at
$9.10 an hour, and this is in 1983, early 1984. Here it is 1994, they
cut our benefits. We are down to $5 an hour, which is ridiculous.
But we have no benefits, no health insurance, no workers' rights,
no say-so in the matter. If you do speak your mind or speak up for
yourself, then you're out the door.

They find all sorts of excuses and reasons to keep us at this level
where we have to be dependent on programs like this. And the only
ones who are going to benefit is going to be the companies who par-
ticipate in these programs.

I'll say again there are no benefits. The working conditions are
so terrible. We risked our own lives. Not just us, our own lives
every day, but we risk your lives by being out there in these unsafe
vehicles and these working conditions and stressed out, no sleep,
running 24 hours a day, 100 hours in a week. Nobody cares. Pony
does not care.

We're trying to bend your ear to hopefully gain some attention
from you ladies and gentlemen. Hopefully we'll benefit from you
today here if you take an active interest in what is actually going
on.

Why should big corporate America continuously benefit when we,
the people, don't matter, period? We don't matter until there's a
problem or you need another way to benefit from us. I say I work
100 hours a week, 7 days a week. I'm on call 24 hours a day. But
it doesn't matter. I'm still at the same wage level of 11 years ago.
It doesn't matter. People ask me why I've stayed so long, why do
I take this, continuously take this.

There comes a time when you have to. You can no longer run.
You have to take a stand and fight. And if I don't, it's going to con-
tinue. I have to say, I've never been afraid of anything that I can
see, there's always a solution somewhere down the line to each
problem. And I figure not just for myself, but I could benefit others
by being here today and speaking my piece and making you aware
of what is actually happening with the big corporations, such as
Pony Express.

Mr. Peterson. Thank you. Thank you, Mr. Currie. We appre-
ciate you being with us.

178

We have Janet Tully with us from Marriott. You use the program
and you are in favor of it, so we want to give — we're trying to have
some balance here, so

Ms. TULLY. OK. On behalf of the Society for Human Resource
Management and Marriott International, I'm pleased to be here to
testify for targeted jobs tax credit. And yes, I am pro renewal of
the program.

We at Marriott are very proud of our national participation in
the program, and our experience has been so positive that we've
hired a tremendous amount of structurally unemployed people who
never really would have otherwise had the chance.

The key to our successful involvement has come because of an ex-
panded awareness on the part of our hiring managers, they —
through training and through financial incentives. Any credit, any
credit that's realized on the part of any employee, the credit is
given right to the unit level and not on the corporate level. So it
affects the bottom line of the unit.

Our managers are encouraged to give TJTC people an advantage
when they are in the hiring process and to spend extra time and
effort once they are hired, to help them to stay as long as they can.
Once our managers overcame their initial reluctance to hire these
individuals, they found that TJTC people stayed as long, if not
longer, than non-TJTC eligible people.

Frankly, I really am extremely surprised at the findings that the
inspector general's office found. This certainly is at odds with my
experience at Marriott and with other companies that I am familiar
with. I know that our managers actively seek TJTC eligible people.

Some of our units, such as our reservations center in Nebraska,
which is extensive, has initiated far-reaching programs for the out-
reach of people with disabilities. The initial impetus for this pro-
gram was TJTC. We knew that any extra time and effort that was
going to be involved — and that was going to happen, starting up
the programs and doing some extra training, was going to be offset
by TJTC.

Other methods of outreach that we use includes job orders with
the State employment services, stating that TJTC applicants are
preferred. We don't say TJTC applicants only. We need some appli-
cant flow, and if they don't have any TJTC eligibles at the time,
we still want to get some kind of a flow.

But we do have — we now have job orders listed with the Job
Service due to the Targeted Job Tax Credit Program. We list open-
ings with vocational rehabilitation agencies, veteran agencies, and
numerous community-based organizations.

Responsibility for initiating the paperwork and handling of the
process, the TJTC vouchering process, at Marriott is an in-house
hotline screening program and we supplement that with TJTC con-
sultants. Because of the savings from TJTC, we have initiated nu-
merous programs at Marriott which in the present economy would
not be otherwise feasible.

Some of these programs include work adjustment programs for
people with disabilities, Marriott job coaches and supported em-
plojnnent programs for people with disabilities to increase their
skill levels. We have developed preemployment life skills and a jobs
skills training program for people who are coming off of welfare or

179

people who have had unsuccessful job experience where maybe in
the last 2 or 3 years, they haven't worked.

We found that when we did our outreach for TJTC people, we
were finding that a lot of the people that came on board had so lit-
tle job experience and background experience that we really had to
spend a tremendous amount of time in the beginning working with
them.

So therefore, we developed a program called "Pathways to Inde-
pendence" where we work with the different welfare work-to-pro-
grams and the — JTPA program to help in preemplo3rment training.
Some of the modules that we have in this training program include
some self-esteem training, basic communication skills with your
managers, your co-workers, with our hotel guests, managing your
paycheck, just basic how to manage your budget and basic hospi-
tality skills. These programs really can't be continued if this pro-
gram ends.

My biggest problem is that I can't market them internally to our
units if I can't say that there will be an offset to all the initial
losses in — excuse me.

Mr. Peterson. I was — go ahead.

Ms. TULLY. So it's hard to market it internally into the — into our
individual units when we know there isn't going to be any offsets
for all the additional costs for the initial training programs.

Time is money and training costs money. As much as we would
like to continue these programs, we have a responsibility to the
shareholders. We just can't seem to carry it. In the chairman's let-
ter to Marriott, we were asked to provide our general assessment
of the TJTC program and recommendations for change.

We believe the program is first-rate, naturally, based on the fact
that it encourages Marriott to reach out to workers who might not
have otherwise been able to enter the work force. We give them the
opportunity to learn basic workplace skills. Some of our best em-
ployees came to us through TJTC and they would not have had this
opportunity if we were not doing the preferential hiring in looking
for TJTC. This is the reason for which the program was developed
in the first place.

Of course, the program can be improved. To deal with the con-
cern that these people would have been hired anyway, I rec-
ommend that the company should be requested to do at least one
of the following: Where State EEO laws permit, companies try to
determine probable eligibility. I understand that a lot of existing
EEO laws do not allow companies to ask these questions prior to
making a hiring decision and the questions that are necessary to
be asked to determine if they are eligible for the programs.

But there are some States where the EEO laws permit this, and
they can do that in those States. Or the company should file a re-
quest with the Job Service stating they want TJTC eligible people
preferred and the Job Service could file the job orders with the
State welfare offices. Or the company could develop and have proof
of outreach programs which indicate that the company will do one
of a number of things, either advertise in economically disadvan-
taged communities, provide bonuses for hiring managers, for hiring
TJTC eligible persons, develop working relationships with commu-
nity-based organizations indicating that they prefer TJTC eligibles.

180

I believe that if the program were made permanent and given
proper funding, it would become an integral part of every compa-
ny's hiring procedures. We have definitely altered our hiring proce-
dures because of this program.

It is necessary that there be more information about the pro-
gram's existence in the form of public relations and advertising. It
is in many cases a very, very well-kept secret. I saw it advertised
one time, just due to the budgeting. President Reagan was talking
about it and it was around 1:15 a.m. on television, and that was
the only TV coverage it had.

Currently, the Job Service does not staff its TJTC units ade-
quately or with their strongest staff members because they don't
believe it's going to be a long-term program. Companies don't as-
sign their resources to the TJTC program because of their constant
belief that the program is going to expire.

The 23- and 24-year-old economically disadvantaged youth cat-
egory should be reinstated. This category was dropped for unre-
lated budget reasons several years ago, but is an extremely impor-
tant part of the program. Employers are reluctant to hire individ-
uals within this age group who have little or no prior workplace ex-
perience. By giving employers an incentive to take a risk on these
individuals, many of these young people receive their only oppor-
tunity for employment.

In closing, I urge the subcommittee to support renewal of TJTC.
On behalf of Marriott International, I would be happy to answer
any questions.

Mr. Peterson. Thank you. Miss Tully. We appreciate your testi-
mony.

[The prepared statement of Janet Tully follows:]

181

On behalf of both the Society for Human Resource Management
(SHRM) and Marriott International, I am very pleased to be here
today to testify with respect to the Targeted Jobs Tax Credit
Program (TJTC) . SHRM is the leading voice of the human resource
profession, representing the interests of more than 60,000
professional and student members from around the world.

Recognizing that certain groups of individuals are structurally
unemployed. Congress acted in 1978 to establish the Targeted Jobs
Tax Credit. This landmark legislation established a partnership
between the government and the private sector to place certain
"hard to employ" individuals into the job market.

The key to this program is a "targeted" tax credit. An employer
can receive a credit for a percentage of an employee's first-year
wages. It is available only to businesses who agree to hire
workers from among groups such as disadvantaged youth, welfare
recipients, and Vietnam-era veterans.

We at Marriott are very proud of our nationwide participation in
this program. Our experience has been so positive due to the
fact that because of TJTC we hire far more structurally employed
workers than would otherwise be the case. Furthermore, we are
very pleased that, even though most of these workers come to us
with little or no basic workplace skills, many learn the basics
and go on to be highly valued and highly productive employees.

The key to our successful involvement has come about because of
expanded awareness by our hiring managers about TJTC, through
training and monetary incentives. Managers are encouraged to
give TJTC eligible applicants extra consideration in hiring and
to retain these workers once they are on the job, because any
wage savings are passed on to the unit's bottom line. Once our
managers overcame their initial reluctance to hire these
individuals, they found that many of them stayed with the company
longer than non-TJTC eligible employees.

Frankly, I am extremely surprised at the conclusions reached by
the Office of the Inspector General of the Department of Labor
regarding TJTC. Certainly their conclusions are at odds with the
practice we have initiated at Marriott, and what we have found is
the case with other companies with whom we are familiar.

I know that our managers actively seek to hire TJTC eligible
people. Some of our units, such as our reservations office in
Nebraska, have initiated a far-reaching program for outreach to
persons with disabilities; the initial impetus to this initiative
was TJTC. Other methods of outreach include job orders with the
State Employment Services stating that TJTC applicants were
preferred, Vocational ReheUailitation agencies, Veterans agencies
and community-based organizations.

Responsibility for initiating paperwork with the TJTC vouchering

182

agencies lies with our in-house hotline screening system or with
our TJTC consultants.

Because of the savings from TJTC, we have initiated numerous
programs at Marriott which in the present economy would not
otherwise be feasible. Some of these programs include work
adjustment programs for persons with disabilities, Marriott "job
coaches" to increase skill levels of persons with disabilities.
We have developed pre-employment life skills and job skills
training for many of those employees who have been on welfare or
who have had a limited or unsuccessful work experience. These
training programs include self-esteem training, communications
skills in relation to supervisors, co-workers and guests,
managing a paycheck, and basic hospitality skills.

