Community Development: Block Grant Economic Development Activities
Reflect Local Priorities (Chapter Report, 02/17/94, GAO/RCED-94-108).

To help state and local governments develop viable communities, Congress
has appropriated more than $62 billion to the Community Development
Block Grant Program since 1975.  Grantees have broad discretion, but
funded activities must either benefit low- or moderate-income
households, help prevent or eliminate slums, or meet other urgent
community development needs. This report (1) provides information on the
funding of economic development activities and the impediments that
grantees have experienced; (2) identifies issues related to the proper
use of these funds; (3) provides information on the types and quality of
jobs resulting from programs funding and identifies possible criteria
for measuring job quality; and (4) identifies potential performance
indicators for measuring the overall effectiveness of economic
development activities under the program.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-94-108
     TITLE:  Community Development: Block Grant Economic Development 
             Activities Reflect Local Priorities
      DATE:  02/17/94
   SUBJECT:  Community development
             Grant administration
             Federal/state relations
             Aid for training or employment
             Housing programs
             Economic development
             Business assistance
             State-administered programs
             Funds management
             Block grants
IDENTIFIER:  Community Development Block Grant
             Small Cities Community Development Block Grant
             FmHA Business and Industry Loan Guarantee Program
             Urban Development Action Grant
             HUD Family Self-Sufficiency Program
             Buffalo (NY)
             Los Angeles (CA)
             Detroit (MI)
             Newark (NJ)
             Philadelphia (PA)
             Rochester (NY)
             Seattle (WA)
             Dayton (OH)
             District of Columbia
             Denver (CO)
             Reading (PA)
             Pittsburgh (PA)
             Caguas (Puerto Rico)
             Jersey City (NJ)
             New York (NY)
             Syracuse (NY)
             Columbus (OH)
             King County (WA)
             Troy (NY)
             Luzerne County (PA)
             
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Cover
================================================================ COVER


Report to Congressional Committees

February 1994

COMMUNITY DEVELOPMENT - BLOCK
GRANT ECONOMIC DEVELOPMENT
ACTIVITIES REFLECT LOCAL
PRIORITIES

GAO/RCED-94-108

Community Development Block Grants


Abbreviations
=============================================================== ABBREV

  BLS - Bureau of Labor Statistics
  CDBG - Community Development Block Grant
  GAO - General Accounting Office
  GPR - grantee performance report
  HUD - Department of Housing and Urban Development
  PER - performance evaluation report
  SBA - Small Business Administration
  UDAG - Urban Development Action Grant

Letter
=============================================================== LETTER


B-256286

February 17, 1994

The Honorable Donald W.  Riegle, Jr.
Chairman
The Honorable Alfonse M.  D'Amato
Ranking Minority Member
Committee on Banking, Housing, and
 Urban Affairs
United States Senate

The Honorable Henry B.  Gonzalez
Chairman
The Honorable James A.  Leach
Ranking Minority Member
Committee on Banking, Finance,
 and Urban Affairs
House of Representatives

This report provides the results of the two studies of the Department
of Housing and Urban Development's Community Development Block Grant
Program required by the Housing and Community Development Act of 1992
(P.L.  102-550, Oct.  28, 1992).  Section 806(c) of the act required
GAO to study the proper, efficient, and effective use of grant funds,
and section 806(d) required a study of the types and quality of jobs
created or retained through the program's assistance. 

We are sending copies of the report to the Secretary of Housing and
Urban Development and to other interested parties.  We will make
copies available to others upon request. 

This work was performed under the direction of Judy A. 
England-Joseph, Director, Housing and Community Development Issues,
who can be reached on (202) 512-7631 if you or your staffs have any
questions.  Major contributors to this report are listed in appendix
I. 

Keith O.  Fultz
Assistant Comptroller General


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

To help state and local governments develop viable communities, the
Congress has appropriated over $62 billion to the Community
Development Block Grant Program since 1975.  The Housing and
Community Development Act of 1992 (P.L.  102-550) directed GAO to
conduct studies addressing the proper, efficient, and effective use
of grant funds and the types and quality of jobs the program has
helped create or retain.  As agreed with the cognizant congressional
oversight committees, GAO's specific objectives were to (1) provide
information on the funding of economic development activities and the
impediments that grantees have experienced; (2) identify issues
related to the proper use of these funds; (3) provide information on
the types and quality of jobs resulting from program funding and
identify possible criteria for measuring job quality; and (4)
identify potential performance indicators for measuring the overall
effectiveness of economic development activities under the program. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

The Department of Housing and Urban Development (HUD) manages the
Community Development Block Grant Program.  It distributes annual
grants using statutory formulas based on communities' needs. 
Entitlement communities (mostly cities with at least 50,000 people
and urban counties) receive direct grants, and nonentitlement
communities (located predominately in rural areas) are eligible for
state- or HUD-administered "small cities" grants.  Grantees have
broad discretion, but funded activities must address at least one of
three national objectives by (1) benefiting low- and moderate-income
people (households earning less than 80 percent of the local area's
median income), (2) helping prevent or eliminate slums or blight, or
(3) meeting other urgent community development needs.  Grantees must
spend at least 70 percent of their funds to meet the program's basic
intent:  benefiting low- and moderate-income people.  Economic
development, housing rehabilitation, and providing public works
improvements and public services are examples of eligible activities. 
Grantees annually report to HUD information on the activities funded,
but because of the timing, HUD's annual program report to the
Congress usually reflects the use of grants made 2 or 3 fiscal years
earlier. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Annual appropriations for the Community Development Block Grant
Program have ranged from $2.2 billion to $4.5 billion, with a general
downward trend in the amounts appropriated in constant dollars. 
Grant funds targeted to economic development activities have
constituted a relatively stable percentage of total program funding: 
10-14 percent of total program funding for entitlement communities
and 15-22 percent for nonentitlement grantees.  Grantees identified
three principal impediments to using grants for economic development: 
confusion over rules and requirements for the grants; the
administrative burden of having to document payment of the local
prevailing wages for small construction projects; and the difficulty
of using grants for job retention activities.  Remedies are under way
or proposed for the first two impediments, but HUD has not identified
a remedy for the third. 

The proper use of block grant funds for economic development requires
that grantees benefit low- and moderate-income people, appropriately
assist for-profit businesses, and safeguard the lending of public
funds.  HUD's Office of Inspector General, community groups, and
others have questioned whether funds have been properly used.  To
address these issues, HUD expects to issue proposed regulations in
March 1994 to help grantees select economic development activities
and assess their public benefits, as mandated by the Housing and
Community Development Act of 1992, and has begun to collect data on
loan defaults. 

Because local economic conditions and economic development strategies
differ, program funds have been used to support many types of jobs,
and there are no generally accepted federal criteria for defining job
quality.  Because the Congress built local discretion into the
program, GAO believes that establishing standards for either job
quality or the overall effective use of economic development funds is
best left to local communities.  However, GAO has identified
potential indicators of job quality (such as pay and promotion
potential) and overall effectiveness (such as the characteristics of
jobs resulting from the program and the amount of other funds
leveraged).  If these potential indicators are further refined,
communities might find them useful.  And although HUD will soon be
publishing proposed guidelines to help grantees better define overall
performance indicators for economic development, grantees might also
benefit from learning about the procedures and criteria other
grantees have used in promoting job quality. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      SEVERAL FACTORS AFFECT THE
      USE OF PROGRAM FUNDS FOR
      ECONOMIC DEVELOPMENT
-------------------------------------------------------- Chapter 0:4.1

Economic development activities have centered on financial assistance
to businesses.  The grant amounts that entitlement communities spent
for this purpose generally decreased between 1984 and 1990 (a trend
not seen among nonentitlement grantees).  In fiscal year 1990, about
450 entitlement communities spent $290 million in program funds for
economic development, but 45 percent of these expenditures were made
by 20 grantees.  The pattern was similar in fiscal years 1988 and
1989, but not necessarily for the same grantees.  During 1989, 1990,
and 1991, 10 state-administered grant programs (again, not
necessarily the same ones) accounted for about 60 percent of the
program funds allocated to economic development. 

