[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
MOVING THE CDBG PROGRAM FORWARD: A LOOK AT THE ADMINISTRATION'S REFORM 
                  PROPOSAL, WHERE DO WE GO FROM HERE?

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON FEDERALISM
                             AND THE CENSUS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 27, 2006

                               __________

                           Serial No. 109-222

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                      http://www.house.gov/reform

                                 ______

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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
JON C. PORTER, Nevada                C.A. DUTCH RUPPERSBERGER, Maryland
KENNY MARCHANT, Texas                BRIAN HIGGINS, New York
LYNN A. WESTMORELAND, Georgia        ELEANOR HOLMES NORTON, District of 
PATRICK T. McHENRY, North Carolina       Columbia
CHARLES W. DENT, Pennsylvania                    ------
VIRGINIA FOXX, North Carolina        BERNARD SANDERS, Vermont 
JEAN SCHMIDT, Ohio                       (Independent)
------ ------

                      David Marin, Staff Director
                Lawrence Halloran, Deputy Staff Director
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

               Subcommittee on Federalism and the Census

                   MICHAEL R. TURNER, Ohio, Chairman
CHARLES W. DENT, Pennsylvania        WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       PAUL E. KANJORSKI, Pennsylvania
VIRGINIA FOXX, North Carolina        CAROLYN B. MALONEY, New York
------ ------

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                     John Cuaderes, Staff Director
                       Shannon Weinberg, Counsel
                         Juliana French, Clerk
            Adam Bordes, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 27, 2006....................................     1
Statement of:
    Patenaude, Pamela Hughes, Assistant Secretary, Office of 
      Community Planning and Development, U.S. Department of 
      Housing and Urban Development; Stanley J. Czerwinski, 
      Director, Intergovernmental Relations, Strategic Issues, 
      U.S. Government Accountability Office; and Michael 
      Springer, Assistant Director, Strategic Issues, U.S. 
      Government Accountability Office...........................     7
        Czerwinski, Stanley J....................................    14
        Patenaude, Pamela Hughes.................................     7
Letters, statements, etc., submitted for the record by:
    Clay, Hon. Wm. Lacy, a Representative in Congress from the 
      State of Missouri, prepared statement of...................    30
    Czerwinski, Stanley J., Director, Intergovernmental 
      Relations, Strategic Issues, U.S. Government Accountability 
      Office, prepared statement of..............................    16
    Patenaude, Pamela Hughes, Assistant Secretary, Office of 
      Community Planning and Development, U.S. Department of 
      Housing and Urban Development, prepared statement of.......     9
    Turner, Hon. Michael R., a Representative in Congress from 
      the State of Ohio, prepared statement of...................     4


MOVING THE CDBG PROGRAM FORWARD: A LOOK AT THE ADMINISTRATION'S REFORM 
                  PROPOSAL, WHERE DO WE GO FROM HERE?

                              ----------                              


                         TUESDAY, JUNE 27, 2006

                  House of Representatives,
         Subcommittee on Federalism and the Census,
                            Committee on Government Reform,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m., in room 
2154, Rayburn House Office Building, Hon. Michael R. Turner 
(chairman of the subcommittee) presiding.
    Present: Representatives Turner, Clay, Dent, and Foxx.
    Staff present: John Cuaderes, staff director; Shannon 
Weinberg, counsel; Juliana French, clerk; Adam Bordes, minority 
professional staff member; and Jean Gosa, minority assistant 
clerk.
    Mr. Turner. Good morning. We will call the hearing of the 
Subcommittee on Federalism and the Census to order. We welcome 
you to the Subcommittee on federalism and the Census oversight 
hearing entitled, ``Moving the CDBG Program Forward: A Look at 
the Administration's Reform Proposal, Where Do We Go From 
Here?'' This is a followup to the subcommittee's series of 
hearings held regarding the Community Development Block Grant 
[CDBG], program and our committee report on the hearings and 
the program.
    The Community Development Block Grant program [CDBG], is 
one of the largest Federal direct block grant programs in 
existence. State and local governments use CDBG grant moneys to 
fund various housing, community development, neighborhood 
revitalization, economic development, and public service 
provision projects. For over 30 years, the CDBG program has 
been a critical tool in the arsenal of cities to help create 
livable communities for individuals and families. Without 
question, the program provides vital funds for addressing 
poverty as well as community development needs, from 
eradicating blight to providing building infrastructure.
    While CDBG is a valuable tool that enables States and local 
governments to accomplish many of the objectives outlined in 
the original authorization, the program exhibits several 
problems that require remedy. Since 1978, the factors used in 
calculating poverty and community development need have 
remained constant while the demographic compositions of the 
Nation have changed dramatically. In particular, the number of 
entitlement communities has grown.
    In fiscal year 2004, there were more than 1,100 designated 
entitlement communities. More than 250 new entitlement 
communities were certified since 1993 alone as compared to only 
128 new entitlement community designations between 1982 and 
1993. And while the number of communities sharing the 
entitlement portion of CDBG funds continues to grow, the 
overall funding of this program has not kept pace.
    Thus, a larger portion of the population is sharing a 
relatively static portion of CDBG funds, resulting in smaller 
per capita grants per jurisdiction. At the same time, the 
number of non-entitlement communities grows smaller, 
effectively increasing their share of the 30 percent portion of 
CDBG.
    Additional questions of fundamental fairness have arisen in 
recent years. First, there are instances of ``richer'' 
communities receiving higher per capita awards than ``poorer'' 
communities. Second, similarly situated communities often get 
disparate per capita awards.
    The subcommittee held five hearings in 2005 examining the 
CDBG program. Those hearings culminated in an extensive report, 
which was unanimously voted out of the full committee in 
December. The report contained numerous findings on the 
effectiveness of the program and recommendations for improved 
fairness, efficiency, efficacy, and program administration.
    These recommendations were formed with significant 
government partner and stakeholder input. In particular, the 
report focused on the growing inequity of the grant formula 
over time, the subjective nature of the needs index, and the 
apparent lack of grantee performance measures and related 
enforcement capability.
    In another attempt to address some of these issues, the 
administration proposed legislation to reform the CDBG program. 
This proposal, the Community Development Block Grant Reform Act 
of 2006, chiefly addresses three areas: the grant formula, 
performance measures, and incentives for quality community 
development.
    First, the act eliminates the two dualities of the grant 
formula. Currently, grant funds are disbursed to entitlement 
and non-entitlement communities based on two formulas. By law, 
the collective pot of CDBG funds must be split between the 
entitlement and non-entitlement communities 70 percent to 30 
percent. Under the CDBG Reform Act, all communities would be 
treated as ``formula grantees'' rather than entitlement and 
non-entitlement communities with separate grant allocation 
calculations.
    Second, the act directs the Secretary to establish new 
performance measures and grantee accountability standards. The 
act specifies that State grantees must submit for approval a 
housing affordability strategy. All other grantees must submit 
a ``Performance Plan,'' which must include specific performance 
measure objectives.
    The act also directs the Secretary to perform periodic 
reviews of grantee activity and use of funds. If the Secretary 
finds grantee performance inadequate, the Secretary may reduce 
or limit block grant assistance.
    Third, the act authorizes $200 million for a new grant 
program: the Challenge Grant Fund. The Challenge Grant Fund 
would reward grantees with additional funds to be used ``in 
neighborhood revitalization strategy areas as a targeted 
strategy for activities eligible under this title that expand 
economic opportunities.'' A grantee must demonstrate 
``measurable progress'' toward certain goals using CDBG funds. 
Eligible entities will be ranked on their performance and funds 
awarded accordingly.
    We commend the administration for recognizing that CDBG 
would be most effective remaining at HUD. We also applaud the 
administration's recognition that, while an important and 
beneficial program, there is room for improvement within the 
CDBG program.
    At the same time, we are concerned that formula reform is 
the greatest and most complex of the reform challenges and 
cannot be undertaken lightly. Additionally, there are a number 
of non-controversial reforms identified in this committee's 
CDBG Report that were not mentioned in the administration's 
reform proposal. We are here today to explore the 
administration's reform proposal in depth. We hope to discover 
more about the decisionmaking process and the reasoning behind 
the choices made in crafting the reform proposal.
    To help us with these questions today, we have witnesses 
from both HUD and GAO. We welcome the Honorable Pamela Hughes 
Patenaude, Assistant Secretary of the Office of Community 
Planning and Development at the U.S. Department of Housing and 
Urban Development; Stanley J. Czerwinski, Director of 
Intergovernmental Relations for Strategic Issues at the U.S. 
Government Accountability Office; and Michael Springer, 
Assistant Director of Strategic Issues at the U.S. Government 
Accountability Office.
    I look forward to your expert testimony and I thank you all 
for your time. I believe Mr. Clay has an opening statement 
which we can give him an opportunity to provide us as the 
hearing progresses.
    [The prepared statement of Hon. Michael R. Turner follows:]

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    Mr. Turner. We will begin with our witnesses. As it is the 
policy of this committee, we do swear in all of our witnesses. 
I would ask if you would please stand and raise your right 
hands.
    [Witnesses sworn.]
    Mr. Turner. Please note that all the witnesses have 
responded in the affirmative by saying I do. And we note that 
two additional witnesses from HUD have also been sworn in who 
have not been identified in our list but who might be called on 
by the Secretary.
    We will now start with the witnesses. Each witness has 
kindly prepared written testimony which will be included in the 
record of this hearing. Each witness has also prepared an oral 
statement summarizing their written testimony.
    Witnesses will notice there is a timer with a light on the 
witness table. In order to be sensitive to everyone's time, we 
ask that witnesses cooperate with us in adhering to the 5-
minute time allowance for their oral presentation. The green 
light indicates that you should begin your remarks and the red 
light indicates that your time has expired. The yellow light 
indicates that you have 1 minute to conclude, and we will 
follow that with a question and answer period.
    We begin with the Honorable Pamela Hughes Patenaude.

