Mr. JOHNSTON. I agree.

Mr. MARTINEZ. Proceed.

Mr. JOHNSTON. Our recommendations are, one, that subgrants' administrative costs be either excluded or included in the 15-percent limitation for all types of contracts. Either alternative would separate the issues of performance contracting from those of administrative cost limits.

Two, when SDA's do select performance-based contracting they should be required to pass on to their subgrantees the same performance standards that they negotiate with the State. Performance-based standards should be low enough that if they are not met, the provider deserves to go out of business, because that is surely what will happen to CBO's who don't recover even a small portion of their costs.

And it's already caused a number of school districts and community colleges in our area to withdraw as service providers to JTPA. Three, we believe that the legislation should repeat in section 303(a)(i) the "most in need" language from section 141(a) and require States to establish a priority system for selecting eligible applicants who are most in need and who can benefit from JTPA's services.

Some SDA's are measuring performance not by improving their performance, not by modifying their delivery systems to meet the needs of those who are more disadvantaged, but by merely screening them out.

And this includes, in my opinion, dropout youth who can't pass the necessary entrance tests to get into skill training.

In conclusion, we have to state that some SDA's such as the balance of Santa Clara County have managed to meet State performance standards with very little creaming, and have tried within the limits of the regulations to meet both their own administrative cost needs and cash-flow and cost-recovery problems of service provid

ers.

But even in the case of Santa Clara County, the problems of performance-based contracts as defined in the regulation are such that it would be better to tie performance to refunding decisions rather than to cost recovery.

And if it's tied to refunding decisions, accountability can still be imposed. CETA did not have very much teeth in terms of refunding decisions, but the SDA's themselves are refunded on the basis of prior performance.

But they still recover their costs. Under CETA the most successful programs were those operated by CPO's and those community colleges and school districts that have developed special programs tailored to the needs of the disadvantaged poor.

Under JTPA it is these very programs that are disappearing because of cash-flow and cost-recovery problems, and those that are left are by and large forced to cream.

Thank you for the opportunity to present this testimony. [Prepared statement of Robert Johnston follows:]

PREPARED STATEMENT OF ROBERT E. JOHNSTON, DIRECTOR OF PLANNING, CENTER FOR EMPLOYMENT TRAINING, SAN JOSE, CA

INTRODUCTION

The Center for Employment Training (CET) is a community-based organization (CBO) which for the past 18 years has provided occupational skill training coupled with skill-related educational remediation and language training to disadvantaged adults and youth.

We are nationally recognized for our program design that enables us to accept eligible participants without any qualifying tests and then provide them with the competencies needed for stable employment into their chosen skill. Basic education and language training are integrated into each occupational skill course, and are geared to employer requirements for that occupation.

Participants who can move rapidly through the course material are allowed to do so and, conversely, participation time is longer for persons who have less ability, basic education deficiencies, or more personal problems. Finally Resource Counselors act as advocates to extract needed social services from family or the community so that participants can remain in training until they are placed in employment by CET Job Developers.

CET is currently a JTPA Title IV, Section 402 farmworker grantee for 18 Southern and Central Coast California counties, but we receive slightly more funding as a subgrantee to most of the Service Delivery areas (SDA's) in which our 13 California training centers are located, as well as from SDA's serving Tucson, Arizona, Yuma, Arizona and Nampa, Idaho.

It is in this latter capacity as a subgrantee of SDA's that we wish to offer testimony today. In particular, we wish to testify regarding the relationship between the 15 percent limit on administrative costs, fixed fee performance based contracting, cash flow and cost recovery problems of CBOs, as well as pressures to select eligible applicants who least need special services.

ADMINISTRATIVE COST LIMIT AND PERFORMANCE BASED CONTRACTING

Both the 15 percent limit on administration and the conversion of allowances to limited needs-based payments were intended to ensure that more resources were devoted to the actual training of participants. The reduction of administration at the SDA level from 20 percent to 15 percent may also have been intended to allow for the increased cost of adding another layer of administration at the state level.

SDAs immediately were faced with a problem. They and their program operators had been spending 20 percent on administration; administration requirements were substantially the same; and the reduction of allowances removed a segment of spending that had relatively low administrative costs.

SDAS solved the problem by taking advantage of the performance contracting features carried over intact from Comprehensive Employment Training Act (CETA) which were in the regulations, but not the Act. The administrative costs of program operators are excluded from the 15 percent limitation, if they agree to negotiate a single unit charge for training at a fixed unit price in which full payment is made only for participants who complete training, and are placed into unsubsidized employment in a training-related occupation at a wage above that specified on the agreement. In other words, a successful (billable) placement has to meet a lot of other requirements in addition to the CETA standards of entering unsubsidized employment.