These programs will not be continued if we are unable to market
them to our properties as a program that will assist in training
new TJTC applicants while offsetting potential financial loss.
Time is money, and training costs money. As much as we would
like to be able to administer these programs without a financial
offset, we have a responsibility to our shareholders and owners
to protect their investments. In the Chairman's letter to
Marriott you asked us to provide our general assessment of TJTC
and make recommendations for change.

We believe the program to be "first rate," based on the fact that
it encourages Marriott to reach out to workers who might
otherwise not enter the workforce and give them the opportunity
to learn basic workplace skills. Some of our best employees come
to us because of TJTC: without it, they might never have found a
job. This is the reason for which the program was developed in
the first place.

Of course the program can be improved. To deal with the concern
that "these people would be hired anyway," I recommend that the
company should be requested to do one of the following:

1) Where State Equal Employment Opportunity (EEO) laws permit,
companies could try to determine probable eligibility.

2) The company should file a request with the job service
stating that TJTC eligibles are preferred. This request would be
filed by the job service with the state welfare office.

3) The company would develop and have proof of outreach programs
which indicate that the company will do one of a number of
things:

a. Advertise in economically disadvantaged communities.

183

b. Provide bonuses to hiring managers for employing TJTC
eligible persons.

c. Develop working relationships with community-based
organizations, indicating that they prefer TJTC eligibles.

I believe that if the program was made permanent and given proper
funding, it would become an integral part of every company's
hiring procedure. It is necessary that there be more information
about the program's existence in the form of public relations and
advertising. Currently, the job service does not staff its TJTC
units adequately or with their stronger staff members, because
they do not see TJTC as a long term program. Companies, in turn,
do not assign their resources to the TJTC program because of
their constant belief that the progreun will expire.

The 23 and 2 4 -year old economically disadvantaged youth category
needs to be reinstated. This category, which was dropped for
unrelated budget reasons several years ago, is extremely
important. Employers are reluctant to hire individuals from this
age group who have little or no prior workplace experience. By
giving employers an incentive to take a risk on these
individuals, many of these young people receive their only
opportunity for employment.

In closing, I would urge the Subcommittee to support TJTC. This
valuable program is set to expire on December 31, 1994, and with
it, perhaps the goals and career aspirations of thousands of this
country's structurally unemployed individuals. Congress should
act now to extend the TJTC program and keep this key partnership
between the government and the private sector alive.

184

Mr. Peterson, Next we are going to hear from Charlean Jackson
from the State of Texas. Appreciate you being with us today.

Ms. Jackson. Thank you. Chairman Peterson, members of the
subcommittee, I am Charlean Jackson, Deputy Administrator of
the Texas Emplojmient Commission, which is the State employ-
ment security agency for our State.

I had been asked to come before you to testify representing an
agency administering the Targeted Jobs Tax Credit Program.
Texas has consistently had the highest volume of TJTC activity in
the Nation.

As you're aware, the Revenue Act of 1978 established TJTC.
Through the years, legislation has modified the program with
changes in process, as well as eliminating and then adding tar-
geted groups. As these changes occur, the program has become so
confusing that it is out of the reach of the normal employer, and
I want to stress that. This is the regulation document from the Em-
plojonent and Training Administration.

I would say to you £in employer has to be trained on extensive
government regulation in order to effectively utilize TJTC. And in
the case of the Marriott Corporation, they have gone through a
massive training program for their people so they could access this
program. And that's really what it takes.

A virtual industry has been created by consulting groups who ac-
cess the program for a fee as a representative of the employer.
Some large employers, such as Marriott, have human resources
staff trained to coordinate the TJTC Program for their purposes. I
repeat, however, that the program is just not accessible for the av-
erage employer. The program can create huge tax savings for large
service and retail industry employers who make TJTC a part of
their business strategy.

Today, we heard a few comments about the funding which sup-
ports the TJTC Program through allocations to the State employ-
ment security agencies, and I would say to you, and I believe this
would be backed up by the OIG, that the funding is woefully inad-
equate. The allocation has never been sufficient to support the de-
mands of the program and is currently at such a level that dollars
will only support a basically ineffective program.

I would also say to you that we have never, ever been asked by
the Department of Labor how much it costs to administer the pro-
gram. The consulting groups have asked us what we need to ad-
minister the program. We have never been asked by the Depart-
ment of Labor. And it is extremely important that consideration be
given to the people who have to do the work of this program.

In the State of Texas, our dollars will only pay for 31 positions
and in our State, we have 102 full-service offices and an additional
109 employment service points to smaller communities. We feel if
we have a program, we need to have people who can do the work
in those local offices.

We recently testified that the ES offices do not have enough
staff — we don't — to handle this program the way it was intended to
be handled. The consulting groups have been after us for several
years to accept mail-in eligibility documentation, as opposed to
their sending the applicant to a local office. The integrity of the
program with the mail-in system is seriously compromised. Yet

185

lack of staff has forced us to join most other States in allowing this
procedure.

The TJTC Program is one which invites fraud. Our resources are
so limited that the staff cannot begin to audit all of the applica-
tions received in the mail. We do the best we can. We deal with
groups who try to take the tax credit on food stamp recipients,
classifying them as general assistance. Qualified general assistance
programs are not even available in our State, yet we have folks
who try to use that to make people eligible. Mental health and
mental retardation clients are identified as vocational rehabilita-
tion clients, clearly trying to t£ike advantage and slip something by,
and it's a real problem for us.

A staff member has recently identified a situation in one of our
major cities involving a consulting group who is submitting eligi-
bility worksheets on young people stating that they individually
qualify as a family of one with no income. During contacts with
parents about such living arrangements, our interviewer discovered
that the information was falsified. The young people state that the
forms were already filled in and they were told to sign. We re-
turned these folders to the consulting group 5 to 6 months ago and
we have had no response.

This is not to be interpreted as a bashing on consulting groups
because we have many who do a good job. But what I want to infer
is that the program is ripe for fraud, for people who want to do
something that is not right, it's there for the taking.

Statistics on the certifications issued during a recent quarter for
our State agency reflect four factors which are very interesting and
should be of interest to you. Eighty-eight percent of those certified
were paid minimum wage or less. Twenty-nine percent were cleri-
cal or retail. For the most part, they are retail sales clerks. Fifty-
eight percent were service occupations and 80 percent were be-
tween 16 to 24 years of age.

I would say to you I think something that's very, very critical —
and I have not heard enough attention to it in this hearing, is what
types of jobs are being filled. I say that to say this. In our paper
in Austin, Texas Sunday in the business section, headlined "help
wanted". People, employers cannot find people to fill these jobs.
And I would say to you to put anyone who wants to work in front
of them, TJTC or not, they're going to hire the worker. They need
the workers, and TJTC is not a big part of that. This information
supports studies which found that most TJTC certifed workers
were youth in minimum-wage, high turnover occupations.

For the last program year reporting, which ended June 30, 1994,
545,000 job openings were listed with our agency of which 783 were
openings for TJTC eligible candidates were to be the only referrals.
Very, very limited number.

To support the OIG assessment that most workers would have
been hired regardless of the tax credit, 110,206 openings were list-
ed where employers said they would take a TJTC eligible worker;
however, eligibility was not a requirement for the job, and Marriott
Corp. is an employer that does this.

The purpose of this program established 16 years ago was well
intended. Designed for target group members to be vouchered as el-
igible for TJTC, these potential workers were to take the vouchers

186

as a self-promotional tool for job search. This process proved to be
unsuccessful. An individual's self-esteem can be seriously damaged
when he wears a sign around his neck saying that he has a barrier
to employment.

Our agency strongly agrees with the findings of the Office of the
Inspector General's report that the TJTC should not be reauthor-
ized following expiration Dec. 31, 1994. If reauthorization does
occur, Congress should adequately fund this program.

I say to you no one knows what the real cost is with operation
of this program. In the case of the allocation for our State, we
would need dollars, three and one half to four times of the current
amount. Mr. Chairman, this concludes my written statement.

I'll be happy to respond to any questions you might have.

Mr. Peterson. Thank you very much for your testimony. We ap-
preciate you being with us.

[The prepared statement of Charlean Jackson follows:]

187

[The questions addressed by Mr. Peterson and Ms. Jackson's
replies follows:

You asked that I respond to two additional questions.

Question: If the law were changed to limit tax credits to workers who are referred
by the Employment Service on a pre-employment basis— and your funding was
increased proportionately-do you believe that the TJTC would be a good program
for the disadvantaged and a good marketing tool for your agency?

Response: If you believe, as we do, that these job seekers would be hired
regardless of the TJTC Program, then the other issues are moot. Our statistics
show that these workers are hired, for the most part, in unskilled, low paying, high
turnover jobs. To make any difference in increasing opportunities for the
disadvantaged in "breaking the mold", jobs must have a training plan where the
worker can obtain much needed skills. If TJTC is a program which truly helps the
disadvantaged, there must be a retention factor much stronger than what currently
exists. An increase in wage rate from entry level and beyond must be defined.
This wage rate should be tied to the increased skill level and training plan.

There is absolutely nothing in the current TJTC Program to force an employer to
make a difference in the future of a disadvantaged person. This is a program that
benefits all the players but the applicant.

188

-2-

Your comment about the use of TJTC as a marketing tool for the Employment
Service (ES) is an interesting one. Our experience has been that most employers
are interested in either a "warm body" or a "best qualified" applicant. TJTC, even
in its infancy, never proved to be a marketing tool in and of itself. Our staff used
TJTC as a part of a total package of staffing services. "Let the Employment
Service send the employer well qualified applicants for the job opening-decide who
you want to hire-then let the ES determine if the imminent hire is TJTC eligible"—
this is what we marketed. This also lends credence to the OIG finding that the
applicant would be hired regardless of TJTC eligibility.

Question: Does the use of consultants by employers who seek tax credits for their
workers facilitate the work of the Job Service in implementing the TJTC Program?

