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Chapter 1: Background

Texas has established three primary employer-driven, customized training programs: the Smart Jobs Fund, the Skills Development Fund and the Self-Sufficiency Fund. In 1999, the Texas Legislature directed the Comptroller of Public Accounts to conduct a performance review of these programs and report back to the 2001 Legislature.

During the interim, the State Auditor’s Office, the Sunset Advisory Commission (SAC), the Legislative Budget Board and the Comptroller’s office issued reports that included recommendations related to the Smart Jobs and Skills Development Fund programs. In the first of two reports, the State Auditor’s Office (SAO) cited “gross fiscal mismanagement” of the Smart Jobs program by the operating agency, the Texas Department of Economic Development (TDED).[1] Legislators responded to the reports by freezing funding for Smart Jobs, which halted all new applications. By March 2001, the Legislature had not reauthorized TDED to process new applications despite compliance with many of the SAO audit recommendations.

SAC’s report raised additional concerns about TDED’s ability to manage the Smart Jobs program and recommended transferring the program to the Texas Workforce Commission (TWC), the operating agency for the Skills Development Fund (SDF).

The Comptroller’s report also recommended moving Smart Jobs to TWC and merging the Smart Jobs and Skills Development Fund programs into a single program funded entirely by the Smart Jobs Fund. In addition, the report recommended spending Smart Jobs funds on adult basic education and literacy courses under certain conditions.

The Legislative Budget Board issued a summary of the history of the SDF. This report contained no recommendations, but pointed to the Comptroller’s performance review for further information.

With the previous reports serving as starting points, the Comptroller’s performance review of these programs addresses the effectiveness and efficiency of the programs through a systematic study of participant records, survey findings and financial reporting.

Comptroller’s Performance Review

Recommendations from the Senate Economic Development Committee in 1998 and findings from the House Economic Development Committees in 1997 and 1998 indicated a need for an external performance review of these programs. The 1999 Texas Legislature passed House Bill 3657 directing the Comptroller to perform a biennial performance evaluation of the state’s Smart Jobs Fund and Skills Development Fund programs. Specifically, the Legislature directed the Comptroller to:

  • Perform an analysis of the wage levels of trainees both one and three years after the trainee’s participation in the programs ended;

  • Gather information relating to the number of trainees employed in the same field after one and three years;

  • Conduct a survey and analysis of program satisfaction from former grant recipients;

  • Provide a description of the overall impact of the programs on economic development in the state in general and economically distressed areas in particular; and

  • Provide any additional information determined necessary by the Comptroller for analyzing the performance and impact of the programs.

The Legislature also requested that the Comptroller provide an analysis of the efficiency of the programs, including their use of administrative funds. [2]

The Comptroller’s review was delayed, primarily by the lack of timely and accurate information. The Comptroller’s office began working with the agencies in August 1999 to gather background information, develop a research design and collect trainee records. As a last resort for collecting Smart Jobs program data, the Comptroller’s office hired temporary employees to pull trainee information from contract files to create a database for those records that were not entered by the SAO or TDED.

All trainee records were finally collected and accepted for processing by December 2000. Other delays were caused by the problems encountered in processing the data by TWC’s Career Development Resources (CDR) division, primarily in cleaning the data for duplicates and errors in data entry and developing control group information.

During the study period, the Smart Jobs program had significant changes in personnel, including four different program directors. These changes required additional work at each point to bring new staff up to date and also resulted in situations where new staff could not explain past program data.

Although TWC experienced a change in the SDF director position in early 2001, other TWC staff and management had sufficient knowledge to provide a consistent transition and meet information requests. The new TDED administration and director of the Smart Jobs Program has significantly improved the program and has provided faster and more accurate responses to information requests. However, the instability that the program has experienced made reviewing the program difficult. In addition, the program’s focus and performance most likely suffered during the transition, although current leadership has made significant progress in strengthening its contract management.

Finally, data on control group operations were delivered too late to the Comptroller’s office to include in the investment analysis. Expert consultants hired by the Comptroller to perform this analysis did not receive the control group data until March 2001. Initial meetings were conducted in December 2000.