  STATEMENTS OF PAMELA HUGHES PATENAUDE, ASSISTANT SECRETARY, 
 OFFICE OF COMMUNITY PLANNING AND DEVELOPMENT, U.S. DEPARTMENT 
   OF HOUSING AND URBAN DEVELOPMENT; STANLEY J. CZERWINSKI, 
 DIRECTOR, INTERGOVERNMENTAL RELATIONS, STRATEGIC ISSUES, U.S. 
    GOVERNMENT ACCOUNTABILITY OFFICE; AND MICHAEL SPRINGER, 
     ASSISTANT DIRECTOR, STRATEGIC ISSUES, U.S. GOVERNMENT 
                     ACCOUNTABILITY OFFICE

              STATEMENT OF PAMELA HUGHES PATENAUDE

    Ms. Patenaude. Thank you, Mr. Chairman. I am pleased to be 
here today on behalf of Secretary Jackson to discuss the 
administration's proposal to reform the Community Development 
Block Grant program.
    The President's fiscal year 2007 budget retains and 
consolidates the CDBG program at HUD. We have proposed the 
reform because the program's intended purpose to the Nation's 
neediest communities has decreased over time. Quite simply, the 
current formula that allocates billions of dollars is no longer 
as fair as it used to be.
    Over the past three decades, demographic and socioeconomic 
changes, development patterns and other factors have created 
significant distortions in the distribution of CDBG funds. 
There has been a steady erosion in the ability of the formula 
to target funding to places with the greatest needs.
    The CDBG formula has been untouched since the 1970's. 
Reform is also necessary because HUD must be able to hold 
grantees accountable for performance and provide incentives to 
maximize the impact of these limited and valuable funds. To 
address these issues, the administration proposes the CDBG 
Reform Act of 2006. The three main elements of the act are 
formula reform, the introduction of a challenge grant and 
enhanced performance measurement requirements.
    To explain further, Mr. Chairman, I call your attention to 
the first chart displayed on the screen. Chart One illustrates 
the current formula. These vertical jagged lines represent the 
1,100 entitlement communities and their per capita grant. The 
solid line from the lower left to the upper right is the 
measuring stick that represents the community development needs 
index.
    The least needy communities are shown on the left and the 
ones with the most needs on the right. As you can see on the 
right, under the current formula, many high need communities 
are receiving amounts far below their needs index. The biggest 
problem with the current formula is that grantees with similar 
needs are receiving significantly different per capita amounts. 
Based on the needs index, these grantees should be receiving 
roughly the same per capital amount.
    Next slide, please. Chart Two shows a more equitable 
distribution of the Community Development Block Grant funds 
under the new or proposed formula. It demonstrates the ability 
of the new formula to more fairly target funds to communities 
with greater needs.
    Next slide, please. And finally, Chart Three provides an 
overlay of the current formula with the proposed formula to 
demonstrate how we intend to allocate grants in a way that more 
fairly ensures funding to places that need it most.
    Grantees with similar need profiles will receive a more 
equitable amount per capital and most importantly, the proposed 
formula will ensure funding to the most needy communities. The 
second element of the CDBG Reform Act of 2006 is the 
introduction of a $200 million competitive CDBG challenge 
grant. This fund would give communities the opportunity to 
compete for additional funding to carry out economic 
development revitalization in distressed neighborhoods.
    In order to be considered for the challenge grant, 
distressed entitlement communities are required to have both a 
strategy and a track record of concentrating investment in 
distressed neighborhoods. Communities are selected based on 
objective criteria, including the extent to which they target 
their assistance to distressed neighborhoods and expand 
economic opportunities for lower income households. HUD will 
award challenge grants to communities that achieve the greatest 
results in their neighborhood revitalization strategies.
    The third element of CDBG reform is to strengthen 
performance measurement requirements to improve the 
effectiveness and viability of the program. HUD is currently 
implementing a new framework that clearly establishes 
measurable goals. The CDBG Reform Act will give HUD the 
authority to hold grantees accountable.
    CDBG has helped communities across the Nation address a 
variety of community and economic development needs. Reforms 
are necessary to ensure the program's continued ability to 
improve the lives of low and moderate income Americans.
    Thank you, Mr. Chairman, for the opportunity to discuss a 
proposal on CDBG reform.
    [The prepared statement of Ms. Patenaude follows:]

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    Mr. Turner. Mr. Czerwinski.

               STATEMENT OF STANLEY J. CZERWINSKI

    Mr. Czerwinski. Mr. Chairman, Mr. Clay, thank you for the 
opportunity to be here to speak today about the 
administration's reform proposal.
    As you noted, Mr. Chairman, about 30 years of CDBG have 
resulted in many valuable things happening in this country. We 
see communities revitalized, we see living conditions improved. 
The committee's examination today is very timely for several 
reasons. First of all, as you know, we are facing a long-term 
fiscal crisis characterized by growing deficits. Second, as you 
noted, Mr. Chair, the economics and demographics of the country 
have changed significantly since the program began in the 
1970's.
    And third, as you also know, Mr. Chairman, there has been a 
continuous decline in funding for CDBG. For example, today the 
per capita funding of the program is one-quarter what it was at 
its inception. Our view is the best way to save this program is 
to improve its targeting. In that view, Mr. Chairman, the 
administration's proposal is a step in the right direction. 
However, it is not a final step. More needs to be done.
    Today I would like to speak about two things. First of all, 
to give you a quick reaction to the administration's proposal, 
and second, I would like to discuss the work that we are 
undertaking at the subcommittee's request. As you mentioned, 
last month the administration unveiled its latest proposal to 
reform the CDBG program. I will not summarize the proposal, 
because Ms. Patenaude has already done an excellent job of 
that.
    However, what I would like to do is share some 
observations. First of all, the single formula that the 
administration proposes is a significant step forward. It 
represents better targeting. For about 25 years, GAO has been 
noting problems with this area, and this is the kind of problem 
that you noted in your opening statement, Mr. Chairman, with 
sometimes communities that are more well off actually get more 
benefits than those that are less well off.
    The variables in the single formula that the administration 
proposes also represent improvement but they do raise some 
concerns. Most significant is the inclusion of a cost of living 
adjustment. Right now, CDBG is disbursed without regard to how 
expensive it is to live in an area. We support HUD's attempt to 
adjust for cost of living. However, we are concerned with the 
way that HUD goes about it. Because there may be some 
unintended consequences. The proposal that HUD has would take 
the cost of living for a community and compare it to the cost 
of living for its neighbors. By doing such, you run the risk of 
penalizing those communities with poor neighbors while 
rewarding those with rich neighbors. For these reasons, we will 
be evaluating both how the cost of living assessment is going 
to be made and other different measures of the cost of living 
as we do the work for you.
    I would now like to briefly describe the work that we are 
undertaking at the committee's request. There are three primary 
tasks that GAO will be undertaking. First, as I mentioned, an 
alternative measure of need. Second is looking at the 
feasibility of measuring capacity of local communities. Right 
now, as you know, CDBG is allocated according to need only. It 
does not take into account the capacity of the communities. 
This can have some distorting effects.
    For example, those communities that have a strong local 
capacity may be able to address some of their needs on their 
own, while those with weaker capacity may have a greater need 
for Federal help, and the current formula does not do that.
    Finally, as you requested, what we will come up with are 
options on the various formula decisions the committee will 
face. As you requested, we will not be making recommendations, 
because frankly, that is the prerogative of Congress. As 
everyone knows, this is a very technically demanding and 
sensitive area. We are just beginning our work. I estimate that 
it will take us about a year to complete that work.
    Before closing, I would like to highlight two things that 
we will be doing in that work. First of all, GAO has contracted 
with the National Academies of Sciences to provide the 
technical expertise, statisticians, economists and those with 
local government experience, i.e., hands-on understanding of 
the program. We expect these expert panels to help us come up 
with ideas on variables to include the formulas, how to 
evaluate those variables, and finally, to study the 
implications of different formula options.
    Second, and this may seem like a small point, but I 
actually think it is an important one, is we will be working 
closely with representatives of State and local recipients. 
They are the ones most affected by the program and any changes 
to the program. We have already begun a dialog with 
representatives, and in fact, I see some of them in the room 
behind me today. We will continue that dialog throughout.
    Finally, HUD has already been very cooperative and very 
helpful with us as we have done our work. I would like to thank 
them for their assistance, and we will continue to engage with 
them as the work progresses.
    In closing, we support the committee's efforts to better 
target CDBG. We stand by to help the committee as it does its 
work. Frankly, this is probably the only way that we will 
preserve a very valuable program, that is by better targeting 
to those who need it the most.
    That concludes my statement, Mr. Chairman. I will be glad 
to respond to questions that you may have.
    [The prepared statement of Mr. Czerwinski follows:]