Response: Consultants are in business for profit. Many of them have very broad
interpretations of TJTC regulations. Before we were forced (due to staffing
limitations) to discontinue one-on-one interviews with potential TJTC clients,
consultants were constantly pressuring our staff to come to their clients' place of
business for on-site vouchering. The consultants wanted priority service in the local
office for vouchering. It was constant confrontation. These folks are in business to
sell as many clients as possible on use of the TJTC Program, regardless of whether
there is staff on our end to handle the workload. This is not the fault of the
consultants who promote their business interests, but the resources of the ES are not
funded accordingly. There are several consultants who take pride in running an
honest program. They become knowledgeable on prograir requirements and send
in error-free paperwork. I cannot say that this statement applies to the majority.
Consultants always have notified the state personnel as to changes in regulations,
dollar amount of allocation to the states, etc., much ahead of the Department of
Labor. It is easy to understand the perception by many that the consultants control
this program rather than the Department of Labor.

Please let know if additional clarification is needed.

Sincerely,

Charlean M. Jacksor;
Deputy Administrator for

Human Resources & Administrative Services

189

Testimony of Charlean Jackson, Deputy Administrator

Texas Employment Commission

Subcommittee on Employment, Housing and Aviation

Committee on Government Operations

United States House of Representatives

September 20, 1994

Chairman Peterson, members of the Subcommittee, I am Charlean
Jackson, Deputy Administrator of the Texas Employment Commission
(TEC), which is the State Employment Security Agency for the State. 1
have been asked to come before you to testify representing an agency
administering the Targeted Jobs Tax Credit (TJTC) Program. Texas has
consistently had the highest volume of TJTC activity in the nation.

As you are aware, the Revenue Act of 1978 established TJTC. Through
the years, legislation has modified the program with changes in process as
well as eliminating and then adding targeted groups. As these changes
occur, the program has become so confusing that is out of reach for the
normal employer. A virtual industry has been created by consulting
groups who access the program for a fee as a representative of the
employer. Some large employers have human resources staff trained to
coordinate the TJTC program for their purposes. 1 repeat, however, that
the program is just not accessible to the average employer. The program
can create huge tax savings for large service and retail industry employers
who make TJTC a part of their business strategy.

The funding which supports the TJTC program through allocations to the
State Employment Security Agencies is woefully inadequate. The

190

allocation has never been sufficient to support the demands of the
program and is currently at such a level that dollars will only support a
basically ineffective program. These dollars will only pay for 31
positions in Texas which has 102 full-service offices with an additional
109 employment service points in smaller communities across the State.
Needless to say, the program has been fragmented to such a degree that
our face to face interviews with potential TJTC employees in most
instances have been eliminated. The consulting groups have been after us
for several years to accept mail-in eligibility documentation as opposed to
their sending the applicant to a local office. The integrity of the program
with a mail-in system is seriously compromised, yet lack of staff has
forced us to join most other states in allowing this procedure. The TJTC
program is one which invites fraud. Our resources are so limited that the
staff cannot begin to audit all of the applications received in the mail;
however, we do the best we can. We deal with groups who try to take
the tax credit on Food Stamp recipients, classifying them as General
Assistance recipients. Qualified General Assistance Programs are not
even available in our State. Mental Health and Mental Retardation clients
are identified as Vocational Rehabilitation clients. A staff member has
recendy identified a situation in one of our major cities involving a
consulting group who is submitting Eligibility Worksheets on young
people stating that they indivdually qualify as a "family of one" with no
income. During contacts with parents about living arrangements, our
interviewer discovered that the information was falsified. The young
people state that the forms were already filled in and they were told to
sign. The folders were returned to the consultant five to six months ago,
requesting clarifying information and have yet to be returned.

191

Statistics on the certifications issued during a recent quarter reflect four
factors which are predominant:

• 88% were paid minimum wage or less

• 29% were clerical /retail (for the most part sales clerks)

• 58% were service occupations

• 80% were between 16-24 years of age

This information supports studies which found that most TJTC workers
were youth in minimum wage, high turnover occupations. For the last
Program Year reporting which ended June 30, 1994, 545,305 job
openings were listed with our agency, of which 783 were openings where
TJTC eligible candidates were to be the only referrals. To support the
Office of Inspector General's (OIG) assessment that most workers would
have been hired regardless of the tax credit, 110,206 openings were listed
where the employers said they would take a TJTC eligible; however,
eligibility was not a requirement for the job.

The purpose of this program established 16 years ago was well intended.
Designed for target group members to be vouchered as eligible for TJTC,
these potential workers were to take the vouchers as a self-promotional
tool for their job search. This process proved to be unsuccessful. An
individual's self-esteem can be seriously damaged when he wears a sign
around his neck saying he has a barrier(s) to employment.

192

Our agency agrees with the findings of the Office of Inspector General's
Report that the TJTC Program should not be reauthorized following
expiration December 31, 1994. If reauthorization does occur. Congress
should adequately fund this program. In the case of our allocation, Texas
would need dollars three and one-half to four times of the current amount.

Mr. Chairman, this concludes my prepared statement. I will be happy to
respond to any questions you or other members of the Committee may
have.

193

Mr. Peterson. Mr. Lorenz from Alma College in Michigan.
Thank you for being with us.

Mr. Lorenz. Mr. Chairman, I'm very pleased to have this oppor-
tunity to appear before you. I would like to begin by emphasizing
the unique perspective from which I come here today for I've been
both a TJTC researcher recently and also you might call it a practi-
tioner.

Currently I am an associate professor of history and political
science at Alma College in Alma, MI. I am also president of the
Michigan State, Political Science Association. My special interest is
the study of the social policy process. (I might add I also went to
the University of Chicago in Mr. Rush's district.)

An example, of my interest in social policy is my research on the
failure of the TJTC oversight process which will appear in the
spring 1995 Journal of Policy Analysis and Management. And I
might also add something I wasn't going to originally say. I heard
a comment earlier about we're getting lobbying on both sides of the
issue. Well, I think we do, we do hear somewhat from both sides
of the issue. But, one of the problems with TJTC, as so many pro-
grams like it, is we get most of the lobbying, most of the pressure
from those who are getting the immediate cash benefit from the
program. I heard the Department of Labor also add at the last mo-
ment that they are going to have meetings tomorrow regarding the
program, and they mentioned they were going to talk to employers,
which I think is very good, but they didn't — and I'm sure this is
a Freudian slip, so to speak — ^they aren't going to search out job
seekers. They also are not going to consult with those of us who
are maligned social scientists or auditors. They apparently are
going to go to just one segment of the interested public.

At the request of the House Ways and Means Committee to the
National Commission for Employment Policy, I conducted two of
the empirical studies in the 1980's of TJTC. I also have practical
TJTC experience having served as the Maryland TJTC coordinator
from 1979, when the program was beginning, until 1986, and I
know Janet from then. We also had dealings with Borg- Warner as
a user of the program,

I'd like to use the brief amount of time remaining to summarize
the evidence of what I would call TJTC failure and the reasons for
that failure and the need for reform.

First of all, the National Commission for Employment Policy
studies, which I did, tracked the employment experiences of about
2,000 TJTC participants, producing findings which are comparable
to those of the inspector general's study.

Without going into methodological details — I will be glad to go
into those in questions, I have prepared a summary, which I think
you each have with my written statement. It compares the NCEP
study on some key indicators of TJTC impact with those of the IG,
showing very similar results and, I think, very negative results for
the program.

And incidentally, these negative results from the NCEP study
were reported at hearings of the Ways and Means Committee in
1989, following our study in 1988. I was pleased to hear today that
Doug Ross clarified the ETA response to the IG report. I agree with
him that TJTC is difficult to evaluate, in a pure social scientific

194

sense, because we never had a real control group, which would be
some group we deny services to.

Despite that qualification, I believe the scientific evidence is
overwhelmingly in, and I think TJTC, as it currently stands, has
largely failed. And I think this is a fact. I don't think this is just
a hypothesis that needs some more study.

Aiid I think what that raises is the question of what is wrong
with TJTC? And I think a brief exercise can help us clarify that.
I think, first of all, we should ask what is the problem TJTC is de-
signed to solve, and is it defined correctly to solve that problem?

I think the answer to that question is that TJTC is aimed at the
right problem. Clearly, employment opportunities for disadvan-
taged youth, welfare recipients and other targeted groups are woe-
fully inadequate to support viable families, et cetera.

Thus, a subsidy to derive more employment of targeted individ-
uals is a rational response to a major social problem. Then we have
to ask from where does the failure arise in having implemented
this policy? And I think the answer is that it comes from the seg-
ment of the employer community that has been made up most of
the users of the credit.

In response to TJTC, almost no employers changed their employ-
ment procedures to help group members. I think a few did, and ac-
tually I think Marriott may be one of those because I am somewhat
familiar with what Janet has spoken of. That may be why she is
a good witness to have from the employer perspective.

But I think there is not evidence of a change in behavior de-
signed to provide more opportunity. However, there is a lot of evi-
dence— and we have to be clear on this when we talk about
changes of behavior, there's a lot of evidence of chang^ing behavior
by firms that hire large numbers of low-wage workers in high turn-
over positions. They have worked diligently to maximize their cred-
its, but being largely indifferent to the impact upon the workers
who are getting hired.

I'm sure that the IG is within the ballpark, if that's right to say
during the strike, anyway, in the ballpark in saying 92 percent of
the credits are windfalls. Consequently, we should ask what is the
proper response to TJTC failure?

And I think it is not to continue the program as is or to delay
changes until some future study is made or that sort of thing.
There should be only two options under consideration: No. 1, termi-
nation, as the IG recommended, or. No. 2, significant immediate
changes.

And I reject recommending termination personally, not because
of any merits in the current TJTC, but, rather, because of the con-
tinued deterioration in the emplo3rment opportunities for disadvan-
taged workers, especially minority youth.

In the absence of a national full employment program, simple
justice requires attention be given to targeting emplojnnent and
training resources on this population. However, if the disadvan-
taged are to be helped, fundamental change, not more studies,
must be made in the credit.

Subsidizing high-turnover, low-paying jobs must be replaced with
credits which encourage employers to offer targeted workers living
wages and stable opportunities. To respond to Mr. Rush's wish for

195

formal — or for specific reform proposals, I have included in my
written statement, and would be glad to review, some specific
changes in the current law related to the credit percentage and the
wage base upon which the credit is earned, which I think should
greatly reduce windfall credits while increasing TJTC impact on
the poor.

Since relatively few of the current TJTC jobs should qualify
under a revised formula, such as the one I have proposed, there
would be adequate savings, compared to the existing program, with
this revised formula to pay for a new, larger program focusing on
encouraging the creation of good jobs.

In addition to reforming the rate at which the credit is earned,
administrative changes should be made to prevent retroactivity,
that is determining eligibility after people are already working and
to encourage TJTC vouchering. And having administered a pro-
gram in the 1980's, I sympathize with the Texas Employment Com-
mission about the shortage of funds.