Long-term, concerns over repeating the same study in future interims include improving the timely responsiveness of the agencies to requests for data and analysis and the quality of the data. In addition, the use of the TWC’s CDR group may be problematic, because that group is no longer independent from TWC’s management, as it was when it was known as the State Occupational Information Coordinating Council (SOICC) at the beginning of the Comptroller’s contract with that group.

Review of Interim Reports

The following sections provide a more detailed summary of the reports from the State Auditor’s Office, the Sunset Advisory Commission and the Comptroller of Public Accounts.

State Auditor’s Office Reports

In a January 2000 audit, the SAO found widespread problems in TDED’s administration and fiscal management of the Smart Jobs Fund program. In the report, SAO concluded that “gross fiscal mismanagement” of the Smart Jobs program prevents TDED from meeting program objectives and using state funds appropriately. SAO determined that TDED does not provide adequate fiscal and administrative oversight of Smart Jobs contracts or keep “accurate financial records of the $201 million Smart Jobs Fund balance.” These problems, SAO found, place state funds at great risk of waste and abuse by employers who receive contracts to train employees.[3]

A follow-up SAO report in August 2000, which focused on TDED’s contracting practices for the Smart Jobs program, found that the Smart Jobs funds awarded by TDED between September 1995 and August 1998 were not consistently used to successfully upgrade workforce skills and enhance employment opportunities in the Texas workforce. In this report, SAO concluded that “the Smart Jobs program has not achieved its objectives because TDED’s primary focus has been on awarding and distributing funds, with less regard for the outcomes of the services provided.” The result, according to SAO, was that participants often did not receive the type and quantity of training needed to prepare them for new or better jobs or provide Texas employers with a more highly skilled workforce.[4]

The objective of this follow-up audit was to determine the extent of possible fraud, waste and/or abuse in the Smart Jobs program. SAO focused on determining how many employees were actually trained and how many new jobs were created through use of Smart Jobs funds. SAO considered an employee trained if he or she received a minimum of 75 percent of the hours the employer agreed to provide. The scope of the audit included Smart Jobs contracts executed between September 1995 and September 1998.[5]

Sunset Advisory Commission’s Review

In April 2000, the SAC staff report questioned TDED’s ability to manage the Smart Jobs Fund program and recommended transferring the program to TWC and requiring more clearly defined contract provisions and monitoring practices. The Sunset Commission concluded that TDED was unable to determine whether Smart Jobs grant recipients actually trained their employees or how much money was spent in training. In addition, TDED’s failure to monitor the Smart Jobs Fund balance exposed state assets to potential fraud and abuse, and had the potential to cause an increase in the state’s unemployment insurance tax. According to SAC, TDED has been aware of some of these problems since 1997, but only began to take serious action in December 1999, during the SAO’s audit of the Smart Jobs program.[6]

In a review of its recommendations, members of the Commission recommended that all but a small portion of the Smart Jobs program be transferred to TWC. The remaining share, the size of which would be determined by the Legislature in the appropriations process, would remain at TDED for use in attracting businesses for economic development. The SAC specifically recommended, however, that TWC be made responsible for administering Smart Jobs grants whether awarded by TDED or TWC.[7]

According to the report, transferring the Smart Jobs program to TWC would provide a more stable environment for the program’s administration. Transferring the program would also increase coordination with other workforce development efforts at TWC and local workforce boards and give businesses one agency to contact to access the state’s entire customized job training system. This transfer would not result in any goal or objective changes to the Smart Jobs program itself.

Funding for Smart Jobs grants would continue to flow directly to individual employers. The program’s focus would remain on helping businesses provide customized training for their employees. In addition, the Commission’s recommendations place statutory requirements for more clearly defined contracts, while other recommendations include more effective risk-based monitoring to ensure better administration and accountability.[8]

Comptroller’s Report

In December 2000, the Comptroller’s report, e-Texas: smaller, smarter, faster government, recommended that the Legislature consider merging the Smart Jobs Fund and Skills Development Fund programs. According to the Comptroller’s report, prior to a change in state law that prohibited such actions, businesses that received grants from both the Smart Jobs Fund and Skills Development Fund identified problems associated with a need to merge the programs. In addition, the SAO and SAC reports highlighted critical weaknesses in the Smart Jobs Fund program.