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    Mr. Turner. Mr. Springer.
    Mr. Springer. I have no testimony.
    Mr. Turner. Well, first, thank you so much for your 
participation today and for your preparation. This has been a 
topic throughout community development groups and 
organizations, as the administration has begun the process of 
identifying CDBG as a program that needs reform. And then the 
discussion as to how that reform should take place.
    As I stated in my opening statement, this act that would 
reform CDBG but would retain it at HUD is certainly an 
improvement over what we faced with the Strengthening America's 
Communities initiative that would have dismantled the CDBG 
program and taken it to Commerce. This is at least a reflection 
of HUD's expertise.
    Obviously, this is just an initial hearing to begin the 
discussion and the review of the act that is proposed. There 
are a number of factors and impacts that will have to be 
reviewed and the communities that are affected will have to 
study its impacts and weigh in as to the benefits or lack of 
benefits or negative impacts of this act.
    So today, it is not our attempt to go exhaustively into 
each of the aspects of this, but we are going to have to start, 
obviously, from some of the discussion that began from the 
administration in targeting CDBG as a reformed program. In our 
first hearing on CDBG reform, it was noted that the 
administration had targeted CDBG as a program that needed 
reform, as a result of the PART analysis that the 
administration undertakes in determining whether or not a 
program is working.
    The PART analysis that was applied to CDBG had this first 
assessment, and the question was under the PART performance 
measurements used by the administration for evaluating 
programs, is this program purpose clear. The sentence that 
follows says, the program does not have a clear and unambiguous 
mission. Both the definition of community development and the 
role CDBG plays in that field are not well defined.
    Ms. Patenaude, the first thing that I would like to start 
with of course is, the administration has now, through HUD, 
proposed this act, in part to address the lack of performance 
that is identified in part. And in looking at the act, I note 
that it would now provide to recipients of funds, to formula 
grantees, performance measures objectives. And the first one 
is, foster a suitable living environment within the community 
for families and individuals.
    Could you please tell me how that is defined within the act 
and how that might fare under a PART analysis?
    Ms. Patenaude. If I may, Mr. Chairman, start with the PART 
analysis. We obviously have taken OMB's recommendation 
seriously, and have been addressing the PART score for more 
than 2 years. We don't completely agree, because we think the 
statute is clear and that the program is not ambiguous.
    The performance measurement framework is an attempt to 
capture the outcomes. Obviously there is a tremendous amount of 
flexibility with the program. There are numerous eligible 
activities with the CDBG program, so these categories were 
designed to capture activities and outcomes that are certainly 
in accordance with the statute and the purpose of the program.
    Mr. Turner. As a measurable outcome, how are you going to 
measure delivering a suitable living environment within the 
community?
    Ms. Patenaude. We will measure indicators in neighborhoods' 
improvements.
    Mr. Turner. Such as?
    Ms. Patenaude. Employment, reduced crime rate, the 
affordability of housing, jobs created.
    Mr. Turner. Turning to the chart that you provided us, you 
have the graph of the needs index and then the entitlement 
grantees and the disparity, if you will, between the different 
amounts that communities receive. In the initial HUD review of 
the grant formulas, there were four different alternative 
formulas that were presented before this committee last year. 
The proposal that we have before us appears to more closely 
relate to alternative four. Would you please give us the 
rationale for choosing that one over the other three?
    Ms. Patenaude. Sure. As you know, Mr. Chairman, there are 
four formulas. The first three are very distinct. The fourth 
one is a modification of the third alternative. The decision 
was made, obviously by Secretary Jackson, to go with 
alternative four. But based on feedback that we received after 
the formula study was sent to the Hill and from stakeholders, 
we modified the definition of poverty. So it is based on 
formula four, and we feel that it best targets the community 
development need in line with what the statute intends for the 
program.
    Mr. Turner. I would like to walk you backward, then, to the 
description of the line that appears on the chart, the line of 
which the grantees are plotted against, where it says low need 
and high need. Could you please describe the factors that go 
into the determination of low need versus high need and how 
that plays, then, into the graph that we see?
    Ms. Patenaude. As I stated in the testimony, the solid line 
is the needs index, or the measuring stick. There were 17 
variables used in the needs index and, Mr. Chairman, are we 
talking about the proposed formula?
    Mr. Turner. We are talking about the 17 needs.
    Ms. Patenaude. The 17 variables?
    Mr. Turner. You are right. You are going right down where I 
am going to ask you questions about. So please continue.
    Ms. Patenaude. The expert on the variables is behind me, 
but I am going to take an attempt to answer your question, sir.
    The 17 variables are grouped, the factors, to represent 
proxies for community development need, such as poverty, 
unemployment, crime rate, and the formula is measured against 
the community needs index.
    Mr. Turner. My understanding is that you did not modify 
that needs index. You are modifying the allocation of the grant 
formula, but not the needs index, which, would you please tell 
me the rationale as to why you did not modify the needs index?
    Ms. Patenaude. As you know, we partnered with the Office of 
Policy Development and Research and the experts in PD&R believe 
that the variables that they used when it comes to the needs 
index are time tested and reliable indicators. And the needs 
index is the same needs index in the old formula as the new 
formula.
    Mr. Turner. Because if you have an assignment as a program 
administrator to fashion a grant formula that more accurately 
approximates need, your outcome is going to be inherently 
biased by what your underlying definition of need is. And so 
the reason why I raise the question is that, without a 
significant review of where the first line is, the need line, 
your process of narrowing the variants between communities and 
the amounts that they receive is going to be biased to a needs 
index that you have not undertaken a review of.
    Ms. Patenaude. As I said, the 17 variables were reviewed, 
so it is obviously a very broad range of community development 
needs in that measuring stick. And the data that was used is 
reliable data that is consistent and available to at least 800 
of the entitlement grantees that we can get consistent data 
from the census.
    Mr. Turner. Mr. Czerwinski, you were nodding. Perhaps you 
can assist in this discussion more eloquently than I have as to 
describing the bias inherent in this process.
    Mr. Czerwinski. Actually, Mr. Chairman, what I was thinking 
about is the nature of your request to us was to do exactly 
that, and that is examine the needs. I think there are two 
themes here, one going back to your original question, the 
quality of the program. This program does match up with 
congressional intent. The issue, though, is how you measure 
performance and how you then allocate funds.
    The second theme is that this is an effort that is going to 
take quite a bit of time. We are in the early stages of it. HUD 
I think is stepping in the right direction, but I would not say 
that the answer is final by any means. What we really need to 
do is really just as you said, to reexamine the needs index, to 
calibrate the various variables and formula for allocating 
funds against that needs index, and then there is a whole 
dialog that has to go on with all the different players and 
then finally, it really is a congressional decision.
    Mr. Turner. Do you think there is a rationale that would 
justify the review of that needs index prior to changing the 
grantee formula, since we would be performing the program to 
conform to a needs index that was previously established?
    Mr. Czerwinski. I would hope so, Mr. Chairman. Because GAO 
has a protocol that when requests come in to us from the 
Congress, we do evaluate whether they are worthy requests. And 
yours came in and we said, oh, this is a really good one to do. 
So yes, I would say there is a rationale.
    Mr. Turner. Great.
    Mr. Patenaude, as you are aware, this subcommittee 
undertook a review of CDBG last year. And the full committee 
passed out a report with various recommendations as to issues 
that should be addressed with CDBG. Could you please tell me to 
what extent HUD took into consideration that bipartisan, 
unanimous committee report prior to delivering the act to 
Congress?
    Ms. Patenaude. Thank you, Mr. Chairman. The CDBG Reform Act 
and the work that went into the act was actually on parallel 
tracks with the committee's work. Obviously we have read the 
committee report and we have taken some of the things into 
consideration. But some of the work had begun before we 
actually saw the report from the committee. And we obviously 
focused a tremendous amount of our energy on the formula.
    Mr. Turner. One of the issues that was raised in the 
hearings that we held on the proposed four formula changes that 
HUD was reviewing was the concept that is adopted in the 
proposed act, looking at the ratio of per capita income between 
a recipient community and their metropolitan area. Could you 
please describe HUD's decision to include that ratio?
    Ms. Patenaude. The fiscal capacity?
    Mr. Turner. Yes.
    Ms. Patenaude. The fiscal capacity adjustment would measure 
a community's per capita income against that of the greater 
metropolitan area, and that is one of the variables that we use 
in the proposed formula.
    Mr. Turner. Why?
    Ms. Patenaude. I would have to defer to Mr. Richardson, Mr. 
Chairman.
    Mr. Turner. Mr. Richardson.
    Mr. Richardson. Thank you, Mr. Chairman.
    Mr. Turner. Please note for the record Mr. Richardson was 
sworn in at the beginning of the hearing.
    Mr. Richardson. This variable accomplishes three things. It 
captures a community's tax base relative to the cost to provide 
services in the area. It tends to address some of the 
inequities caused by the poverty variable, it tends to actually 
deal with some of the cost of living issues that GAO has 
discussed. And third, it significantly increases funding for 
more needy communities over the less needy communities.
    We think that this is a very strong variable. There is past 
research that supports it. David Rusk has done previous work 
that supports this variable. We very much look forward to the 
GAO doing a careful review to see if they have any alternative 
approach.
    Mr. Turner. Could you just describe in the act how it is 
proposed to be utilized, how it applies to a grantee's formula? 
You told me your basis then for including it. Could you please 
tell me now how it works?
    Mr. Richardson. How it works, I am sorry.
    Mr. Turner. No, that is my next question. You answered the 
first one correctly. The second one is, how does that work?
    Mr. Richardson. So, let's take Dayton, for example. 
Dayton's per capita income relative to its metro area is less 
than that of, it is about 70 percent that of the metropolitan 
area. So Dayton's grant would be adjusted, you first do a flat 
allocation using the four variables that we are proposing, the 
poverty variable, the old housing occupied by a poor family, 
the overcrowding variable, and the female head of households 
variable. You make an allocation based on each community's 
proportional share of those variables, using those variables. 
And then you adjust that grant using this per capita 
adjustment.
    So Dayton's grant from after this flat grant would be 
increased 25 percent in this particular case, because the 
maximum that could be increased is 25 percent, and Dayton's 
grant would be increased the maximum amount. Whereas another 
community, Kettering, for example, which has a higher per 
capita income than the metropolitan area, it would have its 
grants reduced.
    Mr. Turner. You mentioned the issue of housing occupied by 
an individual that is in poverty. The previous grant formulas 
took into consideration the age of the housing stock. By 
limiting the element of the age of housing stock to only those 
that are occupied, you have eliminated any recognition of 
communities that have abandoned housing stock.
    Could you please describe to me, my understanding in our 
first hearings on this matter was that HUD's goal was to remove 
from the grantee's calculations housing that was greater in age 
of 50 years that might have been occupied by someone who in 
fact was wealthy. So by then going to limiting the structures 
that have individuals that are in poverty, you are also then 
not recognizing in the available housing stock those properties 
that are just vacant, for which CDBG funds would be targeted.
    Almost any mayor who has been before us will testify of an 
abandoned house that was a source of criminal activity, a 
blighting influence on a community and its desire to remove 
that, either having it renovated and placed in the hands of a 
family so that it can be occupied once again, or removing it 
from the community by demolition and then looking hopefully to 
an in-fill opportunity. The impact on the community and 
community development is clear. In the factors, though, it 
appears that it would not recognize a community's distressed 
nature of abandoned housing.
    Ms. Patenaude. Mr. Chairman, we obviously appreciate the 
impact that abandoned housing has on neighborhoods and 
particularly declining neighborhoods. But we did not have 
available resources that is consistent across the entitlement 
communities on abandoned properties. I know that the Office of 
PD&R is working with the Postal Service to try to develop 
consistent data so that it is possible in the future we would 
be able to measure that. And by substituting, as you said, the 
pre-1940 housing that was distorting the formula, particularly 
in the northeast, by having the poverty household, that is a 
good proxy for declining neighborhoods.
    Mr. Turner. In the midwest, the number of units that are 
abandoned in the inner cities by far exceeds the number of 
families that are in those areas that are wealthy. So the 
desire to count abandoned housing units as a distressed or 
blunting influence factor would be very high on the list of 
communities that are impacted by abandoned housing.
    At this point I am going to turn to Mr. Clay for his 
questions.
    Mr. Clay. Thank you, Mr. Chairman. I would appreciate if I 
could forego my opening statement and use that time as part of 
my questions.
    [The prepared statement of Hon. Wm. Lacy Clay follows:]