After these short-run reforms have been instituted, a study, as
favored by Doug Ross, could commence reviewing the impact of
those reforms to better target the subsidy on permanent jobs. If
subsequent studies found that, even with reforms, the program
isn't helping get more jobs, then I think we could confidently agree
with the IG that outright termination is the only solution.

[The prepared statement of Mr. Lorenz follows:]

196

STATEMENT OF EDWARD C. LORENZ, ASSOCIATE PROFESSOR OF HISTORY AND
POLITICAL SCIENCE, ALMA COLLEGE, ALMA, MICHIGAN

Mr. Chairman, I am very pleased to have this opportunity to present
to you a summary of my research into the Targeted Jobs Tax Credit's
success in improving employment opportunities for the disadvantaged
and the disabled. I hope to address two issues in my oral
testimony :

1. Provide an independent analysis of the recent TJTC
findings of the Inspector General of the Department of
Labor, and

2. Make some concrete proposals, based upon the results of
scientific studies of the credit, regarding credit reform
or termination.

In addition to reviewing these points orally, I have attached to my
written statement a revised version of my most recent TJTC study,
which will appear in the Spring 1995 Journal of Policy Analysis and
Management. That study focuses not only on the Inspector General's
findings and reform proposals, but also has a detailed analysis of
the failure of the current TJTC, with special attention to the
failure of the TJTC evaluation and oversight process.

Before beginning my comments about TJTC, I hope I can make a
few observations about my qualifications for and interest in TJTC
analysis. First, I have conducted several studies of the credit,
including two research projects evaluating TJTC s impact on income.
These studies were done for the National Commission for Employment
Policy at the request of the Committee on Ways and Means. Second,
I am an academic historian and political scientist without personal
financial interest, other than as a tax paying citizen, in the
outcome of the credit renewal process. Even my travel to these
hearings is paid for by my College. Third, I have had intimate
experience with the credit on a non-academic level, having served
as Maryland TJTC Coordinator from the inception of the program in
1979 through the middle 1980' s.

The above are not meant to imply I have only an indirect
interest in credit renewal. As a teacher of Political Science, and
current President of the Michigan Conference of Political Science,
I am passionately committed to improving the policy process. I
spend much time in teaching and research seeking to increase my
student's sense of political efficacy. I teach them to be appalled
when the Long Term Public Interest is sacrificed for the benefit of
a few affluent and influential individuals and firms. While
control of self-interest is a timeless problem of our free
government, I urge students to become committed to controlling self
interest and to trusting our system can control it. When it does
not do so, as in the case of TJTC, I want the policy changed.

Ultimately, I am most concerned with TJTC because of our
pressing need to address the declining employment prospects for the

197

poor, disabled, and minorities. The new global economy threatens
to make them special victims. This concern also relates to my
teaching. One of my classes this term is the History Seminar in
20th Century American Social Reform. My students are studying a
generation of reformers who brought justice, hope, and opportunity
to an earlier group of disadvantaged workers. I would not be true
to the purpose of that class and to my own mentors at the
University of Chicago, if I were not determined to use my knowledge
of social policy to reform TJTC.

The publication in the last year of two reports from the
Department of Labor's (DOL) Inspector General [IG] documenting the
failure of the Targeted Jobs Tax Credit (TJTC) has reignited the
debate about the continuation of the credit. That debate has been
a heated one ever since studies in the early 1980' s documented
fundamental weaknesses, if not failures in the program. Yet, each
time TJTC faced renewal, despite considerable evidence of problems,
it has been renewed, often with minor changes which made failure
more likely. In fact, the findings of the Inspector General are
not in the least surprising, given the earlier social scientific
research on TJTC, some of which I conducted, and most of which has
been part of the record of the TJTC oversight process.

Among the comparable studies of TJTC impact which used "a
'carefully constructed methodology'" were two conducted for the
House Committee on Ways and Means by the National Commission for
Employment Policy, the first in 1985, with a follow-up in 1988. I
use the words "Carefully constructed methodology, " because the
Employment and Training Administrator said in response to the IG
report that reform should be delayed until after such a study. I
would maintain more than enough such studies have been done to
begin credit reform.

For example, the two NCEP studies assessed the success of the
program in raising the earnings and improving job retention of
program participants. Furthermore, the Inspector General's
national report contains considerable information on worker
retention and income which may be correlated with the NCEP data to
see if the two studies reinforce or contradict each other. Since
both studies call for major change in employment tax credit policy,
the reports' consistency, based on data independently collected
over many years, would represent a powerful argument for reform.

The Inspector General's August 1994 report identifies the
following specific earnings and retention findings which can be
compared to NCEP data:

1. "One of three employees (37%) was paid at or below the
minimum wage prescribed by law; for all TJTC jobs in our
sample, starting wages averaged $4.96."

2. "Two of three employees (61%) worked part-time."

3. "One of four employees (25%) worked in eating and drinking

198

establishments ..."

4. "Three of four employees (76%) were no longer with the TJTC
employer five quarters after being hired."

5. "TJTC employees' average annual earnings were $7,738 {$4.96
average hourly wage X 30 average hours per week X 52 weeks) . "

Quite significantly, the NCEP findings fully support,
sometimes more negatively, each of these measurements by the
Inspector General. Of course, the NCEP study often asked slightly
different questions or collected data in slightly different ways
than did the Inspector General. Most different was the selection
of the NCEP samples. The NCEP wanted to answer questions about
variations in program impact by race, sex, and targeted group.
Therefore a stratified random sample was constructed to assure each
category had a significant number of cases. Consequently, the
total NCEP sample was composed of groups of nearly equal numbers,
while the actual TJTC participation by group varies greatly, with
over half in one category and as few as three percent in another
used in the NCEP studies. This sampling procedure made combining
NCEP group data into a "TJTC average" unnecessary. Because data
varied only little by group, the NCEP group data can be averaged
for a rough estimate of total NCEP findings.

Tracking a stratified random sample of 1,808 people vouchered
in 1982, the NCEP studies reviewed incomes after two and five years
and compared them to pre-employment earnings. In addition to
sorting data by targeted group, race, and sex, the study
distinguished whether or not the voucher was retroactive. A
comparison group of workers found eligible but not hired was
included. While the studies found significant income gains for all
participant categories in the first year after vouchering, by the
fifth year, two-thirds of the groups no longer had significantly
better incomes than the comparison groups . Perhaps most
disturbing, only one of seven minority categories continued to have
significantly higher income after five years.

The starting wages earned by workers in the NCEP study were
very similar to those found by the Inspector General, if changes in
the value of the dollar are considered. For persons vouchered
before hire, the average starting wage was $3.60/hour (in 1982).
For those found eligible retroactively (after hire) , it was
$3.45/hour. Converting these to 1993 dollars, the vouchered
starting wage averaged $5.29 and the retroactive $5.07. The IG' s
figure would be $5.23 (in 1993 dollars) .

In the Inspector General's national study, sixty one percent
of workers hired under TJTC in 1991 worked part-time. While the
NCEP study did not ask if the initial job was part-time, it did
report mean income figures as well as track those who earned a full
credit for their employer. Both of these numbers reveal the
proportion of workers working sufficient hours to approach the
earnings of a full-time minimum wage worker (52 weeks X 35 hours X

199

$3 . 35/hour or $6, 097/year) . In contrast to the IG, which found 39
percent of TJTC workers working full-time, only 28 percent of the
vouchered workers in the NCEP sample achieved minimal full-time
earnings ($6, 000/year) and only 25 percent of the retroactively
certified.

The Inspector General's national report found concentrations
of TJTC hires in job classifications and industries which
traditionally offer little opportunity for advancement. The NCEP
study data agrees with the IG' s conclusions. Table 1, below shows
the comparison. The general point of these data is that TJTC led
to few jobs in occupations usually associated with opportunity.

TABLE 1
TJTC PLACEMENTS BY JOB CLASSIFICATION

JOB CATEGORIES

IG PERCENT

NCEP PERCENT

Prof. /Mgmt .

3.2

2.8

Clerical/Sales

38.5

23.8

Service

37.6

47.5

Ag/Forest/Fish

0.2

0.8

Processing

2.5

4.3

Machine Trades

3.2

3.0

Benchwork

4.8

9.0

Structural

2.9

1.5

Miscellaneous

7.2

7.5

Likewise the industry data of the firms employing the TJTC
eligibles shows remarkable similarities between the NCEP and IG
data. This data is shown in Table 2, below.

TABLE 2
TJTC PLACEMENTS BY INDUSTRY

INDUSTRY

IG PERCENT

NCEP

VOUCHERED

RETROACTIVE

Service

17.5

Wholesale/Retail

66.4

Manufacturing

10.9

Other

5.2

A notaible fact reported in both NCEP reports, but ignored in most
others, including the IG report, is the rather significant
differences in the experiences of those vouchered before hire and
the retroactively certified. While both were heavily concentrated
in retailing and services, clearly the vouchered were less so.
This difference supports the assumption of the original TJTC
supporters that voucher ing is a valued part of the program.
Unfortunately, pre-employment vouchering has been minimized in
recent years for all but the handicapped.

Another impact upon workers measured by the Inspector General
was retention. The IG found that 76 percent of workers hired under
TJTC were no longer with their employer after five quarters. The
NCEP study, while measuring credits earned by employers rather than

200

quarters of retention, found 72 percent were gone after one year.
Obviously, retention has remained a problem of TJTC, and one with
a direct impact upon the earnings of TJTC workers.

The Inspector General used the mean wages and hours and
average weeks of employment of TJTC hires to calculate a mean
annual income for participants. Assuming a 1993 wage of $5.23 and
30 hours of work in an average week multiplied by 52 weeks, the IG
annual income would be $8,162. The NCEP computed annual income by
tracking actual wages paid by the TJTC employer to those in the
stratified sample. Those vouchered before hire earned a mean
annual income (in 1993 dollars) of $5,929. The retroactives earned
$5,620 (in 1993 dollars) . Here the Inspector General's figures are
considerably more positive than those of the NCEP study. The
differences may result from the different sampling used in the NCEP
and IG research, as well as from the two methods of determining
annual income. Since the NCEP data are less positive than the IG
findings, the IG conclusion would only be reinforced, that, "We
question whether better results should be expected of activities
subsidized with public funds." Clearly, the current TJTC has
failed to achieve dramatic changes in the employment opportunities
and earnings of the disadvantaged.

