[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





                      COMMUNITY DEVELOPMENT BLOCK
                       GRANTS (CDBG)--THE IMPACT
                       OF CDBG ON OUR COMMUNITIES

=======================================================================

                             FIELD HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   HOUSING AND COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 30, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-46



91-774              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          CHARLES A. GONZALEZ, Texas
    Carolina                         MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California                 HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin                KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania      JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona             STEVE ISRAEL, New York
VITO FOSSELLA, New York              MIKE ROSS, Arkansas
GARY G. MILLER, California           CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania        JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia  JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota           ARTUR DAVIS, Alabama
TOM FEENEY, Florida                  RAHM EMANUEL, Illinois
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director

           Subcommittee on Housing and Community Opportunity

                     ROBERT W. NEY, Ohio, Chairman

MARK GREEN, Wisconsin, Vice          MAXINE WATERS, California
    Chairman                         NYDIA M. VELAZQUEZ, New York
DOUG BEREUTER, Nebraska              JULIA CARSON, Indiana
RICHARD H. BAKER, Louisiana          BARBARA LEE, California
PETER T. KING, New York              MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North          BERNARD SANDERS, Vermont
    Carolina                         MELVIN L. WATT, North Carolina
DOUG OSE, California                 WILLIAM LACY CLAY, Missouri
PATRICK J. TOOMEY, Pennsylvania      STEPHEN F. LYNCH, Massachusetts
CHRISTOPHER SHAYS, Connecticut       BRAD MILLER, North Carolina
GARY G. MILLER, California           DAVID SCOTT, Georgia
MELISSA A. HART, Pennsylvania        ARTUR DAVIS, Alabama
PATRICK J. TIBERI, Ohio
KATHERINE HARRIS, Florida
RICK RENZI, Arizona


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 30, 2003................................................     1
Appendix:
    June 30, 2003................................................    75

                               WITNESSES
                         Monday, June 30, 2003

Braithwaite-Burke, Hon. Yvonne, Chair, County Board of 
  Supervisors, Los Angeles County, CA............................    21
Branch, Cheryl, Associate Director, Los Angeles Metropolitan 
  Churches, Los Angeles, CA, Chair, Empowerment Zone Oversight 
  Committee......................................................    70
Bregon, Hon. Nelson, General Deputy Assistant Secretary (acting), 
  U.S. Department of Housing and Urban Development, Washington, 
  DC.............................................................     4
Garcetti, Hon. Eric, Member, District 13, Los Angeles City 
  Council, Los Angeles, CA.......................................    24
Gay, Lori, President, Los Angeles Neighborhood Housing Service, 
  Los Angeles, CA................................................    59
Graves, Clifford, General Manager, Community Development 
  Department, City of Los Angeles, CA............................    27
Jackson, Carlos, Executive Director, Community Development 
  Commission, Los Angeles County, CA.............................    30
Merino, Felipe, Executive Director, Molina Gardens Improvement...    66
Mistrano, Sam, Acting Executive Director, Southern CA Association 
  of Non-Profit Housing, Los Angeles, CA.........................    62
Sausedo, Robert, Chairman of the Board, Los Angeles Community 
  Development Bank, Los Angeles, CA..............................    33
Ybarra, Arturo, Executive Director, Watt Century Latino 
  Organization...................................................    69

                                APPENDIX

Prepared statements:
    Braithwaite-Burke, Hon. Yvonne...............................    85
    Branch, Cheryl...............................................    76
    Bregon, Hon. Nelson..........................................    80
    Garcetti, Hon. Eric..........................................    88
    Gay, Lori....................................................    91
    Graves, Clifford.............................................    91
    Jackson, Carlos..............................................   114
    Merino, Felipe...............................................   131
    Mistrano, Sam................................................   121
    Sausedo, Robert..............................................   124

 
                             FIELD HEARING
                      COMMUNITY DEVELOPMENT BLOCK
                       GRANTS (CDBG)--THE IMPACT
                       OF CDBG ON OUR COMMUNITIES

                              ----------                              


                         Monday, June 30, 2003

             U.S. House of Representatives,
                        Subcommittee on Housing and
                             Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 10:01 a.m., 700 
State Drive, Los Angeles, California, Hon. Robert W. Ney 
[chairman of the subcommittee] presiding.
    Present: Representatives Ney and Waters.
    Chairman Ney. Welcome. Today the subcommittee will hold its 
first field hearing of the 108th Congress to discuss the 
effects of the community relative to block rent or the CDBG 
program. And this is the Subcommittee on Housing Community 
Opportunity which is within the Financial Services Committee.
    CDBG is generally recognized as the mainstay for target of 
community development of cities, counties and rural areas to be 
principally dependent as well as moderate income persons. The 
program attempts to strike an appropriate balance between local 
flexibility and national targeting to low and moderate-income 
persons.
    It has developed this reputation for the past 28 years, and 
local officials constantly use CDBG funds to take on new 
challenges in the areas of housing, neighborhood development, 
public facilities in the division of Social Services.
    The CDBG program emphasizes HUD's division of partnerships 
with State and local governments. Due to the flexibility and 
uses of CDBG funds, the program is in conjunction with many 
other HUD programs to target specific populations. 
Notwithstanding the flexibility of the program, rehabilitating 
and producing housing is the largest singular use of 
approximately 31 percent of the funds by entitlement 
communities.
    Housing activities include rehabilitation of ownership and 
rental units assisting new construction, transitional, 
temporary housing as well as necessary site improvements and 
administrative assistance. The second largest use of the funds 
is approximately 25.6 percent of public facilities and prudent, 
and, I think, in that area as a more generalized area where we 
could find out the answers to questions where does it is 
actually go, and how does--how are those decisions actually 
determined?
    Every year HUD provides block raised eligible communities 
to, one, central cities of metropolitans, MSAs; two, other 
population cities for the population of at least 50,000; three, 
qualified urban counties with populations of at least 200,000, 
excluding the population of entitlement cities; and four, State 
distributed funds to small communities that are not otherwise 
eligible.
    HUD determines the amount of each entitlement rent by 
statutory dual formula uses several measures of community 
needs, including the extent of poverty, population, housing, 
overcrowding, age of housing and population growth in 
relationship to other metropolitan areas. I also want to at 
this time applaud the leadership of my colleague, our ranking 
member, Maxine Waters. She asked for this hearing, and the 
Congresswoman has invited me out to California here, and I want 
to preapologize to my relatives in El Monte, South El Monte, 
Fontana when they find out I'm here, I'm not able to get to 
their house. So it will cause a--I am going to make a phone 
call to them. I want to assure myself of that.
    But I want to again thank Maxine Waters. She's played an 
active role in helping her property maximize their use of CDBG. 
We also support funds coming from the Federal government, but 
frankly loan members that have urban or rural settings, where 
are the funds going, where do they go, what type of input is 
out there from the Federal representatives of members of 
Congress themselves and how can they play a part in this 
process?
    I'm from a very rural area of Appalachia in Eastern Ohio, 
and I just really want to thank the cooperation and spirit of 
cooperation that my colleague, our ranking member, Maxine 
Waters has shown in the U.S. Capital.
    But I also would like to share that I appreciate the 
working relationship that we have developed. We have both 
discovered that working together, we can deal with the problems 
of rural America as well as the problem of urban America, and 
we are attempting to forge an alliance wherever we can to make 
sure that resources are directed both to rural and to urban. So 
my--my work on this committee has been extremely enjoyable 
because we have found that we can, indeed, have bipartisan 
efforts to deal with the problems that we're charged to take 
care of.
    The Community Development Block Grants are important, too, 
in the economic development care to revitalizing neighborhoods 
and providing social services. CDBG funds may be used for a 
wide range of activities, including acquisition of real 
property, relocation and demolition, public services and 
assistance to profit-motivated businesses to carry out economic 
development and job creation, retention programs.
    The City and County of Los Angeles received 92 and $38 
million to deliver services. Section 108, the loan guarantee 
provision of the Community Development Block Grant program is 
one of the most potent and important public investments 
materials that HUD offers to local governments. It allows them 
to transfer a small portion of the CDBG funds into federally 
guaranteed loans large enough to pursue fiscal and economic 
revitalization projects that can renew entire neighbors. Such 
public support is often needed to inspire private and economic 
activity providing the initial resources or simply the 
confidence that private firms and individuals may need to 
invest in distressed areas.
    Section 108 loan guarantee funds are extremely important to 
me. One of my early accomplishments, when I went to Congress, 
was to discover Section 108 funds that were underutilized, and 
at that time, they were being scored in the budget. And they 
were not as attractive because they were being scored, and we 
went to work. And we helped move the Congress to not score the 
CDBG, and that year, I was able to pass legislation to identify 
$10 billion in CDBG--I mean, in Section 108 to be used 2 
billion per year for five years to get into the cities to get 
involved with economic development. I understand some things 
have changed now in the way that Section 108 is looked at, but 
I think still, it's a very important tool that is either 
underutilized, misutilized or just misunderstood. And so we 
want to find out today what's happening with Section 108 here 
in Los Angeles.
    Ms. Waters. Thank you, Mr. Chairman.
    It's eight years later, and LACDB will be dissolved at the 
year 2003. The City of Los Angeles will have access to $190 
million of Section 108 guarantee authority available to the 
LACDB, and I would like to hear what their plans are for the 
reallocation of this money.
    Earlier this year, the city requested that $50 million of 
the 196 million go to the city's community development 
division. I and the affected community specifically would like 
to know which projects or proposals does the city plan to fund 
with this funding? Also, I'd like to hear how does the city and 
the county plan to address their affordable housing needs? We 
understand that the mayor has organized $100 billion housing 
trust fund, and hopefully, we can learn some more about that 
today.
    The primary purpose of the Community Development Bank 
programs were designed to create and to retain jobs in the 
empowerment zone, and I hope that our witnesses today can talk 
about jobs in relationship to the Community Development Bank 
programs. Because of the problems that we had here in Los 
Angeles, we were hopeful--we were supportive of the city and 
the county receiving exemption of the CDBG cap, and we 
increased the social services from 15 to 25 percent.
    Some of the conditions that were identified when we had our 
problems here, certainly still exist and remain, and we need to 
examine the possibility of--as we have been requested to do, to 
look at permanent exemption for the 25 percent public services 
cap. I don't know where we are with that at this time.
    Again, I'd like to thank the Chairman for holding this 
field hearing here in Los Angeles. I look forward to hearing 
from the witnesses today.
    Chairman Ney. Thank you. Gentlelady, ranking member of the 
committee. And our first panel and the first witness.
    By the way, this is in the 108th Congress the first time we 
have ventured outside the capital for a public hearing, so 
you'll be our first witness on this.
    Nelson Bregon is the Deputy Assistant Secretary for the 
grant programs in the office of Community Planning and 
Development of HUD. And he's responsible for the management 
oversight of the CDBG program the Section 108 loan guarantee 
problem and the home investment partnership program. He has a 
Bachelor of Arts from the InterAmerican University of Puerto 
Rico in 1976, and although he didn't attend the Ohio State 
University, he got close with Kent State University in Ohio in 
1978. Prior to accepting his appointment at HUD, he was the 
Senior Vice President for the officer of community based 
securities of Ginny Mae, the Government National Mortgage 
Association, and we appreciate you and your staff for traveling 
to California. We'll begin.