    [GRAPHIC] [TIFF OMITTED] T3866.019
    
    [GRAPHIC] [TIFF OMITTED] T3866.020
    
    Mr. Clay. Ms. Patenaude, your proposal would cause a 
dramatic shift of resources between grantees and jurisdiction. 
But it doesn't contain a transitional period for those that 
lose funding. Why was this not included in your proposal?
    Ms. Patenaude. Thank you, Congressman Clay. We acknowledge 
that there will be winners and losers with the redistribution 
under any of the formulas. We have provided for a 1-year 
transition period. And that in the first year, if a community 
is not eligible under the minimum threshold, they will be 
eligible to receive 50 percent of their previous year grant.
    And at the same time, if they are no longer eligible under 
the minimum threshold, they can either join an urban county or 
participate through the State CDBG program.
    Mr. Clay. OK. In that instance, in my home town of St. 
Louis, it is slated to lose 31 percent of its funding under the 
proposed formula, while St. Louis County only gains 4 percent. 
Are there specific circumstances to indicate why St. Louis and 
its surrounding communities are deserving of a 27 percent net 
loss in funding, and do census population figures justify this?
    Ms. Patenaude. Thank you, Congressman. We have used this 
example of Miami, St. Louis and Detroit, all communities with 
similar needs, not identical needs, but certainly similar 
needs. And if you look on the chart, this is an example of 
entitlement communities with similar needs receiving vastly 
different grant amounts. So those would be the jagged lines on 
the chart.
    Currently, St. Louis is receiving $59 per capita, while 
Miami is receiving $22 and Detroit $43. So yes, St. Louis would 
be losing CDBG dollars, but it would bring the formula more in 
line, it would be fairer treatment. There isn't enough money 
gained from the communities with low need to give to the high 
need communities.
    Mr. Clay. OK, well, help me understand now. Have we 
developed a new definition of poverty? Is there a new 
definition that you all are operating under as far as what 
poverty is or what it looks like? That is one of the factors 
that you consider, am I correct?
    Ms. Patenaude. Yes, it is, Congressman. Currently, St. 
Louis is funded under the formula B that measures growth lag, 
poverty and pre-1940 housing. Under the proposed formula, the 
factors that are being used measure the number of persons 
living in poverty, excluding college students. That was a 
distorting factor under the old formula. The number of housing 
units 50 years or older headed by a poverty household, the 
number of female-headed households with children under 18, the 
extent of housing overcrowding, and finally, there is a fiscal 
capacity adjustment.
    Mr. Clay. And that is the new formula, right?
    Ms. Patenaude. Yes, it is, sir.
    Mr. Clay. Well, we fit into all of these categories. I am 
just bewildered of how we lost 31 percent. I mean, and don't 
get me wrong, I want transparency, I want accountability in the 
CDBG program. That is one of the things that St. Louis suffers 
from now. The supporters of CDBG can contest what I am saying, 
but I can take them to St. Louis and show them that St. Louis 
has derived these block grant moneys and has used them for 
other purposes, OK?
    So here is what I need to know. Have you all consulted with 
any other groups, like the National League of Cities or U.S. 
Conference of Mayors? Have you gotten any input from them on 
this proposal?
    Ms. Patenaude. The development of the formula was done, it 
was released in February 2005, and I understand the study took 
more than a year. I do believe that we did listen to our 
stakeholders. We have quarterly meetings with our stakeholders, 
and I am sure that consideration was given to their thoughts 
and ideas.
    Mr. Clay. I have just received a list here that says you 
have the U.S. Conference of Mayors, National Association of 
Counties, National League of Cities, National Association of 
Local Housing, Finance Agency, National Association for County, 
Community and Economic Development, National Community 
Development Association do not support the proposal. And so I 
assume you bounced off----
    Ms. Patenaude. Congressman, I am not aware of them not 
supporting the proposal. I am aware of the opposition to the 
funding level. But we called in all of those stakeholders in 
May when we rolled out the CDBG reform proposal and briefed 
them thoroughly. We have been tracking, obviously, their 
newsletters.
    Mr. Clay. Well, this is a statement to this committee on 
this day that says, we wish to state at the outset that we do 
not, do not support this proposal. Let me go on to Mr. 
Czerwinski. And thank you for your responses.
    Please explain how using metropolitan per capita income in 
the new formula can prove beneficial to higher income 
metropolitan areas? Wouldn't this leave older industrial cities 
at a disadvantage to those with high-tech or finance-based 
economies?
    Mr. Czerwinski. Mr. Clay, if I may start for a second with 
the comment that HUD had about this being a measure of fiscal 
capacity, this may very well be a measure of fiscal capacity, 
it may not be. We will have to see. I am sorry to digress for a 
second, but when I was in junior high, I took a math test. I 
got the answer right, but the teacher marked it down some and 
said, you didn't show how you got there. And I think that is 
part of the issue that when you talk about how we got there, 
that is where your question is going.
    Mr. Clay. Well, let us continue to digress, then--
[laughter]--because when I was in law school, I got the answer 
right, but according to professor, it was wrong. Now, let me 
ask you about capacity. Explain capacity of a community and 
what do you mean by targeting? Tell me what that means in 
layman's terms.
    Mr. Czerwinski. Sure. When we talk about capacity, we are 
looking at the strength of the local government, the tax base, 
its ability to carry out programs. Essentially when you want 
something done by your city or county, do they have the means 
to do it.
    Now, a great example of capacity is found in the Gulf 
Coast. There was capacity there, after Hurricane Katrina, there 
is not capacity.
    Mr. Clay. OK, but now following that train of thought, 
won't this favor communities that are more well off? I mean, in 
the end, won't this formula favor those communities and won't 
they eventually get the lion's share of the block grant money?
    Mr. Czerwinski. Well, the devil is in the details, Mr. 
Clay. And it is a matter of how the variables come together and 
how they are weighted. And HUD's proposal just came out last 
month. We haven't had a chance to go through it. What we will 
do is look at their proposal. We will also look at needs and 
then separate from that capacity and then bring them together. 
It is almost like, to use the analogy of a math problem, you go 
back and you do a proof to see if you come up in the same 
place. At this point, I really can't say where their's will 
come up.
    Now, looking at cost of living, compared to the 
metropolitan cost of living, in isolation, we can say that in 
that instance, it would favor those communities who have richer 
neighbors, because by comparison they will look poorer. But 
beyond that, I can't say.
    Mr. Clay. Now, maybe, just maybe that accomplishes what I 
would like to see, is that the money is actually targeted to 
those neighborhoods that actually need the economic infusion, 
that actually need the block grant money to rebuild, like you 
said, houses more than 50 years old. I can take you to St. 
Louis and show you entire neighborhoods like that, where there 
are plenty of vacant lots and few houses standing that are in 
good shape. Even business districts, that were once thriving, 
that are now dilapidated.
    Now, will this new formula, this new proposal help address 
that, so that my city will not be able to take that money and 
put it into downtown, thriving business communities, or even 
well to do neighborhoods, instead of using it where it really 
needs to be used? Will this address that in any way?
    Mr. Czerwinski. I don't know whether my answer will satisfy 
you, because we don't know. What we do know is that HUD shares 
your goal and ours to effectively target where the funds go. 
What we don't know is exactly how this works.
    And getting back to the other point that you made about 
those who are at the local level living with this, that the 
League of Cities, the Conference of Mayors, the NGA, etc., 
those stakeholders were the starting point for our work. We 
were just beginning. But that was the very first thing that we 
did, we called all those people into a room and said, ``OK, we 
are going to be looking at that, at your request. What kinds of 
things should we be thinking about?''
    We didn't guarantee that we would do what they want, we 
didn't guarantee that we would come out with options that they 
favor. But we view them as a starting point, because ultimately 
they are the end point also.
    Mr. Clay. And as the process continues, I think that there 
will be a real need to put some strings on this money with 
local communities to ensure that the money goes to those 
targeted communities that actually need it.
    Mr. Chairman, I will stop there. I guess we will get 
another round. But thank you very much, and thank you both for 
your responses.
    Mr. Turner. Mr. Dent.
    Mr. Dent. Thanks, Mr. Chairman. Thanks for holding this 
hearing, too.
    Questions on this formula change, and I am looking at my 
own district in Pennsylvania. Clearly we don't do very well. 