SDAS are therefore negotiating more and more of their subgrants to meet the technical requirements of fixed unit price contracts in order to retain all allowable administrative costs for their own use. CET believes that the issues and problems of fixed fee performance contracting should be determined on their own merits and this form of subcontracting should not be used merely as means to evade the 15 percent limit on administrative costs.

CASH FLOW AND COST RECOVERY PROBLEMS

The immediate effect of performance-based contracting on both CBOs and special school or college programs was that payment for services was delayed. Some SDAS discontinued giving advances to meet current expenses. Progress payments were delayed by the need to provide proof of attendance or completion of various phases of training; and a portion of the fee was withheld until placement and (in California) proof of 30 days work retention. The cash flow problems are obvious, since it also takes at least 30 days for reimbursement after an invoice is submitted. The non

profit status of CBOs allows them little opportunity to accumulate the working capital needed to finance such delayed compensation, and banks are reluctant to loan money to cover costs that may not be paid by the SDA.

Performance contracting also leads to even more serious cost recovery problems that are unrelated to meeting national performance standards. The SDAs penalty for non-performance is a one year probation followed by reorganization or defunding, if performance does not improve in the second year. But in the meantime they do recover all of their costs. On the other hand the program operator's penalty for even slight underperformance on a performance contract is that they do not recover their costs.

Lip service is sometimes paid to charging a fee high enough to cover this risk, but, in fact, line item budgets are typically required to support the fee charged, and these budgets do not normally allow for a risk factor or a "profit" or a fee high enough to build up the working capital needed to ensure adequate cash flow.

Furthermore contract provisions for payment are increasingly more complex. The definition of a "placement" is much more restricted; and SDAs typically impose more severe performance criteria in their performance contracts with program operators than are contained in their own cost reimbursement contracts with the state. Cost recovery has therefore become a serious problem even for program operators whose performance far exceed national and state performance standards.

The cash flow and cost recovery problems that we face have serious policy implications. Both CBOs and special programs in local education agencies have to generate income to pay their costs as they are incurred. If they cannot do so, they will not be able to continue providing services under JTPA. And yet these are the agencies that have been the most innovative in developing alternative structures to provide comprehensive occupational skill training, remediation and counseling to adults and youth who have not been successfully integrated into our mainstream educational and economic systems. Employers themselves do most of the occupationspecific training for all new employees, but only the largest employers are able to set up programs that deal effectively with the remediation and behavioral problems of the "hard core" unemployed. Likewise, mainstream educational agencies have had a difficult time serving those who are most in need of JTPA services.

If JTPA is to continue serving both the employer's need for dependable, well trained employees and at the same time the needs of those who have "missed the boat" of economic opportunity, then it is necessary to strengthen and foster those institutional structures that have been most successful in meeting both needs and not allow them to atrophe because their cash flow and cost recovery needs were not even considered in the formulation of policy.

PRESSURES TO CREAM

Another problem we have experienced in the implementation of JTPA is the pressure to shift the clientele being served-away from those traditionally served (for the past 15 years) by community-based organizations and by special school programs and towards those traditionally served by schools and hired without special training by employers. Some Private Industry Councils (PIC's) now openly advocate serving those who can most benefit from the training; some even offer skill training only to those persons who have a GED or who are high school graduates; employers naturally recruit the "best of the lot" for on-site training; and performance-based contracting creates tremendous pressures on SDAs and provides alike to exclude from training those who are difficult to serve. Many SDAs have also eliminated allowances without providing any needs-based payments at a time when welfare and other social services are being reduced.

We believe that the very limited vocational training dollars available to the Department of Labor under JTPA should be targeted primarily toward the stable employment of structurally unemployed adults and of drop-out youth who are trying to function as adults, since local vocational education funds are available for the mainstream population and are augmented by funds from the Vocational Education Act which has a much broader purpose than the Job Training Partnership Act.

RECOMMENDATIONS

1. Exclude subgrant administrative costs from the 15 percent limitation for all types of contracts, not just for fixed limit charge contracts. An alternative would be to include all types of contracts in the 15 percent limit on administration, but it is our sense that the addition of another (state) level of administration has increased the total administrative burden on SDA's. Either alternative would separate the issues of performance contracting from those of administrative cost limits.

2. When SDA's select performance-based contracting, require them to pass on to their subgrantees the same performance standards that they negotiate with the state. Performance-based standards should be low enough that, if they are not met, the provider deserves to go out of business because that is surely what will happen to CBOS who don't recover even a small portion of their costs. And it has already caused a number of school districts and community colleges to withdraw as service providers.