STATEMENT OF NELSON BREGON, GENERAL DEPUTY ASSISTANT SECRETARY, 
           COMMUNITY PLANNING AND DEVELOPMENT OF HUD

    Mr. Bregon. Good morning, Chairman Ney, ranking member 
Waters, Mr. Clinton Jones and other members of the 
subcommittee. Thank you for giving me the opportunity to be 
here this morning as part of the subcommittee's examination of 
community and economic development activities for the City of 
Los Angeles.
    As Chairman Ney indicated, my name is Nelson R. Bregon. I 
am the General Deputy Assistant Secretary for the Office of 
Community Planning and Development with the U.S. Department of 
Housing and Urban Development. I am a career employee with the 
department. I started with the department some 22 years ago, 
and I've been in and out of the private sector and the public 
sector on numerous occasions, and here I'm back with the public 
sector.
    I'm here today on behalf of Secretary Martinez and 
Assistant Secretary Bernardi to discuss one of HUD most 
important tools for community housing and economic development. 
That is the Community Development Block Grant program which 
most of us refer to as ``CDBG.'' As you are aware, State and 
local governments depend on HUD and a system of grants to 
support community economic development projects that revive 
troubled neighborhoods and spark urban revitalization.
    This year, HUD has requested nearly $4.5 billion for the 
CDBG program to meet local community housing and economic 
development needs in more than a thousand eligible cities, 
urban counties, the 50 States, the Commonwealth of Puerto Rico, 
the U.S. Virgin Islands and in the Insular Areas.
    For fiscal year 2003, which is the fiscal year we're in, 
the City of Los Angeles received approximately $89 million in 
CDBG funding, and by the same token the County of Los Angeles 
received about $37 million in CDBG funding. We are all aware 
that one of the most important reasons for the success of the 
HUD-sponsored Community Development Block Grant program is its 
great flexibility and its reliance on local elected officials 
and community leaders to identify key revitalization projects 
and activities.
    CDBG activities are initiated at the local level, based on 
a communities identified local needs, priorities and benefits 
to the communities. As identified in that community's 
Consolidated Plan, which is a document that is submitted to HUD 
in conjunction with the CDBG, the home and other formula grant 
programs.
    Entitlement communities such as the City of Los Angeles may 
use CDBG funds for a variety of community, housing and economic 
development activities which focus on neighborhood 
revitalization, economic development and the provision of 
improved community facilities and services to lower moderate 
income residents. Those communities receiving a grant are free 
to determine what activities to fund as long as certain 
requirements are met, including that the activity is eligible 
and, in addition, meets one of the three following national 
objectives: The first one is benefit to low and moderate income 
persons. The second national objective would be: Aid in the 
prevention or elimination of slums or blight; and the third is 
an activity that meets urgent community needs for which that 
community cannot find the financial resources to fund itself.
    In addition to this requirement, 70 percent of an 
entitlement grantees CDBG funds--and this includes the Section 
108 loan guarantee, it includes the economic development 
initiative grants, as well as the Brownfield economic 
development initiative grants, must primarily benefit low and 
moderate income residents. 70 percent of all these monies must 
primarily benefit low and moderate income residents. And this 
is calculated by HUD on either a one- or two- or three-year 
basis, depending on the period of time that the consolidated 
plan that is submitted by that grantee covers.
    In most instances, we see that most communities have a 
three-year consolidated plan. Now, the responsibility for 
ensuring that local Community Development Block Grant funds 
meet Federal requirements rests initially and primarily with 
the executive authority and the mayor or the County 
Commissioner of each CDBG grantee, subject to schedule 
monitoring by representative of HUD in the case of Los Angeles, 
the county and the city, it is our Los Angeles field office 
representative that had the responsibility to monitor on a 
scheduled basis our grantees.
    And by the same token, it's also conditioned on audits by 
HUD office of Inspector General. As we all know, working with 
local governments and nonprofit, mostly 501(c)(3) 
organizations, are an important conduit for neighborhood-based 
program delivery. Nonprofit organizations such as community 
development corporations or local development corporations are 
often asked to undertake projects that are inherently risky 
because of factors such as locations, which many have high 
crime, high vacancy rate, high poverty and a lot of this 
investment.
    CDBG grantees utilize nonprofit organizations because they 
have specialized skills and neighborhood acceptance. It is 
important to note, however, that the primary responsibility for 
insuring that Community Development Block Grant funds are used 
to revitalize low and moderate income neighborhoods and that 
the projects and activities undertaken meet all programs, 
statutory and regulatory requirements, belongs to the CDBG 
grantee.
    In this particular case, we're talking about the City of 
Los Angeles and the county of Los Angeles. The Community 
Development Block Grant program statute and regulations 
requires that grantees identify eligible activities that will 
provide benefits to communities, especially low and moderate 
income distress communities.
    The flexibility of the CDBG program allows grantees to 
implement community development activities based on local 
decisions. Communities may choose to provide assistance to 
nonprofit organizations for neighborhood development 
initiatives as they deem necessary. The success of any 
community development initiative must include accountability 
for use of program funds to create tangible results for the 
neighborhoods for which it serves.
    Working together with local leaders, special officials and 
members of Congress, we at HUD have forged a partnership which 
has made CDBG a shining example of how government can work. 
CDBG provides funding for grantees to develop strategies 
revitalize neighborhoods, promote economic development and 
provide much needed social services.
    Grantees have great latitude in the type of projects and 
activities that they may fund. As you mentioned, Mrs. Waters, 
and I agree, a grantee can undertake myriad of activities 
whether acquisition, disposition, housing rehabilitation, 
public facilities, social services, economic development, all 
within the realm of the CDBG program.
    For instance, we have some statistics here that shows that 
in fiscal year 2002, entitlement grantees expended 
approximately $275 million for economic development activities, 
about $955 million for public facilities, about $518 million 
for social services and about $1 billion, the preponderance of 
the use of these funds for housing-related activities, either 
housing rehabilitation or down payment assistance or any type 
of housing assistance.
    For the program year, Los Angeles expended about $15 
million for economic development activities, about $44 million 
for public facilities and improvements, about 45 million for 
social services and approximately about $28 million for 
housing-related activities.
    By the same token, the County of Los Angeles expended 
approximately $6 million for economic development, $12 million 
for public facilities and improvements, $9 million for social 
services and about $15 million for housing-related activities. 
As part of the CDBG program, each formula's grantee's 
responsible for developing its own consolidated plan that 
encompassed funding for the CDBG program, the home program, the 
housing opportunities for persons with AIDS and the emergency 
shelter grant program.
    So each community prepares a consolidated plan for these 
four formula grants. They must hold a public hearing, and they 
must receive the input from the community as to which 
activities they would like to see funded in their particular 
neighborhood. HUD's CDBG program currently provides funds 
directly to entitle units of general local government, cities, 
town and urban counties, based on the statutory formula that 
Chairman Ney pretty much gave us what those parameters are, 
poverty, pre-1940 housing, growth lag and a number of statutory 
requirements that dictates how we distribute the money to our 
grantee clients.
    The current method of funding appears to be satisfactory. A 
grant may not be disbursed. A grantee may not disburse CDBG 
funds until there is a legal obligation to pay. Generally when 
contracted goods and services have been delivered or provided. 
A grantee has full responsibility to assure that his 
contractors have conformed to all applicable program 
requirements and that invoices or other type of documentation 
are proper and represent goods and services provided consistent 
with the contract.
    So the rule is that grantees can draw down the money, when 
they're ready to use. We have a three-day rule, as you all 
know, that once they draw down the money from Treasury, they 
have to disburse that money within three days. So hopefully, 
they have all the documentation that is required for them to 
make that payment to a contractor or subrecipient, as the case 
may be.
    I know that this subcommittee has some questions on Los 
Angeles Community Development Bank, and let me just mention 
some facts: In December, 1994, the City and County of Los 
Angeles received designation from HUD for a Supplemental 
Empowerment Zone in the area covered by the unsuccessful joint 
City, County and empowerment zone application.
    So in 1994, there was an empowerment zone designation 
competition and, the City and the county applied. They were not 
successful in obtaining the Empowerment Zone designation, but 
the previous administration felt that it was a good thing to 
give a supplemental empowerment zone designation; and that's 
what this did. The purpose of the Supplemental Empowerment Zone 
designation was to provide a special name for the award to the 
City's hundred million dollars in economic development 
initiative which was a grant and $25 million to the County.
    Now, once this grant money was received, one of the 
conditions was that this money must be matched with Section 108 
loan guarantee funds, and both the City and the county did 
that. The EDI awards to Los Angeles City and County took place 
pursuant to a notice of funding availability published in the 
Federal register on December 7th, 1994. And the supplemental 
empowerment zone designation and the economic development 
initiative grant were awarded on December 21st, 1994.
    Now, there are a number of different levels of 
accountability. The Los Angeles Community Development Bank, as 
an operating entity, is accountable to its Board of Directors, 
and as a subrecipient of the City and the county, it's also 
accountable to the City and the county. Concurrently, the City 
and the county, as CDBG grantees, are accountable to HUD for 
the expenditure of the Section 108 and the EDI funds by the Los 
Angeles Community Development Bank in compliance with 
applicable Federal statutes and regulations.
    HUD does not have a direct contractual relationship with 
the bank. The contractual relationship is between the City, the 
County and the bank. And the City and the county are 
accountable to HUD for the uses of the EDI grant and the 
Section 108 loan guarantee funds. The original intent of the 
Los Angeles Community Development Bank was to fund economic 
development activities in some of the most economically 
disadvantaged areas of the City and the county, primarily the 
area of the supplemental empowerment zone.
    The Los Angeles Community Development Bank has, in fact, 
utilized approximately $190 million from the combined City and 
County Section 108 and EDI awards to undertake economic 
development activities in the designated area.
    Thank you very much, and this statement concludes my 
opening remarks. At this point, I will be more than happy to 
answer any questions that you may have.
    I have next to me Mr. Stanley Gimont who is the Deputy 
Director for the Financial Management Division, and he's really 
the expert when it comes to the nuances of the 108 and the EDI 
grant program. By the same token, we have some of our Los 
Angeles field office staff members, Mr. Robert Ilymin who is 
our CBD director and he has a lot information as to the 
activities that are undertaken by the county and the city 
utilizing CDBG funds, 108 funds, EDI funds, BEDI funds or any 
other HUD funds.
    So at this point, I'd like to turn it over to you if you 
have any questions. Thank you.
    [The prepared statement of Nelson Bregon can be found on 
page 80 in the appendix.]
    Chairman Ney. Thank you for your testimony. The question I 
have is: When was the last time that the formula was reviewed, 
and do you think it's balanced between the east and the west?
    Mr. Bregon. That's a very good question. In 1980 was when 
we came up with the dual formula that gave a community a grant, 
based on two formulas. We give that community the benefit of 
the doubt; and we give them the amount of the greatest formula.
    Now, what has happened lately, Chairman Ney, is that with 
the 2000 data on population, on poverty, on growth lag, we've 
seen some major dislocations, if you will, from one community 
to another. We've seen that some communities are loosing maybe 
up to 20 percent of the CDBG formula grant, and other 
communities gaining 15 percent of CDBG funds.
    So right now, the Department, the Community Planning and 
Development office in conjunction with the Office of Policy 
Development and Research at HUD, are looking at the formula, 
and we're looking at different ways that the formula perhaps 
could be either tweaked or changed altogether. And we will be 
making recommendations to Assistant Secretary Bernardi and to 
Secretary Martinez who will, in turn, make a proposal to you as 
to whether, in fact, the formula should need some sort of 
changes or not.
    Chairman Ney. That was 22 years ago that formula was 
established, and that's why you, know, the question should be 
changed by you're saying that you're looking into it.
    Mr. Bregon. That is correct.
    Chairman Ney. Do you have an idea of a time frame when you 
will complete preliminary look at it, it will be given to 
Secretary Martinez, when he will come to us?
    Mr. Bregon. Our Office of Policy Development and Research 
is telling us that by the end of the fall, they should have 
concluded their studies. As you know, we work very closely with 
the Office of Management and Budget. They make sure that 
they're always looking over our shoulder. Maybe there's someone 
here from OMB. So we'll be working closely with them. I would 
say early next year we will have--we'll be meeting with 
Secretary Martinez and start discussing what the effects and 
the impacts of the formula is.
    Chairman Ney. In the fall?
    Mr. Bregon. I would say late fall, that the report will 
come out, early next year. I would say February we'll be 
meeting with Secretary Martinez and giving him different 
options, if you will.
    Chairman Ney. And if you could post us on the progress of 
that, we'd appreciate it.
    Mr. Bregon. We will.
    Chairman Ney. Los Angeles has a special exemption to allow 
25 percent of the CDBG funds for public services use is the 
category. So what--what uses can be utilized under that 
category of public service?
    Mr. Bregon. Public service. You are correct. The 
regulations stipulate that a community may not use more than 15 
percent of their grant for public services. The City of Los 
Angeles was given an exemption, and they can use up to 25 
percent as Congresswoman Waters indicated before. The monies 
can be used for mostly soft cost. It could be for meal for the 
elderly, it could be operating expenses for day care centers, 
it could be Meals on Wheels for handicap people. So it is 
pretty wide how this money can be utilized by--by a grantee.
    Chairman Ney. How about--how about oversight between HUD, 
City, County? How would that work?
    Mr. Bregon. Oversight?
    Chairman Ney. Uh-huh.
    Mr. Bregon. Well, as I indicated before, we do regular 
monitoring visits of our grantees. Because of our limited 
resources, we're doing about 40 percent of all grantees in 
monitoring on a yearly basis. So when we monitor the City, we 
also try to do the County because a lot of the activities are 
interrelated. A lot of funding is interrelated. So we do 
monitor the City and the county on a regular basis.
    Chairman Ney. One other thing. My final question: Dealing 
as you would with urban and rural, do you--do you see any 
differences? For example, CDBG in towns of, you know, 4,000, 
2,000 also went from what we call 5,000 a city--that would be a 
large City--we have a lot of places 2-, 300 people, and 
everybody knows about these funds, trust me. I mean, they're in 
the paper. They're in meetings. They're small towns.
    Now, in--that's why I'm here to learn--and larger urban 
settings, I know there are people who care about these, but I 
would assume there would be--or let me ask this: Would there be 
a difference in communication on where these monies are going 
or could they go between the urbans and rurals, and is there a 
difference of how you look oversight between urban and rural?
    Mr. Bregon. Yes, sir. As you mentioned on the entitlement 
grantees, we have central cities. We have cities with the 
population of 50,000 or more. We have urban counties with 
population of 200,000 or more. On the other hand, then we have 
the States. About 30 percent of the funding goes to--I'm sorry, 
25 percent--25 percent of funding goes to states.
    Chairman Ney. So the $4.5 billion gets divided. 75 percent 
goes to entitlement communities; 25 percent goes to the States. 
Now, how the States divvy up that money among the smaller 
designations is up to the States. Some States might say, 
``We're just going to divvy up the money by per capita,'' 
looking at how many low income residents a community has, and 
we're going to give them $80 per each low income resident.
    Some other State says, ``No, we don't want to do it that 
way. We going to do priorities,'' and perhaps our first 
priority is infrastructure. Our second priority is housing 
rehabilitation. Our third priority is public facilities. And 
then they would have all the smaller communities come in and 
compete for the money at the state level.
    The State must do a consolidated plan just like an 
entitlement community. They must go around the entire state and 
receive input from the smaller communities to be part of that 
consolidated plan that is submitted to HUD on a regular basis.
    So the entity that is accountable to HUD for the small 
cities program is the state. It's not each individual community 
that receives its monies, but it's the state that entity that 
is responsible for the management and oversight of the State 
CDBG program.
    Chairman Ney. Gentlelady? Counsel?
    Ms. Waters. Thank you very much.
    I certainly appreciate your very well-organized 
presentation to explain the mission, the national mission for 
CDBG. I think I'm going to ask some questions that are directly 
related to this area. I want to know about the Community 
Development Bank first. I want to understand what happened.
    We're going to have some more people here testifying today. 
The reason I'm so concerned about it at this point is because 
there are dollars that are now--that could be made available 
from that Community Development Bank to be used for other 
purposes or like purposes or purposes that are inconsistent 
with the intent of Section 108.
    As I understand it, the Community Development Bank is no 
longer the Community Development Bank that, based on a decision 
by the city of Los Angeles with some maybe encouragement from 
the Inspector General based on a report, that there is no 
longer the Community Development Bank as we knew it. And that 
there's several things going on: Requests for some of that 
money again to be used for other purposes or for like purposes 
in different ways. And there's another part of this discussion 
that I'm recently just getting information about that talks 
about or discusses the venture capital firm that had a 
management contract of some sort with the Community Development 
Bank that placed or invested funds in some businesses.
    Some of them went belly up, I suppose--but it's still in 
that portfolio--we still have some businesses who owe us money 
who are operating or they may be out of business, and there's 
further talk about selling off that portfolio in some way that 
may help us to recapture some of the debt--can I get some 
discussion on that?
    Mr. Bregon. Sure. As I indicated originally, when the 
supplemental empowerment zone designation was given to the City 
and the county of Los Angeles, there was an EDI grant of $100 
million to the City and $25 million to the County.
    As a minimum requirement, Miss Chairman----
    Ms. Waters, the City had to match the hundred million 
dollars of EDI grant with a hundred million dollars of Section 
108 loan guarantees. The City opted to request a higher 
authority on the 108. So even though the minimum amount of 108 
that the City had to apply for was a hundred million dollars, 
they indicated to HUD that they really wanted to do $300 
million.
    So the minimum requirement was a hundred million; so there 
was an additional $200 million in one-way authority for the 
City. So you are correct. The City has expended the original 
hundred million dollars to match the EDI, and in addition, they 
had spent about $4 million of the additional $200 million, so 
there's about $196 million in Section 108 authority which the 
City could use in other areas outside the targeted area as long 
as they meet all the other requirements of the 108 program.
    Ms. Waters. Outside the target area?
    Mr. Bregon. Yes.
    Mr. Gimont. And just as a final point, the original 
application that we considered in 1995 defined something called 
the Section 108 area outside--which included not only the zone, 
but other enterprise community areas designated within the City 
of Los Angeles as well as other census tracts and areas of the 
City which would meet certain low moderate income thresholds as 
well as poverty thresholds.
    So that was the 108 area as defined in the original 
application, and our--our understanding at this point with 
respect to the City proposal is that of the initial $15 
million, they would like to carve off the remaining 196, those 
funds will be expended within the area defined in the original 
application back in 1995.
    Chairman Ney. Generally--can we have that broken down one 
more time? The whole----
    Mr. Bregon. Sure. The--with the original empowerment 
supplemental empowerment zone designation, the City received 
$100 million of EDI grant, the economic development initiative 
grant--this is free money--the County received $25 million. The 
city and the county were to meet dollar for dollar the grant 
with 108 monies. The County did $25 million in 108, and the 
City, instead of doing the minimum, a hundred million, did 300 
million. So now we're looking at a total amount of about $430 
million.
    Chairman Ney. 430 million?
    Mr. Bregon. That is correct.
    Ms. Waters. Okay. Go ahead.
    Mr. Bregon. Now, Miss Waters, you indicated that it has 
come to your attention that the City and the county will be 
closing down the bank. It is our understanding, that there is 
an agreement that the bank will cease to operate by the end of 
this calendar year. There is a portfolio there that is owned by 
the bank with a number of loans, many of them performing loans. 
Many of them nonperforming loans as well, and there is a 
venture capital fund that perhaps Mr. Gimont can give you more 
details as to how that works and how that came about and what 
are the nuances there with the venture capital.
    Ms. Waters. Okay. Before you go into that, I want to go 
back so that we can have a better understanding. The 50 million 
that's been requested by the city has been requested to be used 
in the same manner that it would have been used under the 
Community Development Bank and meeting the requirements of 
Section 108 expenditures?
    Mr. Gimont. Yes.
    Ms. Waters. Is that what you're saying?
    Mr. Gimont. The before profit businesses. That's what we 
approved in the original application in 1995, and that is how 
the city would propose to use this 50 million----
    Ms. Waters. No. I want to be on the same track.
    Are they going to use the $50 million in the same area that 
they would have had to use it under the agreement that you had 
when you created the supplemental zone, or are they going to 
use it in the way that you would use the original Section 108 
money that could be used in--throughout the City in other ways 
that's identified for economic development?
    Mr. Gimont. Well, then let me back up a step. With respect 
to the $200 million that was over and above the $100 million 
required as to match the EDI funds, those 200 million could be 
spending what the City defined as the 108 area which included 
not only the zone, but the other enterprise community areas 
within the City as well as other census tracts and areas 
meeting certain poverty and low to moderate income thresholds.
    Ms. Waters. Well, tell me how that is matching money in 
order to get the money for the supplemental zone.
    Mr. Gimont. That----
    Ms. Waters.----the Section 108, 200 million or 300 million.
    Mr. Bregon. There was a $100 million requirement, minimum.
    Ms. Waters. Okay.
    Mr. Bregon. And in addition, to the hundred million, the 
city requested $200 million that has, let's say is less 
restrictive, the use of that monies is less restrictive than 
the original hundred million that was to match the EDI grant.
    Ms. Waters. Okay. So the EDI grant was 100 million. All 
they had to do was put up $100 million match.
    Mr. Bregon. That is correct on 108.
    Ms. Waters. Okay. If they had only put up $100 million 
match, all of that money would have been confined to the 
supplemental zone; is that correct?
    Mr. Gimont. Right.
    Mr. Bregon. That is correct.
    Ms. Waters. However, since they decided to use more for 
that match, you're saying that could be used anywhere----
    Mr. Bregon. The original----
    Ms. Waters.----in the other zone.
    Mr. Bregon. The original $200 million----
    Ms. Waters. Yeah.
    Mr. Bregon.----they identified the service area larger than 
the supplemental empowerment zone. As Mr. Gimont indicated, it 
was the supplemental empowerment zone area other areas that 
showed high incident of poverty and low income.
    Ms. Waters. Well, let me----
    Mr. Bregon. For instance----
    Ms. Waters. Let me just interrupt you. It seems to me that 
if it was--you already had Section 108 identified areas. There 
was no need for you to put that additional money into the match 
because you could use it any way that you wanted to.
    Mr. Bregon. That is correct.
    Ms. Waters. So why did you--why did you put it into the 
match? Why did they put it into the match?
    Mr. Bregon. The city requested at that time, they said not 
only did we have--they felt that the need of the community was 
so great that there was a market, there was a need in the 
community for more than the $200 million or the--and they 
decided that they wanted a larger authority under the 108 in 
the amount of $200 million more, and that is the grantees' 
prerogative. I mean, if the grantee requests that and it's 
within the limits under the 108 program which is five times----
    Ms. Waters. Yeah, they would have done that or could have 
done that if you had no such thing as a supplemental zone----
    Mr. Bregon. That is correct.
    Ms. Waters.----in the way that you normally use it.
    Mr. Bregon. Yes, ma'am.
    Ms. Waters. What I'm trying to find out is, why was it 
connected to the supplemental zone?
    Mr. Gimont. That was a decision on the part of the city.
    Ms. Waters. Well, evidently the city felt there was more 
money needed in the supplemental zone; is that correct?
    Mr. Bregon. That is correct.
    Ms. Waters. Okay. Now, if that is true--if that is true, 
then we have monies that are now from the Section 108 
supplemental zone money, that you're telling me has more 
flexibility and can be used outside the supplemental zone. Who 
made that decision, and how do you make it?
    Mr. Bregon. The grantee made that decision. The grantee 
told us which were the areas that they want to service with the 
additional $200 million.
    Ms. Waters. So now that the bank is closing down and we've 
got this 196 million, the City is talking about taking a 
portion of that and doing whatever it is they want to do with 
it. It doesn't have to be identified or confined to this 
supplemental zone area, and when HUD looks at that, what does 
HUD say as the oversight? Is that in compliance with the 
original purpose of the use of the Section 108?
    Mr. Bregon. Yes, it is. The $200 million in addition to the 
already used $100 million that had to be used within the 
supplemental empowerment zone. In addition, they have used $4 
million more into the zone, which they didn't have to do. Now, 
they have $196 million. Now, they're saying the bank is going 
to close. We want to use this 196 authority to do other Section 
108 funded projects----
    Ms. Waters. So then----
    Mr. Bregon.----in the larger area that we had identified to 
you HUD before----
    Ms. Waters. So when HUD worked the agreement with the city 
of L.A. For the supplemental zone and the application that 
included the 100 million plus, the 200 million----
    Mr. Bregon. Yes, Ma'am.
    Ms. Waters.----there was something in that agreement that 
said you only have to use $100 million of this in the 
supplemental zone.
    Mr. Bregon. That is correct. As a minimum.
    Ms. Waters. As a minimum.
    Mr. Bregon. Yes.
    Ms. Waters. And you could have the flexibility to take the 
other 200 million and use it in what you have identified as 
areas----
    Mr. Bregon. Areas of distress.
    Ms. Waters.----areas of need that would fit into whatever 
we call our Section 108 loan guarantee?
    Mr. Bregon. That is correct.
    Ms. Waters. Okay. And you will, of course, show to the--the 
Congresswoman that agreement?
    Mr. Bregon. Absolutely, ma'am.
    Ms. Waters. Okay. Thank you.
    Mr. Bregon. Now, by the same token, all public documents, 
ma'am----
    Ms. Waters. Congresswoman wants to see the agreement.
    Mr. Bregon. Okay.
    Ms. Waters. All right.
    Mr. Bregon. Now, by the same token, let's say that the city 
says to us, now we have $196 million but we really want to use 
it city-wide in any neighborhood, for any activity that is 
eligible under 108. If they decide to do that, then they would 
have to amend that agreement, and they would have to go perhaps 
even amend or consolidate that plan, perhaps even hold public 
hearings with the citizens of the City of Los Angeles and the 
county of Los Angeles and then go through that process of 
amending that agreement.
    Ms. Waters. Okay. Thank you. Now back----
    Mr. Gimont. Is it okay if I just put one additional point 
on that?
    Ms. Waters. Yeah.
    Mr. Gimont. It's--the real essence here is going to 
change----
    Chairman Ney. Move your mike just a little bit closer. 
Thank you.
    Mr. Gimont.----is that no longer will the bank be 
responsible for deciding, making the lending decision would 
reside with the city's community development department as 
opposed to the bank. We're still carrying out the same 
activities. They're going to carry them out in the same areas 
that they identified in the original 1995 application when 
there will no longer be LACDB, making decisions as to what 
community development department as to which activities to 
fund.
    Ms. Waters. Okay. Now, a little bit about--well, if you can 
explain to me the contract between the venture capital company 
and what they did for the Community Development Bank, and I'll 
ask a little bit more when I get the Community Development Bank 
here a little bit more detailed question, but just your 
understanding--did you have to sign off on this also?
    Mr. Gimont. I did not sign off on the agreement between 
LACDB And Joint Ventures? No.
    Ms. Waters. This was between the City and the county?
    Mr. Gimont. No, this was between the LACDB And an entity 
known as Zone Ventures.
    Ms. Waters. And Zone Ventures.
    Mr. Gimont. Yes.
    Ms. Waters. So Zone Ventures was given an amount of money 
to go around and invest in venture capital. Let's find some 
businesses put some money into them that was going to make some 
money nor the bank; is that right?
    Mr. Gimont. Up to $35 million is my understanding.
    Ms. Waters. So they were given 35 million?
    Mr. Gimont. The agreement called for an investment in the 
bank of the partnership up to a maximum of $35 million.
    Ms. Waters. Now, what did they do with that $35 million?
    Mr. Gimont. They operated the fund to analyze the proposals 
for investment and when the--based on the applications they did 
receive, they elected to invest in a number of different 
businesses. I believe it was 15 or 16 business in total.
    Ms. Waters. I see. So some of that was management. They had 
management fees.
    Mr. Gimont. Yeah.
    Ms. Waters. How much, do you know what percentage of the 
$35 was management fee?
    Mr. Gimont. No, I do not right now.
    Ms. Waters. Okay. We'll talk to the Community Development 
Bank people about that.
    And so what happened with that portfolio?
    Mr. Gimont. Some of the businesses are still up and active; 
some are in a condition that is called ``hibernation,'' where 
they--they still exist on paper. There's some possibility that 
they may resurrect themselves and--and get back on their feet 
and a number of other businesses are totally closed and out of 
business--business consistent with the types of--types of 
investment that venture capitalists make which were primarily 
high-tech investments in the late 90's.
    Ms. Waters. I see.
    And so now, you have--this portfolio some performing, some 
not performing, we want to sell it off. Who are we selling it 
to?
    Mr. Gimont. I would not use the term ``sell'' at this 
point. I would say----
    Ms. Waters. Give?
    Mr. Gimont.----divest. Divest their interest in the Zone 
Ventures' portfolio.
    My understanding of the deal that is currently on the table 
is that there is a--an investment group interested in taking 
the LACDB interest in Zone Ventures. They really would not pay 
anything on the front end with respect to the past investments, 
the capital investments that have been made on the part of the 
bank.
    However, they would be reimbursement for certain management 
fees that the bank has paid out to Zone Ventures over the past 
year or so. So the immediate return to the bank would solely be 
the management fees that they've paid out in the last 6, 12 
months I believe.
    And then, ultimately if some of the businesses went--went 
public, where you had initial public offering, and there was a 
significant upside to--to the investment made in the business, 
ultimately, the bank might see some return on that; but the 
primary return would go to the group that takes on the 
investment from here on out because they will continue to pay 
the management fees that are required as well as make any 
capital calls that are necessary in order to maintain the--the 
bank's percentage interest in these businesses.
    Ms. Waters. Okay. Let me see if I understand this: The--the 
joint venture firm that was doing the management for the 
Community Development Bank would substitute--who pays them 
management fees we would no longer pay management fees, and 
under this agreement, the group who is the recipient of the 
divested portfolio would be paying the management fees.
    We would not receive any money from those performing or 
nonperforming businesses unless, of course, they went public, 
and then there's something in an agreement for in perpetuity 
that would say, ``If this happens a hundred years from now, we 
want our money''?
    Mr. Gimont. I don't know what the outside time limit is as 
far as the return would be concerned.
    Ms. Waters. All right. Fine. We'll----
    Mr. Gimont. I also don't believe the agreement's been fully 
negotiated at this point.
    Ms. Waters. I see. Well, that's good. We'll see what we can 
find out some more detail about that.
    Now, we're going to be talking with--with other panelists 
about this, but I also understand that if the $50 million is 
transferred, the balance that's left could be used in any way 
that the city would like to use it; is that right?
    Mr. Bregon. Of the 196, if 50 is used for this revolving 
loan fund or business fund that is called under the community 
development requirement of the city, then, yes, you would have 
then the balance, the 146 available.
    Ms. Waters. And let me see if I understand this correctly: 
The 146, would the city have to go back out and amend the plan 
and hold hearings, or they could just spend it?
    Mr. Bregon. If they're talking about using the same--
funding the same activities in the same areas, then they would 
not have to come back to us. If they're talking about changing 
either the scope or the location of the activities, then, yes. 
They must come to HUD for a--with a formal amendment request, 
and before they do that, they must go back to the citizens and 
hold public hearings and go through the formal amendment 
process that is required in a regulation.
    Ms. Waters. If they were going to use it in any way 
different?
    Mr. Bregon. Yes, ma'am.
    Ms. Waters. If they were going to use it in the same way, 
could they still contract with the joint venture firm to do the 
kind of work that was done for the Community Development Bank--
that was under your original agreement--could they still do 
that again?
    Mr. Gimont. I would say that the city--I would think it 
highly unlikely that the city would go forward with a proposal 
of that nature, and they would certainly question it at this 
point in time.
    Ms. Waters. There's nothing in the agreement that would 
stop them from doing it. You're saying that HUD may not look 
kindly on it, but they certainly could if they were going to 
use it consistent with the way they had used the money in the 
bank; is that right?
    Mr. Gimont. There's nothing in the agreement right now to 
prohibit.
    Ms. Waters. Okay. I think that's all.
    Chairman Ney. I just have a couple. It's a little bit more 
complicated than the fire truck we had in the CDBG back home, 
I'm sure.
    I just kind of--I wanted to ask a question: What happened 
to the initial 100 million, where's that?
    Mr. Bregon. That has been invested. That has been invested 
by the bank on a--for a number of loans to--for profit entities 
within the zone.
    Chairman Ney. So we know where that--where that is?
    Mr. Bregon. Yeah. Some of them that are businesses that are 
no longer in business that went belly up, and there's other 
businesses that are still performing and doing very well and 
hiring employees from within the zone, low income residents.
    Chairman Ney. Do we know the percentage of the businesses 
that are--are hibernating or the percentage of the working, do 
we have those percentages, or can we get that?
    Mr. Bregon. Yes. The City gives us a performance report on 
a yearly basis, and we would have that information available 
for you, sir.
    Chairman Ney. And then would you rate this overall a 
successful venture as it went about?
    Mr. Bregon. The--the bank venture?
    Chairman Ney. I can give you a one to ten scale, if you 
want.
    Mr. Bregon. I--well, I think one thing that we should take 
into consideration, Mr. Chairman, is that this is a very 
difficult area for difficult projects. I mean, HUD recognized 
the difficulty to the point where we were willing to match 
dollar for dollar giving them a dollar of grant money for every 
dollar that they invested. I think that that indicates the 
degree of--of risk that we all knew we were getting into. 
Measure performance--success can be measured in a number of 
ways: Has this bank had a positive impact on this particular 
neighborhood because they have created jobs, they have brought 
in private investment? I would say yes. Is there nonperformance 
portfolio out of whack with, let's say, Bank of America? I 
don't know.
    Chairman Ney. Well, I understand what you're saying about 
the--some difficult investment. I mean, we--our projects, for 
example, in some areas are more simple. Some people may look at 
the projects and say, ``What are those worth?'' The impact of a 
community to actually have a fire truck to save somebody's 
life. If you don't have that, you lose your insurance in a 
small community, and it all starts to domino.
    Some things are hard probably quantitatively to say what 
helped the community or didn't? You know, who got a job and 
month were able to further help their families. But there's got 
to be other--are you telling me this is such a unique project, 
or were there other projects in the history of CDBG that we can 
look and say, ``How did we measure their success versus this 
project?''.
    Mr. Bregon. Well, we have--there's a couple of things: 
There is another bank which is the Cleveland Bank that is 
similar to this one. We have two other Community Development 
Banks: We haven't done a comparison as to performance, but 
perhaps we can do that and take a look at how well the other 
banks have performed in relationship to the Los Angeles 
Community Development Bank.
    Chairman Ney. I would like to see that if you can get the 
information to myself or Congresswoman Waters.
    Mr. Bregon. Absolutely.
    Chairman Ney. One final question that I have, and I don't 
know if we answer this today or not: But if an area embarks on 
a project of major significance, which at the end of the day 
is, you know, a lot of money that is, you know, to go towards 
helping people, but if it has certain flaws and it doesn't 
then, you know, what happens to that money and how's the public 
ever served again to be able to utilize that money for the 
greater good of their communities?
    Having said that, are you comfortable that the mechanism 
that we have--I'm talking about the Fed--is in place and is 
tight enough so that if a city or a county goes in one 
direction, they state they're going to do ``A,'' ``B,'' ``C,'' 
and then all of a sudden for whatever reason, some of the 
businesses don't come through or whatever, they--they again 
change direction, but maybe they tell us, in fact, that they're 
not changing direction. How do we step in as the--as the 
Federal government to say, ``Wait a minute. You've got to lay 
out your plan. Is it similar?'' I mean, I'm relating some of 
the things you've said today.
    Mr. Bregon. Yeah, right.
    Chairman Ney. Are they going to come back with the same 
thing, and is it just take your word for it; or is there some 
type of set criteria that we have--they have to show?
    Mr. Bregon. Absolutely, sir. And that's a very good 
question. As I indicated to you, the first thing we get from 
our community, our grantees is a consolidated plan. They tell 
us how they're going to spend the money. What are the 
activities they're going to undertake. As you heard throughout 
this testimony, activities has to be eligible, and they have to 
be one of the three national objectives that we talked about. 
As I have indicated, we do monitoring. And by the same token, 
our office of the Inspector General perform audits of our 
grantees.
    So let's take the example of a community that says that 
they were going to do something, and when we go out, we find 
that they do--they did something totally different, perhaps to 
the point where that activity's not eligible or it doesn't meet 
one of the three national objectives.
    At that point, we will have an audit finding, we will have 
a monitoring finding, if you will. If it's a matter of us going 
out and monitoring the grantee, if that finding is sustained, 
if the grantee cannot explain to us with satisfactory evidence, 
then we will tell the grantee we have $500,000 in ineligible 
uses of CDBG monies. You owe us $500,000 of general funds. Now 
you must repay this to your line of credit with general funds.
    So what happens now is this particular community will go 
into their general fund, they will take $500,000, and they will 
put it back into the line of credit for CDBG and then reuse 
that money for an eligible activity.
    Chairman Ney. One final question I have: Is the public 
hearing process different across the U.S., meaning, you have to 
notify a certain number of people, does it have to be 
advertised? Does it vary? I don't know what the questions is. 
Does it vary state to state community?
    Mr. Bregon. It varies, sir. For instance, you can have a 
community like New York City. Our experience in New York City 
is that they might have five public hearings in the different 
one in each of their burroughs. They might advertise it in a 
Spanish-speaking newspaper. A Chinese speaking newspaper.
    They might have interpreters in all these public hearings, 
and that's the way they satisfy the citizens' participation 
requirement. You could have another community that says, 
``We're just going to hold one public hearing in City hall, and 
we're going to put it in a paper of general circulation and let 
everyone know that we're going to have one public hearing"; and 
everybody comes to one public hearing. So it all depends on the 
community.
    Chairman Ney. It's open; correct? I mean, we really don't 
have--HUD doesn't say, ``Here, here's the hearing process.'' 
This is loose or open compared to----
    Mr. Bregon. Right. Each community give us a citizens' 
participation plan. As part of the consolidated plan, they give 
us something called a citizens' participation plan so the City 
of Los Angeles would say, ``HUD, this is how we are going to 
reach out to our community.'' And we will monitor that as well. 
We will go out and say, ``The City of Los Angeles said that 
they were going to have five public hearings, and they only had 
one.'' And we will confront them with that. And if we find----
    Chairman Ney. But it may vary, though; correct----
    Mr. Bregon. Yes, sir.
    Chairman Ney.----community to community?
    Mr. Bregon. Local decisions, local--a lot of flexibility in 
this program.
    Chairman Ney. Do they have to contact the office holders in 
all cases, members of congress?
    Mr. Bregon. No, sir. It would be nice if they did, but 
they--they don't have to.
    Chairman Ney. Okay. That's something we should--in my case, 
frankly again, we will see the notice. We get a phone call, and 
I'll get a call from any Commissioners; and that's basically 
how it works down home. Then we get a call from the people who, 
in fact, submitted a request or the Coalition of Appalachian 
Development or Housing Coalition or whatever. But I've always 
kind of assumed, I guess, that that was mandated by somebody 
else, and I guess it's not. It's just the way they're doing it 
where I'm from.
    Mr. Bregon. We give them a minimum threshold. We say, ``You 
must hold a public hearing. It must be accessible to people who 
speak other languages other than English.''.
    Chairman Ney. Does it state the time, the day of the week?
    Mr. Bregon. It does not, sir.
    Ms. Waters. It doesn't say anything about public notice?
    Mr. Bregon. It does say about public notice. We do tell 
them that it must be published in a--in a newspaper of general 
circulation, and some communities, for instance, say, ``Look, 
our low income residents don't read the--the `Los Angeles 
Times.' So what we going to do is we going to have fliers, and 
we going to distribute fliers door to door,'' some community 
might say. Some other ones say, ``We will have ads on the 
radio, some of the Latino radio and the Chinese radio station, 
the African-American station, and we will put ads in,'' so it 
all depends.
    Chairman Ney. So there's really no particular set standard?
    Mr. Bregon. That's correct.
    Ms. Waters. Mr. Chairman, I know that you said that was the 
last question. I do have just one last question.
    Chairman Ney. Go ahead.
    Ms. Waters. I'm looking at the Community Development Bank's 
$100 million expenditures, the companies that were loaned 
money.
    Am I to understand that these companies are all in the 
supplemental zone?
    Mr. Bregon. If it's for the hundred million----
    Ms. Waters. First 100 million.
    Mr. Bregon. Yes, ma'am. They should be. Whether they are or 
not--for instance, the--our office of the Inspector General has 
performed an audit. They are some questions as to whether, in 
fact, all these companies are within the zone.
    Ms. Waters. The Inspector General's report does discuss 
this?
    Mr. Bregon. It does, ma'am.
    Mr. Gimont. It included a sample is my recollection. Not 
all--not 100 percent of the portfolio, but it included a sample 
is my recollection.
    Ms. Waters. I see. So it was a sample. So we don't know, 
based on the Inspector General's report, whether or not they 
were able to capture, you know, all of them--where all of these 
companies might have been operating from.
    Mr. Bregon. But since there is a question, we have our 
field office working with the city to identify the location of 
each business, not only the ones that the IG select selected 
randomly, but we're looking at a hundred percent of the 
universe, if you will.
    Ms. Waters. So while you are looking at it, what if you 
discovered that they were not, what would you do?
    Mr. Bregon. Then it would be an ineligible activity, and 
perhaps they would have to pay that money back to the line of 
credit.
    Ms. Waters. Okay. We will get that information from you 
also?
    Mr. Bregon. Absolutely.
    Ms. Waters. Okay.
    Chairman Ney. We have had some cases down home where we 
have a--the use of CDBG money created this pot of money, a 
policy that would pay in and pay out, somebody came in town, 
herds of people and then vanished, and by the time you found 
out what they had bought and purchased, it was too late. We try 
to, you know, recapture--recapture that money.
    Ms. Waters. Well, my curiosity was raised by the fact that 
I just happened to see something here that says the Summit 
Industries of Nevada. They may be, you know, California--Los 
Angeles company.
    Mr. Bregon. I would hope they're not in Nevada, ma'am. That 
would definitely be a red flag.
    Ms. Waters. Thank you very much.
    Chairman Ney. Thank you for your time. I appreciate your 
traveling.
    [recess.]
    Ms. Waters. Thank you very much.
    Mr. Chairman, we have a panel here that includes, first, 
Supervisor and President of the Board Supervisors, Yvonne 
Braithwaite-Burke who represents the Second district of the 
County of Los Angeles. She brings to the board of Supervisors 
more than 30 years of experience in public service, and at the 
national and State as well as local levels.
    She has focused a great deal of her energy on the needs and 
education of children, especially those cared for in the county 
foster child program. Supervisor Burke's Department of Science, 
Department of Affirmative Action Compliance. Community 
Development Commission, Department of Human Resources, Museum 
of Natural History, Department of Parks and Recreation and the 
county of Public Library and the Public Social Services.
    Welcome, Supervisor Yvonne Burke.
    We also have Mr. Clifford Graves, who is a General Manager 
for the Community Development--Development Department, City of 
Los Angeles. Mr. Graves is the new General Manager in the 
Community Development Department for the City of Los Angeles. 
He will oversee the department which creates economic, social 
and employment opportunities for individuals, families and 
neighborhoods in need. Prior to Mr. Graves' position as Vice 
Chancellor for fiscal--physical planning at the University of 
California, Merced and served as Executive Director of the City 
and County of San Francisco Redevelopment Agency.
    Welcome, Mr. Graves.
    Mr. Carlos Jackson, Executive Director Community 
Development Commission of Los Angeles County. Mr. Jackson 
joined the community development commission in June of 1983. On 
February 19, 1991, he was appointed as Executive Director of 
the Los Angeles County Board of Supervisors. As Supervisor 
director, Mr. Jackson directs the County's public housing 
approximately 3,640 units, housing rehabilitation Section 108 
assistance, Redevelopment Community Block Rent and the Housing 
Revenue Bond programs.
    Welcome, Mr. Jackson.
    Also, we have here, is this--I think that we'll wait for 
the introduction of Mr. Sausedo.
    Mr. Sausedo, How are you doing? I didn't recognize you, and 
it's been just a few months back that I'm trying to pick your 
brain about everything that was going on.
    Mr. Sausedo. Okay.
    Ms. Waters. So I get to do a little bit more today.
    Mr. Sausedo. Clean myself up.
    Ms. Waters. He's Chairman of the Board of the Los Angeles 
Community Development Bank. Thank you so much for coming today.
    Chairman Ney. The Honorable Ms. Burke.