Local officials and representatives of national interest groups
identified three conditions that have impeded the use of funds for
economic development.  HUD is beginning to provide additional
training to program staff to address the first impediment: 
inconsistent interpretation of program rules by HUD's headquarters
and field offices.  The President's National Performance Review has
recommended action that would ease the second impediment by raising,
from $2,000 to $100,000, the dollar threshold governing construction
projects subject to the Davis-Bacon Act.  This act requires that
contractors on federally funded government construction projects pay
the area's prevailing wage rates.  The third impediment is the
difficulty communities encounter in using grants to help struggling
businesses retain existing jobs.  Currently, recipients must document
that the threatened jobs would be lost without the assistance and
that at least 51 percent are held by (or could be turned over to)
low- and moderate-income people.  HUD began reevaluating these
requirements several years ago but has taken no action since January
1993, when it received what officials characterized as limited input
from four national associations. 


      PROPER USE OF ECONOMIC
      DEVELOPMENT FUNDS HAS BEEN
      QUESTIONED
-------------------------------------------------------- Chapter 0:4.2

Grantees may not be consistently meeting two key requirements that
govern the proper use of grant funds.  First, some economic
development activities have not met the requirement that at least 51
percent of the jobs created or retained must either be taken by, or
made available to, low- and moderate-income people.  Second,
assistance provided to some for-profit businesses has not met an
appropriateness test.  This test should show, among other things,
that the assistance is not excessive relative to the business's needs
or the expected public benefit.  HUD's Inspector General and others
have found many instances in which grantees did not adequately
perform or document actions to ensure compliance.  The Housing and
Community Development Act of 1992 has eased these requirements and
instructed HUD to issue guidelines to help grantees select economic
development activities and assess their public benefits.  By March
1994, HUD expects to issue proposed regulations containing the
guidelines for public comment. 

Grantees often provide economic development assistance to for-profit
businesses in the form of loans that must be repaid to the grantee. 
The number of defaults on these loans, along with the amount of
program funds thus put at risk of loss, is another issue related to
the proper use of block grant funds.  HUD has begun to collect data
from grantees nationally on these defaults; these data should be
useful to grantees in assessing their own experiences and to HUD and
the Congress in assessing the overall seriousness of the situation. 


      CRITERIA MAY HELP MEASURE
      JOB QUALITY AND OVERALL
      EFFECTIVENESS OF GRANTEES'
      ECONOMIC DEVELOPMENT
      ACTIVITIES
-------------------------------------------------------- Chapter 0:4.3

GAO's review of performance reports for fiscal year 1990 found that
the jobs that entitlement grantees said they created or retained were
in many different occupations.  These occupations fell predominately
into 4 of 12 broad civilian job categories used by the Bureau of
Labor Statistics:  production (26 percent), service (20 percent),
administrative support (13 percent), and handlers/equipment
cleaners/helpers/laborers (9 percent). 

GAO found no generally accepted federal definition of a "quality" job
but prepared a list of potential broad indicators of job quality
suggested by labor experts.  These indicators include, for example,
the level of pay, the potential for promotion and pay increases, the
availability of fringe benefits such as health insurance, the
availability of training to enhance work skills, and the length of
the workweek (full- or part-time).  However, without a control group
or other means of accurately estimating what would have occurred
without the grant program, it is very difficult to measure the net
effect the program has on either the number or quality of jobs. 

GAO also found no generally accepted set of performance measurements
for assessing the overall effectiveness of grantees' economic
development activities.  However, GAO identified the following
possible indicators, some of which individual grantees are already
using:  (1) various job elements (the number of jobs, cost of
creating them, type, and targeted population); (2) an increase in the
community's tax base; (3) the amount of public and private funds
leveraged relative to the amount of loans; (4) the level of defaults
on loans made by grantees; (5) the extent to which essential services
and facilities are created; and (6) the types and sizes of the
businesses assisted. 

The Congress chose a block grant program so that it would be
flexible, allowing grantees to match the program's resources to their
individual local needs.  Many grantees, federal officials, and
economic development experts view this as the program's greatest
strength and believe grantees should be permitted to measure the
outcomes of their economic development activities against their local
economic goals and development strategies.  GAO shares this view. 
The previously mentioned guidelines that the Congress directed HUD to
develop to assist grantees in evaluating economic development
activities may also, to some degree, help them establish their own
performance measurements. 

Establishing job quality criteria is also a task logically left to
local communities.  Many economic variables can shape grantees'
perceptions of job quality and their ability to provide such jobs. 
These variables include, for example, the skill level of the local
work force and the community's relative need for jobs.  Many grantees
have encouraged jobs with locally desired characteristics by giving
these jobs higher priority when selecting projects--a practice GAO
believes HUD should encourage. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

GAO recommends that HUD (1) periodically assess the effectiveness of
the training provided to the HUD officials responsible for monitoring
and administering block grant economic development activities; (2)
revive efforts to determine whether and how Community Development
Block Grant funds could be more easily used for job retention
activities; (3) include in HUD's annual report to the Congress the
data that HUD is starting to collect on delinquencies and defaults on
loans for economic development that grantees make to for-profit
businesses; and (4) encourage grantees to establish and apply job
quality goals by means such as distributing information on the
criteria that other grantees have developed and use. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

GAO discussed a draft of this report with the Director of HUD's
Office of Block Grant Assistance and his staff, and they agreed with
GAO's findings and draft recommendations.  These HUD officials also
provided updated information and technical corrections that have been
incorporated into this report.  As requested by the congressional
oversight committees, GAO did not obtain written agency comments on a
draft of this report. 


INTRODUCTION
============================================================ Chapter 1

The Community Development Block Grant (CDBG) Program, established by
the Housing and Community Development Act of 1974, provides annual
grants, principally to state and local governments, to aid in the
development of viable communities.  The program is managed by the
Department of Housing and Urban Development (HUD).  The levels of the
grants are set by statutory formulas that take into consideration
various indicators of need.  Although CDBG grantees have broad
discretion in deciding how to spend their annual grants, they are
limited to activities that address one or more of the program's three
national objectives.  These objectives are to (1) benefit low- and
moderate-income people, (2) aid in the prevention or elimination of
slums or blight, and (3) meet other urgent community development
needs.  The activities also must fall into 1 of 25 categories of
eligible activities, which include housing rehabilitation, public
works, public services, and economic development.  Overall, the
program is intended to benefit principally low- and moderate-income
people.  Grantees are required to spend at least 70 percent of their
funds on activities benefiting these populations. 