The Comptroller’s recommendation calls for transferring the entire Smart Jobs program to TWC and merging it with the Skills Development Fund. According to the report, the state created TWC specifically to consolidate its workforce programs under a single administrative unit, and Smart Jobs clearly fits its mission. Rather than leave a portion of the program at TDED, the Comptroller’s recommendation directs TDED to work with TWC staff in “critical recruiting efforts to attract businesses to Texas.” The report also recommends expanding the Smart Jobs Fund to allow expenditures for adult basic education and literacy courses for qualified trainees.[9]

Review of Programs

For decades, customized training programs across the nation have served as a tool to address worker displacement, skill development, competitiveness, economic development, technological change, business attraction and business climate issues. In March 2001, 46 states including Texas, operated programs targeted to specific workers in specific companies. Montana, New Hampshire and Wyoming have not had customized training programs, and New York and Oregon discontinued their programs in the mid-1990s, citing other funding priorities.[10]

In Texas, employer-driven customized training programs are focused through three programs: the Smart Jobs Fund program, the Skills Development Fund and the Self-Sufficiency Fund. Texas created the Smart Jobs Fund program in 1993 to respond to demand for highly skilled workers in the technology sector and to retrain skilled workers in the declining defense industry. The state established the Skills Development Fund in 1995 to respond to the needs of local businesses and industries to train or retrain workers in their area. Texas designed the Self-Sufficiency Fund in 1999 to respond to the needs of local businesses and industries by providing job training and support services to recipients of Temporary Assistance for Needy Families (TANF). In addition to providing job training through employer incentive programs, Texas also provides job-training programs for incumbent and dislocated workers and economically disadvantaged individuals through the Workforce Investment Act and for individuals with disabilities through the Vocational Rehabilitation Act.

Smart Jobs Fund Program

The Legislature established the Smart Jobs Fund program in 1993 to meet strong employer demand for highly skilled workers that affect location and expansion decisions of technology-oriented businesses and industries.[11]

The Smart Jobs Fund program awards grants to Texas employers for customized training to promote the creation of new jobs and increase the wages of existing employees. Employers must provide at least a 10 percent match or in-kind contribution and pay a salary increase to trainees at the end of the training. To avoid a penalty, businesses must continue to employ 85 percent of the trainees for at least 90 days after a project is completed.

Through fiscal 2000 the Legislature has appropriated $227.3 million in general revenue. The Smart Jobs Program is funded by one tenth of one percent of the Unemployment Compensation Tax, after the fund is certified as solvent by the TWC.

Between fiscal 1995 and 2000, Smart Jobs awarded 1,592 grants for about $183 million in partnership with 1,591 businesses to train 156,420 proposed workers (Table 1). On contract closeouts, however, a much smaller number of trainees actually qualified for reimbursement.

Table 1

Smart Jobs—Program Growth

Fiscal 1995-2000

Total Grant
Dollars Awarded
Number of
Grant Awards
(not actual)
Number of Trainees*

* Numbers reflected in the “Contracted Number of Trainees” column cannot be used to estimate the average cost of trainee or the average cost of grant dollars per trainee. Contract closings have resulted in fewer than projected actual trainees and fewer grant dollars used.

Source: Texas Department Economic Development.

Over the history of Smart Jobs, the average cost of training including actual administration and grant costs was $1,891 for the 43,832 trainees who actually qualified for reimbursement.[12] State agency administrative expenditures for the program are capped at $1.5 million per year from the Smart Jobs Fund. However, each contract with an employer allows up to 10 percent of direct training costs to cover the costs of project management, and contract reporting and other non-training costs. Not all companies use these funds, and some do not use the full 10 percent.[13]

Changes to the Smart Jobs program

The original legislation focused on addressing global competitiveness concerning jobs requiring a high level of technical skills. At the time the legislation was introduced, a great deal of concern revolved around high-wage jobs leaving the state and the practice of companies importing skilled employees for high-wage jobs.

By 1999, the Legislature had substantively changed the purpose and expanded the scope of the Smart Jobs program.[14] The program has become a more general, broad-based training program serving all sizes and types of businesses with training needs for any job paying at or greater than the county average wage. The customized training no longer has to be in an emerging occupation or involve technical skills.