STATEMENT OF HON. YVONNE BRAITHWAITE-BURKE, CHAIR COUNTY BOARD 
         OF SUPERVISORS, LOS ANGELES COUNTY, CALIFORNIA

    Ms. Burke. Thank you very much. Good morning.
    And we want to welcome you, Chairman Ney, and Congresswoman 
Waters. Very pleased that you're here in Los Angeles at this 
Exposition Park Center which is growing and has really brought 
many dimensions to this area. I also welcome you because this 
is part of you're Supervisorial district that I chair and that 
I represent.
    In fact, and Federal programs play a great--important part, 
of course, in this district. It's--in the county of Los 
Angeles, and I'm really here speaking for the entire County of 
Los Angeles, not just for the Second District. And there are 
two programs that are certainly very important, is the CDBG as 
well as the Section 8 housing voucher system that you maintain.
    I do want to thank Congress, and particularly you 
Congresswoman Waters, for your support of CDBG and your support 
of many of the programs that are very important to Los Angeles. 
And we depend upon the support of Congress obviously for the 
growth and the extent to which we receive CDBG funds. Many of 
those funds that we have are not just CAPA projects. And we 
have some very successful CAPA projects, and I have to kind of 
distinguish the County of Los Angeles. Our funds are used only 
in unincorporated areas. In other words, our funds that we 
receive--is about a million people who live in the 
unincorporated area of Los Angeles County. There are 88 cities 
in that County so those 88 cities, their funds, the City of Los 
Angeles being the largest, of course, their funds go directly 
to them, and the 88 cities are funded separately; but we 
administer those million people and those areas that are in 
unincorporated areas where they do not have a City, and we're 
all the City they have, we're the mayor, the council and 
everything in those cases.
    And so the impact of CDBG funds in those areas are so 
important, and first of all, we have been fortunate to have 
that waiver; and that 25 percent waiver has made it possible 
for us to do a number of things in terms of public interest 
projects. I hope that will continue.
    I know it's supposed to terminate in 2004, but it's--we use 
those funds and we use them in a very positive way and in a 
diverse County, we have to realize that this is probably one of 
the most diverse counties in the world, 136 languages spoken.
    So it's very important to try to address these separate 
communities, each of which have their demands, their needs. I 
can say to you, you know, we provide assistance in one 
community where there's really a lack of ability to relate to 
other communities adjacent to them. So we have to address each 
one of these individual communities and try to meet their 
specific needs and their resources.
    I'd like to address--I know you're going to talk a lot 
about the Community Development Bank. We were part of that 
bank, and our portion that we are withdrawing is 15 million. It 
is our intention to use that 15 million for what is called the 
Los Angeles Eye Institute. It's a--an institute that is being 
established at one of the major complexes that exists in the 
unincorporated area that is covered by this empowerment zone 
and the Martin Luther King Drew Medical complex.
    Much of our money, the CDBG money, has gone into that 
complex--housing, everybody open two large developments 
recently in terms of housing, whether it's rental housing or 
condo or home ownership, but a--surrounding that area. Major 
commercial development, but what we're really planning to so is 
to establish an eye institute which will provide care and also 
outreach to provide specialty eye care, in an institute in that 
area.
    We will also probably include--some of those funds will go 
to what's called the Drew Child Care Center. So a lot of the--
they're working together, so it will be child care as well as 
the eye institute that will probably be the beneficiaries of 
that 15 million we withdraw. So I think that we can be very 
proud of the funds that we have utilized in that Community 
Development Bank.
    And all of it in those areas that are very in need--and I 
mean, very much in need--but what you see it, you can see it, 
you can look at it, you can walk, you know that those things 
have been very effective. Now, I'm not--I know that I won't be 
here tomorrow when you're talking about Section 8.
    I just want to say a couple of things about that. The 
administration of Section 8, moving to the State, we feel would 
have a detrimental impact upon our Section 8 program. We have 
long waited for Section 8 as it is now. There are many people 
who were served after the earthquake with Section 8.
    I have calls every day, people are homeless who are looking 
for Section 8, and to move it, this administration, we think 
would be an unnecessary labor as far as the administration and 
the bureaucracy. I know that these are very difficult times. 
They're difficult for us, they're difficult for the State, and 
I know they're difficult for the Federal Government; and we 
recognize that we have taken some cuts in CDBG, but to the 
extent that this program can continue in the very vital way 
that it has and continue to make impact is going to be very 
important for us.
    And I know through these hearings, you'll be able to see 
how it's being used here, the dimensions of the problem as well 
as some of the solutions that have been provided by these very 
important funds. So I thank you very much for being here.
    Chairman Ney. Thank you.
    [The prepared statement of Yvonne Braithwaite-Burke can be 
found on page 85 in the appendix.]
    Ms. Burke. I won't be here during the rest of the panel. I 
see that Councilman Garcetti is here. If there are questions 
that you want to address to me, I'd be very happy to answer 
them.
    And if not, Carlos Jackson will be able to address detailed 
questions about it in the bank.
    Chairman Ney. Thank you for your attendance.
    Ms. Burke. Thank you.
    Ms. Waters. I'd like to thank you also for coming, and 
Carlos is here; and we can get into a bit more detail----
    Ms. Burke. Sure.
    Ms. Waters.----with him about the bank and some other 
things. But we do appreciate your coming making the statement 
about the important of these funds, too.
    Ms. Burke. And we appreciate the strong support we've 
received from Congress, and particularly, I know Congresswoman 
Waters has a deep interest in and has been a strong supporter.
    Chairman Ney. I also appreciate having a former colleague 
here.
    Ms. Burke. Thank you very much.
    Chairman Ney. Thank you.
    Ms. Waters. Thank you. Mr. Chairman, I'd like to introduce 
Councilman Garcetti representing the 13th Commercial District 
as Chair of the economic development and employment committee 
and vice Chair of the housing and development committee. 
Councilman Garcetti has promoted affordable housing and 
strengthened unit intervention programs, community and senior 
centers and overseeing the expansion of after school programs.
    Welcome, Councilman Garcetti.

   STATEMENT OF HON. ERIC GARCETTI, MEMBER, DISTRICT 13, LOS 
         ANGELES CITY COUNCIL, LOS ANGELES, CALIFORNIA

    Mr. Garcetti. Thank you very much, Congresswoman. It's 
great to be here, and I want to thank the Chair, Mr. Ney, for 
coming all the way out to Los Angeles. It's really wonderful to 
have you here. We're trying to beat the June gloom. So 
hopefully, we won't have it too much longer, and I hope you 
enjoy your stay. And I want to praise the leadership of Maxine 
Waters, too, and thank you for making this happen as well.
    The testimony I'm going to give, I couldn't give two years 
ago: One, because I wasn't a councilman, so that makes it 
uneasy. But also, because I think the City of Los Angeles was 
in a very different place in terms of block rent, in terms of 
how we spent it, in terms of how we looked at it, and I have 
hopefully much better news, good news to share with you and not 
because I've been captured by the bureaucracy, not because I'm 
simply now on this side of things; but because I've seen this 
change, I've lived that change, and I've been a part of the 
change.
    Cliff Graves will speak next who is one of the original 
authors of the block rent legislation from his work in D.C. Now 
as head of our community development department. An entire 
leadership team I think has really changed the way we do block 
rent from the city level.
    My testimony will really focus on that. When I came here 
two years ago, we were almost, I think, two-and-a-half over our 
yearly balance, and we were being threatened by HUD of losing 
some of the block rent monies because we simply weren't 
spending it out. We really--the mayor and the council took a 
hard look at how they did it, the department, and we were able 
to in a year period really spend that down to the proper ratio 
that it should be at.
    What we did in that process, too, is we changed the way 
that the grant is being spend, making sure that it was really 
going back to the root of the seed money that it's intended to 
be and not to just sustain programs, not to just be another 
place to fill in services, but something that would be 
encouraging entrepreneurialism, something that would encourage 
creativity and something that would plant those seeds in 
communities that would hopefully blossom into true community 
development.
    I know that Los Angeles is a poor city and that it needs 
more resources. The census count has us at 22 percent. The 
official poverty line, obviously, if we go to 200 percent of 
the poverty line, we have the majority of our children being 
born into that essentially working poverty. And we have an 
estimated undercount of about 80,000, mostly people of color, 
which equals a loss of about $180 million in funding over the 
ten-year shelf life of that census.
    And we have an extreme housing and homelessness crisis. We 
need to be building in this city about 8,000 units of 
affordable housing just to keep up with population growth. Most 
of that is not migration. About two thirds of that is just the 
baby boom echo. So the baby boomers' kids are having kids, and 
we are building about 2,000 units of affordable units.
    So each year we're falling behind by about 3,000 units. As 
a way of answering that, we have now--so that you don't think 
we're not putting our money where our mouths are, we build the 
largest affordable housing trust fund per capita in the 
country, which would be $100 million every year hereafter for 
the building of affordable housing. If you want to leverage 
that to about half a billion dollars a year, combined with the 
State funds, we've really prioritized that in a new and dynamic 
way.
    Phil Mangano who is the President and Director of the 
Interagency Council on Homelessness recently came to our skid 
row and called it Calcutta to give you an idea of what his view 
and his extensive work throughout the country was. He really 
was struck by what he saw on our own skid row in Hollywood, 
where I represent is the second biggest population that we have 
some similar areas.
    I think we do need an extension on 25 percent CAPA services 
where we do face a dramatic cut in-services. Now, I know it's 
not going to be easy to say, ``Why are we funding services,'' 
and I think that block rent is intended again as seed money. 
But the way that we do services is not just to sustain programs 
and groups.
    We really are focusing on those programs which do build 
capacity, intellectual capacity, work force capacity, things 
that--where it's read as services essentially as doing much 
more. As much CAPA infrastructure as a building because it's a 
human physical infrastructure.
    If we do have the services reduced to the 15 percent level, 
about $11 million in direct services will be cut in the City. 
So please consider extending that waiver at the very least 
phasing it out over time for us to be able to see how we can 
use work force investment monies or other human infrastructure 
dollars to get there.
    With the Community Development Bank--this has been one of 
the more fun areas to work on in the last two years, and we 
certainly, even though we are aren't directly overseeing the 
bank, our work in the City was--I think they're as experienced 
as anybody else to see what direction the bark had gone.
    And when we look not at the bank itself, but at the 
problems, the civil unrest of 1992, you have essentially 
increase in unemployment in South Los Angeles; you have the 
problems which have manifested themselves have gotten even 
worse, and I think it would be one of the worst things we could 
do not to keep that Section 108 authority.
    Now, what we do with it is the question: I think we can use 
the same target areas, the easy, the 20 percent poverty areas. 
And I would make the formal request the $1$96 million be kept 
available. But I think that the leadership team that we have, 
as opposed to what the bank was doing before, really has the 
experience, right here on my left, the knowledge and the know-
how and the innovation to spend this in very creative ways, in 
capital deprived areas that will spur the economy, spur 
employment and deal with blight.
    We should have the flexibility to use the section 108 
funding to adjust these problems holistically. To be able to 
combine--and this is what we're trying to do in the council, 
too--our housing programs together with our economic 
development programs, and job training programs and our 
community development programs. Instead of taking these all in 
silos, we're trying to mix these grains together to really see 
in a community, you know, I don't think a child care is where 
the school district ends and the City begins, where one 
department ends and another one begins.
    They want to see that mix of housing and economic 
development and education and work force development go hand in 
hand. I think the Section 108 authority is a critical piece of 
this. As I said, I couldn't have given this testimony two years 
ago, but I have a lot of confidence in this leadership team 
that we have right now.
    We have a committee chair for the development committee 
which oversees the block rent and helped distributes it. We are 
now actually focusing on having yearly priorities. So it isn't 
just this big grab bag of different things, whatever we 
inherited. I'm really saying that nothing is safe anymore, 
that's on this table.
    One of the four or five areas that we want this committee 
to really impact on, not just who do we know from one 
organization, depoliticize that process as much as possible, 
and I should say to both Congresswoman Waters and to Chairman 
Ney, that we really have a pretty apolitical process.
    I know in a lot of places block rent is all about who knows 
who, and I see here that there's very--a small percentage of 
that really has to do with personal pet projects of any council 
members. It is spent, I think, in a very neutral and fair way. 
But increasing that and really focusing on certain policy 
areas, again, affordable housing, work force development, 
literacy is one of the areas that we're focusing on, too.
    And quite literally, this is our lifeline to other 
programs. Surprisingly and not political and dealing with 
infrastructure issues, I think the way that I would categorize 
how we're dealing with the block rent money, and the last thing 
that I'll conclude with is I know that to talk about whether we 
should administer this differently.
    To me, you know, I think the council level, the local level 
is one that is most in touch with what's happening out there, 
you know. Every Saturday I meet with constituents, I have 
office hours where people come up and talk to me where we get 
that kind of on-the-ground intelligence, but it's difficult to 
get through any departmental agency.
    And certainly as you go higher up the--the food chain, I 
think it's more and more removed from the people on the ground. 
We have citizens' units for participation that have done some 
incredible things here. They are all representatives from the 
community, but they did polling for this entire city.
    They took a political polster, one of the best in the 
country, and they actually came in and asked me about block 
rent money, where they would want to see it spent. I don't know 
if that's been done by a CPA in the country, but we then broke 
that down by district, and every council member has seen that.
    That gives us a real jumping off point, not just to say, 
``One of my priorities as an elected official, I'm the 
gatekeeper, but what does my community want?'' And lastly, with 
the Section 8 stuff, just goes--I know Supervisor Burke 
mentioned that, too.
    I did want to say with our $100 million housing trust fund 
that I mentioned, a lot of what we're spending it on is the 
preservation of project based Section 8, which we really have a 
lot that is risking being lost, and so for us being able to 
keep that in place is critical, too, as we address the housing 
crisis and not falling further behind, but I will be here for 
the rest of the testimony and thank you very much for coming 
out here.
    [The prepared statement of Hon. Eric Garcetti can be found 
on page 88 in the appendix.]