   PROGRAM FUNDING
---------------------------------------------------------- Chapter 1:1

Since providing initial funding in 1975, the Congress has
appropriated over $62 billion for the CDBG Program.  Annual
appropriations have ranged from $2.2 billion to $4.5 billion. 
However, there has been a general downward trend in the constant
dollars appropriated.  (See fig.  1.1.)

   Figure 1.1:  CDBG
   Appropriations in Current and
   Constant Dollars, 1975-93

   (See figure in printed
   edition.)

Most of the appropriations go to two major programs:  the Entitlement
Program and the state- and HUD-administered Small Cities Program. 
Communities participating in the CDBG Program have two other
CDBG-related sources of funds that can be used to support these
program activities:  income generated from their previous CDBG
activities (such as repayment of loans) and funds obtained through
the Section 108 Loan Guarantee Program.  Under the Section 108
Program, HUD guarantees notes issued by the grantee, and the grantee
pledges its current and future CDBG grants for the repayment of the
guaranteed loan. 


   ENTITLEMENT PROGRAM
---------------------------------------------------------- Chapter 1:2

The Entitlement Program is the largest CDBG Program component,
historically representing about 70 percent of CDBG appropriations. 
The communities that receive annual entitlement grants are generally
cities designated as central cities of metropolitan statistical
areas, other cities with populations of at least 50,000, and
qualified urban counties with populations of at least 200,000
(excluding the population of any entitlement cities within these
counties).  The grant amount that each entitlement metropolitan city
or urban county receives is determined by a statutory formula
incorporating several quantitative measures of community need.  These
measures include population, poverty levels, housing overcrowding,
the age of housing, and population growth or decline in relation to
all metropolitan statistical areas.  In fiscal year 1992, 889
communities--758 cities and 131 urban counties--were eligible to
receive entitlement funds. 

Although CDBG grants are entitlements, grantees must submit a plan
describing the proposed uses of funds and later document how the
funds were actually used.  The plan, called a "final statement," must
be submitted before the applicable program year begins.  Within 3
months after the end of this program year, the grantee must submit a
grantee performance report (GPR) to HUD to account for how program
funds were used. 


   STATE- AND HUD-ADMINISTERED
   SMALL CITIES PROGRAMS
---------------------------------------------------------- Chapter 1:3

The state- and HUD-administered Small Cities Programs are the
second-largest program component, receiving about 30 percent of CDBG
appropriations.  These programs aid communities that do not qualify
for assistance under the Entitlement Program.  These communities are
frequently very small and predominately rural.  About 65 percent of
fiscal year 1991 funds in the state-administered Small Cities Program
were distributed to counties or communities with populations of less
than 2,500.\1 The grant is based on the higher of two different
needs-based formulas, which include factors similar to those used in
the formula for entitlement grants.  States (and Puerto Rico) have
the option of administering their Small Cities Program or allowing
HUD to do so.  All but two states have opted to administer their own
programs.  HUD administers the Small Cities Program for New York and
Hawaii. 

States choosing to administer their Small Cities Program (hereafter
referred to as the State-Administered Program) are required to
annually submit a final statement to HUD describing their states'
community development objectives and method of distributing funding
among eligible communities.  States must also submit annual
Performance Evaluation Reports (PER).  The PERs must include
information on which communities were allocated funds, the amount of
their grants, the activities being funded, and the national
objectives being met by the funded activities. 


--------------------
\1 Information on fiscal year 1991 funding was the latest available
and was reported in HUD's fiscal year 1993 Annual Report to Congress
on the Community Development Block Grant Program. 


   PROGRAM INCOME
---------------------------------------------------------- Chapter 1:4

In addition to annual CDBG grants, grantees may receive program
income from previous years' CDBG-funded activities.  This income can
consist of payments of principal and interest by recipients of loans
made with CDBG funds, proceeds from the sale of real property or
equipment, or interest earned on funds held in a revolving fund. 
Program income must be used only to fund eligible activities that
comply with all CDBG requirements. 

Program income has become a significant source of funds to finance
CDBG-eligible activities.  According to HUD's data, entitlement
grantees received $514 million in program income (about 22 percent of
the value of annual grants) in fiscal year 1990, the latest full year
for which such information has been reported.\2 The largest amount of
program income has consistently come from repayments of housing
rehabilitation loans; the second largest has come from repayments of
economic development loans. 


--------------------
\2 These data are based on reports from 97 percent of the entitlement
grantees. 


   SECTION 108 LOAN GUARANTEE
   PROGRAM
---------------------------------------------------------- Chapter 1:5

Communities and states that receive CDBG grants can, under section
108 of the Housing and Community Development Act of 1974, apply for
additional financing in the form of loans.  Under this program, HUD
guarantees notes issued by grantees for up to five times their
current year's CDBG grant.  Proceeds from these notes can be used to
finance community and economic development projects that are too
large to be financed from the grantee's annual grant.  Activities
funded with Section 108 loans must comply with regular CDBG
requirements, and expenditures must be reported to HUD in the
grantees' annual GPRs and PERs.  Currently, notes issued under the
Section 108 Loan Guarantee Program are sold centrally in periodic
public offerings conducted by an underwriting group selected through
a competitive process. 

The National Affordable Housing Act of 1990 made significant changes
to the Section 108 Loan Guarantee Program.  These changes included
expanding the program to nonentitlement communities, increasing the
maximum loan repayment period from 6 to 20 years, and increasing the
maximum loan amount from three to five times the latest CDBG grant. 

Since the program's inception, Section 108 activity levels have
varied.  In fiscal year 1992 (the latest year for which data are
available), HUD approved 46 Section 108 loans totaling $163.8
million--the highest amount since 1982.  (See fig.  1.2.)

   Figure 1.2:  Section 108 Loan
   Commitments in Current and
   Constant Dollars, 1979-93

   (See figure in printed
   edition.)


   CDBG-FUNDED ECONOMIC
   DEVELOPMENT ACTIVITIES
---------------------------------------------------------- Chapter 1:6

Local and state economic development strategies often focus on
retaining existing businesses, helping local businesses expand, and
encouraging new firms to locate inside local and state boundaries. 
To support their economic development strategies, state and local
governments may use a variety of federal economic development
programs, including the CDBG Program, to supplement their own
resources.  Many economic development activities can be funded under
the CDBG Program, including (1) direct financial aid to for-profit
businesses; (2) assistance to for-profit businesses for land
acquisition, infrastructure development, construction, or
rehabilitation; and (3) commercial and industrial improvements by the
grantee. 

The creation or retention of permanent jobs is one way that a
CDBG-funded activity can meet the national objective of benefiting
low- and moderate-income persons.  However, the job creation or
retention activity qualifies under this objective only if 51 or more
percent of the created or retained jobs are either taken by or made
available to low- and moderate-income people.  Low- and
moderate-income people are defined as families and individuals whose
incomes do not exceed 80 percent of the median income for the local
area, as determined by the Secretary of HUD, with adjustments for
smaller and larger families.  According to HUD's data, communities
that receive entitlement grants justify many of their economic
development activities on the basis of job creation or retention. 
Although the State-Administered Program does not collect information
specifically on which economic development activities qualify on the
basis of job creation or retention, HUD officials believe the vast
majority of these activities qualify for the program on this basis. 