3. Repeat in Section 203(a)(1) the language from Section 141(a) requiring the states to establish a priority system for eligible applicants who are "most in need” and who can benefit from JTPA services. Some SDA's are measuring performance, not by modifying their delivery system to meet the needs of those who are more disadvantaged but by merely screening them out. Obviously there must be a balance between participant needs and the ability to meet those needs but we believe that JTPA with its limited funds should sharpen its focus by targeting those who are, not least, but less likely to become economically self sufficient without those services.

CONCLUSION

Some SDAs such as Balance of Santa Clara County have managed to meet state performance standards with very little "creaming" and have tried, within the limits of the regulations, to meet both their own administrative cost needs and the cash flow and cost recovery needs of service providers. But they were also performing well under CETA and had in place CBO's who were giving priority to the "hard to serve" and who had adapted their programs to meet the needs of those with language or education deficiencies. Even in the case of Santa Clara County the problems of performance based contracts (as defined in the regulations) are such that it would be better to tie performance to refunding rather than to cost recovery.

We know that we share these problems with other CBOs as well as with special school programs. Under CETA the most successful programs were those operated by CBO's and those community colleges and school districts that developed special school programs tailored to the needs of the disadvantaged poor. Under JTPA it is these very programs that are disappearing because of unintended cash flow and cost recovery problems.

Mr. MARTINEZ. Thank you, Mr. Johnston. Mr. Guichard? STATEMENT OF GUS GUICHARD, EXECUTIVE VICE CHANCELLOR, CALIFORNIA COMMUNITY COLLEGES, SACRAMENTO, CA

Mr. GUICHARD. Thank you, Mr. Chairman, Senator Greene. I'm Gus Guichard, executive vice chancellor of the California Community Colleges, and as the chancellor-designee on the State Job Training Coordinating Council and the sole representative of postsecondary education on the council, I appreciate this opportunity to share with you my observations of the operation of JTPA in California.

I need to emphasize, however, that I speak from the point of view of postsecondary education as a service provider. Overall, I feel that the operation of the Job Training Partnership Act is positive.

I believe that the JTPA Program in California has to a significant degree attained most of its early objectives. It is soundly operated, fiscally secure and demonstrates a positive overall placement rate which exceeds the Secretary's performance standards.

Individuals have been able to gain employment and raise their standard of living, and we in the colleges have been able to assess and provide training to match individual needs.

An example of this exists at neighboring East Los Angeles College, with their very exemplary assessment center. JTPA is an improvement over CETA, yet there are some current and projected problems which need attending, particularly from the perspective of public education.

This is the critical time to do it, because I believe firmly that the good placement rate is in large part due to the nonjustifiable ap

proach on the part of SDA's to train and place those eligible individuals most easily trained and placed.

But now, with close to 2 years' operation, many SDA's will have to focus their training on the harder to serve and the structurally unemployed, the population with the greatest needs in the area of basic skills and motivational support.

Here I believe the need for the education link will be most crucial. Community colleges have a great deal of experience, and I believe expertise, in these areas. Colleges have developed numerous programs as a result of experiences with retraining programs resulting from plant closures and other economic disruptions.

I believe that these programs would be of value to service delivery areas in meeting the needs of their clients. I want to emphasize that I take very seriously the concept of partnership embodied in JTPA, and my perspective of the public side of that relationship includes all of the public funded agencies that have resources to contribute to the JTPA's objective of training and placement of eligible participants.

Obviously among those publicly funded agencies are the local public educational agencies, and particularly the community colleges for which I have some statewide responsibility. My observations have forced me to conclude that there is underutilization of California's public educational agencies as full partners in this vital enterprise.

To be specific, California's 106 community colleges represent a formidable and available vocational education and training resource costing the taxpayers of this State some $500 million annually, and I am dismayed to hear that these resources are on occasion ignored and often in favor of duplicative and costly alternatives.

We obviously should not set up a competitive system at the Federal or State level and for the benefit of cost-effectiveness and a cost-effective use of limited resources we must not set up competitive systems at the local level.

Title II-A funds, both the 78 percent and the State education coordination grants, 8 percent, as well as title III, should be aggressively used to leverage additional and, I would emphasize, available resources in public educational agencies.

It's probably undeniably true that many operations and perceptions were carried over from CETA and carried forward under the JTPA. So where there was earlier limited use of community colleges or of other public educational agencies, this may not have been corrected in light of the decidedly different thrust of JTPA, which is the partnership concept.

Contributing some confusion in California was what I believe to be an unnecessary extension of the LEA definition to include community-based organizations and proprietary institutions under 8percent money, and while I agree that the local decisionmaking should prevail in those areas of JTPA which require it, I believe that State councils themselves have the responsibility to point out and to encourage nonduplicative use of resources.

There should be, from my point of view, regulatory or statutory clarification of congressional intent to use publicly funded resources to a maximum as a planning strategy of first resort, An