The failure of TJTC resulted from both some of the assumptions
inherent in most tax credit and vouchering schemes and in some of
the specific TJTC rules that carry those assumptions to extremes.
TJTC experience does not prove that vouchering and tax incentives
will not work to redistribute opportunity. It does indicate that
a sophisticated understanding of the limits of human rationality,
as well as aggressive and competent public management, and rigorous
empirical program evaluation are essential if minimally managed tax
credit programs are to succeed. Discounting the need for
competent, if minimal, management, underestimating the influence of
special interests, or replacing empirical analysis with rational
argument doom such policies to distortions that benefit only
organized interests, not the disadvantaged. The integrity of
minimally managed redistributive programs can be protected by
emphasis on independent, empirical impact assessment, competent
administration by the remaining public managers, and the aggressive
search for widespread participation in the policy.

INCREMENTAL REFORM:

As the eleventh expiration of TJTC approaches, given the
extensive evidence of failure, there should be only two options
under consideration:

1. Termination; or

2. Significant short-run changes, followed by complete reform
or redesign during the coming year.

The primary reason for rejecting credit termination has nothing to

201

do with the merits of the current TJTC structure but rather arises
solely from the continued deterioration in employment opportunities
for disadvantaged workers, especially minority youth. Simple
justice requires that, in the absence of a national full employment
program, attention be given to targeting employment and training
resources on this population. While the recently implemented
empowerment zone program may do some of that, the number of
empowerment zones is so limited that they can impact only a
fraction of the disadvantaged population.

However, if the reason for not terminating TJTC is to help the
disadvantaged find jobs, fundamental change must be made
immediately in the credit. There is no reason to delay taking
action that would reduce, if not eliminate, most of the current
windfalls. Current subsidies for high turnover, low paying jobs
need to be replaced with credits earned by employers who change
their employment practices and give opportunity to the economically
disadvantaged and the disabled. This change can be dealt with
quite simply by changes in a few lines in the current tax law.

The change most likely to increase significantly TJTC s impact
on the poor is to reform the credit percentage and the wage base
upon which it is earned. The following formula would be one way to
institute this reform:

1. A credit of 10% of the first $4,000 paid in the first six
months of employment, for those workers retained at least
three months but not beyond one year;

2. A credit of 20% on wages above the first $4,000 but under
the first $8,000 paid in the first year of employment for
those retained between six months and one year, but
terminated before the end of the first year;

3. A credit of 40% of the first $15,000 in wages for workers
retained for more than one year; and

4. A credit of 20% of the first $15,000 in wages paid in the
second year of employment, available only for those
earning at least $7,500 in the first year of employment.

Since relatively few of the current jobs eligible for the credit
would qualify for a significant subsidy under this revised formula,
there would be adequate savings to pay for the new larger credits.

In addition to reforming the rate at which the credit is
earned, certifications should only be allowed on workers
interviewed in person and found eligible by participating agencies
before the first day of employment. This change would free the
staff of agencies such as the Job Service from the current burden
of processing thousands of letters requesting credits and allow
them to focus upon vouchering job seekers. Regulations should be
changed to require that the vouchering agency staff inform job
seekers referred by potential employers of the right to use the

202

^, i voucher at any business.

After these short-run reforms have been made, a study could
commence reviewing their impact and proposing redesign to better
target the subsidy on permanent jobs with training opportunity.
The study also should examine the vouchering process to make
certain there is vigorous outreach to job seekers and a cross
section of the business community. If the reforms result in better
job opportunities for the disadvantaged, the reformed credit should
be made permanent, so employers and communities with large eligible
populations could plan its use when making location and production
decisions. If studies find the reformed credits are not
stimulating more jobs for the poor, then employment tax credits can
be abandoned as insufficient to overcome education and geographic
barriers to employment of the disadvantaged.

203

Mrs. Thurman [presiding]. Miss Jackson, it is my understanding
you have a plane to catch at noon.

Ms. Jackson. Yes.

Mrs. Thurman. If we could deviate for the members, if there are
any questions for Miss Jackson, we might hear from her before we
hear from Lori Sterner.

Mr. Rush. Madam Chairman, I just think if she has a noon
plane, she better get out of here.

Ms. Jackson. It's not at 12 it's at 12:45.

Mr. Zeliff. I guess on a nonpartisan basis, we would agree.

Mr. Rush. Thank you so much.

Ms. Jackson. Thank you.

Mrs. Thurman. We thank you for appearing. And if we have any
additional questions, we will probably ask you to respond to them.

Ms. Jackson. That will be fine. Be happy to.

Mrs. Thurman. I appreciate that.

Miss Sterner, thank you for allowing us to do that for a few min-
utes.

Ms. Sterner. Thank you. Thank you for the opportunity to
speak today. My name is Lori Sterner. I am sponsored here today
by the Governmental Affairs Committee of the Minnesota Rehabili-
tation Association, as well as my employer. Access to Employment
located in Minneapolis, MN and Grand Rapids, Minnesota.

I come to express my experience with the program as having
worked with this agency for eight and a half years now, providing
placement services to people, particularly with disabilities, and
other barriers to employment, as well.

Access to Emplo3rnient's belief is that people with disabilities
have been denied for too long equal opportunity to employment.
The population we serve has been traditionally unemployed as well
as underemployed. We take an approach to not only place people
in jobs that exist, but to create jobs because the people we serve
are so significantly disabled that there isn't always a job for them
to walk into. So we have to work with employers to create opportu-
nities tailored to their unique abilities. That's when TJTC becomes
very important, because an incentive like that entices the employer
to create the opportunity and to be supportive of the unique needs
of the person and allow the extra time they will need to learn the
job.

Our consumers fit target eligibility in the following areas, people
who have completed a VR program with the State of Minnesota or
with the Veterans Affairs, General Assistance recipients, SSI re-
cipients, and persons in other work incentive programs.

Our program matches candidates that have qualifications to jobs
in which they are interested, therefore, we go after jobs that will
increase their chance of retention. We assist employers to obtain
TJTC vouchers and to complete the entire certification process for
the qualified applicants.

Access to Employment provides services to approximately 175
consumers at any given time. That's in both communities that we
serve. Approximately 75 to 80 percent of our consumers are em-
ployed at any given time. The average wage is $1,61, through the
use of subminimum wage certificates, to a high of $11.92. Our av-
erage wage is just over $5.

204

These are not typically, then, high paying jobs, but as I said, be-
cause we match our candidates to the jobs they want, they do se-
lect the industries that they want to work in. Typically, people do
work in hospitality industries. There is a high turnover, but the
people we place want to work there and TJTC becomes the incen-
tive to gain that employment.

Access to employment supports the targeted jobs tax credit pro-
gram because it has provided an incentive to employers to provide
increased opportunities to persons in the targeted groups. TJTC
has opened doors for more people to become productive members of
the work force. More people in the work force means more tax-
payers to support Federal programs. Targeted job tax credit has al-
lowed persons in targeted groups to gain skills and experience
through the best possible means. That is, on the job.

More persons with disabilities in the work force then educates
employers as well as the general population that people with dis-
abilities do have skills and abilities similar to the majority of per-
sons. Targeted job tax credit then ultimately enhances the recipi-
ent's chance for job success and retention. Thank you. That is all
I have.

Mrs. Thurman. Thank you, Ms. Sterner. Mr. Carey, it's com-
mendable that you were recommending changes to improve the
TJTC rather than terminate it in view of the many problems your
members have experienced with it.

If the credit were tied to health benefits, higher pay, much longer
retention and compliance with the EEO and other Federal laws as
you suggest, would it attract employers at all?

Mr. Carey. I think it would, and I think that was the basic con-
cept when it was drafted, that it was to provide the kind of oppor-
tunities. If, in fact, disadvantaged individuals are given a job and
the job does not provide for the kind of benefits that you spoke
about, then it's transition, and all it is is a musical chair for more
subsidies by the taxpayers.

Mrs. Thurman. If these were done, would you also support in-
creasing the $2,400 credit?

Mr. Carey. Yes, I would.

Mrs. Thurman. The problem you described where the tax credit
enabled one contractor to underbid another is troublesome. How
would you suggest you deal with it?

Mr. Carey. Well, I think there's a fair bidding process that could
take place. I don't know that there is a magic bullet for that par-
ticular problem.

Certainly, anyone who receives entitlement under these pro-
grams should live up to a code of conduct. I also urge that the em-
plo3rment period under which companies would receive this should
be extended. The jobs should have stability. What's the sense of
putting people into this job and then six or eight or a year later,
they go somewhere else?

Mrs. Thurman. Mr. Currie, let

Mr. Carey. Madam Chairperson, there was a question raised by
Congressman Shays with respect to Borg Warner having its oppor-
tunity to defend itself I might say that in 1989, Borg Warner testi-
fied on TJTC. And I just wanted to have that on the record. Thank
you.

205

Mrs. Thurman. Testified to whom?

Mr. Carey. The Ways and Means Committee. Thank you.

Mrs, Thurman. OK. Mr. Shays, we'll see if we can't get that tes-
timony then.

Mr. Currie, just out of curiosity, you have mentioned that you've
actually been with them for 11 years?

Mr. Currie. Yes, ma'am.

Mrs. Thurman. And you went from, what's it, 10-something or
11

Mr. Currie. $9.18 an hour.

Mrs. Thurman. To $5 today.

Mr. Currie. Yes.

Mrs. Thurman. After being trained and coming in, and 11 years
is a long time to be there, have — what would be the reason for
staying? I mean I'm just curious.

Mr. Currie. Well, as far as my training goes, none was ever pro-
vided. It's more like trial and error. You're sent out on your own.
You tell them you know the city, you know locations, you know the
State. They'll try you, and if you prove successful, then so to speak,
you're on the inside. But as far as my staying there, things weren't
always that bad.

Like I said, at $9.18 an hour, I was quite comfortable. I had ben-
efits, health insurance, dental, everything. But since Pony took it
over, everything's declined, gone backward. Instead of progressing,
it's been regression.

Mrs. Thurman. Have you looked for other employment?

Mr. Currie. Yes, ma'am. I don't want to make this a personal
issue.

Mrs. Thurman. That's fine.

Mr. Currie. I'm a disabled veteran, Vietnam vet, and I don't
want this to be personal. But a lot of other employers, once they
found out that you do have a disability, then they want nothing to
do with you. So I was fortunate in that reason, because I was able
to just hang on.

Mrs. Thurman. Thank you.

Ms. Tully, it sounds as if Marriott is using the TJTC program
the way it was intended. That is, reaching out to hire the hard-to-
employ and using some of the tax credits to give them extra serv-
ices. Approximately how many people did Marriott hire under this
program last year? And we've actually — and then are going to, if
you have got the information, break it down to the disabled, Viet-
nam veterans and ex-offenders.

Ms. Tully. I'm sorry, I don't have those figures with me.