The Housing and Community Development Act of 1992 significantly
affects CDBG-funded economic development activities.  Section 806(a)
of the act requires HUD to establish, by regulation, guidelines to be
used by grantees in evaluating and selecting CDBG-assisted economic
development projects.  Section 806(b) amends the CDBG legislation by
removing certain limitations on CDBG assistance to for-profit
businesses:  Such assistance no longer may be limited to activities
for which no other forms of assistance are available or to activities
that could not be accomplished without the CDBG assistance.  Section
806(e) allows grantees in certain circumstances to presume that an
employee has a low or moderate income.  Section 807(c) of the act
encourages grantees to reserve 1 percent of their annual CDBG grants
for microenterprises--commercial enterprises with five or fewer
employees, one or more of whom owns the enterprise. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:7

The Housing and Community Development Act of 1992 (P.L.  102-550)
required that we conduct two studies of the CDBG Program.  One study,
required by section 806(c) of the act, was to address the proper and
effective use of CDBG funds and possible impediments to such use. 
The second study, required by section 806(d), was to address the
types and quality of jobs created or retained through CDBG
assistance. 

As agreed with the cognizant congressional oversight committees, we
are providing the results of both studies in this report.  Our
objectives were to (1) provide data on the extent to which CDBG funds
have been used for economic development activities and identify
impediments grantees have experienced in using such funds (ch.  2),
(2) identify issues related to the proper use of these funds (ch. 
3), (3) provide information on the types and quality of the jobs
resulting from CDBG funding and identify criteria that might define
job quality (ch.  4), and (4) identify possible performance
indicators for measuring the effectiveness of CDBG economic
development activities (ch.  5). 

To obtain data on the extent to which CDBG funds are used for
economic development, we reviewed HUD's annual reports to the
Congress on the CDBG Program for 1988-93.  We also analyzed HUD's
computerized data summarizing the individual GPRs and PERs.  HUD used
these data as the basis for preparing the 1991, 1992, and 1993 annual
reports.  To obtain information on the types of jobs grantees
reported as created or retained through the use of CDBG economic
development funds, we reviewed 308 of the 343 GPRs on entitlement
grants for fiscal year 1990 in which expenditures were justified on
the basis of job creation or retention.\3 While HUD's Office of
Inspector General has questioned the accuracy of these GPRs and
whether HUD properly reviews them,\4 to our knowledge they provide
the best existing information. 

To identify impediments that grantees have experienced in using CDBG
funds, factors that influence the proper use of economic development
funds, and possible indicators of effectiveness, we reviewed audit
reports on CDBG activities by HUD's Inspector General issued during
the 30-month period ending March 31, 1993.  We also analyzed HUD's
CDBG regulations and guidance relevant to the funding of economic
development activities and recent statutory changes for which HUD has
yet to publish proposed regulations.  We discussed these issues with
HUD officials (including the directors of HUD's Entitlement Division,
State and Small Cities Division, Section 108 Loan Guarantee Program
Office, Office of Economic Development, and Office of Inspector
General) and with community development officials at HUD's Buffalo
and New York City field offices.  In addition, we interviewed
representatives of numerous national and local economic and community
development organizations, including low-income advocacy groups, and
officials from other federal agencies involved in community
development--the Small Business Administration (SBA), the Department
of Commerce's Economic Development Administration, and the Farmers
Home Administration's Rural Development Agency.  We also analyzed
documentation we obtained during these interviews. 

To determine the key characteristics of jobs created or retained, we
extracted job titles from grantees' performance reports and used the
Department of Labor's Occupational Outlook Handbook (1992-93 edition)
to identify the characteristics associated with these job titles. 
This publication identifies characteristics such as salary and the
potential for advancement for various categories and types of jobs. 
We relied on this method because information on job characteristics
like salary is not systematically collected or reported to HUD by
grantees.  We also reviewed the final statements submitted by the 49
State-Administered Programs (including Puerto Rico) for fiscal year
1992 to identify the priorities states use in their funding
decisions, particularly those designed to indicate job quality.  We
also discussed the issue of job quality, particularly possible
indicators of quality, with experts from the Department of Labor, the
Congressional Research Service, labor unions, and business
associations. 

To obtain a first-hand understanding of issues facing grantees that
fund CDBG economic development activities, we visited two cities
(Buffalo, New York, and Dallas, Texas), and one urban county
(Riverside County, California) in the Entitlement Program, and one
state (Michigan) in the State-Administered Program.  At those sites,
we discussed all our objectives with knowledgeable local officials
and reviewed relevant documentation.  We judgmentally selected these
four grantees because of their high level of expenditures on economic
development and geographic distribution, and in order to cover all
three major types of grantees (cities, urban counties, and states) in
the two programs. 

For the purpose of this report, we follow convention in using terms
such as "job creation" and "job retention." However, it is very
difficult to estimate the creation or retention of jobs that can be
attributed to the CDBG Program.  From the standpoint of the overall
economy, funds used to finance the CDBG Program, if not used for the
program, would have funded other government or private activities. 
This funding, in turn, would have had some employment effects. 
Strictly speaking, it would be necessary to subtract out the effect
on employment that would have occurred in the absence of a CDBG
program in order to gauge the CDBG Program's effectiveness.  At the
local level, an infusion of CDBG funds may be more likely to result
in a net increase in employment in that locality because jobs can
move between neighborhoods.  However, such a result is not a foregone
conclusion.  It depends on the extent to which similar effects on
employment would have been generated anyway.  In some cases, the
infusion of CDBG funds might lead to more rapid effects on employment
at the local level than otherwise would have been the case.  These
net effects on employment are very difficult to estimate.  The
fundamental problem is the lack of a control group or the ability to
otherwise estimate with some reasonable precision what would have
occurred in the absence of a program.\5

As agreed with the congressional oversight committees, we did not
obtain written agency comments on a draft of this report.  However,
we did discuss a draft of the report with cognizant HUD officials. 
These officials agreed with our findings and draft recommendations
and provided certain updated information and technical corrections
that we incorporated into this report.  We conducted our review
between March 1993 and November 1993 in accordance with generally
accepted government auditing standards. 


--------------------
\3 We did not review the other 35 GPRs because they were not
available at HUD headquarters. 

\4 Multi-Region Review of the Controls Over the Preparation and Use
of Grantee Performance Reports, HUD Office of Inspector General,
92-TS-141-0014, July 30, 1992. 

\5 Whether or how CDBG can affect tax revenues or the "quality" of
jobs in a community is also difficult to measure for these reasons. 


THE USE OF CDBG FUNDS FOR ECONOMIC
DEVELOPMENT VARIES AND CAN BE
IMPEDED BY SEVERAL FACTORS
============================================================ Chapter 2

On the local level, economic development activities must compete for
CDBG funding with other eligible activities, such as housing
rehabilitation and public works.  Over the last several years,
economic development activities accounted for 10 or more percent of
communities' expenditures in the Entitlement Program and over 15
percent of activities funded under the State-Administered Program. 
Not all communities use CDBG funds for economic development, and
spending for this purpose has been concentrated in a small percentage
of grantees.  Assistance to for-profit businesses was the predominant
economic development activity funded, and a wide range of businesses
were assisted.  Concern has been expressed by some local and national
economic development officials that some factors restrict the use of
CDBG funds for economic development initiatives.  These factors
include inconsistent application of HUD's rules, the effect on job
retention activities of the requirement that funding benefit low- and
moderate-income people, and the low dollar threshold for construction
projects to which wage rates established under the Davis-Bacon Act
apply. 