The Commonwealth of Pennsylvania's numbers, other than 
Philadelphia, everybody seems to take a cut. I represent the 
cities of Allentown, Bethlehem and Easton. Allentown does get a 
slight increase, which is a larger city than Bethlehem and 
Easton. But Bethlehem and Easton both receive significant 
reductions, according to this.
    I am just trying to understand the methodology of this 
formula. Can you help me out with this? Allentown, for example, 
I guess does well on the needs index here and receives a 9 
percent increase. But there is another community in 
Pennsylvania, the city of Chester, that has a 10 on the needs 
index but receives a 4 percent reduction.
    Can you just explain to me what went into this thinking?
    Mr. Richardson. This is the most difficult thing about 
formula reform. It is the very needy communities that might 
have a reduction in funding because of the proposed change. The 
way to look at this is not, I know the first way to look, of 
course, is to see how your community fares, if it is reduced or 
increased. But the way to think about it in fairness is to look 
at your community's per capita grant relative to the per capita 
grants that will go to other communities you see as having 
similar needs as those jurisdictions.
    Pennsylvania was developed some time ago, it has had a lot 
of population loss. A lot of the communities in Pennsylvania 
have done well because of the pre-1940 housing in growth lag 
variables, whereas some communities with very high poverty have 
not done well, they have been formulaic communities and had 
very small grants.
    To bring some parity to the grant amounts----
    Mr. Dent. So you are saying because of population declines 
in some cities, that has essentially increased the per capita 
grants to those communities until this change?
    Mr. Richardson. That is right. The loss of population is a 
good measure of need in a lot of communities. But the variable 
that is used in the current formula is a very sensitive 
variable, so it only takes very little difference between 
communities in terms of their population loss to cause very 
large differences in grant funds. I think a good example would 
be to compare Pittsburgh and Philadelphia.
    Mr. Dent. Yes, Pittsburgh has had substantial decline, as 
has Philadelphia.
    Mr. Richardson. Absolutely.
    Mr. Dent. But Philadelphia increases. They have both had 
substantial population declines.
    Mr. Richardson. That is right. Let me go into that. 
Currently, Philadelphia gets $36 per capita and currently 
Pittsburgh gets a very different grant amount. They are right 
next to each other, handily enough on that chart.
    Mr. Dent. Yes. Philadelphia receives a 10 percent increase.
    Mr. Richardson. So Philadelphia's grant would go up to 
about $40 per capita, which is closer to how much Detroit gets. 
And Pittsburgh's grant would fall to $30 per capita, which is 
closer to how much New York or Chicago gets.
    Mr. Dent. I guess the question, then, is this formula 
overall geared more beneficially toward States with population 
increases? Because I am looking at the overall list on page--I 
don't know what page, it is Roman numerals, 23, I guess, XXIII. 
Alternative 4, table ES 3, if I am looking at alternative 4, 
which I think is a close comparison to what you have presented 
here today, it just shows that the southeastern portion of the 
United States and the southwestern portion of the United States 
overall seem to receive substantial increases and it is safe to 
say those are areas of population increase in the recent years. 
And in Puerto Rico, too, and I can't explain that.
    But the bottom line is it looks like the midwest and the 
mid-Atlantic region where I am, and certainly New York and New 
England all receive substantial reductions overall. Is it fair 
to say it is because of the population growth in the south and 
the west? That is what drives this funding formula?
    Ms. Patenaude. If I may, Congressman, just answer. We made 
a conscious choice on this new formula to target the 
communities in decline. I do believe the northeast benefited in 
some instances, perhaps unfairly because of the pre-1940 
housing in wealthier communities. So the new formula definitely 
favors declining communities. And as Todd said, it is all 
relative to need. So comparing a community with similar needs.
    Mr. Richardson. If I can add to that, on average, 
communities that have, in the southwest, that have higher 
poverty rates, that in the past, got fairly small grants under 
the formula, their grants do go up, and that is why you see the 
increase in the southern region of the country. And on average, 
communities with population loss and older housing in decline 
do see their grants decline.
    But overall, the communities in decline still receive 
substantially larger grants than the communities that have the 
high poverty and population growth. I think if we, actually, 
chart two is a little clearer about this. Could you put chart 
two up, please?
    So the needs index doesn't distinguish well between 
communities in decline versus communities that have the high 
poverty. So if we had targeted exactly to the needs index the 
lines would be much closer to that solid line. But instead, by 
having the formula proposal target more closely to communities 
in decline, you still see this difference between, so you see 
some communities well above the line and some communities below 
the line. And those reflect that difference between communities 
in decline versus communities with the higher poverty. There is 
still a difference, but that gap is narrowed from what that 
first chart showed about, so that you went from gaps that were 
quite large to gaps that were smaller. But there is still a 
favoring of communities in decline over communities with high 
poverty.
    Mr. Dent. I am looking at the city of Easton, PA. I am 
trying to understand how they receive, it is a city that is 
landlocked, it has a lot of challenges to say the least. But it 
receives a 30 percent reduction. It is not a big city, but an 
entitlement community, and I just see a $294,000 reduction. I 
guess the per capita number is still high, but it just strikes 
me as a significant reduction for that community with that type 
of need. I see what you are attempting to do here. But overall, 
it just doesn't work very well where I live.
    Can you just give me a comment on Easton, why they would 
have seen such a dramatic decline? Is it because the population 
has been pretty stagnant, maybe a slight decrease over the last 
20 years, but not a huge decline?
    Mr. Richardson. Easton certainly is a community with 
distress, it has 12 percent poverty. Its allocation would be on 
par with other communities of similar types of distress, like 
Richmond, Virginia or Toledo, OH. So that is what the 
allocation is doing, it is adjusting the grants to be similar 
for communities of similar need. It is obviously difficult for 
a community that does have high needs to have a reduction in 
funding, absolutely.
    Mr. Dent. All right, then, well, I have no further 
questions. I will yield back. Thank you.
    Mr. Turner. Mr. Richardson, I am going to go back to the 
per capita income comparisons. You described Dayton as an 
example. In my first question, with respect to the per capita 
income ratio, I asked you, actually Ms. Patenaude deferred to 
you on the issue of why you would include the ratios. Your 
answer was because it would take into consideration the tax 
base to cost of services and inequities in the cost of living.
    Now, the provision of the act that the administration has 
been put forward only does the comparison for the ratio of per 
capita income of the metropolitan area to the per capita income 
of the formula grantee within the metropolitan area. Then with 
the amount that you indicated of the 25 percent cap for 
adjustment.
    There is no element within that, or within this act that I 
see, and I am asking you to point it out if it is there, of any 
indication with respect to the elements that you told me as the 
why this is here, there is no provision that relates to 
measuring the tax base of cost of services. There is no element 
that relates to cost of living, so there is nothing that would 
relate to the inequities of cost of living.
    For tax base, for example, some communities are real estate 
tax dependent. Some communities are income tax dependent. To 
take into consideration tax base, you would actually have to 
have some element that goes to the revenue generation of the 
community and the cost of services. Again, you would have to go 
to some of the differences in each of the community as to those 
costs.
    Cost of living, cost of services, of course are two 
different things. You said inequities of cost of living. I 
don't see anything in here that relates to cost of living. So 
could you please tell me how it is that by taking into 
consideration only the ratio per capita income that you expect 
to capture tax base to cost of services and inequities of cost 
of living.
    Mr. Richardson. You have certainly hit on one of the most 
challenging things about trying to deal with fiscal capacity. I 
think GAO will address this, too. Per capita income in itself 
tends to be, well, I will start off by saying there aren't very 
many good variables that allow you to capture a community's 
taxing ability. But per capita income, a measure of income, a 
community with higher incomes tends to have more ability to tax 
than a community with lower incomes. I think we can probably 
agree on that.
    Mr. Turner. If they are income tax based.
    Mr. Richardson. How the community chooses to tax itself is 