Mrs. Thurman. Do you think you could get those to this commit-
tee for the record?

Ms. Tully. Yes, I can get them.

Mrs. Thurman. We'd appreciate that.

[The information referred to follows:]

206

ALL YEARS

1991

1992

Catagory A

1,750

5.62%

594

6.32%

509

6.27% Voc. Rehab. Associates

Catagory B

15,698

50.45%

5,050

53.71%

4,250

52.33% Disadvantaged Youth

Catagory C

733

2.36%

215

2.29%

203

2.50% Viet Nam Veterans

Catagory D

864

2.78%

188

2.00%

186

2.29% SSI Recipients

Catagory E

3,261

10.48%

962

10.23%

774

9.53% General Assistance

Catagory F

0.24%

0.23%

0.18% Co-op Students

Catagory G

1,155

3.71%

312

3.32%

298

3.67% Ex- Felons

Catagory H

6,376

20.49%

1,793

19.07%

1,580

19.46% AFDC Recipients

Catagory J

1,205

3.87%

266

2.83%

306

3.77% Summer Youth

TOTAL

31,118

9,402

8,121

1993

1994

Catagory A

390

5.73%

257

3.78% Voc. Rehab. Associates

Catagory B

3,433

50.47%

2,965

43.65% Disadvantaged Youth

Catagory C

180

2.65%

135

1 .99% Viet Nam Veterans

Catagory D

198

2.91%

292

4.30% SSI Recipients

Catagory E

602

8.85%

923

13.59% Genera! Assistance

Catagory F

0.24%

0.34% Co-op Students

Catagory G

284

4.18%

261

3.84% Ex- Felons

Catagory H

1,473

21.66%

1,530

22.52% AFDC Recipients

Catagory J

226

3.32%

407

5.99% Summer Youth

TOTAL

6,802

6,793

207

"PATHWAYS TO INDEPENDENCE... A TRAINING FOR JOBS PROGRAM"

Marriott's Community Employment and Training Programs (CETP) department has
developed a training program called "Pathways to Independence... A Training for Jobs
Program." Ordinarily, another training program would be of minimal interest, but there
are several things about "Pathways to Independence" that make it quite unique.

First, and foremost, the program works. That in itself is noteworthy. It has proven to
be very effective in the training and retention of entry level associates at a number of
locations. "Pathways" has been successfully implemented in Atlanta, GA; El Paso, TX;
New Orleans, LA; and Chicago, IL.

"Pathways to Independence" was created in order to meet guidelines set up by state and
federal employment and training sources. They required that a training program be
unique and separate from the "normal" training given to new employees in order to
qualify for funding. As a result of in-house research our CETP group found that many
entry level associates terminated their employment during the first 180 days. Most left
the job, voluntarily or involuntarily, not because they were unable to perform the
technical aspects of the job, but because they lacked basic skills in one or more areas
related to social, cultural or individual behavior.

As a result, "Pathways to Independence" was designed to address their needs with
customized modules focusing on areas directly related to performance on the job. Some
of the modules are:

♦ Importance of Teamwork

♦ Dependability

♦ Attitude

♦ Stress Management

♦ Personal Finance

♦ Importance of Self-Esteem

♦ Communication with Co-workers and Supervisors

♦ Accepting and Giving Criticism

208

The training manual is very user-friendly and enables the trainer to conduct classes with
a minimum of exposure to the material. "Pathways" classes are extremely participatory
and successful completers report feeling a true part of the Marriott team.

Initial publicity concerning the "Pathways to Independence" training program has resulted
in an external management company contracting with our CETP department to provide
"Pathways" training to 300 Native Americans from the Omaha tribe in Macy, Nebraska.

This is a "Win-Win" program. People who need an extra hand in beginning their work
experience get extra support and we get a better prepared associate, reduce our turnover,
and have an associate who treats our guests well.

(2)

209

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210

Mrs. Thurman. Do you find that turnover is a problem? Or are
you able to claim the ftill $2,400 credit for them before that actu-
ally happens?

Ms. TULLY. Turnover is, in an entry-level position, is always a
problem, it's always an issue, and it's something we try and keep
very, very low. Contrary to the belief that because the person com-
pletes the TJTC eligibility that a company would want to turn
them over, I can only speak for Marriott. By the time somebody
has been it's either — it's somewhere around 5 or 6 months after
we've hired them that they would complete their eligibility. We
have, by that time, invested a tremendous amount of time and ef-
fort in training. And if we have a good employee, we very much
want them to stay.

There's no way that we would try and turn over an employee like
that just because the TJTC eligibility had run out. The big asset
to it is that the additional time and effort and patience that's in-
volved in working with people who have been structurally unem-
ployed, in the first couple of months of emplo3rment. That's how we
market it to our properties, to say that, well, at least at that point
in time, some of the wages are offset by the targeted job tax credit
program.

By the time they're there 5 or 6 months, they're working very,
very well, and they're a valued employee. I mean we wouldn't want
to turn somebody over we spent all that time training. I don't un-
derstand that concept.

Mrs. Thurman. Let me ask a question here. However, it's my un-
derstanding in most jobs you go through training, whether you
happen to be in this program or another program. Do you have any
numbers or anything that shows where those that are in the pro-
gram turn over more so than those that go through other training
programs that you might have?

Ms. TuLLY. Years ago, they did a study with the program to
see — I was concerned about it because they were trying to pigeon-
hole TJTC-eligible people, and I had a problem with that. But what
they did was did all the study and checked it out £uid at the time
we came that there was very, very little difference. The only dif-
ference was that with the TJTC-eligible people stayed longer than
those who were not TJTC-eligible.

The numbers were not big enough to make a big, big statement
about it. But I do know that in many cases and in many of our op-
erations, that additional time up front, time and training that's
spent helps them to have a basis to keep them going later on.

Mrs. Thurman. And then do you ever do any tracking when they
leave? Do they go to a higher paying job, are they — I mean

Ms. TuLLY. Oh, a lot of them go to higher — to other jobs. We
don't know exactly what they make. But at that point, after you've
worked 5 or 6 months, now they have an employment history.
When they fill out an application, they can say they worked some-
where, which makes them a lot more valuable to another employer.
Whereas when we got them, they had been out of work maybe any-
where from 6 months to 2 years or maybe hadn't worked at all.

Even if they do turn over in 6 months, they have some work ex-
perience and we all know now, I mean really and truly, it is so
much easier to find a job when you have a job. So they're there,

211

they can go around and have the luxury of looking to see if they
want something else. Maybe the hospitality business isn't for them,
or whatever they want. But their self-esteem is certainly higher
and they're certainly a much more marketable person.

Mrs. Thurman. Mr. Zeliff.

Mr. Zeliff. Thank you. I just — ^you know, the first two panels
here seem to be overwhelmingly against. And I was hesitant to use
this as an example, but as an employer, I'd like to give you two
examples that we dealt with. And just on the record.

One is a guy that we hired that's still working for us. He's been
with us for 8 years. He was hired as a dishwasher under this pro-
gram. He then got promoted to a prep person, then went to a line
cook. He is an assistant chef today. He will probably be moving out
of the area in another few months.

Another guy was hired as a dishwasher. He stayed for 5 years,
did not have potential to go beyond that, had a severe disability.
We had to work with job coaches and put extra effort in order to
bring him up even to minimum skills to do that job. Ended up get-
ting married and left the area. But there's two examples where the
program worked.

Marriott's examples, I think, are examples where the program
worked. And I think what we're trying to do here today, unlike the
Department of Labor, which hasn't, in my judgment, really tried to
figure out how to make the program work. It would seem to me
that they would have a successful program user, such as you, be-
fore them, not tomorrow morning but, you know, maybe yesterday
before this hearing or at some point meeting with lots of employers
to figure out what's working and what's not. And I would like to
have you, if you would, submit for the record copies of, if you're
willing to, your training program, your outreach program, so that
maybe we can pass them on to them.

If in the event this gets extended, let's try to make the thing
work. Let's find out what it is that's working for you, and particu-
larly if we can come up with some kind of reference or proof that
shows stability, how long are you keeping your employees, like the
two examples I just used, and I just — I'm just kind of glad to see
in your case that there's an example where perhaps it is working.

Where I'm concerned here is if we drop this program and we
don't replace it with something that will work for disabilities, you
know, and hard-to-hire people, hard to employ, people who need
help, that they're just going to get caught up and lost in the shuf-
fle. And I think that's irresponsible on our part as well.

And, Mr. Carey, I would like to just — maybe that testimony was
submitted to Ways and Means in 1989 or 1988, but I do feel that
Pony Express, and I have — I don't even know who they are. I don't
do any business with them, but certainly they should have a right
to be able to give their side of their point of view. And I share some
of your concerns and some of the testimony in terms of results, but
if you have, as Marriott has expressed, any additional information
where you could — where we can take this program and make it
work better, not concentrating on the abuses, I mean we can beat
up on Pony Express all day long, but, you know, is there any infor-
mation that you might have after thinking through the testimony
that you could add to make this thing work? Or should we just

212

drop it? And if we do drop it then, you know, I go back to my con-
cern. What are we going to do for the hard to employ?

Mr. Carey. Well, I have submitted specific recommendations in
my written statement and I agree, obviously, they should have the
opportunity to defend themselves and they were quite aware that
we would be here. And I'm supportive of the program. And, again,
if it still doesn't work, we ought not meddle with it. We ought to
end it and dismantle it.

Mr. Zeliff. You're — ^you're a guy that's got some great experience
you might be able to share with us. In terms of disabilities, forget-
ting about this program, are there other programs that the Federal
Government is using that are more effective?

Mr. Carey. I don't have

Mr. Zeliff. Or are there any programs that the union would rec-
ommend, things that we should be doing that we're not doing?

Mr. Carey. Yes, and I will not take the time of this committee
to go through some of them. You've been patient with us. But I will
certainly be submitting additional recommendations so that it can
help this committee make some decisions.

Mrs. Thurman. Mr. Zeliff, if you will let me just — in his written
testimony, there are about five recommendations and proposals
that he has offered to this committee, for your information.

Mr. Zeliff. Let me just make one final comment, and I know Mr.
Shays will have some comments. But I think what I am hearing,
the thing that worries me more than anything else, is the lack of
management on the part of the Department of Labor. And I mean
there's no management, there's no review, doesn't seem to be much
guidance and there seems to be little or no followup. And I think
that's something that concerns me, not only in this program, but
also in other job training programs. And what I hate to see happen-
ing here is we just dismantle a program where we see some exam-
ples where it can work.