 STATEMENT OF CLIFFORD GRAVES, DIRECTOR, COMMUNITY DEVELOPMENT 
          DEPARTMENT, CITY OF LOS ANGELES, CALIFORNIA

    Mr. Graves. That was great. Let me add my welcome to those 
that you've already had.
    As was pointed out, I'm relatively new to Los Angeles and 
to this position, and I thought I'd open my testimony by 
reciting some numbers that amazed me when I got here. The City 
of Los Angeles is home to nearly 3.6 million people. 816,000 of 
them are below the poverty line. When you use a percentage like 
6 percent or 20 percent, it hides the real number, but if you 
think of 816,000 people and compare those to the populations of 
other major cities, it gives you an idea of the magnitude of 
what we're trying to address here--147,000 families below the 
poverty line.
    Supervisor Burke mentioned the number of languages that are 
spoken around the City. 226,000 persons are disabled. Focus on 
that absolute number to understand what we're dealing with.
    Beyond the census figures, think about what's happening to 
the housing stock here. We grew by about 6 percent from census 
to census. That translates into new households. During that 
same period, only 5,400 dwelling units were added to the 
housing stock. That's a very simple explanation of why housing 
costs are increasing beyond the means of more and more of Los 
Angeles residents
    Mr. Garcetti did mention the census undercount which 
concerns us deeply. The undercount (which we estimate at about 
79,000) represents a large shortfall in Federal funding to 
which we would otherwise be entitled.
    So this is the setting for our Block grant activities. One 
of the virtues of the Block grant program is the flexibility it 
provides to local officials to establish priorities and 
allocate resources. Los Angeles, with an allotment of 
approximately $90 million a year, takes advantage of that 
flexibility.
    I'd like to go through the main categories of what we fund 
and give you a few examples: We spend about $41 million a year 
on public services. This includes the Community-Based 
Development Organizations. These fund a variety of services. We 
have a human services delivery system which integrates CDBG 
funds with other Community Services, Block Grant and others. We 
fund a number of youth and family centers, supplemental youth 
recreation and youth nutrition, just to name a few.
    The impact of reverting to the 15 percent public services 
cap would be greatly felt. That amounts to an $11 million 
reduction, a 40 percent cut in the services we have been 
providing.
    We also fund neighborhood improvement activities to the 
tune of about $9 million. These include such things as alley 
closure programs, code enforcement, nuisance property 
abatement, sidewalks and tree planting, the kind of things that 
increase the quality of life in our most difficult 
neighborhoods.
    For public facilities, we have allocated approximately $6 
million this year for such things as neighborhood parks, multi-
purpose centers for seniors, and the Temple Beverly Recreation 
Center. As the Deputy Assistant Secretary pointed out, the 
framework for all of what we do is the multi-year consolidated 
plan. Our job is to make sure that the program is well 
publicized, that there's ample public participation and that we 
get creative ideas.
    We then test the submitted applications for eligibility and 
compile them as a list which is made public. Then it's 
subjected to our community review process. Councilman Garcetti 
mentioned the Citizens' Unit for Participation cup, which is 
our public participation arm.
    Members of that organization are selected to represent the 
various facets of the community. Most of the members are 
appointed by the city Councilmembers from each district. We 
also have a couple of at-large members. Mr. Garcetti mentioned 
the polling that they do. They hold several public meetings and 
hearings. They meet once a month. We go before CUP to explain 
to them what we are doing, any issues that we have. CUP will be 
deeply involved in our reprogramming effort, which we do to 
keep our spend rate within HUD requirements.
    In addition to the CUP, we also post the consolidated plan 
on our Website. We work with 72 neighborhood councils. The City 
Council Committees hold hearings, and finally, the City Council 
reviews and adopts the consolidated plan. Once the plan is 
done, we submit an annual CAPERS report. This Consolidated 
Annual Performance and Evaluation Report to HUD discusses our 
accomplishments and issues. Every one of our CDBG-funded 
project is required to file a quarterly report with us. We 
review the reports which rolls up into HUD's own information 
system.
    So we have a fairly good handle on where the money is going 
and its effectiveness. Is it perfect? Nothing is, but I think 
we're improving it every year. The monitoring that is done on 
the ground, is the one area that I'd like to see us improve.
    Like most City departments, we could always use more funds, 
but we're trying to make our monitoring less of an audit and 
more of a technical assistance review. We work with a number of 
very fine agencies here in Los Angeles, but staying on the 
right side of the regulations isn't always the easiest thing to 
do. We're trying to shape our monitoring program to be more 
assistive to these agencies.
    Moving to the Community Development Bank, you'll be hearing 
directly from Mr. Sausedo, but I'll give you the City's 
perspective on the Community Development Bank.
    Chairman Ney. I don't mean to interrupt you, but just based 
on the councilman's statement, now will you be taking over the 
development bank? I didn't know if that was your reference?
    Mr. Graves. The activities of the bank will be undertaken 
by the Community Development Department.
    Chairman Ney. I didn't mean to interrupt you. I just wanted 
to make sure I could follow you.
    Mr. Graves. The Community Development Bank was an 
experiment, and I think it was recognized as such when it was 
formed. And I think there have been a lot of lessons learned as 
a result of it. But as was pointed out by Mr. Bregon, when it 
comes down to do the loans go to the right places, and do they 
make a difference? Yes, they probably did. Was it the most 
efficient way of doing it? Probably not. And were there some 
things we will do better based on lessons learned? Yes, and 
I'll go through those.
    The contract between the City and the Community Development 
Bank is in the form of a comprehensive agreement which lays out 
the roles and responsibilities of the bank and the other 
parties and obligates the Department to perform annual reviews 
to review annual business plans.
    It is not the role of the City to get involved with 
individual transactions. The LACDB was set up as an independent 
body, and we have respected that. The question was raised about 
the Zone Ventures' aspect of the bank. That was a part of the 
original business plan that the bank submitted to the city and 
to HUD.
    The agreement between Zone Ventures and the Bank is between 
those two entities. The city is not involved in that aspect of 
it. There is an issue of accountability here. I think this is 
one of the weaknesses of the original business plan. The Board 
of Directors of the Bank and the Bank itself are independent 
and accountable only to themselves with regard to the loans 
that they make, subject to the general criteria set forth in 
the funding.
    However, the way I look at it, the LACDB is using CDBG 
money, for which the City is ultimately responsible to HUD. So 
any issues that arise with regard to the Bank, we end up 
holding the bag, and that has caused some concerns. I think 
we're addressing that through the transition.
    I'd like to go to the lessons learned. And I think these 
are lessons which we will apply to the loan authority when we 
receive it. One is to make sure that the requirements of the 
program are really practical. For example, one of the more 
difficult charges that the Bank had was that it could not loan 
money to anyone except persons who had been turned down by 
other banks.
    It was in effect, a lender of last resort. So that the 
loans that were funded for by the Bank generally were of a 
poorer credit than most banks would have. In retrospect, that 
probably wasn't necessary. It was more important where the 
money went and how to get the best community impact.
    There is a need for more adequate financial and compliance 
controls. The bank had a very difficult set of requirements to 
follow, and we believe that under the Department, we will be 
able to apply the same type of controls that we apply to our 
own programs.
    The bank was originally chartered to attract private 
investment as well as the HUD funds. This did not happen which 
left the Federal funds further exposed than I think they should 
have been.
    And finally, with regard to strategic utilization of 
resources, the bank, lent money to individual applicants who 
met their criteria without regard to overall impact on an area, 
without regard to broader priorities that the City might have. 
We would like to be able to utilize them in a targeted way in 
concert with other programs by our department and by the city.
    To emphasize a point I think that's been made previously, 
of the $196 million in loan authority which still exists from 
the bank, we have asked HUD for an immediate allocation of $50 
million to be used exactly as provided in the Bank's plan in 
terms of the activities to be funded and the geographic area to 
be supported.
    We believe we can do this, Mr. Bregon said, without 
amending the current plan. We would like to amend the plan for 
the other $146 billion. The intent would be to continue to 
invest in the geographic area that the bank was chartered to 
invest in, but we would like the flexibility to use the funds 
for a broader range of purposes within the domain of Section 
108.
    We believe that that will allow us to use the funds more 
effectively and still carry out the spirit of the supplemental 
empowerment zone plan.
    Mr. Chairman, I'll stop my remarks at this point.
    Chairman Ney. Thank you.
    [The prepared statement of Clifford Graves can be found on 
page 91 in the appendix.]
    Chairman Ney. Mr. Jackson.

  STATEMENT OF CARLOS JACKSON, EXECUTIVE DIRECTOR, COMMUNITY 
     DEVELOPMENT COMMISSION, LOS ANGELES COUNTY, CALIFORNIA

    Mr. Jackson. Thank you.
    First of all, I'd like to also welcome you to Los Angeles. 
And also, this is the first major opportunity that we have had 
a chance to express our support that the community block 
program here on the West Coast. Typically, we have to travel 
back east to express our needs, and to express, you know, what 
kind of things we need here on the West Coast. So this is a 
grand opportunity.
    The Los Angeles County Community Development Commission is 
responsible for the Urban County Block Rent Program. We have 88 
cities in the county of Los Angeles, 40--53 cities have a 
population of 50,000 or less. Of that 48 cities participate in 
our program including the City of south El Monte. But we 
represent approximately 2 million people, a million from the 48 
cities, and a million in the unincorporated areas. In Los 
Angeles County, historically, the only corporate areas have 
been rated from all its commercial viable communities. Most of 
the cities either incorporate those areas and take you know the 
industry part, the manufacturing part, so we're spaced with 
communities and major infrastructure needs, major housing 
needs, some old housing style. So our focus is not only the 
unincorporated areas, but the 48 cities. And many times when 
I'm asked to describe what we do as an urban County, which 
happens to the largest one in the nation, we receive about $38 
million annually. The allocation between the cities and the 
county is almost split down the middle. The cities get about 14 
million; the unincorporated areas gets awarded about 16 
million. We use the allocation formula that HUD uses for 
awarding the times, their allocations, we use the same with the 
county and 48 cities.
    That has been in place since 1975, that policy that was 
adopted by the board. And we have found it to be very effective 
in terms of working with the cities. Over the years, the cities 
have been responsible for developing the programs with the city 
council requiring approval of such a program. I work closely 
with each of the Supervisors for developing the unincorporated 
area programs, and that has been intact again since 1975.
    I'd like to say that recently 93 percent--I'm sorry, 94 
percent of the recipients have been low income residents of the 
County, both the cities and the unincorporated areas. Our focus 
is predominantly to--to look at how we can best improve the 
communities. Unfortunately, like the City of Los Angeles, you 
know, it's--it's dealing with a variety of resources. The 
County is not, and I have to focus really on the unincorporated 
areas. Our tax base is lower than--in other areas. The 
challenge that we have is how to leverage our resources. 
Because again, when you look at $60 million published or a 
million--of a million of unincorporated area, it's not a whole 
lot of money. If you look at the allocations made for by the 
Supervisorial district, the highest one which is in the first 
Supervisorial district is about $6 million, and has tremendous 
needs of money, development housing, infrastructure to the 
loan, communities that have not been intended to.
    One of the matters that have--you have to asked me to 
address, which is more in detail than my testimony, was how our 
monies--how do we involve the communities? You know, it was 
mentioned that by law we're required to have one public hearing 
which is before the board of Supervisors when our action plan 
or consolidated plan is adopted, but we have--we have 60 
communities throughout the unincorporated areas of Los Angeles.
    We ask the cities, the 48 cities, to have their own 
community meetings. When you tally that, that's quite a few 
community meetings. We go to the community stakeholders invite 
them to participate, we will go to the churches. We go to other 
community organizations that will provide any input, not only 
as to what is needed. We return back to the community and say, 
``This is how the monies were allocated this past year'' and 
ask feedback, not only up front but at the back end.
    As an agency, we--I have the opportunity to look at public 
housing, Section 8, administration of the home dollars, the 
homeless dollars, as well as the monies for affordable housing, 
the community development of block rent. The challenge that we 
have is how best to leverage those dollars, because the needs 
are tremendous.
    It's mentioned that the homeless crisis is surfacing again. 
It was interested in seeing that the--there was a plan of ten-
year plan to eliminate the homelessness. Well, since I've been 
around, it's the second one. And that is really a confronting 
problem that I'm not sure no one--as one agency can resolve 
that problem.
    It requires really a multijurisdictional agency. But 
there's one funding source that we have fortunately that we 
administer, and this is where I'd like to use the leveraging 
factor.
    And it's the housing money that we get from the City of 
Industry which is for the redevelopment set aside, special 
legislation was passed in early 1990 at the State level. When 
we first started allocating dollars for this housing program in 
1998, we have allocated $102 million from that fund, had to 
leverage $600 million and produced 2,400 affordable housing 
units, home ownership, special needs housing, housing for 
domestic violence victims, emancipated youth, the whole gambit. 
Some of them have been used in the City of Los Angeles. How we 
can encourage similarly leveraging from other jurisdictions, 
not just from the County of Los Angeles.
    We do a five-year consolidated plan. We just completed ours 
recently. Again, we go out and solicit information from the 
various communities that we're involved with, and then, 
finally, a formal public hearing before the board of 
Supervisors. But you know, our meetings have taken place prior 
to them.
    Most of our funds, I would say--and I don't have the 
numbers handy--but it's been owned housing, economic 
development, public services and public facilities. And most of 
our public facilities are--are easily fund expended by the 
cities our 48 participating cities. The County unincorporated 
area needs really are prioritized around housing, economic 
development and public services.
    Different from the City of Los Angeles, the counties have 
mandated prudent health, welfare, protective children's 
services, a variety of things that local jurisdictions are not 
faced with. The discretionary funds that the county has are 
very limited. So really the future of the Walkman program 
because it's a very viable program to look at these areas of 
needs that typically the County are not able to fund. And it 
really is a--it's a major challenge if you look at reducing our 
25 percent from 50 percent. Overall, it's a $4 million loss for 
us.
    I think poverty probably describes our world with the city 
as the mini HUD. We're responsible for assuring that their 
funds are spent properly and according to all the regulations. 
We're the grantee of the funds so that we're the ones who are 
responsible. For anything that doesn't occur, we have 
agreements with the cities for expenditures for eligibility in 
case there are disallowances, you know, we have a mechanism to 
recover those funds.
    Even though it may have been political before, we have that 
mechanism and then we are also responsible for compliance in 
the unincorporated areas. We do--we have spent a lot of time 
over the years in improving our compliance systems. We have 
learned through experiences that in working with participating 
cities, we have to work with them a certain way with our CBOs, 
we have to do a lot up-front technical assistance because many 
are not equipped to deal with all the Federal regulations that 
area is confronted with.
    Not only eligible projects, but as well how can they 
account for the expenditures which are--sometimes gets them in 
trouble. But we have done an extensive rebuilding of actually 
building up a system. We do desk top reviews, performances, we 
check their accounting systems before they are contracted to 
make sure that it can handle the funds coming in, and then we 
do our field reviews at the different sites. Not only the CBOs, 
but as well as the cities, as well as the county departments. 
And we go through a lot of data collection to make sure that 
the funds are accounted for.
    The 108 loan program is a viable one for the county. Cities 
have been using the 108s to help them develop economic 
development packaging. For example, in the City of Santa Fe 
Springs, we had a $23 million project that was to clean up old 
oil tank field, and it has now become a very viable industrial 
warehousing facility that creates over 600 jobs; but without 
the assistance of the 108 and their EDI and their bedding, they 
wouldn't have undertaken a particular project, and now it's 
become a major cornerstone in the southeast Los Angeles area.
    We had just resumed work with West Hollywood again to do an 
economic development project. We have undertaken some in our 
area, in East Rancho Dominguez, West Altadena, which is in the 
5th Supervisorial District. Because of the lack of resources 
that the county has, 108 is a field to us again to leverage and 
to get investments locally for viable projects.
    And lastly in the Community Development Bank, I don't know 
if I have the pleasure or really, but I was beginning--I was 
there at the beginning of the bank; and if I have to reflect 
back as to what took place: One of the key--one of the key 
factors that the board of Supervisors took was that any project 
dollars belonging to the County required authorization by the 
County prior to any expenditure or commitment.
    And the reason we did that was that the bank, when it first 
started, didn't have the administrative infrastructure to 
undertake all the requirements, Federal requirements and local 
requirements, that really would put them on the right track. We 
were conservative on how we approached that, and of course, the 
County took a lot of criticism being conservative; but the 
Inspector General report pointed out that administrative 
policies and procedures were not there.
    For some reasons why some of the loans were made out of the 
zone or were questionable, there was environmental issues of 
clearances. So my staff spent a lot of time with the bank early 
on developing manuals and administrative policies and 
procedures to ensure the accountability took place, but I think 
that when we have two legal entities, the county and the city 
and our--we have five census tracks in the environment zone, 
supplemental environment zone, which equated about 13 percent 
of the area.
    We were dominated, in essence, but in our agreement, we 
require that they--that it get approval from us for any 
expenditure or agreement. So we're protected on that. Now, we 
were confronted with trying to come up with viable projects in 
the five census tracks, and Supervisor Burke has identified one 
of them which I think will really assist the undeserved 
communities, the medical undeserved, and we're working with a 
group of doctors from Drew Medical University to look at this 
in terms of an eye institute.
    But again, we're in a transition. We are requesting, you 
know, that once the bank is closed that the money reverts back 
to the County of Los Angeles and we already have anticipated 
how to spend those dollars. I'd be available for any questions.
    Chairman Ney. Thank you.
    [The prepared statement of Carlos Jackson can be found on 
page 114 in the appendix.]
    Chairman Ney. Mr. Sausedo.

STATEMENT OF ROBERT SAUSEDO, CHAIRMAN OF THE BOARD, LOS ANGELES 
      COMMUNITY DEVELOPMENT BANK, LOS ANGELES, CALIFORNIA