   COMMUNITIES HAVE MADE DIFFERENT
   CHOICES IN THE USE OF CDBG
   GRANTS
---------------------------------------------------------- Chapter 2:1

As a block grant program, the CDBG Program is designed to provide
grantees with maximum flexibility in using the funds to address local
needs that are consistent with the program's national objectives. 
Grantees have used this flexibility to incorporate CDBG grants in a
wide range of strategies to achieve their locally determined goals. 
While many grantees have used CDBG funds for economic development,
most CDBG funds for this use have been concentrated on a limited
number of grantees. 


      CDBG ECONOMIC DEVELOPMENT
      COMPETES WITH OTHER ELIGIBLE
      ACTIVITIES
-------------------------------------------------------- Chapter 2:1.1

The amount of funding that each CDBG grantee chooses to commit to
economic development varies and depends on many local factors.  Two
major factors are how important economic development is relative to
other local priorities and what other sources of funds are available
for activities eligible for CDBG funds.  According to economic
development professionals, in recent years these decisions have
become more difficult because inflation has reduced the purchasing
power of CDBG funds, and many communities have experienced worsening
fiscal conditions. 

CDBG grantees have considerable flexibility in deciding how to
allocate their CDBG funds among several categories of eligible
activities.  Economic development is one of seven primary expenditure
categories in the Entitlement Program and one of five primary
"purpose" categories in the State-Administered Program.  Economic
development has consistently accounted for about 10-14 percent of
expenditures in the Entitlement Program since 1984 and 15-22 percent
of planned expenditures in the State-Administered Program since
1982.\1

In fiscal year 1990 (the latest data available) communities in the
Entitlement Program spent the largest percentage of CDBG funds on
housing and public works.  Economic development was fourth.  (See
fig.  2.1.)

   Figure 2.1:  Entitlement
   Program Funding by Activity,
   Fiscal Year 1990

   (See figure in printed
   edition.)

Note:  Data are reported expenditures. 

Source:  GAO's illustration based on data from HUD's 1993 annual
report to the Congress on the CDBG program. 

In fiscal year 1991, under the State-Administered Program, plans
called for spending the largest proportion on public facilities and
housing; economic development was third.  (See fig.  2.2.)

   Figure 2.2:  State-Administered
   Program Funding by Activity,
   Fiscal Year 1991

   (See figure in printed
   edition.)

Note:  Data are planned allocations.  States are asked to provide
activity data by general purpose categories.  The purpose categories
seek to portray what the state and its recipients were trying to
accomplish with their CDBG resources. 

Source:  GAO's illustration based on data from HUD's 1993 annual
report to the Congress on the CDBG program. 

In contrast, communities that also received Section 108 Loan
Guarantee funds chose to spend the largest percentage on economic
development.  (See fig.  2.3.)

   Figure 2.3:  Section 108
   Funding by Activity, Fiscal
   Year 1992

   (See figure in printed
   edition.)

Source:  GAO's illustration based on data from HUD's 1993 annual
report to the Congress on the CDBG program. 

Although the percentage of funds used for economic development
activities has remained relatively stable in entitlement communities,
the total dollar amounts in constant dollars have declined.  In its
1993 annual report, HUD reported that in the 5 fiscal years from 1984
to 1988, entitlement communities annually spent an average of $351
million on economic development activities.  During fiscal years 1989
and 1990, entitlement communities spent $251 million and $290
million, respectively.  (See fig.  2.4.)

   Figure 2.4:  Entitlement
   Program Economic Development
   Expenditures in Current and
   Constant Dollars, Fiscal Years
   1984-90

   (See figure in printed
   edition.)

Source:  GAO's illustration based on current dollars from HUD's 1993
annual report to the Congress on the CDBG program.  Constant dollars
were computed by GAO on the basis of the Consumer Price Index. 

The State-Administered Program has remained relatively stable in
terms of the current dollars states planned to spend on economic
development activities.  According to HUD's 1991-93 annual reports to
the Congress, at the beginning of each of those planning years, state
grantees planned to spend between $125 million and $128 million from
each of those years' allocations on economic development activities. 
Because data on small cities reflect allocations and grantees have
several years to draw on a particular year's allocation, states'
allocations for any given year may change.\2


--------------------
\1 HUD officials believe that total Entitlement Program expenditures
for economic development are understated because some communities may
classify economic development expenditures under other categories,
such as acquisition and public works.  However, the officials could
not estimate the extent of the understatement. 

\2 The fiscal year 1989 and 1990 allocations were updated in 1993 to
$138 million and $141.4 million, respectively. 


      CDBG ECONOMIC DEVELOPMENT
      DOLLARS ARE CONCENTRATED
      AMONG A LIMITED NUMBER OF
      GRANTEES
-------------------------------------------------------- Chapter 2:1.2

In fiscal year 1990, about 450 entitlement communities had some
expenditures for economic development.  However, about 45 percent of
the $290 million in total economic development expenditures were made
by 20 of the entitlement grantees.  These grantees were concentrated
in the Northeast and in the West.  These 20 grantees spent about $130
million on economic development activities in 1990.  (See table 2.1.)
For 1988 and 1989, a similar concentration occurred, although not
necessarily among the same 20 grantees. 



                          Table 2.1
           
            Entitlement Grantees With the Highest
            Economic Development Expenditures for
                       Fiscal Year 1990

Grantee                                         Expenditures
------------------------------------------  ----------------
Buffalo, N.Y.                                    $16,325,456
Los Angeles, Calif.                               13,828,094
Detroit, Mich.                                    11,678,655
Newark, N.J.                                       9,207,352
Philadelphia, Penn.                                9,099,119
Luzerne County, Penn.                              8,363,933
Rochester, N.Y.                                    7,294,062
Seattle, Wash.                                     7,133,287
Dayton, Ohio                                       7,124,862
Washington, D.C.                                   6,662,422
Denver, Colo.                                      5,165,854
Reading, Penn.                                     4,462,146
Pittsburgh, Penn.                                  4,066,474
Caguas, Puerto Rico                                3,244,249
Jersey City, N.J.                                  3,140,380
New York, N.Y.                                     2,797,936
Syracuse, N.Y.                                     2,736,365
Columbus, Ohio                                     2,610,322
King County, Wash.                                 2,523,017
Troy, N.Y.                                         2,507,483
============================================================
Total                                           $129,971,468
------------------------------------------------------------
Most states undertook some economic development activities, but the
use of CDBG funds for this purpose was similarly concentrated.  Our
analysis of HUD's data for the State-Administered Program showed that
for 1991, 43 of 49 states used CDBG funds for economic development. 
However, 10 grantees accounted for over 61 percent of the $128
million\3 allocated for economic development activities.  (See table
2.2.) A similar concentration occurred in 1989 and 1990, although not
necessarily among the same 10 grantees. 



                          Table 2.2
           
             State-Administered Programs With the
           Highest Economic Development Allocations
                           for 1991

Grantee                                          Allocations
--------------------------------------------  --------------
Michigan                                         $11,789,879
Wisconsin                                         11,372,249
South Carolina                                     9,440,934
Texas                                              8,191,990
Arkansas                                           7,316,427
North Carolina                                     7,256,193
Mississippi                                        6,963,315
Kentucky                                           5,509,860
Missouri                                           5,348,450
Nebraska                                           5,092,661
============================================================
Total $                                           78,281,958
------------------------------------------------------------

--------------------
\3 This amount was erroneously reported as $127 million in HUD's 1993
annual report to the Congress. 