It would seem to me that if we're going to put Federal programs
out, there should be good, effective outreach on the part of the De-
partment of Labor. There should be some good guidance and follow-
up. And maybe with your — if you can send us that material and
put it on the record, maybe we can use that as part of our final
evaluation. Unfortunately, we have a week or two here, and this
is — this whole thing is probably going to get lost in the shuffle. But
thank you very much.

Mrs. Thurman. Mr. Lorenz, did you want to respond?

Mr. Lorenz. Yes, I just wanted to add something that Mr. Zeliff
asked earlier, about New Hampshire. And you may be interested
that one of the interesting studies of TJTC was one done in New
Hampshire about 2V2 years ago by a summer intern who worked
for the New Hampshire Department of Emplo3rment Security,
called, "TJTC, Who Does It Benefit." And made some recommenda-
tions that basically are the same ones we have agreed with when
I did the work with the National Commission for Employment Pol-
icy, about altering the credit amount to benefit New Hampshire
residents more. I could get a copy of that, if you can't.

Mr. Zeliff. Sure. And I wonder, with your experience, would we
be better off just giving a State a block grant and let them come
up with tailor-made programs for disabilities and handicapped and

213

economically disadvantaged, based on, you know, New Hampshire's
circumstances instead of the Federal Government stuffing a pro-
gram down our throat that may or may not work?

Mr. LORENZ. I think there's a possibility, obviously, of more flexi-
bility with that. I don't think so much the eligibility is a problem.
You know, we have seen in different States, different utilization
rates for different groups, the handicapped in some States more so
than a large economically disadvantaged population. I think it's the
administrative support, and the credit formula that really is a key.

You know, one thing to realize, since 1978, we've dropped the ac-
tual net credit from a $4,500 credit in 1978 dollars, to a $2,400
credit in 1994 dollars. The 1978 credit, if we still had it and had
increased it with the rate of inflation, would be something like a
$9,000 credit, which I think would go much further to encourage
the right type of employment. And it was a 2-year credit, until the
mid-1980's, to encourage retention. You got two-thirds of the credit
the first year, a third the second. And in one of our cost cutting
moves in the 1980's, we cut out the second year credit, which was
the very heart of rewording the retention that we all hope happens.
So I think if we just went back to that, we'd be making a major
reform.

Mr. Zeliff. Thank you.

Mrs. Thurman. Mr. Shays.

Mr. Shays. Thank you. Mr. Carey, I wish I'd waited two more
sentences, because you were all done, and I would have not had to
interrupt you and I apologize for that.

I agree with the general thrust that if a company is abusing
other issues and it's related, that it's pertinent testimony. I just
wasn't sure how much longer it was going to go. I thank you as
well for your five recommendations and I'm going to come back to
one of them, because it is — the irony of the IG's office and the
Labor Department coming and testifying without recommendations
boggles my mind.

Mrs. Thurman. Duly noted.

Mr. Shays. And you all coming with recommendations. I had the
sense that the Department doesn't want to rescue it and they're not
going to go out of their way to try to help us show how it can be
saved. Because intuitively, there is tremendous merit with this pro-
gram. I'm struck by hearing testimony and, Mr. Currie, let me just
say to you that you are one of the most articulate people who have
come before the committee. I was noticing that you had prepared
testimony and you were adlibbing, and you also sensed the mood
of the committee as well. So you are a very smart man besides.

Mr. Currie. Thank you.

Mr. Shays. So you are certainly a gift to whomever has the op-
portunity to have you work for them. You're very articulate. I've
not recalled someone in your situation being so articulate. The
thing that's interesting to me is what would be the logic of having
90 days, and then getting past the credit? It would seem to me
there should be a logical year before you get that credit. And it
does seem to me, like Marriott, that you have to — ^you have to in-
vest some blood, sweat, and tears in that employee. So that you
have something at stake.

214

And it seems to me, if someone's willing to invest some blood,
sweat, and tears in an employee and some training, that then
we've achieved everything we wanted to achieve. And I just open
that up for comment. I mean some of you have touched on it, but
wouldn't this be the central, the reform that would be necessary?
And maybe — I wish you all had testified first and then we had the
Department of Labor come, because my question to them would be
why not do it for a year, why not require that there be some invest-
ment and training that they can show, and then it would seem to
me there wouldn't be the same kind of abuse.

Ms. TULLY. I am trpng to understand, you're saying that you
wouldn't be eligible to take the credit before a year, is that what
you're saying?

Mr. Shays. Why should you get the credit after only 90 days? My
understanding, the way the program works, you hire someone for
90 days. If they leave on the 120th day, you still get the benefit,
correct?

Ms. TuLLY. Yes, yes.

Mr. Shays. That's crazy to me. On the face of it, it seems crazy.
I'd love to have someone defend it.

Ms. TuLLY. Well, at that point you've already invested an awful
lot of time, blood, sweat and tears in someone, 90 days.

Mr. Shays. You have, you have. But I get the sense, with indi-
vidual companies like the company you work for, sir, that they're
basically saying here is the job, go out and do it. I mean I'm not
hearing the other side, but that's the general thrust. That doesn't
strike me as training. It strikes me as if, by the way, you want to
leave in 90 days, we are not going to lose much sleep about it.

Mr. LORENZ. That's why I think changing the credit as you're al-
luding to is the major reform that could completely alter the impact
of TJTC. If the credit were not loaded up front so that you get your
credit very quickly at the beginning — ^you know, now it's 40 percent
of the first 6,000 in wages. If you pay that in a part of a year, you
get your full credit, and there's no longer an incentive to do any-
thing. The credit should be redesigned to reward the employer who
retains for the long term, and to reward those who pay at least
somewhat higher wages, which we're not rewarding now either.

Mr. Shays. Right. Mr. Zeliff was mentioning in his private em-
ployment how the program works. But in the public sector, I be-
lieve an employer should be reaching out. I felt our own office
should, congressionally.

Our first experience was with someone who was off welfare, I
interviewed the person, I said what happens if you fail. She said
I'd try harder next time. I hired her. But our first experience was,
our very first call was from a veteran, and my office manager
called me up, said, Chris, we have a problem.

She got this call, she did just as you said, she asked about what
she didn't understand. And one of her questions was what's a vet-
eran? And we realized in a congressional office, that's not the kind
of question you want to ask. But for 6 months, we worked with this
person, and bless her heart, and she made incremental improve-
ment, and then she finally decided to .leave. We spent more time
than usual and we got back a dear person, but I can understand
the disincentives to an employer sometimes.

215

She didn't have the wealth of information and background we
needed, but then we did it again with someone else, and it was
highly successful. A little bit of work effort, and now we have a
great employee, an employee that can move right through the sys-
tem that we have. So we would never have that employee had we
not made a proactive effort. That's my point. And so Marriott is
doing that, you know, but I hear the abuses you're saying.

That gets to the last point that one of your recommendations is
to improve the employment wage level, so jobs are not just at the
lowest level. My challenge with that, though, is that realistically
someone who is new to the work force is going to be at that level.

Mr. Carey. I think it is, and I think I have to commend Janet
in the things that are happening in that company, where they're
investing in employees. I mean it just doesn't make sense to me
why employees would make that kind of investment, the taxpayers
would make that kind of investment, and then have it transition
people in and out. It should be used for the right things, and,
again, I think we've heard some of them here today. It has to be
tightened up so that the program works as it originally was de-
signed. And today, what we tried to do was to connect with you and
with this subcommittee the real world issues, what is happening
out there.

Now, again, I certainly hope that Borg Warner has its oppor-
tunity to come and to present its arguments and to tell its side of
the story. But this is the abuse and this subcommittee is here deal-
ing with that issue.

Mr. Shays. I just would conclude, and I thank all of those who
have testified, and appreciate the recommendations that this panel
has made to improve the program. I wish we had heard the rec-
ommendation in the previous panel, but I just believe that there
are parts to this program that have to be very beneficial. It would
be a shame if inaction or just a lack of interest allows the program
to die. But I couldn't vote for it the way it is today.

I mean I think we have to incorporate a number of the rec-
ommendations that you both have made. And they don't seem like
difficult — it doesn't strike me that these are — that it took a rocket
scientist, with all due respect, to come up with these recommenda-
tions. That's why it's particularly unsettling that the Labor Depart-
ment hasn't done that.

Ms. TuLLY. They may be aware of it. I guess their problem is in
how are they going to administrate it. I guess that's their concern.

Mr. Shays. Could I Just ask one question? We're paying adminis-
trative costs of about $30 million? Is that

Ms. SiMONSON. Used to be.

Mr. Shays. But you're suggesting, your last recommendation, I
believe, Mr. Carey, that we set up an office to administer the pro-
gram. It would be nice if we didn't have to do that. It would be nice
if — I mean the woman, Ms. Jackson, who left, and showed me the
regulations, I was thinking, my God, that's all we had? It struck
me that — I mean that's an improvement. Seems to me we should
be able to run the program without a lot of regulation, there should
be periodic audits and if you aren't abiding by it in the correct way,
then you get fined. Without a lot of government red tape. Anyway,
thank you.

216

Mrs. Thurman. Thank you, Mr. Shays. I have a couple of ques-
tions here that the chairman had asked me to ask, so if you'll bear
with me, we'll kind of go through them.

Ms. Tully, do you believe that giving a credit to employers for
hiring the disadvantaged is a form of stereotyping, and are we say-
ing that these groups are necessarily less productive or desirable
workers?

Ms. Tully. I think it's — we are targeting people who have bar-
riers to employment, people who do not have a work history. And,
yes, those are going to fit in the disadvantaged categories.

You get caught in the middle of something when you are in the
interviewing process, we can't ask the questions that would put
them in a certain category, to say a particular disadvantaged
youth. So you see whether they have any work history or not, but
when you're in the interview process, you're asking the questions,
and all you can tell, that this person really doesn't have a lot of
work experience and, is likely to be TJTC eligible. We got more in-
volved in this when we did outreach for TJTC, so we had more
numbers of people who were eligible. And one of the things that
came out in our training classes and our focus groups, was a lot
of these people felt that— just say, for example, 15 to 20 sick days
a year was acceptable, no problem with that.

What would be — why would any employer be upset with some-
thing like that? I think unless I was chronically ill or I had some
kind of an illness, I don't think I'd be around. If I had 20 sick days
a year, I mean that's just not — ^you can't run a business. So we sat
down and that's when we got involved in the training modules, to
say, well, if you were running a business and, somebody who you
hired to work 5 days a week was scheduled — ^we got into the logic
of it and back and forth. That's when we went and spent all the
extra time with people who don't have good work history or just a
good work ethic, just to know what's required. And in a way, yes,
they do target that type of group, but they do give them a lot of
extra time and effort in the beginning of it idealistically.