    Mr. Sausedo. Good afternoon.
    Now, Chairman Ney, and ranking Member Waters, and once 
again, my name is Robert Sausedo. I'm the Chairman of the Board 
of the Los Angeles Community Development Bank, and I was 
appointed to the Board of Directors by former Los Angeles City 
Councilman Marjorie Thomas in July of 1999 and subsequently 
elected by the entire Board of Directors to serve as Chairman 
of the Board in 2001.
    My role as the Chairman of the Board is a nonpaid position 
and is strictly that of a volunteer. In short, I'm a community 
guy. That means what I say here, I have nothing to lose with 
respect to politics or what have you. I represent the 
community.
    I--before I move on, though, I do want to compliment your 
staff, Congresswoman Waters, for always being there when a 
cause is to be made and being responsive. As you well know, 
there are times when you call certain political figures and 
don't get return calls, and staff is less than sufficient; so I 
do appreciate a good staff and always take the opportunity to 
compliment you.
    I'm here today to offer testimony on behalf of the Board of 
Directors, and again, as a concerned citizen and volunteer. 
Additionally, I am joined by our President and CEO Mr. Steve 
Valenzuela for any of the more specific questions with respect 
to day-to-day operations of the bank.
    Let me begin by talking about access to capital. As you 
heard earlier, HUD provided the bank with $100 million in 
Section 108 funds and $100 million in matching EDI funds. This 
is the City side of those funds. This extraordinary allocation 
of EDI was made in recognition of the additional risk and 
lending that the bank would undertake.
    Credit risk was an enigma to most commercial banks 
resulting in capital star businesses in the intercity community 
of Los Angeles. The bank adopted credit guidelines and 
underwriting criteria similar to those employed by the largest 
commercial banks in the City. This was done, in part, to help 
facilitate co-lending with these banks in both these 
significant pledges made early on by three large banks in the 
Los Angeles area in 1995.
    The pledges of co-lending with major banks were worth a lot 
less, of course, than imagine they just didn't show up. The Los 
Angeles Community Development Bank was forced to assume even 
greater risk than originally forecasted in order to meet unmet 
capital need for businesses in the empowerment zone.
    So what have we accomplished? Let's talk about that. What 
have we accomplished? To date, the Los Angeles Community 
Development Bank has closed over 250 loans and investments 
totalling over $130 million in funding. We are especially proud 
of having received an award from HUD for implementing an 
innovative microloan program that funded over $1 million in 
loans to very small businesses in L.A. With an average loan 
size of $15,000 of LACBD funding, all of it in the form of EDI, 
reached approximately 70 businesses, while many of these very 
small junior experienced spent time expanding their businesses 
to create new jobs, I will say that the vast majority have 
either repaid their loans in full or are making good on their 
commitments.
    The bulk of the loans made by LACDB have been to small- and 
medium-sized businesses in the empowerment zone and the one-
mile buffer which, by the way, is across the street from the 
empowerment zone. Okay. We have a number of success stories of 
businesses that remain open and viable that met the national 
objective of creating jobs for the benefit of low and moderate-
income persons and that repaired their financial obligations to 
LACDB.
    We also have experienced, as you all well know, some set 
backs--borrowers who have failed to execute their business 
plans and, of course, media stories about the bank's missteps. 
Rarely has the local press published a story prominently about 
the bank accomplishments in light of its challenges.
    Recognizing that some companies require capital and not 
debt to further their business plans and create jobs, LACDB 
also partnered with Draper, Fisher, Jergenson and formed its 
own ventures. The partnership focused on funding early-stage 
investments and portfolio companies in the empowerment zone.
    We formed a similar partnership with Fame Renaissance and 
Hancock Partners that focused on operating companies in the 
empowerment zone. The strategic exits from Zone Ventures 
partnerships relied heavily on continued vitality of the IPO 
and MNA markets. And as we've seen of late, with the .com 
busts, those markets somewhat have within dried up to some 
degree which affected our long-term strategy in short--that's 
the short of that.
    We do, however, remain hopeful and optimistic that the 
economic benefits resulting from these efforts doing the new 
high-tech companies populating the empowerment zone in the 
central City of L.A. And possible zoning impact will continue 
far into the future. We've laid the ground work for the 
baseline infrastructure.
    Let me talk about reduction of liabilities. In 2000, the 
bank, by direction of the Board of Directors, moved 
aggressively to defease its outstanding HUD debt, which as of 
July 2000, totaled $105 million. During 2001, the bank reduced 
the City and County's liabilities to HUD by $10 million and $4 
million respectively, approximately 16 years ahead of schedule.
    The reduction liabilities occurred through a defeasance of 
county long-term debt. The bank has successfully resolved all 
outstanding significant legal issues and prevailed on appeal 
and in the Supreme Court in overturning a 12 million-dollar 
judgment. Our Board of Directors continues to remain pleased 
with the hard work our senior staff put into this successful 
conclusion because we have, in short, one hell of a staff.
    With respect to job creation, providing eligible companies 
with capital was always intended to be a means and not the end 
of economic development. The measure of success we strive for 
is job creation. Primarily benefiting residents hopefully of 
the empowerment zone and/or other low to mod persons. That's 
the standard set forth by the comprehensive agreement with the 
city and County of Los Angeles and that's the national 
objective set forth in the HUD regulations.
    Each company assisted by LACDB is required to demonstrate 
they have the capacity to create one job for every $35,000 in 
financial assistance which is quite difficult to do, but it is 
what it is. Taken together the portfolio of companies are 
required to create approximately $3,800--excuse me, 3,800 jobs. 
So essentially, based on the money loaned, 3,800 jobs should 
have been created. Through December 31, 2002, LACDB-funded 
small businesses have created 3,400 jobs. So what that means is 
that 90 percent of the goal--90 percent of the goal has been 
achieved, from a numbers standpoint. And while the number of 
empowerment zone residents benefiting from these jobs totals 
only one out of every five jobs created, low and moderate 
income persons hold 80 percent of the jobs created by those 
companies who receive funding. While we are proud of these 
accomplishments, we expected to achieve greater results, but to 
be quite frank, it was a difficult, difficult task to carry--
pull that off and make sure that we reach the 51 percent 
number; but we continue to try and do that.
    LACDB also understood that the federally funded job 
training and referral program operating in Los Angeles would 
provide our clients with the type of resources and workers they 
needed in a timely manner. Things like work source development 
and other entities in the community would be a resource that 
individuals could go to for training and job placement which 
and would augment the bank's activities which unfortunately, 
we're not up to par in meeting that opportunity.
    When the founders of the Los Angeles Community Development 
Bank performing their strategies around what was anticipated to 
be our targeted customers, the economy shifted as a result of 
rapid growth in the technology sector. During this time, 
commercial banks lowered their lending standards and began to 
offer business loan products, and they were far more 
competitive and had significantly less red tape than the 
requirements that accompany Section 108 funding.
    This resulted in LACDB taking on higher risk loans to 
businesses that would need to stabilize their infrastructure 
before they could follow through on their jobs creation 
commitments. In short, we got even riskier leans. I continue to 
remain significantly challenged as a board member when I hear 
statements made like, ``The bank has failed at meeting its 
national objectives,'' or, ``The bank is out of compliance,'' 
or, ``The bank doesn't know what they're doing.''.
    It is important to note that the businesses that receive 
funding and remain in business are not required to create jobs 
within a specified period of time, but it appears that 
requirement for jobs creation is open ended with respect to the 
time line of--of the Section 108 commitment.
    That said, current LACDB statistics once again show us the 
90 percent achievement level. While it is true that the 
founders of LACDB intended for the bank to operate autonomously 
from the City, it is a significant departure from the truth to 
say the City of Los Angeles staff has remained hands off and 
unaware of the level of risk that is involved with LACDB 
lending, a significant departure from the truth.
    Additionally, it is important to note that the reason the 
bank is moving towards closure, the reason the bank is moving 
toward closure is primarily due to the lack of political will 
to support the bank. In short, the bank was not set up to 
withstand changes in administration at the local and Federal 
level.
    So where do we go from here? So where do we go from here? I 
will tell you as a third-generation citizen of this great City 
that I am very proud to--to have been born, live in and will 
die in, I'm encouraged by the fact that this committee is 
asking the question: What are you going to do with remaining 
Section 108 funds when the bank closes?
    As a suggestion, I offer the following: While the City of 
Los Angeles wants to expand on the uses of these funds to 
include housing development, I am of the mind that we cannot 
walk away from the job without defined specificity on how the 
funds will be utilized in the future. Additionally, it is my 
belief that we must maintain funding for our mid-size and small 
and/or microbusinesses.
    Therefore, a significant portion of the remaining funds 
should be relegated to this activity and should include the 
areas of the City that meet the low income census track 
criteria while utilizing the 2000 census data, and not the 1990 
census data. Additionally, as the LACDB moves toward closure, I 
believe local organizations that provide this kind of lending 
should be considered for tactical deployment of this resource. 
I offer the following highlights from South L.A. Rioting, 
opportunities for economic self-sufficiency ten years after the 
1992 civil unrest written by two UCLA students, Mark Drisey and 
Danny Flemming, economic round table briefing paper: ``When 
business is created and developed, you obviously have jobs, 
short of that statement. South L.A., in particular, was the 
hardest hit after the 1992 civil unrest with 547 buildings 
damaged in Los Angeles. 78 percent of--or 428 of those damaged 
were in South L.A.
    For the purposes of this study, South Los Angeles included 
the planning districts of South East L.A., South Central Los 
Angeles and West Adams/Baldwin Hills. Of the 428 buildings 
damaged in South Los Angeles, only 19 percent had payroll 
paying estimates in 1999--excuse me, established. The 81 
recovered buildings house 147 businesses employing 985 workers, 
an average of 7 workers per establishment.
    Of the 195 workers comparatively, they were paid 15 percent 
lower wages than their counterparts in other parts of the City. 
The South L.A. Workers are paid an average monthly salary of 
$1,707, which annually is about $20,884, below poverty wages 
for a family of four in the county.
    One of the fundamental problems faced by South Los Angeles 
residents in 1992 was the shortage of jobs. At the time, there 
was only one job to be found in South L.A. For every 4.5 
residents, making it the most out--making it the most job 
scarce area in the City. According to the economic round table 
study presented in April of 2002, by 1999, there was a slight 
decline in City-wide job availability, but a precipitous 
decline in South Los Angeles.
    In 1999, there would 2.8 residents per job Citywide and 7.2 
residents per job in South Los Angeles. This means that there 
were only one third as many jobs per residents in South L.A. as 
in the City as a whole. By the end of the decade, South L.A. 
had a joblessness rate higher than that--the City average, but 
three times higher than the national average, three times 
higher.
    What does this mean to distressed communities in Los 
Angeles, particularly in South L.A.? It means that the initial 
designation of the $400 million to boost the local economic 
engine has a long way to go to create jobs and businesses. 
Rather than place the $198 million in other areas, why not 
designate at least half of those dollars to be placed at the 
local level and local community-based business expansion and 
job creation retention organizations.
    If you'll allow me a couple more minutes, I will come to a 
close. Let me give you an example of that statement: The 
community financial resource center in L.A.'s first private 
partnership in 1993, in its tenure of community economic 
development service of the community, it is based right here in 
South L.A.--by the way, I'm not advocating for one group. What 
I'm advocating for is that we take the remaining dollars, 
identify the people that do what LACDB was formed to do, but 
they do it well, and have a coalition of lenders throughout the 
City that help these underserved communities.
    I will leave that example open for your reading that since 
I happen to note in the interest of time, but I want to drive 
this message home: There are many reasons why we should 
continue to employ capital to small businesses and inside 
business in Los Angeles.
    Some additional reasons are: Of the 6 million people 
estimated to move into California between 1999 and 2010, 
approximately 900,000 will call Los Angeles home creating a 24 
percent increase in Los Angeles's growth rate. Over the next 
five to ten years, approximately 20,000 to 30,000 people in 
California will be released from prison. On an annual basis, 
landing in communities being underserved, poor and low income, 
where will they work? As communities expand, the need for small 
businesses required meet the needs of local communities. This 
is driven by the need for inability for big bucks developers to 
keep up with the growth rate. Increased businesses mean 
increased taxes which mean you get a chance to increase the 
services. As a citizen of this great City, I implore this 
committee to keep the focus on standing on the side of what's 
right in supporting our local economy. Thank you.
    Chairman Ney. Thank you for your testimony. I have a couple 
of questions just for my complete clarification.
    [The prepared statement of Robert Sausedo can be found on 
page 124 in the appendix.]
    Mr. Graves, you will, under your auspices of the city, will 
take over the bank in December; is that right?
    Mr. Graves. We will.
    Chairman Ney. Functions of the bank.
    Mr. Graves. The bank functions basically, yes.
    Chairman Ney. And then, you feel that you're ready, not 
you, yourself, you know, the organization is ready to do that, 
the transition would be occurring in----
    Mr. Graves. Yes, I do. Keep in mind, Mr. Chairman, that the 
department already administers the rest of the 108 program. So 
we would essentially be merging that into our capacity, the 
same is true with the EDI grants.
    Chairman Ney. Now, originally the bank, I think it was your 
statement that it was an independent body from the City. It was 
completely independent.
    Mr. Graves. It was set up----
    Chairman Ney. In '94.
    Mr. Graves.----in '94, '95 as an independent body, but the 
idea was--is that a body that was not bogged down by the red 
tape of the City or the County could become more aggressive in 
its economic development activities.
    Chairman Ney. Was it independent of the County at that time 
in '94?
    Mr. Graves. It was the same thing. As Mr. Jackson pointed 
out, their monitoring process was a little different than ours.
    Chairman Ney. Looking back on it, if you have Government 
money that comes in, it's independent of the City and 
independent of the County, is that wise--I mean, you want to 
keep it, quote, ``from the bureaucrats,'' or want to keep it, 
quote, ``out of the hands of politics?'' But sometimes 
political activities involvement, not on a partisan basis but 
how politicians actually vote on these items help these 
programs along. The use of an independent body took it 
completely out of the realm of the elected Representatives who 
have the responsibility for the funds. Unfortunately, if the 
independent body goes a little haywire, which I think it has in 
this case, then the elected officials say, ``Well, it wasn't 
us.''
    The question I have is: If you reconstitute this will you 
have the same type of situation or how will it differ? If 
anybody wants to answer.
    Mr. Garcetti. Mr. Chairman, I think maybe the best metaphor 
for this was, if it was an arranged marriage and either of the 
spouses live together. So yeah, we have one in which they 
would----
    Chairman Ney. Are either one of them alive? Has one left 
the country?
    Mr. Garcetti. Well, I think we have two alive today. When 
we look at, you know, whether we have the capacity to, I think 
we have to ask ourselves a question: In some ways the bank was 
put in a difficult position because there was never a clear 
policy direction.
    Do we want this to have great jobs, or do we want this to 
have a portfolio that works? Do you want this to be a purely 
functioning financial institution, or do we want this to be 
something that creates jobs? In high risk areas, those are not 
going to always dovetail. In fact, it's almost possible to have 
them dovetail.
    So I think that if the city takes over some of the affects 
in the way of authority, we're not in the business necessarily 
of trying to get the highest return in pure fiscal terms for a 
portfolio. What we are in the business of is getting the best 
return on a human portfolio, and I think that is something the 
bank in some areas did something really well.
    Participating in a microloan program, that was one, I 
think, in which we see the best of entrepreneurialism, and see 
money going out there, and it was a model for the entire 
region, and arguably for the country. Those are the stories of 
successes on the bank side we want to build on new loans. But 
our own section of the loan program is definitely in place and 
ready to go and ready to spend that out in coordination with 
housing and job development programs.
    Mr. Jackson. Mr. Chairman, it wasn't totally independent. 
There was, through the comprehensive agreement, a relationship 
between accounting and the bank. We had----
    Chairman Ney. Excuse me, but not the City.
    Mr. Jackson. The City had the same arrangement because 
there was a joint body and honor committee between the two 
entities that looked at program performance, looked at 
different types of----
    Chairman Ney. Not to interrupt. I just want to follow. But 
I think Mr. Graves said it was autonomous.
    Mr. Graves. Well, it was autonomous in the sense that we 
did not participate directly in their loan program, except for 
108 passing through 108 applications to HUD. We did have an 
annual business plan which was reviewed by the county and the 
city up through the City council and the board of Supervisors.
    Chairman Ney. Sure. Well, was there a vote on that plan, or 
was it just there; or did somebody say good or bad?
    Mr. Garcetti. Well, this information, we still have this 
coming before us, we decided last week, and since I've only 
been here the two years, that we get briefed on it and ask 
questions, and move on. There's no formal vote.
    Mr. Sausedo. And that plan is co-authored by the bank, the 
county and the city.
    Chairman Ney. What was the role then? If there was 
autonomy, what was or is the role of the City or the County 
then? What would you deem your role was? If there was an 
autonomy of this board, but what was the role, to monitor----
    Mr. Jackson. It's similar to like a nonprofit organization. 
We have an agreement that specifies program requirements, 
program activities, the target areas, and then like I 
mentioned, we were not satisfied initially with the 
establishment of the bank in this operation. So we--withheld 
any approval of any expenditures until we felt comfortable, and 
at that point, it was at that point that we allow expenditures, 
loans to be approved. But we were not involved in the daily 
operation of the bank. That was not our responsibility. So we 
had guidelines----
    Chairman Ney. Whose responsibility was that, do you know?
    Mr. Jackson. That was the daily operation staff.
    Chairman Ney. But you had an oversight on the daily--
reporting mechanism to the City and the county that sees funds 
coming through for local control or----
    Mr. Sausedo. The answer to your question is yes. I could 
probably have Mr. Valenzuela speak to that more specifically.
    Chairman Ney. We need your name into the record.
    Mr. Valenzuela. I'm Steve Valenzuela, President, CEO of the 
bank. I think in Mr.----
    Chairman Ney. How long have you been CEO of the bank?
    Mr. Valenzuela. I'm the President and CEO.
    Chairman Ney. I'm sorry. How long have you been CEO?
    Mr. Valenzuela. Since March of this year. Prior to that, 
prior to six years, I was chief operating officer.
    Chairman Ney. Who was the previous?
    Mr. Valenzuela. There have been two prior CEOs. The 
original CEO was Robert Kemp. He was the initial CEO from 
approximately June of '96 until about late 1999, and then the--
we had an interim CEO for about six months in the form of a 
board member, Linda Griego, and then in February of 2000, the 
board appointed William Chu as a CEO who served as CEO until 
March of this year. He's gone to private industry.
    Chairman Ney. Thank you.
    Mr. Valenzuela. And your question was?
    Chairman Ney. The question I had is: Who--well, I'd gotten 
to the issue of monitoring, and what I wanted to know: Is 
there's a certain amount of autonomy between the City and the 
county, say, that they do have a plan that they review. On a 
daily basis, as you all were operating the bank, how or do you 
or when do you report to the City and County and in what 
manner? Is it just reporting, or are they involved anyway in 
the decision making process?
    Mr. Valenzuela. Neither the County nor the City were 
involved in the decision making by the bank in terms of which 
loans or investments they were to make or approve. That 
authority rested with the Board of Directors and credit 
committee of the Board of Directors.
    Chairman Ney. Okay. Which comes to the point that these are 
government minds that come down: Any decisions made at the end 
of the day, who was the bank accountable to? Just the autonomy 
agency of the board? I mean, was there any accountability to 
the City and County?
    Mr. Valenzuela. Well, each year I think as--I think as Mr. 
Graves indicated, each year the bank submitted under the term 
of the comprehensive agreement in October, an annual business 
plan to both the City and the county with copies to HUD, they 
would outline what the expected loan activity and investment 
activity was for that particular year.
    And that--those business plans were--were reviewed and 
approved by the city and County, and while they didn't identify 
specific loans, companies or that we would be making specific 
loans to, it did identify the range of dollars that would be 
made to small businesses to microloans to the venture capital 
program.
    We also work closely with the county, the City, and HUD 
used to participate as a stakeholder as well in oversight 
committees that would meet on at least a quarterly basis 
wherein we would report and the county, City and HUD would sit 
in on these meetings to listen in on the performance of the 
portfolio, the performance of the achievement of our business 
plan day and other activities.
    We also reported on a quarterly basis to the City, County 
and HUD on our progress toward job creation with a detailed 
report showing how our borrowers, investees are doing with 
their job creation goals, jobs to date and some of the remedial 
actions that we would undertake in order to improve 
performance.
    Chairman Ney. Congresswoman Waters has some questions, so I 
want to ask one final question.
    When you talked about the--Mr. Sausedo talked about the 
analysis or about the jobs and the money spent, of the 
successful loans, is there a breakdown or an analysis of how 
much money was spent to create what job--was it 35,000 per job, 
10,000 per job--is there some kind of average, number one, did 
that take into account, of course, the loans that didn't make 
it that were still funded that a person didn't get a job out 
of, but of the successful ones, was there a dollar figure per 
job that can be available out there?
    Mr. Valenzuela. That number is available. We're--we're--the 
county and the city required that we have quarterly compliance 
reviews that are conducted by an outside audit firm as well as 
quarterly financial reviews which are conducted by the same 
audit firm, and one of the evaluations that they conduct--and I 
can make that available, I don't have that information with 
me--is they look at that standard which, I believe, under the 
Federal regulations is one to 50,000 and--one to 35 for the 
bank. I think it's one to 50,000 in general. We have that 
information and can make it available to you.
    Chairman Ney. I just want to--make one statement. We'll 
move on to the gentlewoman from California. It seems to me and 
this is something of importance to us because, you know, when 
you're in Washington, you're voting I'm all for local control. 
I'm a preacher of the legislature and you serve on the 
legislature also. I'm all for local control, but then if 
there's not a check and balance or an assessment or something, 
we can't just say, ``Well, we're trying to help poor people.'' 
It doesn't actually overall do that, not because it was 
intentional, just because of a series of problems we 
represented. But then as we tried to support problems that 
become more difficult here or in Idaho or Ohio or larger or 
smaller places because it's more difficult to support them. 
People say, ``Well, how effective was it?''.
    Also, one thing that's unclear to me--and I'll ask you 
right now--one thing that's unclear to me as you take your next 
step, was this, the whole request of money and the bank all 
geared towards helping distressed area and now as you recross 
this--I shouldn't say you, as this is reconstituted, is it 
really going to help the distressed areas, or is it going to go 
somewhere else where it really wasn't meant to be? I have a 
County at home right now, we're at 13 percent unemployment. 
It's horrific. We were at 17, but now we went to 13. I had a 
County that was 26 percent official unemployment, which was 
depression era on unemployment. As we went to help those 
counties who needed a wide variety of support, I think we had 
to get away from this generic, ``Well, we're helping this 
area,'' and all of a sudden, the money comes in; and we create 
a small factory, but nobody in that County works in the 
factory. That's a problem.
    You know, ``Well, gee, this County adjoining it, if we help 
that County, those individuals that need that job are going to 
work there,'' but then in actuality, they didn't. And we had a, 
you know, major corporation of Honda. I just want to give a 
estimate of the $43 million to, they specifically would not 
interview anybody from my zip code. I mean, this is a fact. Of 
course, we didn't testify. I voted on that Honda loan, too, 
when I was in legislature. I just threw out there as this is 
all reconstituted, I just think that, first, you have to be 
careful of how you do it.
    Mr. Sausedo. Absolutely, Chairman Ney. I'm three years into 
the bank. When I was brought here, I was looking, trying to 
find innovative ways to make our borrowers successful. For 
example, the stakeholders are the City, County and the feds. If 
there's something we can do with the procurement to give these 
people contracts to pay us back, that was one of the things we 
needed to discuss that was left out. This was an experiment, I 
think, that we all have the benefit of hindsight and looking at 
and saying, ``Well, we probably shouldn't have looked at it 
this way, or we could have done it that way'' or given certain 
resources; and you're right, I mean, we have to target the 
areas, but some of the areas--for example, when we start 
looking at employment law, can we legitimately prevent someone 
from getting a job from someone who got a loan from us and not 
be in violation of labor law because they have to meet a 
specific criteria.
    There are a lot of unanswered questions. But what I don't 
want to miss here is that there is a significant lesson learned 
here, and that is that with an entity like LACDB, what we can 
do is take the bureaucracy out of deploying money to businesses 
that need it immediately. And there are other institutions out 
there--I named one--but if there was the right coalition 
because what I don't want to see as a citizen is, to be very 
frank, which is take a hundred million, 50 million or whatever, 
put it in the hands of CDB and say, ``Do the right thing.''.
    Chairman Ney. That's my--and it's going to take the will of 
what we call political or elected, and I have to be in 
preparation, and for the record not in the soft light of day, 
or we are going to shut the lamp off, if you know what I mean.
    Mr. Sausedo. Right.
    Chairman Ney. I'll just mention that I think there's got to 
be a lot of communication out there.
    Mr. Sausedo. Absolutely. What we will tell you in short, is 
that this board--you can probably hear a little bit ever anger 
in my voice. And where that comes from is the Board of 
Directors on this bank are some very savvy folks, some of you 
know Professor Gene Grigby, who has now transitioned off the 
board. Rob Amens, Far East National Bank, and--just to name a 
couple notables. Denise Fairchild, these are people that are 
critical thinkers that analyze policy that understand business 
and that came here to do good.
    We spent the last three years putting out fires, and it's a 
shame because the last three years, we weren't able to serve 
the community in the way that it needed to be served. What we 
were able to do is serve as a buffer to protect the City. And 
we don't get acknowledged for that, and I take issue with it.
    I take issue when I hear statements like, ``The bank did 
this wrong,'' but then when you call the City council members 
to sit down when they're newly elected to say, ``Let me share 
with you where we've been and where we're going'' and you don't 
get a return phone call, and you walk the halls on your own 
time twice to do it, there's a disconnect; and the disconnect 
with any organization is when there's lack of communication, 
that is ultimately going to lead to failure. And we cannot not, 
not let that happen again.
    Chairman Ney. Congresswoman?
    Ms. Waters. Okay. This has been--this is--I'm going to try 
and have questions for each of you.
    Mr. Garcetti is an elected official. I've got to ask some 
questions that may be a little bit uncomfortable.
    Mr. Garcetti. Please do.
    Ms. Waters. But I was drawn into making this work kind of a 
priority despite all the issues that we're confronted with. 
There's Medi-Care reform and all of that. I said I got to pay 
attention to CDBG Section 108 and the development bank and how 
it all works.
    And the reason that I was made to focus on this is several 
things happened: One was I was sitting with angry young people 
at one time who said, ``The Federal Government doesn't give us 
any money.'' ``If it wasn't for my City councilman, I wouldn't 
get any funding.'' He was talking about Federal money. He was 
talking about CDBG, and I thought about it; and I said, ``Well, 
you know, there is a lack of understanding about where this 
money comes from.''.
    Now, for people like me who are tagged as old taxing spare 
liberals who push for money to be sent to my community, I don't 
like it when somebody says you don't spend any money. Then, I 
began to pay attention to campaign brochures where some local 
elected officials were politicking with the money, I'm leaving 
some blood on the floor here in Congress.
    This is what I did as a City councilman. I developed a 
shopping center. I did this. I did that, whole long list of it. 
No mention that that money was Federal money. That it was CDBG 
or Section 108, any of that. And then at one point in time, 
when Los Angeles had not spent its money in a timely fashion, 
$25,000 checks kind of showed up. Okay.
    They were pulled out the back of somebodies pocket and they 
just started passing them out, and that was CDBG money. So I 
guess I'm saying this because you kind of mention, you know, it 
used to be politicize and it's really not so political, and 
these decisions are made because we have this one reform 
outreach and response to requests for proposal and on and on 
and on.
    I'm concerned about all of that, and I'm trying to work 
with this committee and my delegation to figure out how we 
straighten all that out. I have a great respect for what was 
described earlier today about the flexibility that you have in 
City government to be able to target and identify, set some 
priorities about what needs to be funded, and I'd like to see 
that.
    But you know, because I know the community so well and know 
who's connected, I know who gets funded. I know how it works. 
This is what I spend my life doing. I know this stuff. Then I 
figure I got to help straighten this out. So having said that, 
and I'd asked Mr. Graves this question before, and Mr. Graves, 
when we talked, kind of gave me a little bit of idea about how 
you--I asked where is the discretion?
    After all is said and done and you got the CUP and you got 
the neighborhood councils and all of is that, where is the 
discretion, and how do we get to write $25,000 checks and pass 
them out? Where does that come from?
    Mr. Garcetti. Well, I think--you ready for me to respond?
    Ms. Waters. Yeah.
    Mr. Garcetti. Okay. I think you hit the nail on the head, 
and I 100 percent agree. I think that passing out on the last 
round $25,000 checks was the gasping cough of a dying system. 
Because that was that one time in which there was that surplus, 
and as Chair, I mean, you can appreciate this when a colleague 
comes to you and says, ``Help me out, I got this project. I 
have this, I have that.'' There really is not much to go around 
anymore.
    So we are looking at community base in terms of 
discretionary money. There really, we have a list probably five 
times as long as the money that our members request and that 
wasn't the case in the past. When Mike Menendez, my 
predecessor, was there, he was sharing stories with me that he 
had absolute responsibility and somebody come to me, ``Oh, 
okay. This isn't spending out. Let's move that. We funded that 
for five years, and we should have funded it for one,'' and we 
don't have that. I mean, my position's a lot less powerful, but 
I'm glad because that means that some of that is being 
devolved. And I didn't mean to paint too rosy a picture that 
we're there yet. I guess it's about the intent that it's really 
permeating the system right now. For me, that's different. It 
was because we had the crisis of spending down from that 20.5 
to the legal limit there was a bunch of checks that just went 
out the door. And I for one, want to praise the Federal 
government--I always publicly thank the Federal government and 
let my constituents know this is Federal money. When I say that 
we have a hundred million dollar housing trust fund, most of 
that is our money going out where our money is about $5 million 
of that is from CDBG money, so we're always trying to leverage 
that, and I think it is critical for that to be closed. Now----
    Ms. Waters. Well, go ahead.
    Mr. Garcetti. The flip side, though, and I respect very 
much what Mr. Sausedo was saying and I was one of those council 
members who sat down immediately and did get briefed on the 
bank, but I understand the lack of interest. It's something 
that I've tried to get my colleagues to show some interest in, 
too, and it's been a mixture of, ``Oh, I don't want to be 
touched by that.''.
    Because of that perception, sometimes it's unfair to talk 
about the bank, but nobody wanted to engage in the political 
will on this when they saw that it's already out the door. But 
that said, if we just did a system where it only went to the 
community which I, too, philosophically favor, we get that 
oversight problem.
    We have to figure out a thing where if the CDD has failed 
in the past and certainly I think there's blame with the 
department as well as with the bank, we have to shoulder that 
as well. So just to say that I'd be worried CDD take this money 
and run with it, we have to have a CDD that can take that money 
and run with it.
    We have no choice in our system but to have a system that 
works, so the internal reforms that Mr. Sausedo was talking 
about is something that we're working on just as much from the 
inside to make sure that happens, but I was not mincing words 
when I said the leadership term and that attitude is permeating 
places immeasurably different.
    And I think it's got community members that would begin to 
wash out toward the community tried to do but we only have gone 
through one round since those changes have been made.
    Ms. Waters. Okay. And I'd just like to mention, too, while 
my mind was on the description of this money or lack of 
description of where this money comes from. We are pleased 
about the teams that are put together to do some of this 
development, whether it is a big private developer and a 
community group or organization, et cetera, et cetera.
    I've seen some of the private developers who wouldn't walk 
foot into the community without all this gap financing, who go 
around touting what they have done for the community, and they 
don't seem to know where the money comes from. When in fact, 
those developments would never take place without Section 108 
and certain gap financing. So I'm looking at that also in terms 
of developers because in the final analysis, if we know these 
are business deals, but we don't mind people making money, but 
I don't want to see some of the well-healed developers who make 
these--put together these teams walk away beating their chest 
