Community Development Block Grant Formula: Options for Improving 
the Targeting of Funds (27-JUN-06, GAO-06-904T).		 
                                                                 
Congress asked GAO to testify at this hearing whose purpose is to
examine the Community Development Block Grant (CDBG) Program	 
administered by the Department of Housing and Urban Development  
(HUD) and the Administration's proposal to reform this federal	 
government program. This proposal would use a single formula and 
five variables to allocate funds. This hearing is a follow-up to 
a series of subcommittee hearings that GAO participated in during
2005 on the CDBG program. Based on the principles of formula	 
design that GAO outlined in its 2005 testimony, Congress had	 
requested GAO to undertake a body of work to help the Congress	 
explore alternative formulas to allocate CDBG funds among the	 
nation's diverse communities. This work is underway. In this	 
hearing, GAO addresses its ongoing work on options for improving 
the targeting of CDBG funding as contributions to these efforts  
and to determining next steps.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-904T					        
    ACCNO:   A56002						        
  TITLE:     Community Development Block Grant Formula: Options for   
Improving the Targeting of Funds				 
     DATE:   06/27/2006 
  SUBJECT:   Allocation (Government accounting) 		 
	     Block grants					 
	     Community development				 
	     Community development programs			 
	     Formula grants					 
	     Housing programs					 
	     Program management 				 
	     Community Development Block Grant			 

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GAO-06-904T

     

     * 21st Century Challenges Drive Need for CDBG Formula Reassess
     * Budget Resource Trends Underscore Need for More Effective Ta
     * Changing Circumstances Call for CDBG Formula Reassessment
     * Administration Proposes to Reform the CDBG Program
     * GAO Is Assessing Additional Options to Improve Targeting und
     * Concluding Remarks
          * Order by Mail or Phone

Testimony

Before the Subcommittee on Federalism and the Census, Committee on
Government Reform, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EDT

Tuesday, June 27, 2006

COMMUNITYDEVELOPMENT BLOCK GRANT FORMULA

Options for Improving the Targeting of Funds

Statement of Stanley J. Czerwinski, Director, Strategic Issues

GAO-06-904T

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss our ongoing work on options for
improving the targeting of Community Development Block Grant (CDBG) funds
as the subcommittee examines the CDBG program and the Administration's
proposed reforms. CDBG is a significant direct federal-to-local grant
program, supporting a wide array of local community development activities
that benefit low- and moderate-income people. Since its inception in 1974,
the program has provided about $113 billion, according to the Department
of Housing and Urban Development (HUD), to help the nation's communities
focus on challenges ranging from reducing economic isolation to the
elimination of neighborhood blight. To do this, HUD is required to use a
complex dual formula system to allocate CDBG funding. Under this dual
formula approach, grants are calculated under two different formulas and
grantees receive the larger of the two amounts. The formulas take into
account poverty, older housing, population, housing overcrowding, and
other factors.

Much has transpired over the past three decades and it is time to
carefully consider whether the program's funds are directed towards those
communities with the most compelling needs and the least capacity to
address them from their own resources. As you have asked us, we have begun
a body of work to help the Congress explore alternative formulas to
allocate CDBG funds among the nation's diverse communities.

        21st Century Challenges Drive Need for CDBG Formula Reassessment

As discussed in our 2005 report on 21st Century Challenges,1 the federal
government's financial condition and long-term fiscal outlook present
enormous challenges to the nation's ability to respond to emerging forces
reshaping American society. Given the size of our projected deficits,
traditional incremental approaches to budgeting will need to give way to
more fundamental and periodic reexaminations of existing spending and
revenue policies and programs. A periodic reexamination offers the
prospect of addressing emerging needs by weeding out programs and policies
that are outdated or ineffective and updating those policies and programs
that remain relevant by improving their targeting and efficiency. For
example, programs such as the CDBG should be judged according to whether
they target assistance to those with the greatest needs and the least
capacity to meet them. While prompted by fiscal necessity, such a
fundamental review also provides an opportunity to address the role and
responsibility of the federal government in responding to challenges faced
by communities throughout the nation. The Administration's proposal to
restructure assistance for community development opens up important issues
regarding systematically allocating funds based on community need.

1GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).

Budget Resource Trends Underscore Need for More Effective Targeting of Available
                                    Funding

Since 1978, real per capita funding for the CDBG has declined by almost
three-quarters from about $48 to about $13 per capita. (See fig. 1.)

Figure 1: Trends in CDBG Funding Per Capita 1975-2006

The number of communities receiving funds directly from the federal
government through the CDBG formula grant has nearly doubled from 606 in
fiscal year 1975 to 1,128 in fiscal year 2006. This trend can be expected
to continue both because population will continue to grow and because new
standards for designating metropolitan areas, as promulgated by the Office
of Management and Budget and used by the program, are also likely to
increase the number of eligible communities. In addition, provisions in
the current formula allow communities to continue to receive funds even if
they lose their eligibility.