Mrs. Thurman. Ms. Sterner, could you give me your view on that
question as well?

Ms. Sterner. Sure. Could you repeat the question?

Mrs. Thurman. Sure. Do you believe that giving the credit to em-
ployers for hiring the disadvantaged is a form of stereotyping? And
are we saying that these groups are necessarily less productive or
desirable workers?

Ms. Sterner. I don't believe it's stereotyping. These people that
we serve have often never had the opportunity to work in the com-
munity in independent, integrated settings. And so certainly there's
a certain amount of stereotyping that will go with people's atti-
tudes as they see these people enter the work force.

Our presence with them, because we do offer job coaching, you
could say could be added to further stigmatizing them. However,
never given that opportunity to see them gain work skills and then
advance along a career path and become, a member of the work
force, the alternative would be worse.

Mrs. Thurman. When employers hire TJTC workers whom you
refer, do you provide training or other special services for them?

217

Ms. Sterner. Yes, we do. We always offer that, anyway. It's our
belief that the training can enhance the person's retention, so we
try to educate the employer that we can be used as an extension
of their training process. Typically, these individuals do need more
training than the average person. It involves some of the blood,
sweat and tears that's been alluded to on the employer's part. But
once you can get past that point where the person has learned the
job and is doing very well, then that investment was worth it.

And Mr. Shays mentioned about a longer period before the credit
kicked in. I think that would be an advantage to ensuring the re-
tention and having less abuse occur for people who take advantage
of the program solely to get the credit and then turn it over and
hire another person.

Mrs. Thurman. Now, do they pay you

Ms. Sterner. No.

Mrs. Thurman [continuing]. For doing this?

Ms. Sterner. No. We are funded by the State and county, so the
State of Minnesota and the counties of Hennepin and Itasca, which
we are located in. No, there's no cost at all to the employer. That's
another incentive that we offer. We market ourselves that way.

Mrs. Thurman. Since the Americans with Disabilities Act be-
came effective, do you find less need for the cash inducement of the
tax credits to persuade employers to hire your clients?

Ms. Sterner. I don't know if I've ever looked at the two together
like that. We've never used TJTC as an incentive unless — ^you
know, if it wasn't needed. If an employer will hire someone on their
own merits, on their own qualifications, we always think that's
preferable. Not everyone is eligible for TJTC that we serve as well.
They don't fit the criteria of the people we do place with TJTC, I
suppose it's about 50 percent of the people we place.

Mrs. Thurman. OK. Mr. Zeliff.

Mr. Zeliff. No further questions.

Mrs. Thurman. Let me just thank all of you — oh, Mr. Shays, I
thought you had

Mr. Shays. I'm all done.

Mrs. Thurman. The witnesses for their testimony, and we'll cer-
tainly, I think, probably have some interesting arguments on the
floor if we ever get to this issue again in ways that we might con-
tribute it better. But we thank you for being so honest and up front
with us and letting us know how you feel. And this hearing is ad-
journed.

[Whereupon, at 12:24 p.m., the committee was adjourned.]

[Additional information submitted for the hearing record follows:]

218

U.S. Department of Labor Assislant secretary for

Employmenl and Training
Washington, DC 20210

NOV 8 I99d

The Honoraible Collin C. Peterson
Chairman, Subcommittee on
Employment, Housing and Aviation
Committee on Government Operations
U.S. House of Representatives
Washington, D.C. 20515

Dear Chairman Peterson:

This is in reference to your letter of September 23, 1994,
requesting specific information on the Targeted Jobs Tax Credit
(TJTC) program:

- What did the Macro Systems study of TJTC cost?

What was the cost of any other Labor [)epartment
studies of the progrzun over the past 10 years?

The cost of the Macro Systems study in 1986 was $416,802.60.
The study of TJTC done by TVT Associates in 1991 cost $119,000.

- What changes in the program have been made or
->. recommended to Congress on the basis of these

studies?

No changes nor recommendations were made to the TJTC program
as a result of these studies. However, changes made since 1986
include:

- 50% to 40% limitation on an employee's qualified
wages for the first year; and

- elimination of 23-24 year old disadvantaged category.

- Since you have requested no funding for the program
for Fiscal Year 1995, how will the program be
administered if it is reauthorized?

If the TJTC program is reauthorized, we would ask for a
supplemental budget to administer the program.

- We heard testimony that the Employment Service
funding is quite inadequate for its responsibilities
under TJTC. How much money would be required to
implement the current law satisfactorily?

219

-2-

We estimate that $25 million would be needed to implement
the current provisions of the TJTC program.

We hope these responses will answer your inquiries
sufficiently.

Sincerely,
Doug Ross

220

James E. Gafflgan

Vice President. Governmental Affairs

American
Hotel & Motel
Association

1201 New York Avenue, NW
Washington, DC 20005-3931
Tel. 202/289-3120
Fax 202/ 289-3185

September 20, 1994

Educational Institute ot AH&MA
1 407 So. Hamson Road
East Lansing. Ml 48823
Tel. 517/353-5500
Fax 51 7/ 353-5527

The Honorable Collin C. Peterson
Chairman Subcommittee on Employment,
Housing and Aviation
House Government Operations Committee
U.S. House of Representatives
Washington, DC 20515

Dear Chairman Peterson:

The American Hotel & Motel Association, the trade association of the lodging
industry, representing in excess of 10,000 properties through a federation of state
and local lodging associations offers the following comments for the record of the
Subcommittee's September 20, 1994, hearing on the Targeted Jobs Tax Credit.

The Targeted Jobs Tax Credit (TJTC) has proven to bfe an effective program for
compaiues in our industry, having a positive effect on the hiring of individuals in
the designated categories. The existence of a partial tax credit has helped offset
higher training costs, initial lower productivity, and the extra expenditure of
management time necessary to bring these employees up to levels of
productivity equivtdent to others in the work force. By allowing companies a
method of offsetting those costs, ijlC has created a p>ositive incentive to seek out
and hire qualifying individuals.

Much has been made of statements suggesting that many if not most individuals
hired under TJTC would have been hired anyway to fill positions amd that
therefore TJTC is ineffective. We believe this is not the case. While it is
admittedly true that positions in our industry and other industries will be filled
when vacancies exist, it is less likely that they would be filled with individuals
who are TJTC qualified absent the program. The very lack of job skills and access
to the job market which has kept these individuals out of the job market would
continue to be a bar to them absent the TJTC program. The program exists
because it Wcis recognized that some individuals need help in breaking into the
job market. TJIC provides that help by creating an incentive for employers

221

September 20, 1994
Page 2

which balances out the extra costs associated with bringing a less qualified
person into the work place. In addition it identifies individuals for willing
employers to bring into the work force. It is a classic win-win situation.

Despite the fact that this program has been disrupted several times by limited
extensions which have been allowed to lapse and by short term renewals, it
continues to be strongly supported both by business groups and individuals who
are benefited by the opportunities created. TJTC should remain available on a
reliable basis into the future to continue the salutary effect it has had on bringing
into the work force individuals in the disadvantaged categories targeted by this
law.

Sincerely,

Y; I' ^"

^ames E. Gaffigan

Vice President, Governmental Affairs

JEG:kmj

BOSTON PUBLIC LIBRARY

222 3 9999 05982 832 5

Marriolt Drive
Marriotl Inlernalional, Inc. Washington, DC 2005:

Corporale Headquarters 301/380-3000

Harriott

October 21, 1994

The Honorable Collin C. Peterson

Chairman

Employment, Housing & Aviation Subcommittee

2157 RHOB

Washington, D.C. 20515-6143

Dear Congressman Peterson: •>.■,:'.

Thank you for your inquiry of September 27, 1994 regarding Marriott's experience with the TJTC
program. In response to your questions;

1) IS TURNOVER OF TJTC WORKERS A BIG PROBLEM OR ARE YOU ABLE TO CLAIM
THE FULL $2,400 FOR MOST OF THEM?

Turnover for TJTC workers is the same and often less than non-TJTC workers. It is not a problem for
us, and in many cases we are able to claim the full credit. At Marriott, because of the Corporate tax-rate,
we claim a maximum of $1 ,560 net tax credit. However I would like to point out that since an employer
may not claim the business expense for the deduction of wages to the extent he claims the credit, the
maximum credit is worth only $1,560.00, not $2,400.00.

2) ALTHOUGH YOU DID NOT TESTIFY ABOUT AN INCREASED RETENTION PERIOD,
DO YOU BELIEVE IT WOULD IMPROVE THE PROGRAM? WHAT ABOUT A CREDIT
FOR THE SECOND YEAR?

I believe an increased retention plan would be helpful, but is not necessary. As I have testified, I believe
the most difficult adjustment for TJTC workers is during the first six months of employment. That is the
time when it is most necessary for employers to invest more time in them. They have little or no work
ethic, as many of them have been on welfare or some form of assistance. I want to take the opportunity to
clarify what I believe is a complete misunderstanding of the corporate psychology. No employer would
fire a worker who had been with them for a number of months merely to get the TJTC credit, which
hardly covers the costs involved in U-aining a new worker. What employer would disrupt his workplace
for a meager lax incentive? It nuikes no serse.

3) WOULD A REQUIREMENT THAT TJTC WORKERS BE VOUCHERED OR CERTIFIED
BEFORE HIRING BE AN OBSTACLE TO MARRIOTT'S USE OF THE PROGRAM?

If Congress would propose a system whereby we could SCREEN AND IDENTIFY TJTC eligible persons
before making a hiring decision, this would not be an obstacle and would most likely increase our
involvement in the program. I urge you to coasider the terminology that is ased when looking at this
option. If you were to consider having the TJTC workers vouehered or certified, it would be a
tremendous obstacle if we were dependent on the job services, or other government entities, to perform
these administrative tasks. The amount of time necessary to complete this task by their office would
definitely end any participation in the program. If the employer was to pre-screen during the application
process (with the blessing of the EEOC, of course) then TJTC would be taken into consideration in every
case prior to the job offer. After all, isn't that what you really want?.

223

I hope my responses adequately respond to your inquiries. If tftere are any other questions that I may
respond to, please do not hesitate to ask.

Sincerely,

Janet^4. Tully

Director

Community Employment & Training Programs

JMT/jh

85-818 (228)

ISBN 0-16-055487-X

9 780

60"554872

90000

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Full text of "Tax credits to hire the disadvantaged : wasteful or effective : hearing before the Employment, Housing, and Aviation Subcommittee of the Committee on Government Operations, House of Representatives, One Hundred Third Congress, second session, September 20, 1994"

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