The level of wage requirements, which currently ignore the original concerns about high-wage jobs leaving the state and the state’s economic growth and global competitiveness, have increased and decreased over the course of the program.[15] In March 2001, the Smart Jobs wage requirements specified that jobs be at or above the county average wage. In many counties, this wage level is much higher than either the state average wage of the prevailing market wage for the occupation, but in some cases, it may be lower than either one, depending upon the occupation and the county. Although few grants have been awarded using this limitation, it is expected that the average county wage requirements would result in more grants to counties with lower average county wages. According to second quarter 2000 labor market information from the TWC, Texas has about 100 counties with an average wage of less than $10.00 per hour. In 1998-99, more than 150 of the 800 in-demand occupations had average wages of less than $10.00 per hour.[16]

The January 2000 State Auditor’s Office report found serious problems across all critical elements of the Smart Jobs program including contract monitoring and data collection. According to the SAO, these problems included loopholes in the contract provisions and significant weaknesses in the practices TDED used to select contractors, establish contract rates and monitor contractor performance. For example, SAO found that contractors were not selected competitively and loopholes in contract provisions allowed employers to be paid for training employees who had not met program requirements.

Significant weaknesses were identified in the way TDED performed monitoring visits, reimbursed employers and closed out contracts.[17] SAO also found that TDED did not collect accurate and meaningful data to measure and report the success of the program. SAO found that key performance measures were inaccurate and did not directly relate to program objectives and that information obtained from various databases was inaccurate.[18]

TDED, working with the SAO, developed a 31-point “Smart Jobs Corrective Action Plan” to implement recommendations made in the SAO’s January and August 2000 audit reports. In November 2000, TDED’s governing board approved new goals for the Smart Jobs program, clarifying the program’s goals and objectives. According to the SAO, this should allow TDED to focus on establishing contractor selection and monitoring processes to better manage the program.[19] TDED’s progress on the Correction Action Plan is monitored by the SAO and reported regularly to the legislative leadership. In January 2001, SAO officials testified before the Senate Finance Committee that TDED had completed about 75 percent of the corrective actions needed to allow the program to resume operations. Of those items remaining in the corrective action plan, TDED states that many of them are substantially complete.[20] All steps of the plan should be completed and validated by SAO by April 1, 2001.

Skills Development Fund

The 1995 Legislature created the Skills Development Fund (SDF) to develop job training customized to local business needs. TWC administers the SDF. According to its authorizing statutes, the SDF is intended to “remove administrative barriers that impede the response of public community and technical colleges to industry and workforce training needs and to develop incentives for public community and technical colleges to provide customized assessment and training in a timely and efficient manner.”[21] The Texas Engineering Extension Service was added to the fund in 1997.[22] The first grants to the Texas Engineering Extension Service took effect in fiscal 1998. Community-based organizations (CBOs) and faith-based organizations were added in 1999. Two CBOs were awarded grants in fiscal 2000.[23]

Since the program’s inception, the Legislature has appropriated $25 million in general revenue each biennium beginning in fiscal 1996. The SDF does not have a dedicated revenue source, such as the Unemployment Insurance Tax for Smart Jobs.[24] Between fiscal 1996 and 2000, the SDF awarded 247 grants in partnership with 1,376 businesses who proposed to train more than 73,000 workers (Table 2).[25] Over the history of the SDF, 95 percent of the trainees have gained employment with a participating business, and the actual average cost of training has been $878 per trainee that qualified for reimbursement. TWC is authorized to expend a portion of the SDF appropriations to administer the program. In addition, up to 10 percent of grants to individual businesses can be spent on administration. Up to 15 percent of grants to business consortiums can be spent on administration.

Table 2

Skills Development Fund—Program Growth

Fiscal 1996-2000 by Biennium

Total Grant
Dollars Awarded
(not actual)
Number of Trainees*

* Numbers reflected in the “Contracted Number of Trainees” column cannot be used to estimate the average cost of trainee or the average cost of grant dollars per trainee. Contract closings have resulted in fewer than projected actual trainees and fewer grant dollars used.

Source: Texas Workforce Commission.