      FACTORS THAT INFLUENCE
      GRANTEES' CDBG ECONOMIC
      DEVELOPMENT FUNDING
      DECISIONS
-------------------------------------------------------- Chapter 2:1.3

Many local factors could influence how much CDBG funding an
entitlement grantee or a state chooses to use for economic
development.  These factors include a grantee's emphasis on economic
development versus funding other CDBG activities such as housing or
public services, the degree to which other non-CDBG funds are
available, the grantee's capacity to implement economic development,
and the grantee's degree of success in previous economic development
activities.  Grantees that use the Section 108 Loan Guarantee Program
also tend to commit more CDBG funds to economic development, as has
been the case with grantees like Buffalo, Rochester, and Syracuse, in
upstate New York.  These three entitlement communities have
historically been active participants in HUD's Section 108 Loan
Guarantee Program.  Also, as discussed later in this chapter, some
grantees may have limited their CDBG-funded economic development
expenditures because of inconsistently applied HUD regulations as
well as other program provisions perceived as unnecessarily
restrictive. 

Encouragement from the Congress or the administration is a nonlocal
factor that also could influence the amount of CDBG funds grantees
use for economic development activities.  For example, section 807(c)
of the Housing and Community Development Act of 1992 indicates that
the Congress would like each grantee to annually reserve 1 percent of
its grant for assisting economic development through commercial
microenterprises--enterprises with five or fewer employees.  The
National Council for Urban Economic Development has recommended that
the administration also set an internal goal to encourage communities
to allocate resources to economic development. 


   ECONOMIC DEVELOPMENT ACTIVITIES
   CONSISTED PREDOMINATELY OF
   ASSISTANCE TO FOR-PROFIT
   BUSINESSES
---------------------------------------------------------- Chapter 2:2

Communities that use CDBG funds for economic development
predominantly provide assistance (such as loans) to for-profit
businesses.  According to HUD's 1993 annual report, entitlement
grantees spent $244 million (about 84 percent of their 1990 fiscal
year economic development expenditures) on assistance to for-profit
businesses.  The remaining $46 million was spent on commercial and
industrial improvements by the grantee or by nonprofit organizations. 

HUD reported that in fiscal year 1991, states allocated $90 million
(70 percent of their fiscal year 1991 economic development
allocations) to financial assistance to for-profit businesses, either
directly or through nonprofit organizations.\4

The remaining $38 million funded a number of activities.  The largest
amount, $25 million, was spent on infrastructure. 

The type of for-profit business receiving assistance varied widely. 
According to our review of 81 communities' 1990 GPRs, assisted
businesses included restaurants, hotels, retail stores,
manufacturers, auto repair shops, day care centers, beauty salons,
and funeral homes.\5

Our field visits provided additional information on the types of
businesses assisted.  For example, Dallas, Texas--a metropolitan city
that receives entitlement grants--has an active lending program to
provide loans to small businesses.  In order to qualify, the business
must meet several criteria.  However, none limit the type of business
seeking CDBG assistance.  For example, the business must have
operated successfully for 18 months, have less than $2 million in
average net income, and not be eligible for 100-percent conventional
financing.  Businesses assisted through CDBG included a builder of
automobile engines, a meat processing plant, a cabinet manufacturer,
a produce processor, a barber college, a restaurant, an auto body and
repair shop, and a day care center.  Likewise, Riverside County,
California, used the CDBG program to support a wide range of business
activities, including furniture makers, car dealerships, grocery
stores, printing companies, a paper manufacturer, restaurants, food
processing firms, and a warehouse distribution center. 

In Michigan, we also identified a variety of businesses being
assisted, such as manufacturers of auto parts, furniture, wood
products, and electrical fixtures, and food processing and metal
fabricating firms.  CDBG funds were also used to extend utilities to
industrial parks to serve new firms located there. 

In the communities we visited, non-CDBG funds were also an important
source of funds for supporting economic development activities and
were sometimes used in combination with CDBG money.  For example,
Buffalo, New York, and Dallas, Texas--two metropolitan entitlement
grantees--contracted with nonprofit organizations to provide CDBG
assistance in the form of loans to businesses.  These organizations
also used Small Business Administration (SBA) financing to assist
business borrowers.  At the national level, a 1991 SBA survey found
that 66 percent of participants in SBA's 504 development lending
program also administer or package CDBG funds. 


--------------------
\4 HUD officials stated that grantees, in their PERs, were reporting
financial assistance to for-profit businesses both in the for-profit
activity category and in the nonprofit activity category.  Grantees
were confused about the criteria for these two categories.  HUD
officials suggested combining these two categories to cover financial
assistance to for-profit businesses. 

\5 These 81 GPRs were selected for review because they contained
narratives that described the type of jobs funded. 


   GRANTEES IDENTIFIED FACTORS
   THAT MAY RESTRICT THE USE OF
   CDBG FUNDS FOR ECONOMIC
   DEVELOPMENT
---------------------------------------------------------- Chapter 2:3

Although many local officials and representatives of national
interest groups cited the importance of the CDBG Program as a vehicle
for stimulating economic development, they also identified what they
believed were impediments to the use of the program for this purpose. 
Specifically, they said that HUD's rules and regulations governing
the use of CDBG funds for economic development have been
inconsistently applied throughout the country.  In addition, they
pointed to the requirement that grants benefit low- and
moderate-income people, which limited their ability to respond to
local needs for job retention and imposed an unreasonable
administrative burden because of the need to document compliance. 
They also said the administrative burdens caused by applying the wage
rate provisions of the Davis-Bacon Act to CDBG projects that require
construction discourages the use of CDBG funds for economic
development activities. 


      HUD'S GUIDANCE HAS BEEN
      INCONSISTENTLY APPLIED
-------------------------------------------------------- Chapter 2:3.1

Local economic development officials said that the inability of
grantees to obtain consistent guidance from local and national HUD
offices may discourage them from using these funds for economic
development or result in noncompliance if they misinterpret the
rules.  For example, HUD headquarters has said that once individuals
are classified as low or moderate income and are hired, their incomes
no longer need to be tracked, and they may retain their low- or
moderate-income status in counting the number of jobs created.  Yet
several local officials said that they were not allowed by their HUD
field office to count individuals as low or moderate income if their
incomes rose after they were employed either because of promotion or
receiving a higher-paying job.  In another example of inconsistent
application of HUD's guidance, a Los Angeles job creation program
that included job training as a component was cited by HUD as an
exemplary program, while a similar program in Miami, Florida, was
criticized by its HUD field office for using economic development
funds for job training. 

The problem of inconsistent guidance has been commonly acknowledged,
and the Congress has directed HUD to address this issue. 
Specifically, in the Housing and Community Development Act of 1992,
HUD was directed to use unexpended Urban Development Action Grant
(UDAG) funds that it recaptures from grantees to provide continuing
education and training to HUD officials responsible for monitoring
and administering CDBG-funded economic development activities.\6

The National Council for Urban Economic Development has recommended
that this training include financial analysis of economic development
activities within the context of a local community's needs and
priorities.  The Council believes that high-quality training on this
topic targeted to a cadre of staff interested in economic development
may provide consistency in how CDBG Program regulations are applied. 