about what they did for the community without recognizing that 
this was a team effort with the Federal and the local 
government playing an important role. So we're going to be 
looking at how we can bring some reality to some of this. We're 
not out to change the mission of--of CDBG, but I think we do 
have to have some new definitions and I just----
    Mr. Garcetti. Absolutely. In fact, if I could make one 
suggestion. It's not about the name Maxine Waters' name out 
there or whoever's name not on there. But I think whenever we 
have those projects and we have those signs that are out there 
so people know where their tax dollars are going, whether it's 
Federal or whatever. I will make an instruction of the 
community redevelopment, that they make sure that Federal 
moniker's on there, too, because this is made possible by 
Federal Section 108, that this is the rep for the area, that 
these are people who are fighting on the floor because I think 
that is critical for that credit to be out there, too.
    Ms. Waters. Yes, I think that, too. I've never seen that on 
a site. That's interesting.
    Mr. Garcetti. You had my word that I will make that 
direction to the department and try to see if my colleagues 
will come on board with that, too.
    Ms. Waters. We'll have some directions for you also.
    Mr. Garcetti. Good. Thank you.
    Ms. Waters. Thank you. I thank you for volunteering that.
    Mr. Graves, why should we support the idea that CDD should 
have this $196 million, be it in a $50 million allocation or 
further and whatever, and why shouldn't we insist that the 
money go into the areas that were intended in the supplemental 
zone; and could this not be better done by one of these CDFI 
organizations or take, for example, some of our local banks 
that are really Community Development Banks? I see small banks, 
we have them all over. That's what they do. They're in the 
business to lend money. Now, I know that you said that this 
Community Development Bank ended up being the bank of last 
resort. And they had to take businesses to lend money to that 
the banks and turned down. Now in my mind, that's not so bad. 
Let me tell you why.
    The banks haven't had a clue for what to do with minority 
businesses, start-up businesses and never supplied any real 
substantial capital. This has been a struggle that I've been in 
for years. So they've turned out a whole lot of people who, in 
fact, should be given loans and who can pay those loans back. 
So I'm not disturbed by being the bank of last resort.
    When I was in the State of California and we had our small 
business development operation that the banks did guarantee 
those loans, that was the same kind of idea, too, that we were 
kind off of the bank of last resort. And that bank discovered 
ways by which to evaluate the applicants in ways that 
traditional banks don't always do.
    First of all, looking for the ability to repay. But also, 
doing some of the kinds of things that have never been done 
particularly for poor communities and minority communities 
before. We have people who have--could go out and get signed 
contracts for goods or services that they could negotiate at 
any traditional bank, but it's done in nonpoor or nonminority 
communities where, you know, you've got a whole list of people 
who say, ``You make this product. I will buy. This is what I 
need. I'll sign the contract.'' Business does not have money to 
get the inventory. Can't get it from a traditional bank, but I 
would expect a Community Development Bank to be able to look at 
that just a little bit differently, look at the history of the 
person, look at the entrepreneurial spirit of the person, look 
to see, ``Well, maybe they have a little something in 
collateral someplace where they could help out with this,'' put 
together a package where maybe they could get the family or 
somebody else involved in what would be some kind of good faith 
money to show that, you know, you're really struggling for this 
startup capital and then make it work.
    Now--so I--I'm not again shocked that traditional banks 
turn people down, and you become the bank of last resort. But 
what makes a civil servant or a political appointee a better 
judge than some of the Community Development Banks? We're 
funding through the community development financial 
institutions, some banks that are identified as community to do 
this very work.
    Why can't we go over there and look at what is it, One 
United or whatever that bank is, that consolidated with family 
and founders and all of that, these aggressive, young 
community-minded spirited people. Why can't we put that money 
into those banks and let them do this work and just wipe your 
hands of that? Get rid--you don't need that. Why do you want 
that?
    Mr. Graves. Well, now you made me stop and think about it. 
Actually, at one level, there is no reason not to consider 
that. When I was in San Francisco, the redevelopment agency, we 
worked with a couple of banks to use tax increment funds as 
loan loss reserve in exchange for their commitment to make 
loans in our targeted areas.
    There are a lot of ways you can use a bank and not spend a 
lot of money, by assuming some of the risk that they otherwise 
wouldn't take. It's not that what CDD would be doing is that 
much different than what we're doing already.
    As I pointed out, CDD operates the 108 loan program outside 
the bank now, and I think that our folks have a pretty good 
track record in terms of the creativity of using our funds to 
fill in those gaps that you're referring to. At this point, I'm 
not ruling out any alternative for the use of those funds. I do 
know that the initial 50 million is a relatively small amount 
compared to what we're already doing with the same 108 funds.
    With regard to the larger amount, then we probably would 
need to bring in some different kinds of partners, but I would 
very definitely prefer to go with an existing lending 
institution and give them some incentive to take a second look 
at some of the applicants that----
    Ms. Waters. Would you take a very close look at that.
    Mr. Graves. Sure.
    Ms. Waters. Because I think that that's something that 
ought to be considered. While I have both of you.
    Mr. Garcetti and Mr. Graves, there's a pile of money in 
CDBG that's being used for certain kind of City infrastructure 
services that I wonder about--code enforcement, why are we 
using CDBG to do code enforced?
    Mr. Garcetti. This is for housing, substandard housing for 
people--kids who have lead paint poisoning. We're using it to 
make sure that people aren't living--I think it's 15 percent of 
all of our housing stock qualifies as slum housing, and it's to 
make sure that we can supplement and everything is in a three-
year cycle so that every piece of housing in this city was 
getting inspected just once every three years.
    Ms. Waters. Don't we have some special funding for--
Somewhere?
    Mr. Garcetti. We have some from the State that we've 
gotten. It wasn't--we found that it is insufficient.
    Ms. Waters. Okay.
    Mr. Garcetti. So we wanted to make sure--we had kids, you 
know, even as a candidate, I remember going to a couple 
buildings. You could see the kids with gray faces, stunted 
growth and with that, it wasn't nearly enough when you look at 
15 percent of the City of Los Angeles.
    Ms. Waters. I see.
    Mr. Garcetti. They had not begun to even look at that, so 
that was the code enforcement. Also, City infrastructure we 
supplement other areas, sidewalk repair and other things and 
census tracks, poverty census tracks, districts like yours and 
mine.
    Ms. Waters. Why don't we pay for that with regular City 
money--sidewalk repair?
    Mr. Garcetti. We do as well. Say that's split up by 15 
districts equally, more or less, then those districts that have 
greater need are supplemented even more with CDBG so that those 
districts that are represented are getting more than, say an 
area where there's not poverty, although we do that as a City 
anyway, too, that supplements that further.
    Ms. Waters. I have some questions about that. I'll continue 
to think about that.
    Mr. Garcetti. That was cut by half the----
    Ms. Waters. You did reduce there.
    Mr. Garcetti. Yeah.
    Ms. Waters. Because while you're asking for social service 
money, it is identified that this is high priority, don't tell 
me you spend it on sidewalks.
    Mr. Garcetti. Right. Well----
    Ms. Waters. Because I expect the City, I expect the City, 
one of the basic responsibilities of the City is to trim trees 
and clean alleys and to fix sidewalks.
    Mr. Garcetti. Sidewalks are not a legal responsibility of 
the city, so the City wasn't doing them at all up to about 15 
years--10 years, at all.
    Ms. Waters. Is that right?
    Mr. Garcetti. At all.
    Ms. Waters. And for the homeowner?
    Mr. Garcetti. And for the homeowner. We're looking at 
systems where maybe we share that cost again. We'll go back, I 
know we're not testifying about sidewalks today. But it's 
interesting that we never had done that at all. And it was 
precisely because some of those areas that we're trying to deal 
with blight, so how can we bring economic development if we 
have the older blocks, the older sidewalks, older part of it?
    Ms. Waters. Where'd you get the hundred million dollars 
done from the housing trust funds?
    Mr. Garcetti. Mostly a combination of sources. Community 
redevelopment agency tax increment money, from our general fund 
which was pretty dramatic considering the last two years has 
been our worst budget years in a decade. We have monies to be 
gotten from tax reform, there are tax slough laws that weren't 
paying any City business tax and so additional monies from 
that, were dedicated for housing trust funds, and some monies 
from surplus property sales that the City owned.
    Ms. Waters. But none of the CDBG----
    Mr. Garcetti. On top of the balance of $5 million----
    Ms. Waters. Five?
    Mr. Garcetti. Yeah, about 5 million.
    Ms. Waters. 5 million in CDBG----
    Mr. Garcetti. With the exception of the housing trust fund.
    Ms. Waters. A hundred million is a nice amount to package. 
If you can package 95 million, you can package $100 million and 
leave that 5 million in CDBG alone.
    Mr. Garcetti. Well, here's where it came from. Under our 
previous mayor, about--I don't know, a lot of the money 
consolidated families for monies used to go to housing was 
moved away in housing. And so this was found as a commitment 
because housing had basically been not a priority under the 
previous administration. So this was a way, whether or not it 
was through the housing trust fund or whether it was just 
direct dollars into housing subsidies, we thought it was to 
rewrite that wrong.
    Ms. Waters. Oh, don't worry about that.
    We need that 5 million in CDBG for these nonprofit 
organizations that you want us to continue to support the 
waiver on, and I can understand what you're saying.
    Mr. Garcetti. That wasn't coming from that waiver piece, 
though. Yeah, that was coming from----
    Ms. Waters. I know, from the regular CDBG.
    Mr. Garcetti. Okay.
    Ms. Waters. Yeah, I'd like to encourage you to not to use 
that as a symptom. Give the people the money because--like I 
said, if you can package, 95--if you can package, you know, a 
hundred, we need that so, so, very badly.
    Mr. Garcetti. I'm sorry. I would be corrected. Of the 
original plan by the mayor was 5 million, but it's only 
500,000.
    Ms. Waters. We can take that back, too. Okay.
    Now, before I get to Mr. Sausedo, Mr. Graves, this proposed 
arrangement for the joint venture company, to divest the City 
this portfolio and move its management fee over to the new 
entity that may buy, it sounds to me as if the management 
company would continue to be able to manage the portfolio, they 
would just change hats and who's paying for it.
    But that's not a high priority of ours to make sure that 
the management company stays in business. Your priority is to 
see what you have in this portfolio and how you can get back 
the most money that you can get back from this portfolio.
    Now, some of the businesses are performing; some are not 
performing. I don't know what the total assessment is, but 
could you look at that very carefully and decide whether or not 
the way that it's been described to us is the way you really 
want to go with that, and whether or not--you don't have 
anymore--you don't have any management by anymore organizations 
as FAME or any other of the organizations still managing those 
loans that they made?
    Mr. Sausedo. No, FAME actually--there was a breakdown--
there was a $5 million allocation for FAME to do similar type 
work in venture capital. There were no deals brought to the 
table, and so we subsequently----
    Ms. Waters. Took that 5 million back?
    Mr. Sausedo. Right.
    Ms. Waters. And you had one other entity----
    Mr. Sausedo. Which what associated with FAME which was 
Hancock Partners.
    Ms. Waters. Hancock Partners.
    Mr. Sausedo. Right.
    Ms. Waters. So all that 5 million is back into the bank.
    Mr. Sausedo. Right.
    Ms. Waters. So all that you have now is this portfolio 
that's managed by, what is it, Zone----
    Mr. Sausedo. Zone Ventures.
    Ms. Waters.----Zone Ventures that you have to be concerned 
about.
    Mr. Sausedo. Yes, and the short of it is--let me give you a 
little background.
    Ms. Waters. Yes.
    Mr. Sausedo. Because it's important to note history.
    Ms. Waters. Yes.
    Mr. Sausedo. In the fall of 2000, the wonderful ``L.A. 
Times'' reporter--and I do say that sarcastically--wrote an 
article about the Zone Ventures portfolio--why is the City 
involved in venture capital? It's sent a flurry in City hall of 
some council people, not all, but some influential council 
folks, I should say at the time, to include staff and the net 
result of that was, ``You guys need to get out of this, and you 
need to do it now.''.
    Well, the Board of Directors took the position that, ``We 
were brought here to make prudent financial decisions. If we 
walk away from the portfolio, we have a contractual obligation 
to pay all venture fee, et cetera, et cetera, you will lose any 
potential up side. We will not make a poor financial 
decision.''.
    So after some creative thinking, we said, ``How can we make 
a good financial decision and political decision which 
sometimes, more often than not, is an oxymoron and do that in a 
way that the City can win and get them most or best paid back, 
if you would, from that.''.
    So we came up with a strategy as a board to identify a 
third-party entity that would take on our responsibilities, and 
part of that $35 million commitment is about $5 million in fees 
over the next several years due to the general partner, Zone 
Ventures.
    So one of the things we need to do is relieve ourselves 
from that responsibility. During that time we had about 1.5 
million in follow-on investment, meaning if there's a capital 
call, we have to participate in order not to be what's called 
``deluded'' or lose some of our investors. One of the things 
that we did, we engaged a technology firm to come in and not do 
a financial audit of the company, but to come in say, ``Look, 
of what we have, are these companies that are worth continuing 
to invest in, are we getting our money's worth in Zone 
Ventures.''
    Okay. So that if we're not, let me take a different tack. 
At the end of that study, we found that we some funds in the 
group. We also discovered that for them to--one of the main 
companies, for them to go public, they're probably going to 
need about $15 to $20 million in a capital call in the future, 
and as whether some of the other companies. The next question 
is: Will we be in a position to do that and as----
    Chairman Ney. Can you--I'm sorry, hold your thought for a 
second because we're running out of paper, I'm told. So just 
hold that thought about the next question.
    Mr. Sausedo. Fair enough.
    [recess.]
    Mr. Sausedo. The next question was: Will we have the 
financial resources to participate in this long term? The 
answer's no. And you know, it's the will of the City in a 
position to do so? How will they do so? They're going to pull 
money from the general fund, et cetera. With the caveat over 
our head, get out of this deal.
    We then ask ourselves to go out and identify on a 
performance-based agreement some investors that would be 
willing to take over the investment from us and then take over 
our capital commitment, and as part of that, they would be 
taking on future rounds, taking on future rounds of investment 
and the remaining fee arrangement.
    We did talk to a number of other people that potentially, 
and no one wanted to touch it at the time. And now that we've 
been in negotiations with--actually, there were two investors 
at this time: One was MR Bill which was one of the largest bond 
companies in the City at the time and a local developer Bedford 
Group who was interested in taking on and stayed in the 
process.
    MR Bill unfortunately lost their taste to stay in the bill 
because it was being too bureaucratic so what I thought would 
be a very simple process. So--so we think that the board had 
voted on moving forward on this, because we don't feel that we 
have the venue capital to stay in the game, if you would, if 
the City makes a decision to stay in the game and they have 
some other financial resource to do so, then that's a good 
call, because I do believe that some of the companies in the 
portfolio are good, but when you're looking at issues like 
police and fire being challenged by the shortfalls in the 
budget kind of a difficult call to make.
    So that's why--that's the history behind us looking at 
selling off or--or divesting, if you would, the portfolio while 
having some upside in the future should a future event occur 
mark the conditions allowed more.
    Ms. Waters. Well, I think that--that certainly should be 
revisited. For a number of reasons. It seems to me--and I don't 
know if you've done an assessment of that portfolio--there is 
some document that talks about each of those companies, the 
assets, everything, the management, everything, because it 
seems to me that venture capitalists are not magicians anymore 
than anybody else who manage monies or companies.
    You make sound decisions based on the information and the 
facts, and you can determine which companies are going to hold 
and which ones are going to fold. And it seems to me that 
rather than a management company, you know, managing that 
portfolio, that if it's all going to be drawn back in to 
someplace, that all be vested in that someplace to make some 
decisions about rather than keeping the management company 
involved at this point.
    Mr. Sausedo. Unfortunately, we don't have--I concur with 
you 100 percent. We don't have the luxury of making that 
decision because there's a contractual obligation.
    Ms. Waters. I see. How long does the contract run?
    Mr. Valenzuela. July of '08.
    Ms. Waters. July of what?
    Mr. Valenzuela. July of 2008.
    Ms. Waters. Who made that deal?
    Mr. Valenzuela. It's fairly standard. I mean, limited 
partners----
    Ms. Waters. Really?
    Mr. Valenzuela. I mean, limited partners generally have a 
ten-year life span, and in many cases additional options to 
extend at the option of the general partner with the consent 
limited partners. In this particular case, I just want to add 
to the complexity of the matter: Los Angeles Community Bank is 
the sole limited partner.
    So we're the 99 percent financial interest of the limited 
partner with Zone Ventures having the 1 percent stake which is 
fairly common. But we are not in many cases the investments 
that we have through Zone Ventures and the portfolio companies, 
there are numerous other investors and so our ability to--well, 
first of all, we have limited, if any, ability to control the 
investments were limited, and--and so we take recommendations 
from the general partner, we review them, we--we try to 
evaluate, make determinations as to whether the investments 
will meet national objectives and other criteria that we're 
subject to, and the portfolio has grown and matured and it's 
gone through its ``I'' curve and ``S'' curve and beyond.
    We've seen material deterioration and the value of the 
portfolio very similar to what's occurred in other portfolios 
with similar or like kind investments. And so the decision 
process and the bank and the one that we've been communicating 
and sitting on, how do we preserve, maximize the recovery from 
this as opposed to walking away and taking a deep loss and 
worse yet, we think that the proposal that has been approved by 
the board and approved by the city and is now being discussed 
with HUD to get their thoughts on it, is the best available to 
us at the present time.
    We're not sure--and I think, I'm not sure if they're 
prepared to comment, but I know the City hired a consultant to 
do kind of an evaluation or short valuation of the portfolio to 
evaluate the terms and come up with some additional comfort, 
but we believe that is on behalf of the bank and for the 
businesses, this is the best possible proposal of this 
portfolio that's been put forth that we've seen that preserves 
the opportunity to participate in the upside, and we do believe 
that there will be an upside for at least one or two of the 
other----
    Ms. Waters. Well, I forgot about the complication of other 
investors. I was not taking that into consideration when this 
was described. That complicates the matter somewhat. Let me 
move on to Mr. Carlos Jackson.
    Mr. Jackson, we know about the RFP process and the City of 
L.A. And we know about the hearings, and we've heard the CUP 
described and the neighborhood council is placed on role and 
all of that. And whether or not that is fully operational or 
realized, it is a kind of an oversight and involvement that 
certainly everybody supports it should be done. It should be 
worked at so that--in fact, it is real. Now, at the County, you 
don't have an RFP process?
    Mr. Jackson. For public services? We talking about public 
services?
    Ms. Waters. Well, you tell me.
    Mr. Jackson. In the area of housing, we do have RFPs. In 
the area of economic development and limited to what we have in 
the two Supervisorial districts is working in targeted 
communities, and basically it's a commercial business 
revitalization or business loans and solid improvements so 
really owner driven in that sense. In terms of our housing 
rehab program and income driven which is equitable driven, we 
can come forward.
    Ms. Waters. Let's back up so you and I can talk about the 
same thing. You get $38 million in CDBG money. How do you 
disburse it? How did you dispense it?
    Mr. Jackson. Being in L.A. County for 48 cities involved, 
and since 1975, the board has adopted a policy for distribution 
which is using the same formula that HUD uses for the entire 
jurisdiction, population of current housing and people in 
poverty. We run the numbers for the 48 cities, so it's very 
objective in terms----
    Ms. Waters. Okay.
    Mr. Jackson. The cities are responsible for developing 
their program according to the guidelines and requirements of 
CDBG. And they will do a variety of things. For the 
unincorporated areas, I work with each of the Supervisors, 
there's five of them, and predominantly, that money goes into 
housing.
    Ms. Waters. Wait just a minute. I'm talking about a process 
right now.
    Mr. Jackson. That's----
    Ms. Waters. You have a pot of money. Do you just divide it 
up between the five Supervisors?
    Mr. Jackson. No, it's done again by formula. Same formula 
we use with the cities, we use for the Supervisorial districts. 
So----
    Ms. Waters. How do you do that?
    Mr. Jackson. Using the three factors again: Housing, 
population and poverty. We have the census information for the 
unincorporated areas, and that yields a certain number for each 
Supervisor. One Supervisor whose district's predominantly in 
the City of Los Angeles may get 150,000. To Supervisor Burke 
and to Supervisor Molina, we get the bulk, they have the 
highest level of poverty or low income housing. And then, we--
for the cities, they do it, you know, according to their 
particular needs.
    Ms. Waters. Okay. So you've got this formula that's 
synonymous with the formula that you use to disburse the money 
to the cities which is the same formula we kind of use in the 
Fed that divert to the States. We know that. So now you use 
your formula and we each have this pile of money. How do we 
spend it?
    Mr. Jackson. Each of the--I"m going to focus on the 
unincorporated areas because, again, for the 48 cities, if I 
can, as an example mention South El Monte, that City of South 
El Monte would get a----
    Ms. Waters. Just because his relatives are in South El 
Monte.
    Mr. Jackson. I doubt it. But they've been in a program the 
entire time. South El Monte would get an allocation stating 
$200,000.
    Ms. Waters. Okay.
    Mr. Jackson. They will work with their council and the 
staff and the community there as to what is pertinent and 
important to them. We do not interfere with their programs 
select in the sense. We allow them to develop their programs, 
provided it meets all the requirements.
    For the unincorporated areas, it's different. Each of the 
districts, we work with the Supervisor and the staff and our--
and we also conduct community meetings. Like I mentioned 
earlier, we have 16 communities that we go around and listen to 
the communities. Unfortunately, when you look at the numbers 
allocated, we get $30 million, it sounds like a lot. But for 
the unincorporated areas, it's only $16 million.
    Ms. Waters. That's not a lot of money. That's very little 
money.
    Mr. Jackson. That's the reason for----
    Ms. Waters. But they do just kind of give it to whoever 
they want to.
    Mr. Jackson. Not--on the public service side. But not on 
the--not on the other targeted for a particular program. And 
it's really like, say, for instance, in one district we'd have 
certain streets that are earmarked for community--commercial 
business revitalization. It's really the participant's 
willingness to participate in that program, a business. If they 
wanted to do it for sign improvement. For housing rehab, it's 
the same story. We will publicize and market the program, but 
it's a voluntary program. We can't force anybody to take out a 
loan or to accept it. In some cases, unfortunately, we have 
gone and walked the neighborhood and offered a grant. People 
still fear Government, fear the paperwork.
    Ms. Waters. So let's get back to process. For your 
unincorporated areas, you have 48 cities. In that, you have the 
City of Hawthorne? You have Hawthorne?
    Mr. Jackson. It's an entirely different jurisdiction.
    Ms. Waters. Give me--Lawndale?
    Mr. Jackson. Lawndale is a participating City in our 
program.
    Ms. Waters. They get a set amount of money based on this 
formula, and they do what they want to do with it, but they 
have some process, some process, but they spend that money.
    Mr. Jackson. Right.
    Ms. Waters. You have the unincorporated areas, and in your 
unincorporated areas, you have should have some targets that 
you'd like to see the money spent on. The money is basically 
divided up between the Supervisors.
    Mr. Jackson. By formula.
    Ms. Waters. By something, formula. For the unincorporated--
--
    Mr. Jackson. Same formula we use for the cities, 
everything's above board on that.
    Ms. Waters. And people apply for the money. People ask for 
the money. You have community booster organizations who would 
like to see--see some funding and maybe small amounts of money 
because you don't have that much. And so you look at it and 
say, even eeni-meeni-mini-mo, or I know this person. This is a 
good program, something. You do something like that.
    Mr. Jackson. In one program home, which you know we can buy 
with our block grant.
    Ms. Waters. Right.
    Mr. Jackson. Home is an open RFP.
    Ms. Waters. Oh, okay. But that's not the money that was 
included in 38 million.
    Mr. Jackson. No, just----
    Ms. Waters. I want to talk about 38 million.
    Mr. Jackson. Under the public services category.
    Ms. Waters. Uh-huh.
    Mr. Jackson. Under the RFP program, it might be money 
targeted for the redevelopment area, small redevelopment area, 
Willowbrook, say, for instance, and we have certain things 
we're going to do there. But the area that we're--I think we're 
talking about the public service category, this is the--the 
dollars that Supervisors as well as the County we look at in 
terms for social services.
    Ms. Waters. Look, I'm not----
    Mr. Jackson. No.
    Ms. Waters.----saying you shouldn't do it. But I don't want 
you to labor at this too hard. There is no RFP process for 
those dollars.
    Mr. Jackson. I didn't say there was an RFP.
    Ms. Waters. I know. I know. You have a hard time getting 
me. I'm not beating you up about it. I just--I have to 
understand it before I have to start talking about making law 
to try and deal with this. They have the flexibility to fund 
programs that they'd like.
    Mr. Jackson. That's right.
    Ms. Waters. That's right. That's okay. Now, you mentioned 
something that I did not know about--the monies that you get 
from something to do with the city of Industry. What is that?
    Mr. Jackson. Back in early 1990, '91, the City of Industry 
had specialization set aside at the state level. For City of 
Industry, they're set aside money for a tax increment for the 
redevelopment areas, 20 percent set aside. They claimed and the 
legislature approved it that there was no need for housing 
within the City of Industry, and it reverted to the L.A. County 
Housing Authority.
    Ms. Waters. Great.
    Mr. Jackson. Our agreement with the city of Industry was 
that we would do it by housing program, without any input from 
the--in terms of decision making, and so since then, since 1997 
because there was a lot of litigation on that particular 
matter, we've been using the money to elaborate for 
homeownership, senior housing, special needs housing, and a few 
other ones, you know.
    Ms. Waters. That's good. Now I know there was something 
about the City of Industry, and I remember some years ago when 
we found that there were elected officials who lived every 
place but the City of Industry who didn't have to worry about 
it because it was all commercial and industrial. That's okay. 
I'm glad that the county is the beneficiary of that. That's 
fine. But now let me ask you the same question I asked the City 
when I kind of talked to them about not using--maybe they 
should be using money for a certain kind of infrastructure, 
that maybe the money should be used for social service 
programs, et cetera. What--how much of that 38 million are you 
using for something like that, some kind of infrastructure, are 
you repairing rec and parks--park and rec, facilities with CDBG 
money?
    Mr. Jackson. We do limited park improvements.
    Ms. Waters. Why are you using CDBG money to do that?
    Mr. Jackson. Well, the County itself has the park 
improvements.
    Ms. Waters. Why don't you use some of that City of Industry 
money?
    Mr. Jackson. It's strictly for housing.
    Ms. Waters. It was strictly for housing based on the 
legislature?
    Mr. Jackson. Yeah.
    Ms. Waters. The legis--Sacramento?
    Mr. Jackson. No. In the redevelopment area, 20 percent of 
the tax increment monies that are collected is set aside for 
housing by law in any development area. That 20 percent is 
transferred over to and--us, and we have to use that more 
housing and no other purpose.
    Ms. Waters. The tax increment cannot be used for any other 
purpose, even though when you're developing housing and 
considering the neighborhood or the environment which should 
include recreation, parks, all of that, you can't use any of 
that money for that?
    Mr. Jackson. We do not receive the balance of the dollars 
that they--you know, the 80 percent--we're not using that. They 
keep that money. We're only receiving the 20 percent of the 
housing set aside. We're not receiving any other portion. That 
money's restricted to housing only.
    Ms. Waters. And so tell me again, how much was your last--I 
mean, give me some idea of how much money that is, that the 
City of Industry tax increment?
    Mr. Jackson. On an annual basis in July, we get maybe $11, 
$12 million.
    Ms. Waters. You say housing----
    Mr. Jackson. Strictly housing.
    Ms. Waters. So what do you do with it? I mean, how do you 
spend it on housing?
    Mr. Jackson. The board of Supervisors adopted an allocation 
plans, and 50 percent went for affordable housing which is home 
ownership, multi-family housing and senior housing, three 
categories.
    Ms. Waters. That's to the developer.
    Mr. Jackson. It could be to nonprofit.
    Ms. Waters. Computer down payments.
    Mr. Jackson. Not that money. There's another half--the 
other half is special needs housing. It's housing, and it 
cannot be emergency housing. It has to be transitional.
    Ms. Waters. So how do you use 50 percent of that 11 
million. Give me some idea of how you use that for multi-
family, for example.
    Mr. Jackson. We have--we allocate money for helping them on 
acquisition, of property----
    Ms. Waters. Developers.
    Mr. Jackson. Right.
    Ms. Waters. You give it to developers to do acquisition and 
land packaging in order to build multi-family housing.
    Mr. Jackson. It's not just--well, again----
    Ms. Waters. Profit on nonprofit.
    Mr. Jackson. And that is strictly on an RFF process.
    Ms. Waters. Okay. On an RFP process. Right, okay. And the 
other 50 percent, you do on special needs?
    Mr. Jackson. Special needs housing.
    Ms. Waters. Okay. You use any of this for homeless?
    Mr. Jackson. If it's transitional housing. By law, we 
cannot do emergency housing under the redevelopment law.
    Ms. Waters. Okay. All right.
    Mr. Jackson. So we do--again, we do domestic violence. A 
lot of our focus is emancipated youth that come out of foster 
care at 18.
    Ms. Waters. You have a lot of focus on emancipated youth? 
What are you doing for them?
    Mr. Jackson. This. We will develop transitional housing.
    Ms. Waters. Where is it?
    Mr. Jackson. Disbursed throughout the County.
    Ms. Waters. We can't find any homes for people coming out 
of foster care.
    Mr. Jackson. You have to be 21, and the need is tremendous.
    Ms. Waters. Okay. Thank you.
    Mr. Chairman, you were very generous.
    Mr. Garcetti. Just because of your line of questioning, I 
want wanted to give one--and I'll try to make a succinct 
argument for some of the more infrastructure-based things.
    Ms. Waters. Okay.
    Mr. Garcetti. I think all of us want to grant money to 
provide people with self-sufficiency----
    Ms. Waters. Yes.
    Mr. Garcetti.----and communities with self-sufficiency.
    Ms. Waters. Yes.
    Mr. Garcetti. It's really a lather. So when I think about 
where we spend the money as the City, first you have to have a 
safe community.
    Ms. Waters. That's right.
    Mr. Garcetti. I represent an area, which in a 2-month 
period, 13 young people, 5 were taking drugs, in a similar 
district.
    Ms. Waters. Sure.
    Mr. Garcetti. We were able to take some block rent money 
and bring gang intervention folks, chased away at gunpoint. 
Within two months, they had 70 percent of the gang members 
positively enrolled in becoming forest fighters, just one 
example. The second step on the ladder is the infrastructure 
buildings so the community has some capacity.
    In Echo Park where I live, where there was gunshots just 
this weekend, we had an improvement project which had to do 
with sidewalks and trash cans and actually the facade of our 
businesses, things which gave the community pride, things like 
the City should be doing, but the City cannot similar afford to 
use those Federal dollars to get to the third step which is the 
delivering of services, the economic development projects, the 
community pool project.
    Ms. Waters. Can you use Section 108 for infrastructure 
repair?
    Mr. Garcetti. I don't know.
    Ms. Waters. Who mentioned that? Who mentioned the City of 
Santa Fe to you?
    Mr. Jackson. I did.
    Ms. Waters. Did you tell any----
    Mr. Jackson. No. That was economic development project 
where----
    Ms. Waters. Where you had to do some cleanup where----
    Mr. Jackson. Major cleanup.
    Mr. Garcetti. And if you get all those pieces in place, 
then you have Federal money with which you will be able to 
provide self-sufficiency to some parts of communities and 
actually get the rest going and get the community going.
    Ms. Waters. Okay.
    Mr. Garcetti. But I think that's the last round of actually 
being able to deliver services.
    Ms. Waters. It may be, and it's not a lot of money, and I--
--
    Mr. Garcetti. I hear you.
    Ms. Waters. The City of responsibility.
    Mr. Garcetti. Absolutely.
    Ms. Waters. Now, having said all of that and--I'm finished 
Mr. Chairman.
    As we look at the possibility of the management of the bank 
by a financial institution, CDFI institution on bank or 
something, we would really like to keep in contact with you as 
you think this through.
    Mr. Garcetti. Absolutely.
    Ms. Waters. We think that's very important. The other thing 
I'd like to impress upon you is this: You talk about 
infrastructure, the sidewalks, the trees, the alleys, the 
poverty, the unemployment, buildings that are still boarded up, 
since the insurrection, I am going to have to really, really, 
really work--look very closely at what you talk about doing 
with that money, that 50 million and the 146 million because we 
know politically it's very hard oftentimes to direct the money 
where it should go because everybody wants a piece.
    You know, it's just a political reality, but we have to 
resist that. We can't continue to look at the epicenter of the 
problem and divert the resources that were intended for that 
epicenter away from there. I think that most of us have been 
very, very generous in our lack of criticism about this Condit 
thing, but we're in a deficit situation in the Federal 
government, the state's in a deficit situation.
    So this is precious money. I mean, this is precious money. 
And I would like very much to see it go where it was intended, 
and so I'll stay on top of that; and.
    Mr. Sausedo, where I don't agree with everything, I think 
you've made some very valid points about the bank, and if 
you're not to do it, what you think ought to be done in some of 
the statistics that you have cited have been riveting and 
forces us to have to focus on what happened with this very 
precious money that's before us.
    Thank you very much.
    Chairman Ney. Thank you. I would also note to the witness's 
first and second and also in vase of the third panel, some 
members of the subcommittee may have some questions that they 
would like to ask, keep the hearing open for 30 days so their 
questions may be asked in writing potentially.
    Thank you for a very interesting panel.
    We'll take a five-minute recess.
    [recess.]
    Chairman Ney. We'll begin your testimony.