The SDF makes grants available to community and technical colleges or the Texas Engineering Extension Service, each of which has created a partnership with local businesses to develop curriculum and provide business-specific training to employees. This training may be for current workers or new hires of a single business or for a consortium of businesses. In each case the business agrees to hire the workers who participate in the training. Colleges may also propose training for new workers for expanding businesses or for businesses relocating from outside Texas. Grants are awarded annually, and are limited to no more than $500,000 for a single business.

Providers can recover costs if there is an actual or projected labor shortage in the occupation that is not already being met by an existing institution or program in the area, and the wage at the time of job placement is at or above the prevailing wage for that occupation in the area. Funds can only be used for developing customized training programs for business and trade unions and small and medium-sized business networks and consortia. Funds cannot be used for an employer moving within the state. In establishing the program, the express intent of the Legislature was that the funds be spent in all areas of the state to the “greatest extent practicable.”

A comparison of the Smart Jobs and SDF program is contained in Table 3.

Table 3

A Comparison of Texas Smart Jobs Fund and Texas Skills Development Fund


Established as a business incentive program to promote workforce development.
Established as a workforce development program for economic development.
Awards grants to Texas businesses to provide customized training for their employees.
Awards grants to public community and technical colleges, the Texas Engineering Extension Service and community-based organizations for customized job training for specific jobs at local businesses. Consortiums of small and medium-sized businesses are encouraged.
Source of Funding
Unemployment Insurance assessment of one-tenth of one percent of wages paid by employer.
General Revenue Fund.
Accessing Funds
Funding goes directly to employers. Employer reimburses eligible training providers, which may consist of employers, educational institutions, nonprofit training or community-based organizations, for-profit training companies and training associates.
Allows community colleges to work with new and existing businesses to create customized training programs. Colleges may use these funds to develop a new program and offer it to an industry. May also include private training providers and employers.
May be used to:
Pay for training providers/instructors.
Instructional materials.
Travel limited to 10 percent of direct training related costs and state rates.
Equipment lease/rental.
Classroom, on-the-job training, computer-based training.
Administrative costs of the contract, limited to 10 percent of direct training-related costs.
Development of customized training programs.
Pay for training providers, instructors wages and instructional materials.
Underwrite the administration of the grant program.
Types of training may include classroom, on-the-job and computer-based.
Fund some equipment and/or utilities at public colleges for training.
May not be used to:
Pay wages of trainees while in training.
Purchase capital equipment including computers.
Pay for retroactive training costs prior to the start date of the contract.
Pay training and related costs of an employer who relocates from one area of Texas to another.
Pay the wages of trainees.
Maximum Grant Amount
Award per single employer per fiscal year may not exceed $1.5 million and further restricted to 10 percent of the median annual wages of the new or existing jobs created or retained with the grant.
A limit of $500,000 for the training program of a single employer.

Table 3 (continued)

A Comparison of Texas Smart Jobs Fund and Texas Skills Development Fund


Average cost per trainee (closed contracts)
Employer Match
Employers with fewer than 50 employees must provide a matching amount at least equal to 10 percent of the total project costs. Employers with 50 or more employees must provide a dollar-for-dollar match. The match may include in-kind matching contributions, as well as wages paid to trainees during training.
No cash/in-kind match, but the executive director will take employer contributions into consideration when evaluating an application.
TDED accepts applications on a quarterly basis.
Applicants may apply directly or through an agent.
Funding on a quarterly and ongoing basis.
Texas community or technical college and one or more Texas employers present a joint proposal requesting funding for a customized training program to the director.
Application Information
Awards for SJF are based on the following priorities:
Creation and retention of family-wage jobs;
Prevailing occupational wages in that labor market;
Jobs located in an Enterprise Zone or an Enterprise Project;
Demand, emerging and manufacturing occupations;
Existing Texas businesses;
Statewide distribution of funds;
High unemployment areas;
50 percent of funding to small businesses;
Minority businesses;
The financial stability of the employer or employers;
Economic impact of training project;
International impact;
Defense conversion projects;
Defense-dependent communities;
Businesses employ former Texas prison inmates; and
Businesses that provide benefits to employees.
The executive director may also consider the following information when evaluating proposals:
Ensuring funds are spent in all areas of the state;
Developing projects that will create jobs in local workforce development areas where the unemployment rate is above the state’s average;
Responding to the needs of small and medium-sized business consortiums;
Proposed wages for trainees at the end of training;
Prevailing occupational wage in that labor market;
Proposed employment benefits;
A comparison of trainee costs to costs for similar instruction;
Resources committed by the employer or employers;
The financial stability of the employer or employers;
The regional economic impact of the training project;
Facilitating the growth of industry and emerging occupations;