up to that community. But if you find a community that has 
higher incomes, that tends to have higher property values, so 
if you are land based, that would lead to a higher taxing 
authority.
    In any case, the concept here on the two fronts of fiscal 
capacity and also on cost of living are as follows. So for 
fiscal capacity, the concept is that per capita income for a 
metro area is a rough measure of what it costs to live in the 
area. Places with higher incomes tend to have higher costs of 
living.
    If you are a poorer community in an area with a high cost 
of living, you are going to have a harder time raising revenues 
to be able to buy the services in that area, because the 
service is more expensive. So you would have your grant 
increased to reflect that.
    Mr. Turner. Mr. Richardson, would you stop for a second? 
You are making several statements which are assumptions of 
which you do not have, from the information that we had 
presented to us, and the information that GAO reviewed when we 
had this hearing last time, that your data does not prove. 
Would you admit that per capita income does not, as a measuring 
factor, deliver statistical data based upon tax base to cost of 
living ratio, or inequities of cost of living?
    Mr. Richardson. I am sorry, you would like me to confirm 
what comment?
    Mr. Turner. You are stating several assumptions as to how 
it gets you close enough to your purposes and goals of 
measuring tax base to cost of services and inequities of cost 
of living. But they do not. And I am asking you to acknowledge 
that measuring per capita income as a ratio does not measure 
tax base to cost of services or inequities of cost of living.
    Mr. Richardson. I disagree.
    Mr. Turner. OK. Well, the GAO and the other studies that we 
have had before this committee says that it does not, and you 
have been stating several assumptions. Could you please tell us 
what data that you have that shows that, how per capita income 
measures tax base to cost of services or inequities of cost of 
living?
    Mr. Richardson. David Rusk, Cities Without Suburbs, uses 
this measure extensively and looks at that issue. And so I 
would have to refer you to that research.
    In terms of what the GAO is looking for, I look forward to 
the GAO reviewing this variable and seeing if it supports the 
position that we have for the analysis, or if it supports the 
position that you are stating. I think that would be an 
interesting analysis.
    Mr. Turner. Well, the committee is familiar with the Rusk 
studies and his information and data. And what I would like you 
to do is take some time to supplement your answer after this 
hearing, indicating how you believe that per capita income 
ratio measures a tax base of a community or how it measures 
cost of services in a community, or how it relates to cost of 
living in a community.
    Mr. Richardson. Absolutely.
    Mr. Turner. Along with Mr. Dent, I would like to 
acknowledge that under this formula, Dayton, OH, my community, 
would be slated to lose 16 percent of its overall funding in 
CDBG. That 16 percent loss is to a community that clearly has 
significant economic distress factors and significant community 
development factors of abandoned housing and community 
development needs, which would lend me to question the basis of 
which this formula is to improve targeting in that, as with Mr. 
Dent, I can identify several communities in this list that 
appear to receive additional funding that have greater 
financial capacity and perhaps less community development 
stress than one would see in Dayton, OH.
    But in going to the issue of cuts, and Ms. Patenaude, this 
question is for you, in looking at the split in the previous 
funding formula between entitlement communities and non-
entitlement communities, the amount of the pot of funds that 
were available to entitlement communities overall appears to be 
reduced by this proposal. In other words, the total pot of the 
formerly known entitlement communities has available to it is 
reduced. Therefore, those communities that are gaining are 
actually gaining out of a pot that is smaller, and those that 
are losing out of a pot that was already diminished. Is that 
accurate?
    Ms. Patenaude. Thank you, Mr. Chairman. The reform package 
does eliminate the artificial 70-30 split that is statutory 
right now. But the breakdown is actually very close to the 70-
30. And the entitlement communities, the share to entitlement 
communities has been shrinking because of the increase in the 
number of entitlement communities in the last decade. But I 
believe it is still very close to the 70-30.
    Mr. Turner. But even with the 70-30 split, you have taken 
another $200 million out with the competitive grant formula. So 
the overall pot itself is diminished, is that correct?
    Ms. Patenaude. The challenge grant is only available to 
distressed entitlement communities. Communities participating 
through the State program would not be eligible for that, so 
that is still reserved for entitlement communities, and 
communities such as Dayton that target their CDBG dollars to 
distressed communities would have an opportunity to actually 
gain funding with the challenge grant.
    Mr. Turner. Can you go down the list of recommendations 
that came out of this full committee in again, in unanimity on 
a bipartisan basis and the ones that are not addressed at all, 
I will just identify them and move on, and the ones where we 
have a difference of opinion are the ones I want to highlight.
    We first indicated, the full Committee of Government 
Reform, not this subcommittee, indicated that HUD should 
acknowledge that any proposed needs test may be inherently 
subjective by its nature. Therefore the policy implications of 
new or additional needs tests should be fully vetted before 
they are implemented. Ms. Patenaude, you indicated that the 
needs test is not modified in this recommendation, correct?
    Ms. Patenaude. The needs index is the same index, that is 
correct, sir.
    Mr. Turner. The discussion that we had in previous hearings 
concerning the impact of immigration and how that relates to 
impacts on communities, this act does not include any review by 
HUD of the impacts of either legal of illegal, the total 
category of immigration, correct?
    Ms. Patenaude. I believe in the proposed formula that we do 
capture the immigrant growth population.
    Mr. Turner. But there is no other independent data that you 
looked at with respect to the impact of immigrant populations 
on distressed communities?
    Ms. Patenaude. I believe it is considered in one of these 
factors. Todd, do you want to answer?
    Mr. Richardson. I think your question is, have we done 
further review to determine what the impact of immigrant 
populations are on communities?
    Mr. Turner. Correct.
    Mr. Richardson. We haven't done further review. The 
original analysis and the analysis we still have to work from 
is the analysis done by the National Academy of Sciences in 
1997, where they did the analysis on the fiscal impact of 
immigrant populations, which showed a significant impact. The 
communities had a greater cost than they returned in revenue 
generated.
    Mr. Turner. We have already dealt with the issue of the 
income ratio. And the full Committee on Government Reform had a 
different recommendation than the act presents. The next 
category is the vacant and abandoned housing stock. We had a 
recommendation that should be considered as an index factor, 
and abandoned and vacant housing stock, Ms. Patenaude, is not 
included in the act, correct?
    Ms. Patenaude. That is correct, sir, but we are working to 
collect that data.
    Mr. Turner. The initial proposal for, from which this act 
is in part derived, had taken out all single non-elderly 
populations in an attempt to get to student populations. It is 
my understanding that you did correct that in the act itself, 
you did instead exclude only unrelated individuals enrolled in 
college?
    Ms. Patenaude. That is correct, sir.
    Mr. Turner. The one recommendation that we had, obviously, 
was that HUD work in conjunction with GAO. GAO's report is not 
completely finished, so I am assuming that HUD would continue 
its commitment to work with the GAO as its findings are 
available in looking at ways that this act might be able to 
improve?
    Ms. Patenaude. We will fully cooperate with the GAO, Mr. 
Chairman.
    Mr. Turner. One of the recognitions of the need to change 
the grant formula is to look at the fact of the changing 
demographics of communities. The committee had made a 
recommendation that periodic review of the CDBG grant formula 
perhaps should be incorporated in any act reform that would 
cause as a trigger an automatic review. You have chosen not to 
set a time period for periodic review. I am assuming that 
doesn't mean that you are opposed to, on a regular basis, this 
process being reviewed?
    Ms. Patenaude. We did not include it in the legislation, 
but as you know, we have reviewed the formula every 10 years, 
when we have the decennial census data. But I agree that would 
be something that should be considered in the legislation.
    Mr. Turner. We had recommended that if the CDBG formula is 
to be amended, that a phased-in period, to give communities an 
opportunity to modify their processes, because many communities 
have advanced planning for community development, the act, from 
what I understand, has a 2-year phase-in for grantees affected 
by the minimum allocation threshold, those that would be, in 
effect, de-funded, I believe.
    Do you have a consideration for the transition for all 
communities?
    Ms. Patenaude. The communities that would no longer meet 