STATEMENT OF LORI GAY, LOS ANGELES NEIGHBORHOOD HOUSING SERVICE

    Ms. Gay. Thank you. Good afternoon, subcommittee, ranking 
Member Ney and ranking Member Waters. It's a pleasure to be 
here. Welcome to Los Angeles.
    Just a quick word about NHS, and since this is a field 
hearing, we'll focus our comments on what CDBG's been helping 
us do here in Los Angeles. LANHS is 18 years old. We've served 
over 1.8 million people. We are a CDFI as well, and last year 
generated $72 million of business assisting families to improve 
their homes and obtain their homes.
    We provide financial literacy, education, affordable loans, 
construction management services and neighborhood 
revitalization programs. We are members of the national 
NeighborWorks Network, and we spoke to this committee in April 
on the down payment assistance fund, so I won't reiterate all 
the information that I have.
    Chairman Ney. Just a note, I was so impressed I stopped 
you, and I said I wanted to visit----
    Ms. Gay. You did.
    Chairman Ney.----you.
    Ms. Gay. You did, and we welcome you to do that at any 
point. We are interested in leveraging. That's the business 
we're in, so the other panels that spoke before us, one of the 
things I thought was interesting was the capacity for leverage. 
We're at a 35 to 1 leverage now in the housing business we're 
in, and I think that the small business sector has a very 
difficult challenge.
    It will be interesting to see if they can leverage the 
funds that you so adequately place with them, and I thought it 
particular intriguing, the idea that we're suggesting for the 
Community Development Bank resource is what I would certainly 
offer is the notion, that's not our business.
    We don't do small business development detail or investment 
peaks. But a group like LALDC, Little Tokyo Service Center here 
was earlier this morning. These are entities that are CDF 
investments. They along with banks put money on the street 
aggressively, and so just the notion of being able to perhaps 
share some of that 196 million, spread it around, I think, 
would particularly behoove a lot of the communities that were 
formerly served by the bank.
    The other thing I'd note just on CDBG, some of the 
communities we've referred to throughout L.A. County and low 
income census tracts lack economic resources, lack neighborhood 
facilities, lack basic affordable housing so we've spent the 
bulk of our time working with the municipalities and now, 
seeing ourselves as one of the largest home ownership providers 
in the region putting 42 families a day onto home ownership 
paths, we see now the importance of being able to utilize 
flexible CDBG dollars, not only to assist families to get 
ownership, that's just one piece in your district. 
Congresswoman, just as a sample, HUD ran studies several years 
ago which I was certainly happy to provide to your staff 
involving a third-party predatory lending detail going on in 
your district and Congresswoman Diane Watson's district as 
well, and one of the interesting statistics I recall was that 
moderate income blacks borrowed at nine times the rate of low-
income whites from subprime lenders.
    Hispanics were borrowing from FHA at 20 times the rate of 
whites. 14 times the rate of whites for blacks from FHA, and 
just the notion of affordable money being available in our 
communities, it's a huge lack, it looks black, brown, Asian, 
rural, poor whites in many instances--and I raised this because 
I didn't quite hear it today yet on the other panels--that the 
families who are underserved look like some of all us. You 
mention the fire truck.
    I'm interested in the very simple stories. You mentioned 
$500,000. Some might ask: Why are we talking at these levels, 
but for practitioners like us, I'm interested in every single 
dime getting to every single family that needs help. In certain 
instances, it eliminates the opportunity for families to 
participate so that's why I mentioned the bank's resource 
allocation for the future would be very intriguing to privatize 
it, let CDD have some oversight, but whatever's appropriate, 
but see how the people on the street can get the money out.
    That would be a real notion that we've seen work in 
housing. The other thing I'd mention with CDBG, in particular, 
we were given--I'm from the old school--a lump sum draw down 
grant to get or revolving loan fund started 18 years ago, and 
when I came to the NHS it hadn't leveraged very well; and so as 
we got a little more sophisticated, what we found was that, our 
revolving loan fund that's now made up of mostly private 
dollars, could be utilized to leverage Freddie Mac and Fannie 
Mae-type programs, leverage individual down payments and/or 
closing cost assistance.
    And what we see is in using a system to get that money on 
the street, we've been able to maximize as the City of L.A.'s 
primary contractor on their home maintenance program, 
neighborhood preservation program, we end up helping, you know, 
maybe it's only a hundred families a year, but those are people 
who are in danger of losing their home and are at risk of 
falling subject to predatory lenders and are living in homes 
that really are in disrepair.
    So it's how do you utilize CDBG as maybe an initial source 
which the housing department, I believe, has tried to do well 
in this city over the years and then leverage that well past 
the original intent so that the government's money is not 
wasted? And that, in fact, more consumers are assisted because 
your money got it started perhaps.
    Your initial investment of a thousand dollar grant into a 
fund like ours 18 years ago is now generating $72 million a 
year. I mean, that's the kind of story you want to be able to 
have with every single dollar that's spent on CDBG, I would 
think. Similarly, programs like Section 8 to home ownership, 
particularly interesting I think in Congress right now, we're 
watching it, we see those kinds of programs.
    In L.A. There are probably only four or five homeowners 
among 9,200 right now who are able to receive that assistance 
and use their Section 8 voucher to make their mortgage payment, 
but the notion is: How do you make that 40 people? You know, 
how do you take many people off the voucher program and, in 
fact, assist them to grow their lives to a place where their 
capacity is beyond utilizing Section 8, and they're working 
contributing citizens who then give back by becoming homeowners 
on their own?
    The final points I'll make, everything from code 
enforcement to nuisance abatement to graffiti removal to the 
city's handiworker program are all things we've seen in what we 
call full-cycle-type revitalization effort that are needed to 
make neighborhoods work. And what we keep finding is that if we 
limit our vision to thinking that our little home ownership 
stuff and our little home maintenance stuff is all that 
matters, we screw up, quite frankly, the capacity of families 
to make their lives better because as soon as you get them in 
the house, then you have to deal with an alley closure because 
there may be gang members driving behind the alley of the house 
they just bought, okay? Okay, to traffic their drugs.
    There may be some nuisance abatement problem. There may be 
some sidewalk that is a hazard to their children in front of 
their homes. So it's how do you strike the balance? That's 
always the question. Groups like ours have been asked to help 
strike it clearly on the housing, affordable housing and the 
rental side, but I think we have a lot more work to do.
    What we certainly want to encourage the subcommittee to 
consider, is that whether it's small business, economic 
development or affordable housing, commercial resources, we 
need all those pieces of the pie to be able to make the whole 
pie work.
    And the real job of the nonprofit community in our meager 
opinion is to take one small percentage of a pie that makes up 
a community and then stretch that as far as possible so that 
everyone gets to eat from the pie, and that's our job as your 
partner so we're committed to that.
    If you end up having more specific questions on the types 
of programs that we've managed for the City of L.A. Because 
they do privatize through the housing department much more 
aggressive than they did even a decade ago, I'm happy to answer 
them. Just wanted to offer some of the solutions that we see.
    Thank you for your time.
    [The prepared statement of Lori Gay can be found on page 91 
in the appendix.]
    Chairman Ney. Mr. Mistrano.

STATEMENT OF SAM MISTRANO, ACTING EXECUTIVE DIRECTOR, SOUTHERN 
          CALIFORNIA ASSOCIATION OF NONPROFIT HOUSING

    Mr. Mistrano. Ranking member Waters, Council. Thank you 
very much for having me.
    My name is Sam Mistrano, the Executive Director of SCANH, 
which is the worst acronym, which stands for Southern 
California Association of Nonprofit Housing, and I get 
introduced all the time as working for SCAM or SANK or 
something like that. There are two syllables in our time.
    We have over 500 organizational members who help produce 
and develop affordable housing throughout Southern California. 
Our members have built 76,000 affordable housing units since 
1986, and last year, started, completed or were in construction 
on $1.7 billion worth of projects.
    Our members are great supporters of CDBG, and I'm going to 
touch on two reasons why in my testimony briefly: First of all, 
Los Angeles City is in a housing crisis. There's not enough 
housing units being built. For example, between 1990 and 2000, 
the L.A. City population grew by 200,000 people. 80 percent of 
that, by the way, from births.
    However, L.A. County only produced 37,000 new units despite 
the 200,000 population growth. So there's a very large mismatch 
between the need and the production. In fact, the Southern 
California Association of Governments SCAG, perhaps another 
horrible acronym estimates the City needs to produce 47,000 new 
units to meet the current demand.
    What happens when demand is not, assuming production, 
doesn't meet demand prices rise. Of course, it's basic 
economics, and last year the medium price for a house in this 
city was $328,000. That's the medium price of a house. That's a 
30 percent increase since the year before. So it makes sense 
that the statistics show that home ownership rates in Los 
Angeles have actually dropped in the last ten years.
    They--home ownership has risen in California, it's risen 
across the country, but not in Los Angeles. It's dropped. And 
so again, it's understandable that most of the City rents--62 
percent of the City residents rent. The medium rent for a two 
bedroom/one bath apartment in the county is $1,100. $1,100 for 
a low-end basic two bedroom/one bathroom apartment. That means 
people cannot afford this.
    A person earning a minimum wage has to work a 124 hours a 
weak to be able to afford that which means a family--a family 
of two people working minimum wage still have to work over 60 
hours. So there's a massive housing crisis in L.A. City that's 
still current. That's my first point.
    My second point is easing the housing crisis our members 
believe happens to be production of new units. Production of 
affordable housing to meet the demand. CDBG helps ease the 
housing crisis. Basically, local officials and the people who 
live in the region understand that we need to build our layout 
of this crisis.
    Earlier this year L.A. City Council and Mayor Jim Hahn 
approved $100 million affordable housing trust fund to help 
produce new units. And last year 63 percent of L.A. County 
voters voted yes on the statewide initiative of Prop 46 which 
is all about housing, a $2.1 billion housing bond. So people 
who voted for this knew what they were voting for. 63 percent 
of County voters voted yes.
    Despite this new money, L.A. Still desperately needs CDBG. 
It's a critically important financial tool. As Miss Gay pointed 
out, it's a tool that our people--our members leverage. So 
we're a portion of the City funding helps fund L.A.'s high 
leverage program which is a key source of local support.
    So for example, Esperanza Community Housing Corporation, 
one of our members, was awarded almost $600,000 from the 
housing department. Some of that money is from CDBG. Well, 
Esperanza used that first grant of $600,000 to raise an 
additional $2.8 million and was able to build its Alley Grave 
Court project. So the money was used to leverage other money.
    And CDBG also helps to fund the City trust fund. An example 
of the trust fund which is new to L.A City, it committed its 
first rent of 13 projects earlier in the year, and these 13 
projects will produce 700 new affordable units, and CDBG's a 
factor within this fund. So in conclusion, I'd like to say this 
our members or semi-five area developers all have CDBG money in 
their projects. They all need it.
    One of the most important strengths of the program is its 
flexibility. It allows the counties to use the money to best 
fit their own needs. The rest of the state does not understand 
Los Angeles's unique needs, its overcrowding, its high prices, 
its unique City needs. So we support the program as is. I 
appreciate the time. Thank you.
    [The prepared statement of Sam Mistrano can be found on 
page 121 in the appendix.]
    Chairman Ney. Ms. Gay.
    Ms. Gay. I'm here wearing two hats, Chairman Ney and 
Congresswoman Waters and other members. I just want to thank 
you for having me. I'm here as the associate director for the 
Los Angeles Metropolitan Churches, and we are an organization 
of 45 small and mid-size churches.
    Most of our work focuses on employment linking residents to 
job opportunities as well as education opportunities for 
exoffenders. I also happen to be the chairperson for the Los 
Angeles Empowerment Zone Oversight Committee, which is the 
community group that was convened as a result of the Community 
Development Bank we had formed in 1994 and 1995.
    So I'm here today to make testimony in terms of the 
Community Development Bank's contribution to CDBG, but more 
importantly I want to lift up for you that the task of the 
Community Development Bank's lending was to raise the economic 
status of empowerment zone residents, and in our opinion, that 
was not done.
    The other point that I want to lift up for you is that the 
result of the lending was to link residents to job 
opportunities. There was no mechanism to do that which means 
that that component of the bank's goal went unfulfilled. As a 
requirement by the Federal regulations, the empowerment zone 
and oversight committee was established and firmly fostered 
those partnerships between the public sector and the private 
sector.
    In January, 1997, the L.A. City Council had to instruct the 
Community Development Department to identify a source of funds. 
These funds were CDBG funds of approximately 144,000, and those 
funds would be used by the empowerment zone oversight committee 
to carry out its oversight work of the job linkage and job 
creation.
    So as you can see, from '95 to '97, there was no funding, 
no apparatus, no infrastructure that was put in place behind 
that mandate in the cooperative agreement. It took the 
community two years to get funding to make a phone call, to 
send out a fax, to be at the table. In order for residents to 
participate, we have to be at the table. Since that time, the 
empowerment zone oversight committee has approved over $100 
million in a request for Federal funds by both public and 
private entities that operate in the zone or that serve zone 
families.
    About 60 million of those funds have actually come into the 
zone from other sources than the loans that were made by the 
Community Development Bank. Also, our committee has provided 
technical assistance and capacity only for microbusinesses, 
small businesses and community-based organizations in the 
empowerment zone since 1995.
    We've also provided ongoing staff support using CDD staff 
which is our administrator in this project to support the youth 
programs in the empowerment zone, Yo Watts, the Cooley Program, 
all of these were initial employment demonstration programs in 
the empowerment zone. In 2000 when the zone actually received 
the wage tax credits, remember prior to 199--to 2000, we didn't 
have that. In 1998, HUD gave us our full designation as the 
empowerment zone which the tax credit would take effect in 
January 1, 2000.
    So from 1994 until January, 2000, there was actually no 
mechanism and no incentive under this particular lending 
apparatus to attract or retain businesses. Neither was there a 
wage incentive for them to employ residents from the zone. One 
of the questions I want you to ask is: If they're not going to 
tell us what happened to all the money, where are the jobs?
    Where are the individuals that were hired by the jobs, the 
90 percent jobs that were created, which are those empowerment 
zone residents? That's one question we want to know. Of the 51 
percent that were supposed to be retained, are any of those 
employees actually living in the empowerment zone or these 
high-census poverty tracks? We have been unable to get that 
information.
    Additionally, a couple of months ago, HUD came out with a 
report that tells us that there's five states in the union that 
have a disproportionate number of homeless, undocumented 
immigrants and individuals who are below the Federal poverty 
line. California is one of those states.
    HUD has lowered the average medium income which is going to 
place an additional burden on our community development 
corporations, economic development corporations who offer 
affordable housing and other services that these residents need 
that's going to place an additional burden on them, and they 
may no longer be able to provide those services.
    So I wanted to lift that up for you. The employment needs 
that are emerging in the empowerment zone are particularly in 
the 35th Congressional District are comprehensive and adverse. 
We've been told by another division within the corporation of 
the city, our public safety arm, and the State Department of 
Corrections that approximately 30,000 parolees and probationers 
will be returning to these very communities that are currently 
designated at empowerment zone census tracts. How do we want to 
address this problem? We're also being told that there's a 
tremendous housing shortage. How are we going to meet those 
needs? The County also has a health crisis. How are we going to 
meet those needs? The very census tracts and zip codes that the 
economic development activities that were treated by the 
empowerment zone with all of these other myriad domino effects 
happening, we still would like to know, the bank didn't do 
this; the loans didn't do that, how are we going to address the 
job linkage, job creation, job placement requirement? This was 
not an option.
    This was an express outcome in the cooperative agreement as 
well as the empowerment zone initiative, so we have these 
recommendations. For the committee: We believe that about $50 
million of the Section 108 fund which is equivalent to 1,400 
jobs at the market rate of 35,000 for one job, we're not sure 
if that is the equivalent market rate today, but we're going to 
go with that number, that that should be used for broader CDBG-
eligible purposes to create an empowerment zone job creation 
and training center that could address the needs of this 
population in the empowerment zone.
    We already have a study that's been commissioned to June, 
2003 with refunds investment at the empowerment zone oversight 
committee worked to put in place. That study will be complete 
in May, 2004. So our request is for implementation funding of 
which these funds that are on the table for discussion right 
now could be used for implementation of the recommendations 
that the City will produce in May, 2004.
    Finally, the empowerment zone oversight committee 
recommends that the following criteria be applied for all 
remaining activities for Section 108 funds including any 
portion of the funds that are reprogrammed for CDBG objectives 
or for outside the zone.
    Number one, the empowerment zone residents must have access 
to at least 51 percent of all jobs resulting from loans made on 
any economic development activity with remaining Section 108 
funds. $50 million to create an empowerment zone job creation 
and training center with four satellite subsites in the other 
remaining communities. Empowerment zone residents must be 
trained in the areas where they are deficient. Empowerment zone 
consideration in review of the cumulative effect of ecological 
and environmental impact, as they are improving our areas, and 
whenever possible, headquarters of businesses should be located 
in the community, and they should be--utilize local services 
and its suppliers.
    So what we want to leave you with is that even though the 
bank has struggled, and I will admit that it's--I personally, I 
think it's important to know that I personally have been a part 
of this process since 1992, when the application was actually 
prepared, we didn't get anything, so everyone whose come to 
speak to you outside of myself and one other individual are 
new.
    So I think it's important to understand the historical 
process that has gone on and that the community participation 
experiment is only real if the community is actually 
participating in decisions, sharing power and having a real 
voice, and so I'm here to represent those 200,000 nameless, 
faceless men and women in the empowerment zone who need these 
jobs, who did not participate in the economic benefits from the 
lending that has occurred; and we would like to know: If we 
don't have the money, where are the jobs?
    Thank you for your time.
    Chairman Ney. Thank you.
    For the record, we have two additional witnesses who have 
joined us. One is Felipe Merino and--with the Molina Gardens 
Improvement. The other is Arturo Ybarra with Watts Century 
Latino Organization.