Table 3 (continued)

A Comparison of Texas Smart Jobs Fund and Texas Skills Development Fund


Application Information (continued)

Sponsoring creation and attraction of high-value, high-skill jobs;
Providing retraining in response to new or changing technology; and
Ensuring expansion of the state’s capacity to respond to workforce training needs.
Grant Administration
During the course of the contract, the training plan may be altered by the contractor for changes that do not affect the material terms and provisions of the contract. The contractor shall provide written details to changes and TDED must agree in writing prior to implementation. Contract amendments may be requested in writing at least 30 days prior to proposed changes. No amendment may be requested in the last quarter of the contract.
Employer is reimbursed for training expenses on a quarterly or monthly basis.
Twenty-five percent of the grant is withheld by TDED until the end of the 90-day retention period.
If up to 85 percent of the trainees have been retained for 90 days following the training project end date and have met all contractual obligations, any remaining funds due contractor will be remitted.
State-level administrative costs capped at $1.5 million per fiscal year.
Director of the TWC or is responsible for the distribution of money and may have a designee to administer the program.
Amendments are allowed with approval depending on the contractor’s request.
The Director may allocate the use of funds throughout the biennium at her discretion.
The Director may limit the amount of a grant.
Twenty-five percent of the funds are withheld for 90 days until a final report on the project is provided to the Director from the contractor.
Review by TEA pursuant to §303.004, Labor Code, V.T.C.A.
Information sharing
SJF information is shared on a limited basis with SDF through both the program director and the program administrative coordinator.
Joint meetings are held with prospective applicants and funded contractors.
Same as Smart Jobs.

Self-Sufficiency Fund

The 1999 Legislature established the Self-Sufficiency Fund (SSF), modeled on the Skills Development Fund, to provide training for individuals receiving Temporary Assistance for Needy Families (TANF). Besides customized training for TANF recipients, providers may expend funds to provide support services and transition assistance for participants. The fund is financed solely with TANF federal funds and administered by the TWC. Recent agency rules have expanded eligibility to include individuals receiving food stamps.

Training may be provided through the SSF after a market-driven initial job search proves unsuccessful and the individual’s basic skill levels are found appropriate to the level of job training the employer requests. This “Work First” philosophy ensures that scarce resources are spent in the most efficient manner possible.

Since the program’s inception, the Legislature has appropriated a total of $36 million in TANF funds for operation of the SSF. The Legislature appropriated $6 million in fiscal 1998, $6 million in fiscal 1999 and $24 million for the 2000-01 biennium.[26]

Between fiscal 1998 and 2000, the SSF awarded 46 grants in partnership with 644 businesses to train more than 6,300 workers, with more than 48 percent of trainees gaining employment with a participating business (Table 4).[27] Over the history of the SSF, the average cost of training has been $5,797 per trainee that qualified for reimbursement. TWC uses part of the appropriations to administer the program. In addition, individual grantees are allowed to spend up to 10 percent of their grant to administer the program. Consortiums are allowed to spend up to 15 percent.

Table 4

Self Sufficiency Fund—Program Growth

Fiscal 1998-2000

Total Grant
Dollars Awarded
(not actual)
Number of Trainees*

* Numbers reflected in the “Contracted Number of Trainees” column cannot be used to estimate the average cost of trainee or the average cost of grant dollars per trainee. Contract closings have resulted in fewer than projected actual trainees and fewer grant dollars used.

Source: Texas Workforce Commission.

The SSF now more closely resembles the Skills Development Fund. The legislation that created the SSF does not contain “demand occupation” restrictions and requires only that the wage is sufficient to enable program graduates to become independent of TANF and the Food Stamp program.

Because the program is so new, the SSF was not included in this report, except for some observations on its administrative efficiency.