HUD headquarters officials said that they had begun some training of
HUD's staff.  In total, HUD had committed about $176,000 in
recaptured UDAG funds to training as of September 30, 1993, $70,000
of which was spent specifically for underwriting training.  HUD
officials said they plan to spend more on training during fiscal year
1994 as funds become available.  As of January 1994, HUD was readying
courses on the fundamentals of economic development that officials
estimated would start during the second quarter of fiscal year 1994. 
The officials noted that they will also have to train the staff on
forthcoming new CDBG regulations required by the Housing and
Community Development Act of 1992.  As noted in chapter 1, these
regulations are to consist of guidelines to assist grantees in
selecting economic development projects for funding.  HUD plans to
issue proposed regulations for public comment in March 1994. 


--------------------
\6 The Urban Development Action Grant Program, administered by HUD,
provided grants to help alleviate physical and economic deterioration
in distressed cities and urban counties.  Appropriations for the
program were discontinued in 1989, but some unexpended grants remain. 


      CURRENT REGULATIONS ON
      INCOME LEVEL MAY DISCOURAGE
      USING CDBG FUNDS FOR JOB
      RETENTION
-------------------------------------------------------- Chapter 2:3.2

Many communities have been hit hard by corporate downsizing and plant
closures, making the retention of jobs a top priority.  Yet current
CDBG regulations may be counterproductive to that goal.  Currently,
these regulations are designed to ensure that the primary
beneficiaries of the program are low- and moderate-income individuals
and to permit the use of CDBG funds to save jobs only when a business
is threatened with imminent closure or relocation.  Some local
officials have said these regulations make it difficult for their
communities to use CDBG funds to assist struggling local businesses
as a preventive measure--to forestall a situation in which the
business is likely to move or close and thereby eliminate jobs. 

Specifically, the CDBG Program allows program funds to be used for
job retention only if it can be documented that the jobs would
actually be lost without the assistance provided by the program.  In
addition, 51 percent of these threatened jobs either must be held by
low- and moderate-income individuals or could reasonably be expected
to become available to these people within the next 2 years. 
Documenting that a business will close is required if CDBG funds are
to be used for job retention.  However, documenting this situation is
onerous, according to some local officials.  Although HUD
headquarters officials said that a public notice that the business is
closing is not required as documentation, some local officials stated
they will not use funds for job retention because they believe this
is the only way to adequately document that the jobs will be lost. 
Local officials are reluctant to issue such public notices because
they believe doing so puts an emotional strain on workers. 

Other officials found it ironic that the CDBG Program rules make it
difficult to save workers' jobs, although CDBG funds could be used to
get them new jobs.  They explained that the jobs saved might not meet
the low- and moderate-income test.  However, unemployed workers could
qualify as low- and moderate-income persons and could then be counted
towards the 51 percent requirement for job creation. 

One official stated that in order to avoid the job retention
requirements, his agency looks to see if any new jobs are created in
the process of retaining jobs in a local firm.  The agency then
justifies the project on the basis of job creation rather than job
retention.  Another grantee said that his community uses other
sources of funds for job retention activities because of the
difficulty of complying with HUD's current regulations. 

However, advocates for low-income people pointed out that without
stringent regulations, firms could threaten to close simply to
receive benefits from the CDBG Program that could have gone to
benefit low- and moderate-income individuals.  When asked how the
regulations could be revised to both provide flexibility and
safeguard the program from abuse, local officials and advocacy groups
were not able to offer concrete suggestions. 

The job retention issue was also raised by a HUD-sponsored CDBG
paperwork reduction task force.  In response to a task force
recommendation, HUD is reevaluating requirements for job retention
activities.  In December 1992, HUD requested input from four national
associations on issues relating to job retention and received what
HUD officials characterized as limited input in January 1993.  As of
January 1994, HUD had proposed no regulatory changes.  However, HUD
officials did indicate that a change made by the Housing and
Community Development Act of 1992 that allows the presumption of low-
and moderate-income status in certain circumstances may make it
easier for grantees to comply with the current requirements when
using CDBG funds for job retention.  (This change is discussed
further in ch.  3.)

However, resolving grantees' job retention concerns while adequately
safeguarding against program abuse is a difficult task.  Other
federal community development programs without the requirement to
benefit low- and moderate-income people, such as SBA's 504 program,
have had difficulty ensuring that companies are in real danger of
closing rather than just trying to obtain government benefits.  In
determining when assistance is needed, HUD has the added
responsibility of ensuring that the majority of benefits are for low-
and moderate-income people. 


      THE DAVIS-BACON ACT IMPOSES
      ADMINISTRATIVE BURDENS ON
      GRANTEES
-------------------------------------------------------- Chapter 2:3.3

The Davis-Bacon Act was passed in 1931 during the Great Depression to
ensure that federally funded government construction projects covered
by the act would not be awarded to contractors whose bid was based on
undercutting local wages.  The act requires that contractors pay
their workers the wage rates that prevail in the locality where the
construction takes place.  These wage rates are determined by surveys
conducted by the Department of Labor.  Pursuant to the statute
establishing the CDBG program, the wages established under the
Davis-Bacon Act apply to construction projects funded in whole or in
part by CDBG grants.  The same is not true, however, for certain
other federal economic development programs, such as those
administered by SBA. 

While the Davis-Bacon Act seeks to protect local wage rates, there is
controversy over its impact on the total cost of construction
projects.  Some studies have supported the complaints of CDBG
grantees and others that the Davis-Bacon Act increases wages and
drives up project costs.  Other studies have concluded that the
higher wages are offset by higher productivity and better quality
work, leading to less rework and lower maintenance costs.  In any
case, documentation is required to show compliance with the law for
all projects costing over $2,000. 

The $2,000 threshold has remained unchanged for almost 60 years
(since 1935).  When adjusted for inflation, this would equate to
about $21,000 in 1993.  We found that some grantees, avoided the
requirement to document compliance with the Davis-Bacon wage
provisions by using CDBG funds on aspects of a project that do not
involve construction and using other funds not subject to the act to
finance construction.  For example, we found one business loan in
which CDBG funds were used for land acquisition while an SBA loan
financed construction costs.  Because SBA programs are not covered by
the Davis-Bacon Act wage rates, the project avoided the CDBG
documentation requirements. 

We found agreement among the grantees we visited, economic
development organizations, a housing group, and labor union
representatives that the threshold should be raised, although there
were disagreements about how high it should be.  The September 1993
report of the President's National Performance Review task force
recommended raising the threshold to $100,000.\7 The National Council
for Urban Economic Development recommended that the Congress raise
the threshold to $250,000.  Similarly, the National Association of
Housing and Redevelopment Officials recommended raising the threshold
to $250,000 or applying the law to all projects in which federal
funds account for more than one third of the project's financing.  In
contrast, the American Federation of Labor and Congress of Industrial
Organizations supports raising the threshold to $15,000 for
renovation and $100,000 for new construction. 


--------------------
\7 From Red Tape to Results:  Creating a Government That Works Better
& Costs Less, report of the National Performance Review, Vice
President Al Gore (Washington, D.C.:  Sept.  7, 1993). 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:4

CDBG funds targeted to economic development activities have been a
relatively stable percentage of total CDBG funding.  However,
entitlement communities' economic development expenditures have
declined in recent years in constant dollars.  Although some grantees
devote significant amounts of their CDBG funds to economic
development, others do not support economic development with CDBG
funds.  This wide range of use reflects several local variables,
including the availability of other funding sources as well as the
grantees' changing needs and priorities.  Encouragement by the
Congress or the administration is another external factor that also
could influence the amount grantees choose to spend on economic
development.  For example, the Congress, through the Housing and
Community Development Act of 1992, encouraged grantees to spend one
percent of their annual grants on microenterprises. 