the threshold?
    Mr. Turner. Yes.
    Ms. Patenaude. Would be eligible to participate either as 
part of an urban county or through the State program. And we 
have a provision that they would be able to receive their grant 
the first year, under the new formula, at 50 percent of the 
previous year grant.
    Mr. Turner. But for communities like Dayton, OH, that under 
this proposal would have a 16 percent reduction in funding, 
there would not be a phase-in. Upon the adoption of the act, 
the funds would be immediately reduced?
    Ms. Patenaude. Cities like Dayton would qualify to 
participate in the challenge grant program.
    Mr. Turner. Yes, they have an opportunity to apply to you 
to receive additional funding. But those funds that they would 
automatically receive under the act, the reduction that you 
have identified, HUD has identified as 16 percent, that would 
happen without a phase-in immediately?
    Ms. Patenaude. That is correct.
    Mr. Turner. We spent some time in this committee looking at 
the issue of eligible activities for the use of funds. This act 
does not address the issue of use of funds. We raised the issue 
of under the current CDBG program, there is no limitation to 
the amount of dollars that a local community can spend on its 
own staff. There certainly is a limitation on administrative 
funding. But on overall funding that a local community 
allocates to staff functions, that there is not a limitation, 
this act does not address the issue of eligible activities, how 
a community spends their funds, correct?
    Ms. Patenaude. That is correct. We did not change or 
suggest a change to the eligible activities, but we certainly 
are open to that discussion.
    Mr. Turner. Can you tell us why you didn't look at the 
issue of eligible activities?
    Ms. Patenaude. The CDBG Reform Act of 2006 focuses on 
performance and results and obviously encourages communities to 
target their dollars and concentrate their dollars. And by 
offering the opportunity to participate in the challenge grant, 
we believe that communities will hopefully do a better job of 
using their resources in a concentrated way.
    We didn't want to take away any flexibility, so that the 
local elected officials can make those decisions based on their 
community development needs. As you know, the three national 
objectives stayed in place as well.
    Mr. Turner. I'll refer to Mr. Clay for questions.
    Mr. Clay. Thank you, Mr. Chairman.
    Ms. Patenaude, I am concerned that newly proposed 
performance measures will become an expensive administrative 
exercise for grantees. Should HUD provide technical assistance 
or supplemental administrative funds for these activities? Is 
HUD capable of reviewing annual performance outcomes and 
assisting in remediation efforts for grantees?
    Ms. Patenaude. Thank you, Congressman. We are currently 
implementing the performance measurement framework. We have 15 
trainings scheduled throughout the country. They are ongoing 
until the end of August, so all of the entitlement and State 
grantees have been invited to participate in this training.
    We also had thorough discussions with all the stakeholders 
when we were developing the performance measurement framework, 
and it certainly is a consensus document. OMB was also part of 
that working group. We acknowledge that IDIS can be cumbersome, 
but we have invested a tremendous amount of time and energy in 
updating the IDIS system. The screens are available right now, 
and the grantees are already inputting performance measures. By 
October we will require it and we believe that 1 year from now 
we will be able to answer that question better. But we do not 
think it will be an additional burden on grantees.
    Mr. Clay. If a grantee fails to meet benchmarks for 
performance, what types of penalties should there be imposed?
    Ms. Patenaude. The act provides for the Secretary of HUD to 
either withhold or reduce CDBG funding if the community does 
not meet the targets that they have set in their performance 
plans.
    Mr. Clay. Thank you very much.
    Mr. Czerwinski, I have two major concerns with the 
inclusion of a new performance measurement requirement. First, 
will communities have appropriate technical assistance from HUD 
to comply with these requirements? And I don't want grantees 
wasting grant money in order to comply with a paperwork 
exercise. And second, what types of penalties or remediation 
requirements would HUD prescribe if a grantee was not making 
adequate progress?
    Mr. Czerwinski. Mr. Clay, GAO is about to issue a report 
later this summer that looks at those very issues for this 
committee. We are asked to look at the uses of CDBG funds as 
well as HUD's monitoring, which would tie into reporting and 
information system requirements. So your question is right on 
target for what we are talking about.
    And speaking about a target, probably the key issue there 
is technical assistance and how the information is used to help 
the local governments increase their capacity to do what they 
need to do to get the funds. So those should be the exact 
targets of such an effort.
    Mr. Clay. OK. Let me lay out a scenario for both of you, 
and both of you can take a stab at answering. St. Louis County, 
their inner ring suburbs have become less affluent. City 
residents have moved to these areas and have stretched the 
services of those municipalities that they have moved into. St. 
Louis County only gets a 4 percent increase in CDBG funding. 
Perhaps we should take another look at population shifts and 
factor these population trends into the proposed formula. And 
we should probably also look at this new influx of new 
citizens, of immigrants that come to communities like St. 
Louis. We have a large population of Bosnians who have migrated 
to St. Louis over the last 10 or 15 years.
    Would you all consider that once, since you have now gotten 
some feedback from us, I mean, what would you do to change 
those formulas?
    Ms. Patenaude. Congressman, if Mr. Richardson----
    Mr. Clay. Mr. Richardson, you can try to tackle it.
    Mr. Richardson. I'm sorry, would you repeat the question?
    Mr. Clay. We have influxes of new populations into St. 
Louis County inner ring suburb, new immigrants like from the 
Bosnian community. I am not sure that you factored those 
considerations into this proposed formula.
    Mr. Richardson. There is not a direct measure of new 
immigrants into the community. But to the extent that new 
immigrants bring new factors of distress such as increased 
poverty for a community or increased rates of overcrowding, 
those do come into account and would affect that community's 
grant changing and increasing in that particular case, if the 
community is in decline, if those factors would be measured to 
allow its grant to increase.
    Mr. Clay. So in the case of St. Louis city or county, that 
would be an additional factor that you all would take into 
consideration?
    Mr. Richardson. The formula currently has four variables 
associated with need poverty, older housing occupied by poverty 
households, overcrowding and female head of households with 
children under the age of 18. To the extent those variables 
increase, and to the extent those variables increase at a 
higher rate for that community than they do for the rest of the 
country, that community's grant would go up.
    If for example the whole country goes up at the same rate, 
the grant would stay static.
    Mr. Clay. What if one of those factors were not present, 
like overcrowding? Say you have a less densely populated city, 
but what then?
    Mr. Richardson. To the extent that poverty is increasing, 
poverty gets weighted at 50 percent. It is the most important 
variable in the proposed formula. Then your grant would go up.
    Mr. Clay. Thank you for that info. Thank you, Mr. Chairman. 
I yield back.
    Mr. Turner. I have one final question, and then I want to 
open it to any closing remarks. Obviously we have had a pretty 
extensive discussion, and you might have, those who have 
testified, some thoughts that you want to add to the record or 
raise as questions that we have not asked for additional 
review.
    One of the things that has interested me, and this is my 
final question, is the issue of looking at measurable 
objectives in community development block grant funds. The 
Strengthening America's Communities initiative that would have 
moved this CDBG funding and other grant programs from HUD to 
Commerce had as its cornerstone an issue of trying to impose 
performance measures in communities as to how they use these 
funds for community development.
    Many times, the description of how a community would be 
rated are elements of which a community either might not have 
any control or which do not relate to the effectiveness of 
their use of CDBG funds. When I look to the list of the 
challenge grant fund, these are the elements on which a 
community would be rated. The change in employment rate of 
residents, income levels of residents, enrollment rate of high 
school graduates into higher education institutions, date of 
resident ownership of homes and businesses, and the change in 
residential real estate values.
    In looking at the formula grantees, the non-challenge 
grants funding, the performance measurements objectives list, 
suitable living environment, development of decent affordable 
housing, fostering and creating economic development and 
opportunity. When I look at these elements that are in the 
challenge grant, almost every one of them you can go through 
and identify things that could occur within a community that 
have nothing to do with the community's administration of its 