The policy implications of these trends are that with more limited
resources, increases in concerns with effectiveness require better
targeting to high-need communities. This involves a new look at the
program's uses and the way it assesses community needs and capacity to
meet those needs. Given these implications, you have asked us 1) to review
the use of CDBG funds and how HUD oversees the CDBG program and 2) to
assess alternative formulas to allocate CDBG funds among localities,
including evaluating formula options that take into account both community
development needs and localities' abilities to fund their needs from local
resources. In response to your first request, we will be issuing a report
to you later this summer which will examine the uses and oversight of CDBG
funds. Our work on your second request, which I will be discussing today,
will focus on developing various formula options and highlighting the key
policy choices that the Congress will have to make when selecting from
among those options.

           Changing Circumstances Call for CDBG Formula Reassessment

The CDBG program was originally designed to address the pressing urban
problems the nation faced in the mid-1970s. However, as HUD has rightly
noted, the formula for allocating CDBG funds is today no longer as good a
measure as it once was of communities' needs. For example, the amount of
pre-1940s housing no longer works very well as a proxy for community
development need. Communities that embraced urban renewal and tore down
their blighted housing-a statutory goal of CDBG-are penalized, while
cities with older rehabilitated housing occupied by higher income families
are rewarded.

At the same time, since the inception of CDBG in 1974, the understanding
of the underlying problems facing the nation's communities has expanded.2
For example, we have become more aware of the adverse consequences of
geographic concentrations of very low-income households and the negative
effects of growing up in a single parent household regardless of income.
This greater awareness has led to a variety of federal programs such as
HUD's "Moving to Opportunity" initiative, which allows low-income
households to move out of areas of concentrated poverty, and a variety of
efforts to keep nonresident fathers involved in their children's lives. It
is now time to use the knowledge we have gained to reassess the CDBG
program.

2See, for example, HUD's series of five studies on the CDBG program from
1976 through 2005.

               Administration Proposes to Reform the CDBG Program

HUD is required to use a complex dual formula system to allocate CDBG
funding.3 Under this dual formula approach, grants are calculated under
two different formulas and grantees receive the larger of the two amounts.
The existing approach takes into account poverty, older housing,
population, housing overcrowding, and other factors. However, it provides
widely differing payments to recipients with similar needs and funds going
to the neediest communities have decreased over time on a per capita
basis.

In recognition of the significant and dynamic demographic and
socioeconomic changes the country has undergone since the mid-1970s, on
May 25, 2006, the Administration introduced its latest proposal to reform
the CDBG program. At the heart of the Administration's proposal is the use
of a single formula. This proposed formula would use five variables to
allocate funds:

           o  the per capita income (PCI) of the community relative to the
           PCI of its metropolitan area;
           o  the number of overcrowded housing units;
           o  the number of households living in poverty, excluding full-time
           dependent college students;
           o  the number of female heads of households with minor children;
           and
           o  the number of homes 50 years or older occupied by a low-income
           family.

Because we have not yet reviewed HUD's proposal in detail, we cannot
comment on it as a whole at this time. However, we do have some
observations on some of the variables that HUD has included. Although we
recognize the potential value of introducing a relative PCI variable as
HUD has done, we are concerned about HUD's decision to use metropolitan
PCI. For example, if there were two identical communities located in
different metropolitan areas, the community in a metropolitan area with a
lower PCI would receive less aid than the community in a metropolitan area
with a higher PCI. In another case, HUD's continued use of overcrowded
housing, one of the variables included in the current formula, may be more
indicative of a strong local economy that reflects strong demand pressures
in the local housing market than it is indicative of economic decline.
Nevertheless, HUD's proposal certainly represents a significant
contribution to serious discussions of options for allocating CDBG funds.

342 U.S.C. S:5306.

GAO Is Assessing Additional Options to Improve Targeting under the CDBG Formula

In response to your request that we assess alternative formulas to
allocate CDBG funds among localities, it is our intent to build on the
foundation created by HUD's work. Our ongoing work is focusing on 1)
refining a set of indicators of community development need among the
nation's communities, 2) assessing potential indicators of the capacities
of communities to address those needs on the basis of their own fiscal and
economic resources, and 3) exploring ways to adjust such indicators for
local cost-of-living differences. Designing formulas to allocate CDBG
funds among the nation's communities involves more than technical issues.
It also involves difficult policy choices which are most appropriately the
province of the Congress. Our objective is to design a set of formula
options that will assist the Congress in making the critical policy
choices inherent in choosing a formula to allocate CDBG funds.

In our work to refine indicators to more accurately capture key aspects of
community need, we intend to take a fresh look at indicators that are
being used in the current formula and those in the Administration's
proposal as well as to explore the use of some new need indicators. Next,
we will consider whether a CDBG allocation formula can be designed to
reflect variations in local funding capacity in order to address local
community development needs with local resources. This is because
high-income communities generally have stronger tax bases from which to
fund program needs without relying on federal assistance than lower-income
areas do. Additionally, we plan to explore options for making
cost-of-living adjustments within the formula, such as size of population
in poverty based on poverty thresholds adjusted for variations in the cost
of living. One area we intend to look at for arriving at a cost-of-living
factor is the use of fair market rents.