     STATEMENT OF FELIPE MERINO, MOLINA GARDENS IMPROVEMENT

    Mr. Merino. Good afternoon, Mr. Chairman and Congresswoman 
Waters.
    Thank you very much for allowing me to testify before the 
subcommittee today. My name is Felipe Merino. I'm the Executive 
Director of the Molina Gardens Improvement. I'm the 501C3 
community-based nonprofit in the City of Hawthorne, serving 
Hawthorne, Lawndale, Lennox Gardena and other surrounding 
areas.
    Our community-based organization provides very vital 
services to the community, services that I would say are at the 
front line of survival for a lot of families. We help folks 
with housing issues, Government benefits, health care access to 
State-sponsored programs and other social services that are 
very necessary for a lot of our families.
    We work in direct partnership with over 150 partner 
agencies including educational institutions, electrical 
government agencies and other nonprofit organizations. Most 
namely, we work with the Hawthorne School District directly so 
we can make sure that the children of our community have access 
to resources so that students can get a good quality education. 
We've found in working with the Hawthorne School District that 
a good quality education doesn't just mean the textbooks. It 
doesn't just mean what happens in the classroom. It means 
everything after the home, after school and before school. It 
means making sure that the child is safe, making sure that the 
child has a roof over his head, that they have food on the 
table. That their parents are able to get medical insurance. 
That their parents are able to teach them that the cycle of 
poverty can be broken, and that they can excel at everything 
that they set their hearts to.
    As a small nonprofit organization, what we've been able to 
find is that CDBG resources are tremendously necessary in the 
community. They really are an access to other resources is not 
readily available to everyone, which is a sad state of affairs 
particularly in our community where so many things are needed.
    But let me share with you a little bit, and I'll be brief. 
I'll share you with a little bit about what happens in our 
community in the City of Hawthorne. In our community, we 
started off this nonprofit organization. When I came on board, 
we had an annual budget of 6,700 and something dollars which is 
amazing that an association of nearly 150 different partner 
agencies was getting all those different types of things done 
in the community. However, there was nobody on board to make it 
a concerted effort or to channel the agency of those other 
nonprofit agencies or other individuals from the community.
    After our first year, through the budgetary cycle, we were 
at $87,000, I believe, for an annual budget. The reason 
largely--the reason why we were able to expand our budget, and 
now we're at a point where we're going to be closing out our 
books at about $250,000 a day after two years is because of 
CDBG funds because that money was accessible to us by way the 
City of the Hawthorne, and we had the support of people here 
are CDBG funds.
    Why don't you apply for them? Now before that point, we had 
a terrible time as a small nonprofit organization trying to 
raise money and develop the kind of credibility that we needed 
in the community and in--with foundations and with other 
government agencies to do the kind of things that we're doing 
now.
    But once that money was available to us, it was to--would 
have a multiplier effect. We were able to leverage those funds 
because all of a sudden we had the backing of not only the City 
but the Federal Government, and we were table to say, ``We have 
Federal dollars by way of the CDBG program--and mind you it was 
only $10,000 because it's--a percentage of the budget goes to 
direct program services by way of nonprofit organizations, but 
that amount of money has now multiplied to what, next year our 
budget will be closing out at about $600,000 is our projection 
at this point--and that's not even starting the fiscal year 
yet.
    So I want to thank the Federal Government for the CDBG 
program; however, I caution you that in the written testimony 
that I've provided there are three different concerns that I 
have as far as access to the community block rent funds: The 
first one being that many nonprofits don't even know that the 
funds exist.
    Whether it's because they're grass roots nonprofit 
organizations where the education level attained by a lot of 
the individuals that are part of the nonprofit board doesn't 
permit them to know about such resources and because they start 
off with such humble beginnings like ours.
    The second is that a lot of times elected officials are 
disconnected from what's going on at the grass roots level, and 
they really don't understand that the survival of these 
organizations depends on funding like CDBG funds, and unless 
you have somebody who's completely savvy on your Board of 
Directors or involved in your organization, it never trickles 
down to those organizations.
    It only trickles down to the organizations that people know 
about which is very unfortunate, as Miss Waters mentioned 
earlier, that that's been what's been happening.
    And the third point that I have is--is the notice 
requirements. The notice that's given about CDBG funds is done 
by newspaper--by way of newspaper which is a very minimum 
requirement for people to satisfy. However, not all of the 
individuals involved in community agencies in the business of 
survival of community members have time to read through every 
one of those little notice provisions that comes in those 
throwaway papers that go through the communities or even some 
of the larger papers where they're compacted and put in some 
obscure section of the newspaper.
    And at the end of the written testimony that I provided, I 
make a few suggestions that you may want to consider or reject, 
whichever you prefer: The first in order to deal with nonprofit 
organizations, the smaller nonprofits becoming aware of those 
resources and also being able to apply for CDBG funds.
    I've suggested that some kind of technical assistance be 
provided to nonprofit agencies so they're able to develop the 
kind of accounting mechanism that they need to have a place in 
order to track funding and be able to receive funds from cities 
and from counties in the area. The second is addressing the 
concern about elected officials not being aware of what's going 
on at the grass roots level and needing somebody politically to 
be involved.
    I don't think that funding for CDBG programs should be 
contingent upon whether or not you know a political or elected 
official. I really believe that it should be a broad enough 
process where everyone has an equal chance and equal access to 
those kinds of resources because I think there are many good 
causes that are being looked over for whatever the reason, and 
I think in order to employ that, you would have to require some 
kind of mechanism in which you were able to get information 
about other nonprofits.
    I know that there are several Web sites in place right now 
where, if you wanted to investigate a nonprofit organization, 
you wouldn't have to call the IRS. You could get on Web sites 
and find out financial information about nonprofits. I don't 
know how difficult it would be to link that up with some kind 
of database that local governments would have to access in 
order to identify nonprofits within their zip code or within 
their community that could provide equally as good services as 
the ones that are being contracted for elsewhere.
    And the third is the notice provision of CDBG services. A 
lot of nonprofit organizations have absolutely no idea that the 
CDBG funding exists. And I've suggested here as a--as a way of 
notifying nonprofits that that funding is accessible, that 
there probably be some kind of collaboration with the Internal 
Revenue Service that when nonprofit organizations are notified 
of their nonprofit status, that there be an instrument of some 
sort notifying them that there's Federal funding available and 
a possible suggestion of some Web sites that they could combine 
possible resources from some other resources.
    [The prepared statement of Felipe Merino can be found on 
page 131 in the appendix.]
    Chairman Ney. Mr. Ybarra.

 STATEMENT OF ARTURO YBARRA, EXECUTIVE DIRECTOR, WATT CENTURY 
                      LATINO ORGANIZATION

    Mr. Ybarra. Good afternoon, Chairman Ney and Congresswoman 
Waters and Mr. Jones. My name is Arturo Ybarra, and I'm the 
Executive Director of the Watt Century Latino Organization. 
Watt Century Latino is the only Latino Multicultural oriented 
in existence in the whole south central area of Los Angeles. We 
have been in existence for the last 12 years. We are currently 
involved in programs to--that go from violence prevention to 
emergency education, homeless prevention and counseling, job 
training and placement.
    And we also have other projects distributing safety car 
seats for needy families in the community. And we are 
concentrated in serving a community that is growing all over 
California, especially in South Central Los Angeles. Latinos 
are now 60 to 65 percent of the total population in South 
Central Los Angeles.
    Watts Latinos are close to 70 percent of the population. 
And unfortunately, there is a total lack of infrastructure to 
channel services and resources to these communities. A public 
official mentioned earlier that many people in our communities 
are reluctant to deal with government programs because--because 
of the stress of government, and it's very much true within the 
Latino community or the immigrant community.
    But whenever there is--there are programs that are 
culturally and--and very sensitive to these sectors, special 
sectors, the--the programs are property market are very 
successful. In 1994, the Watts Century Latino Organization 
insisted they become an action of the Los Angeles Housing 
Department to successfully market a residential loan program in 
Watts.
    Unfortunately, it was only a drop in the bucket because 
despite the success of this type of program, it has never been 
implemented. Watts has a very large old housing stock with many 
senior citizens and many houses that are in urgent need for 
rehab. But never, as I have told you, never again, these are 
residential low interest loan program, has revisited our 
community.
    My organization will be more than happy to help any senior 
or County officials or department in conducting these kinds of 
committee outreach comprehensive and sensitive marketing 
activities to market these rehab loans or even those grants 
that are available to improve facade, if those housing--houses 
are in need of.
    Finally, I would like to suggest to local officials to--
that are in charge of distributing the CDBG funds, to get in 
touch with my organization. We will be more than happy to 
coordinate the development of a kind of strategy to facilitate 
access for available funds for rehandle grants improvements and 
other community development programs especially for monolingual 
Spanish-speaking and immigrants.
    Chairman Ney. Thank you. Just--I really don't have a 
question. I want to thank you for your testimony, and you know, 
it helps to acknowledge whether you're supporting CDBG or not.
    Just a couple of, I guess, points: One, for Ms. Branch, any 
questions, and we have for the record your testimony now; but 
other questions you want--you would want asked, and it seems 
you have probably a few people that have been there from two 
years to today through the home situation.
    I think it's good to pose the questions of what happened, 
because if there's going to be oversight and HUD is going to be 
involved in an oversight sense, whether it's here or where I 
live or whatever state, we've got to ask questions of--of what 
went wrong in order to find the ability to make sure things go 
right. Not just here, anywhere in the country.
    So any other questions you'd have, I think it--it kind of 
interesting to me that something just hasn't been answered. 
They always elicit testimony, and then I kind of clear and then 
confused. That happens to me quite a lot wherever it is. But 
anyway, I thought I deserved that.

  STATEMENT OF CHERYL BRANCH, ASSOCIATE DIRECTOR, LOS ANGELES 
                     METROPOLITAN CHURCHES

    Ms. Branch. I think you understand how we feel. It's just 
the most frustrating for me to be in a process where they say 
the goal is to have community participation, and then we're not 
there. But I think in addition to asking for a breakdown, ask 
Mr. Sausedo and the community development department, Mr. 
Graves, to provide for you a breakdown of the so-called 9 
percent jobs that were created.
    We want the census track breakdown or the Zip code. The 
mandate when the bank was created, was there were 2000 criteria 
in order for an individual to get a loan from the bank. Number 
one was that they had to be turned down by a conventional 
banker.
    Number 51--they had to have a business plan. That included 
that 51 percent of the jobs would be given to zone residents. 
They also had to have a business plan that indicated how for 
every $35,000 borrowed, they create a job. No one ever--they 
say that there's no time frame on when this should occur. 
That--that shouldn't--that's a question: Why are we doing it 
that way? Why is there an open ended because the community 
doesn't have an open ended option on balance, you know in terms 
of meeting our needs. So we would like to see--there should be 
a time frame, and actually, our committee has made a question 
for that in 1998, 1999 and 2000 that borrowers be given two 
years.
    Some of those things we haven't been able to get any 
feedback. You can ask them: When did they inform the borrowers 
that they had a job creation requirement? I have heard from 
some borrowers and some individuals who've tried to access 
funds or who got funds and their business failed and they 
weren't aware of the job creation requirement when I inquired 
to them from any question. Where is the job?
    They didn't know so we want to know: At loan closing? At 
quarterly report? Disbursement of the first payment? When are 
you telling individuals that they have had job requirement? How 
is the City assisting them in meeting that job requirement? We 
heard Mr. Sausedo did support the community's position in that 
the bank turned to the city's work force development system, 
the ones that used to be JTPA.
    Now, it's one stop, and that that system was not able to 
help them. That's not a response because you're--your mandate, 
the requirement, this is not an option. It's expressly stated 
was to link residents to job creation. So you want--you want 
some real question--you want some real answers as to why did 
none of these things occur, and if they didn't occur in the 
empowerment zone, the committee group has gone to our council 
reps and CDD and asked for that to be addressed in the 
transition plan.
    So the community is attempting to behavior like the other 
key stakeholders. If we were unable to fulfill what is written, 
then we're going to request a reprogram and try to make 
lemonade out of lemons, and the community is making the same 
question, if we were unable to get the jobs that were promised.
    We're asking if you're going to reprogram the 108 monies, 
you must include our response to the job linkage and creation 
piece. I think those would be some key--ask them how are they 
teaching microbusinesses and small businesses to utilize the 
wage tax credits? Is there any technical assistance or capacity 
building apparatus in the City to assist a microlender or a 
small bid owner if they even wanted to take advantage of these 
so-called incentive.
    Chairman Ney. Another real quick observation. It's a matter 
of, I think, communication to you, Mr. Merino. You know of 
this. I don't know that they would do that or they could 
technically, but still an idea of trying to get communication 
out there somehow. I understand that maybe we do look at ways 
to do that, and Mr. Ybarra, one other thing, too, is you might 
be able to find out who you were saying about the crews 
contacting the Latino community, through HUD, I would assume, 
I'll be checking it, of who, in fact, has the hearings, and you 
would then contact them to let them know that you're out there.
    Mr. Ybarra. All right. Well, we have found from City 
agencies and even foundations very hard to invest in emerging 
conditions and organizations. Like Watt Century Organizations. 
I mentioned to you before, we are the only Latino organization 
in an area that has experiment that bring dramatic changes in 
the composition of its population, that brings lots of 
challenges, and some of those challenges and various for 
Latinos are the language barrier. Not knowing how the system 
works, we--we don't know how to process the government 
processes work, you know, and foundations and City agencies 
rarely want to invest or to risk any investment of funds in 
this emerging organizations.
    So if there are no resources for us to learn how to work 
with the system, how we are going to be able to work with the 
system? Something we have to learn, but in order for us to 
learn, we need--we need people with--with the know-how to show 
us where is the way. You know, how can we get access to those 
funds? We have a--a community resource center. You know, we got 
it in 1998 out of a class action suit against a Public Housing 
Authority of the City of Los Angeles due to the institution of 
neglect because of the living conditions for residents in the 
public housing in Watts.
    Out of those $50,000, we bought a liquor store, a former 
liquor store, to convert to a community resource center. The 
government--and we got a $50,000 from this class action suit, 
and we invested it in this community resource center.
    Out of that, we haven't received any--any kind of 
assistance from the government, and this is a very particular 
situation for a recent immigrants and mono English-speaking 
people in Los Angeles and in Watts.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Let me just say thank you to Chairman Ney for coming to Los 
Angeles during his break when he could be in his own district 
or taking vacation as many of our fellows are doing. But I made 
this request to him, and he listened and we have formed a 
bipartisan effort to try and deal with some of the problems of 
housing and rural--and in urban communities and, of course, 
this CDBG Section 108 which turns out to be large and important 
sources of--of funding for our communities.
    So I'd like you to know that I would not be able to do this 
without him, and it's very important that he's here. Mr. 
Chairman, the people that you see before you are extremely 
important for a number of reasons. I'd first like to say to Mr. 
Merino and Mr. Ybarra, thank you for responding on such short 
notice.
    I want you to know that as our Washington, D.C., staffs 
attempt to work to put this together, it is difficult--and what 
normally happens is the--the traditional well-connected 
organizations get here, but the new ones don't often get here. 
And when we discovered what had happened, we were anxious for 
Mr. Ney to hear some new voices about what is and what is not 
happening.
    And you represent that for us, and I'm very appreciative 
for the work that you do. Mr. Merino is an attorney who went 
off to school and came back to work in his community and 
struggle, like he said, starting with $6,000 nonprofit 
donations and fighting the establishment on all of those things 
in order to bring some services to his community. I was 
recently at Mr. Ybarra's to celebrate ``Cinco de Mayo'' and was 
reminded one more time about the struggle of that corner of the 
district and lack of--of resources.
    Now, Ms. Branch is extremely special because not only does 
she understand this game, she is a professional grantsmanship 
person who understands the rules, written and unwritten, of 
this response to request proposal magnes that all these 
nonprofits are caught up trying to access a few dollars. And 
her work is such that she's committed to the community, not 
only in trying to help them access funds, but trying to make 
the establishment do what it's supposed to do and given of her 
time to get the kind of oversight that she was so articulate in 
describing.
    I take her recommendations seriously, and I need to ask you 
just briefly, whether or not the $50 million that you point to 
that need to be erected toward the supplemental zone or the 
zone that was intended under the following insurrection, that's 
the same 50 million that you're talking about that Mr. Graves 
is talking about, you know, they have a plan, they want $50 
million. They said they are going to use that $50 million to do 
the same thing that they would have been doing with--with the 
money from the Section 108, from the Community Development 
Bank. That's what they say. Then the other 4,800 or 46 or so, 
they say that they want some flexibility, I think, with that to 
be able to not only service the zone, but also to service the 
old Section 108 identified areas in the City. I'm a little bit 
skeptical of that. Are you all on the same track? Are you 
talking about the same thing?
    Ms. Branch. We're talking about the same funding, the same 
50 million, yes. The same total 46, yes. We're talking about 
the same money, yes. But we're not talking about the same uses. 
We would support the city's desire to spend some of the 108 
funding in low to mod census tracks outside of the zone. We 
support some of that because we understand why.
    Ms. Waters. Okay.
    Ms. Branch. We understand why; however, we will need that 
of that--not with that proposal there should be at least 50 
million earmarked to continue the job linkage and creation for 
lending activity that occurs with whatever's remaining.
    Ms. Waters. Now, that's what he claims they want to do with 
that 50 million, that first 50 million request. That's what 
he's----
    Ms. Branch. That's not true. I didn't read that, and I do 
have a copy of the city's transition plans because it comes to 
my committee for approval. As of last Thursday, it wasn't in my 
board meeting, and I raised in the board meeting there.
    Today what I heard, the City wants to use 50 million to 
continue lending activities with a broader CDBG use. That's 
what I heard today.
    Ms. Waters. Ah.
    Ms. Branch. I did not hear that they want to use that money 
to focus on linking residents to job opportunities as a result 
of lending from the full portfolio.
    Ms. Waters. Okay.
    Ms. Branch. I think that's worked in part.
    Ms. Waters. All right. Well, that's very good. And let me 
suggest to you Miss Branch. You know, they very timely and, you 
know, as our maker would have it, we're just at the right point 
in time to catch the transition plan before it is given to HUD 
by September.
    And we may be at the right point in time to pull the 
community together to have our own hearings and bring everybody 
out and lay this plan out so that we can influence what happens 
with it. I am committed to the prop signatures that that money 
was intended to be spent in a certain way, and we can't see it 
distributed away with some other wishes by the city, so I'm so 
glad that you're here. Thank you.
    Miss Gay, I want to thank you, and I'd like you to know 
that we are focused on predatory lending. As a matter of fact, 
as you know, we've had a number of pieces of legislation, and 
there's more legislation that is coming forth; and we've got to 
try and find a way to make this a bipartisan effort so that we 
can get something real. I don't want to be in a fight with my 
colleagues about whether or not we have a bill that simply puts 
some window dressing on this very, very terrible problem.
    Let me just say this to you: And a lot of people don't 
understand it, I am so outraged with the predatory lending 
practices of our banks and our financial institutions that I do 
not allow them to be sanitized for donations to the community.
    As a matter of fact, I resent what I call the fifty cents 
to the Boy Scouts, in an effort to get CRA credits, and at the 
same time, they are taking somebody's grandmother's house. So 
what I--and one of the things I want to work with the housing 
organizations and--and talk about is getting tougher.
    Because what they do, they come to you all, and so many 
different ways, and they come to support something or they'll 
be at the annual dinner or they will come with us to help paint 
a house once a year and the bank get their name all over the 
house; and I don't do that stuff.
    But what I want to do with the housing groups is, I want to 
get tougher on the banks and not let them buy off with this 
shell game so that we can force them to do better from, you 
know, whatever we're attempting to do with predatory lending.
    So I thank you for being here. I know that--I will tell you 
the nonprofits that you talk about are doing an extraordinary 
job in building capacity. From my own view of things in the 
past ten years or so, all of that housing that we have, it's 
because of these nonprofits who learn the game and build 
capacity and went out there and did it.
    Now, you got to stop building so much single homes and 
build some more multi-family, for just poor people. I respect 
that. They're not here today. You're here. I'm speaking for 
them. But we know them all. We know who all the players are. 
And they--we--we respect the work that's done, and when I ride 
through my district and I see some of that housing, I'm very 
thankful for it. So we're glad that you're here.
    Again, thank all of you for coming today, and that 
concludes my comments.
    Chairman Ney. I want to thank the ranking member, my boss 
from Ohio, the ranking member of Massachusets, and my name's 
Bob Ney. I chair the subcommittee. Our ranking member's Maxine 
Waters. I want to thank Congresswoman Waters for having us 
here. This is the first hearing of the 108th--first field 
hearing. That's right. I've got to say we've had 11--we've had 
more activity, both of us, in--and I think in recent history, 
we've had 11 hearings within the Capital. This is the first 
outside, and so--so happy to be here.
    Ms. Waters. He hasn't even been in his own district to a 
hearing. Give him a clap.
    Chairman Ney. I want to thank Congresswoman Waters, not how 
you voted to 2:30 in the morning last week and a long flight 
here, and obviously she could be doing also with her time take 
a little bit of breather. We're doing a hearing tomorrow. It's 
wonderful being here in sunny good weather California. Thank 
you.
    Ms. Waters. Thank you all so very much.
    [Whereupon, at 3:15 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                             June 30, 2003

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