CDBG funds or even the effectiveness of its leadership in 
economic development strategies.
    Ms. Patenaude, if you would please respond to that issue, 
it was raised before, I believe, by GAO as we look to the 
proposed formulas and it had been raised in the Strengthening 
America's Communities initiative. Do you similarly have a 
concern that the items on which communities might be measured 
may not relate at all to their community development efforts 
and their use of CDBG funds?
    Ms. Patenaude. If I may, Mr. Chairman, clarify the 
question. You are looking at the objective criteria under the 
challenge grant versus the objective and outcome measures under 
the performance measurement system? Comparing the two?
    Mr. Turner. Right. Which are somewhat similar. In looking 
at both of them, let me give you one example scenario. If a 
community has one large employer that exits in the community or 
ceases operations altogether, its impact on the community, and 
really the occurrence of its exit may not relate at all to how 
effective the community has been with their CDBG dollars, or in 
community development or revitalization. But it would 
significantly impact these factors.
    Similarly, change in residential real estate values, a 
metropolitan community is part of a larger metropolitan area 
that could see a decline in residential real estate values as 
you can pick up almost any newspaper and the discussion of what 
is going to happen in the future of real estate values in some 
markets that have been identified as overheating. Those are all 
areas that have nothing to do with how a community uses their 
CDBG dollars or their effectiveness in community development.
    Do you have a concern that these elements might penalize a 
community that has been very effective with CDBG by elements 
over which they have no control?
    Ms. Patenaude. We still have a very important measure, and 
that is to be sure that the community development block grant 
funds are targeted 70 percent low-mod income. As you know, more 
than 70 percent is spent for low and moderate income persons. 
So I think that is definitely one of the safety nets that we 
have to measure a program that is as complex and flexible as 
the CDBG program is difficult. I think some of the things that 
you were addressing were under the previous proposal, under the 
Strengthening America's Communities initiative.
    Mr. Turner. Actually, I was reading from that.
    Ms. Patenaude. Under the challenge grants, we have listed 
some objective criteria, but we are certainly open to 
discussion on that. The performance measurement framework was 2 
years in the making, working with the stakeholders. So the 
grantees had a tremendous amount of input. We did not design 
this in a vacuum. And OMB participated. So a year from now, Mr. 
Chairman, I may be able to answer that question better.
    Mr. Turner. Mr. Czerwinski.
    Mr. Czerwinski. Mr. Chairman, your question cuts right to 
the heart of performance measurement. There is a tension 
between trying to find the perfect measures of all the things 
that we want a program to achieve or, going the exact opposite 
direction, saying, well, let's just measure the minute program 
outputs. The real challenge is to get some middle ground there. 
And I agree completely with Ms. Patenaude, this is going to 
take some work.
    There are measures in the middle, I would say, affordable 
housing, maybe one that a community has a little bit more 
control over than some others and that is more closely linked 
to community development and its objectives in the projects 
within it. But frankly, we are not there yet.
    Mr. Turner. So you do have some concerns that the elements 
that are identified may be outside the control of a community 
and unrelated to their CDBG performance?
    Mr. Czerwinski. I wouldn't want to be the mayor of some of 
those communities saying I can control all those things.
    Mr. Turner. Thank you.
    Are there any other questions from members of the 
subcommittee? If not, at this time, then, I will turn to each 
of you and ask if you have any closing remarks that you would 
like to place in the record. Also, please include any 
additional questions that you think that we need to pursue. 
Even if you don't have the answers for them, they would be 
important for us to capture as additional items for us to 
review in the future.
    We will start with Ms. Patenaude.
    Ms. Patenaude. Thank you, Mr. Chairman. We appreciate the 
opportunity to share the administration's proposal on CDBG 
reform, and we look forward to feedback from our stakeholders. 
We feel that there is certainly an urgent need to address the 
formula and to restore equity to the fairness in the formula. 
Again, thank you for the opportunity to appear before you 
today.
    Mr. Turner. Mr. Czerwinski.
    Mr. Czerwinski. Mr. Chairman, as you know, GAO is full of 
researchers. So we are policy wonks and we love this kind of 
discussion. So thank you for being able to give us that format.
    There are a few things that came across to me in our 
discussion today. First of all, it seems to me that we have 
pretty close to agreement on the objectives of the program and 
what we want the reforms to achieve. I think we also have a 
pretty clear, maybe not 100 percent, but pretty close agreement 
on what the issues and challenges are. And in that regard, I 
want to make sure that I have been adequately complimentary to 
HUD. Because they have really advanced the ball here. They have 
done a lot of good, hard work.
    I was struck by what you have to deal with. And I was 
thinking about what Mr. Dent was saying about what is going to 
happen to my community. Ultimately you have to decide what the 
right answer is and go back to the community and defend it.
    Then I was thinking about the discussion that we had with 
you, Mr. Clay, and you, Mr. Turner, on a couple of the 
variables. We don't get these discussions, I do a lot of 
testimony. I don't get a chance to dig into variables, so I 
really am grateful that we did that.
    The two that jumped out at me were immigration and 
abandoned housing. I was struck by Mr. Richardson's answer, 
which I think is the right one at this time, is that we don't 
have direct measures. So what we are coming up with by 
definition is proxies.
    Well, the proxy may work and the proxy may not. But when 
you make it a policy decision, you are going back to defend it 
to constituents, that is a really tough position to be in. And 
so what we are hoping to do in our study is to go behind the 
variables, particularly those two that you outlined, and try to 
come up with, if there are direct measures, what are the pros 
and cons of them, what needs to be done to come up or refine 
the direct measures, and then what the implications are.
    So let's take immigration for a second. When we talk about 
overcrowding, that may or may not be a good measure of 
immigration. It may pick up some parts of it. But what we like 
to look at is what are the characteristics of immigrants, and 
what kinds of pressures do they bring on the community. And if 
there is a measure in there, we will try to find it.
    As I mentioned, we brought in the National Academy of 
sciences to help us with the statistics and the local 
expertise. So what we would like to do is go back and do our 
work and then consult with HUD and then come back and talk with 
you about what we found, what works, what doesn't, and then try 
to give you something you can work with. Abandoned housing is 
in that same area. Frankly, there isn't a good measure of 
abandoned housing. My guess is it is going to be several years 
off before you have one. I do think HUD has a good strategy for 
abandoned housing.
    But it is just going to take time. No matter how good a 
strategy is, it just takes time.
    Mr. Turner. Mr. Richardson, any closing comments?
    Mr. Richardson. Just thank you for your time.
    Mr. Turner. Before we adjourn, I would like to thank each 
of you for participating today. I appreciate your willingness 
to share your knowledge, experiences and thought with us today. 
Undoubtedly, CDBG has been a key component to the many triumphs 
cities have had over poverty and community development need. We 
all agree that the program provides vital funds to address 
critical needs.
    Thanks to CDBG, many individuals and families live in 
safer, cleaner neighborhoods, with improved infrastructure such 
as street lights, handicap accessible sidewalks and parks and 
playgrounds, amenities to which everyone should have access. As 
we have all acknowledged, however, we recognize the need for 
CDBG funds and applaud the success of the program, there 
remains room for improvement from the inequitable distribution 
of funds, and the definition of need, to the lack of 
performance measures and enforcement capabilities.
    I am encouraged by the administration's response to the 
need for program modification and I look forward to continuing 
the dialog with suggestions on how to improve the 
administration and distribution of these important dollars.
    I want to thank GAO for their efforts in continuing to 
review this and I appreciate HUD's thoughtful look and approach 
and willingness to continue to work on ways that even the 
administration's current proposal might be able to be improved. 
In the event that there may be additional questions that we did 
not have time for today, the record shall remain open for 2 
weeks for submitted questions and answers.
    I thank you all. We stand adjourned.
    [Whereupon, at 11:35 a.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
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