In our analysis, we will use statistical techniques to calculate and
weight the relative influence of the indicators, identifying a set of them
that effectively represents community development need. Additionally, we
will consider potential indicators of the ability of CDBG grantees to
address their community development needs from their own resources. We
will use the findings from these analyses to develop formula alternatives
that link closely to need, incorporating appropriate variables and
weights. For the formula options that we develop, we will highlight the
key policy choices inherent in selecting a formula to allocate CDBG funds.

Fully recognizing the complexity and controversial nature of the work that
lies ahead of us, we are reaching out widely for input and ideas. First,
the National Academies of Science are assembling a panel of experts to
provide input throughout our project on all phases of our work. The
Academies are seeking individuals with both high levels of technical
expertise and practical experience regarding community development in
local communities. Next, we are working and will continue to work closely
with representatives from national organizations of state and local
governments and community development associations to obtain their
uniquely related perspectives and to identify the concerns of those most
responsible for making the CDBG program work. And lastly, but no less
importantly, HUD staff have been generous in sharing their considerable
expertise and knowledge with us on the CDBG formula and the work they have
done. We will continue to consult and discuss technical issues with them.

                               Concluding Remarks

As we work through the ways that formula options could be shaped, the
critical policy choices that will have to be made are most appropriately
in the hands of the Congress. Our goal is to provide the necessary
information and analyses so that the Congress can systematically examine
the implications and make informed choices.

In closing, I would like to emphasize that the targeting issues raised by
HUD's proposal are important no matter what level of financial support the
Congress provides for community development activities. Additional formula
options do need to be explored as part of the process of reaching a
decision on how best to target CDBG funding, and we plan to continue to
participate in that process with our work for you. Central to any
reexamination is assessing how to better target federal assistance to
those with the greatest needs and the least capacity to meet those needs.

Mr. Chairman, this concludes my statement. I would be happy to answer any
questions you or other members of the subcommittee may have.

For future comments or questions regarding this testimony, please contact
Stanley J. Czerwinski at (202) 512-6806. Individuals making key
contributions to this testimony included Michael Springer, Joyce D. Corry,
Katherine Wulff, Sara Williams, Anna Maria Ortiz, Jerry C. Fastrup, and
Bob Dinkelmeyer.

(450508)

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Highlights of GAO-06-904T , a testimony before the House Committee on
Government Reform, Subcommittee on Federalism and the Census

June 27,2006

COMMUNITY DEVELOPMENT BLOCK GRANT FORMULA

Options for Improving the Targeting of Funds

The subcommittee asked GAO to testify at this hearing whose purpose is to
examine the Community Development Block Grant (CDBG) Program administered
by the Department of Housing and Urban Development (HUD) and the
Administration's proposal to reform this federal government program. This
proposal would use a single formula and five variables to allocate funds.
This hearing is a follow-up to a series of subcommittee hearings that GAO
participated in during 2005 on the CDBG program. Based on the principles
of formula design that GAO outlined in its 2005 testimony, the
subcommittee had requested GAO to undertake a body of work to help the
Congress explore alternative formulas to allocate CDBG funds among the
nation's diverse communities. This work is underway. In this hearing, GAO
addresses its ongoing work on options for improving the targeting of CDBG
funding as contributions to these efforts and to determining next steps.

The CDBG is a significant direct federal-to-local grant program,
supporting a wide range of local community development activities that
benefit low- and moderate-income people. Since its inception in 1974, the
program has provided about $113 billion to help the nation's communities
focus on challenges ranging from reducing economic isolation to the
elimination of neighborhood blight.

Due to the long-term fiscal crisis the nation currently faces, GAO
advocates a thorough assessment of all federal tax and spending programs
and policies across the board. In particular, GAO has suggested that
programs such as the CDBG be measured according to the degree to which
assistance is targeted to those with the greatest needs and the least
capacity to meet them.

Since 1978, real per capita spending for the CDBG has declined by almost
three-quarters from about $48 to about $13 per person. Limited resources
coupled with increasing concerns with effectiveness require better
targeting to high-need communities. This involves a new look at the way
the CDBG program assesses community needs and the capacity to meet those
needs.

The significant economic and demographic changes that have occurred over
the last three decades make this reassessment especially important. Not
only have the economy and population changed, but we have a better
understanding of community problems like concentrated poverty. In light of
such change, the Administration introduced its latest CDBG reform proposal
which would use a single formula and five variables to allocate funds. The
Administration's proposal raises important issues regarding how to
systematically allocate funds based on community need.

In ongoing work for this subcommittee, GAO is looking at additional
options for the CDBG formula, focusing on 1) refining a set of indicators
of the development needs facing the nation's communities, 2) assessing
potential indicators of communities' capacities to address those needs on
the basis of their own fiscal and economic resources, and 3) exploring
ways to adjust such indicators for local cost-of-living differences. The
objective is to design a set of options to assist the Congress in
addressing critical policy choices in choosing a formula to allocate CDBG
funds.
*** End of document. ***