Economic development officials believe that there are three primary
restrictions to using CDBG funds for economic development.  One
restriction--confusion over the content and application of CDBG
regulations--may be alleviated by economic development training that
HUD recently began providing to its staff and plans to expand
beginning in the second quarter of fiscal year 1994.  HUD and others
had been struggling to determine whether there is a suitable solution
to the second restriction:  a way to apply CDBG funds to job
retention activities.  Continuing these difficult efforts to find a
solution is important because many economic development specialists
view job retention as a critical economic development objective in
today's economy.  Finally, the $2,000 threshold for the Davis-Bacon
Act, which is applicable to CDBG construction projects, imposes an
administrative burden on grantees even for small projects.  Some
other federal economic assistance programs, such as those sponsored
by the Small Business Administration, are not subject to this
requirement.  Numerous groups, including the Vice President's
National Performance Review, agree that the threshold should be
raised.  However, raising the threshold is a legislative issue that
affects more programs than just the CDBG Program. 


   RECOMMENDATIONS TO THE
   SECRETARY OF HUD
---------------------------------------------------------- Chapter 2:5

We recommend that the Secretary assess the effectiveness of HUD's
economic development training by obtaining periodic feedback from
grantees and/or the organizations that represent them on HUD
officials' consistency in interpreting CDBG program rules.  In
addition, the Secretary should ensure that CDBG program officials
revive efforts to determine whether and how CDBG funds could be more
easily used for job retention activities. 


ISSUES RELATED TO THE PROPER USE
OF FUNDS FOR ECONOMIC DEVELOPMENT
ACTIVITIES
============================================================ Chapter 3

The primary goals of the CDBG Program are to develop viable
communities, provide decent housing and a suitable living
environment, and expand economic development opportunities,
principally for people with low and moderate incomes.  These goals
provide the underlying criteria by which the proper use of funds for
CDBG activities can be judged.  A number of groups have questioned
whether (1) CDBG-funded economic development activities have
sufficiently benefited low- and moderate-income populations, (2) job
creation meets the projected levels, (3) these activities provide
unneeded assistance to for-profit businesses, and (4) CDBG-funded
loans to for-profit businesses are properly safeguarded against loss. 


   ACTIVITIES SHOULD PRINCIPALLY
   BENEFIT LOW- AND
   MODERATE-INCOME PEOPLE
---------------------------------------------------------- Chapter 3:1

According to HUD's annual reports to the Congress, most CDBG economic
development activities address the national objective of benefiting
low- and moderate-income people.  HUD says this objective is
frequently met by creating or retaining permanent jobs, 51 percent of
which either are or will be held by low- and moderate-income people
or are considered to have been made available to such people. 
However, HUD's Inspector General, community groups, and others have
questioned whether the benefits of CDBG economic development
activities to low- and moderate-income people have been adequately
documented.  Changes mandated by the Housing and Community
Development Act of 1992 should facilitate future documentation. 


      DOCUMENTATION REQUIREMENTS
      FOR LOW- AND MODERATE-INCOME
      JOB CREATION AND RETENTION
-------------------------------------------------------- Chapter 3:1.1

Before the Housing and Community Development Act of 1992, there were
two ways a grantee could demonstrate that at least 51 percent of
CDBG-funded jobs benefited low- and moderate-income people.  The
first way was to have the jobs actually taken by people meeting the
area's low- and moderate-income standards.  The relevant income was
not that of the individual, but rather that of the entire household,
similar to the criterion in federal housing assistance programs. 
Acceptable documentation could consist of a local form, signed by the
employee, stating that his or her household income did not exceed the
income standards for the relevant family size.  (As an example, the
1993 income limits used by Buffalo, New York--an entitlement
grantee--are shown in table 3.1.) No other documentation, such as
copies of federal income tax forms, are required by HUD regulations,
although some field offices may have imposed such requirements. 



                          Table 3.1
           
           Income Limits in Buffalo, New York, for
            Low-and Moderate-Income Households, as
                        of April 1993

                                                   Moderate-
                                  Low-income          income
Number of people in household         limits          limits
------------------------------  ------------  --------------
1                                    $13,650         $21,850
2                                     15,600          24,950
3                                     17,550          28,100
4                                     19,500          31,200
5                                     21,050          33,700
6                                     22,600          36,200
7                                     24,200          38,700
8                                     25,750          41,200
------------------------------------------------------------
The second way to comply with the low- and moderate-income test was
to demonstrate that at least 51 percent of the jobs were made
available to low- and moderate-income people.  To do this, a grantee
had to show that (1) the jobs did not require a skill level higher
than a low- and moderate-income person would be likely to have\1 and
(2) a sufficient number of low- and moderate-income people were
interviewed for each position.  HUD has applied the 51-percent low-
and moderate-income test to the actual number of jobs created or
retained, not to the number of jobs the grantee originally projected
when applying for assistance. 


--------------------
\1 The skill level can be higher if the employer is willing to train
the employee. 


      CONCERNS ABOUT THE BENEFITS
      OF CDBG-FUNDED JOBS TO LOW-
      AND MODERATE-INCOME PEOPLE
-------------------------------------------------------- Chapter 3:1.2

Audit reports by HUD's Inspector General as well as other studies
have questioned grantees' compliance with the national objective of
benefiting low- and moderate-income people.  Most of these studies
found that the benefits could not be demonstrated because of lack of
documentation or that there was insufficient documentation that the
benefits provided with CDBG funding were targeted to these
populations. 

In Seattle, Washington, for example, the Inspector General found
almost no evidence that jobs were created or retained for low- and
moderate-income people through CDBG economic development business
loans.\2 Although HUD officials had previously brought this issue to
the attention of city officials, the city had not corrected the
situation at the time of the Inspector General's audit.  As a result,
neither HUD nor the grantee was sure, on the basis of documentation
available at that time, whether $1 million in CDBG funds was used
properly.  (According to HUD headquarters officials, the grantee
later obtained adequate documentation for most of the expenditures.)

In another example, based on a 1992 multiregion audit,\3

HUD's Inspector General reported that 13 out of 19 grantees had no
documentation or inadequate documentation to support the number of
low- and moderate-income jobs reported as created or retained.  Four
businesses funded by two of the grantees were not even aware that
such a job requirement existed. 


--------------------
\2 City of Seattle CDBG Entitlement Programs Special Economic
Development Activities, Seattle, Washington, HUD's Office of
Inspector General, 91-SE-241-1004, Sept.  20, 1991. 

\3 Multi-Region Audit:  Special Economic Development Activities,
HUD's Office of Inspector General, 92-TS-145-0009, Apr.  29, 1992. 


      ACTUAL JOBS MAY FALL SHORT
      OF PROJECTIONS
-------------------------------------------------------- Chapter 3:1.3

HUD's Inspector General and community groups have expressed concern
that the actual number of jobs for low- and moderate-income people
resulting from CDBG-assisted businesses often fall short of
projections.  For example, the Inspector General's 1992 multiregion
audit found that half of almost 3,500 jobs projected when the
grantees decided to fund economic development activities had not been
created at the time of the audit. 

The extent to which this occurs overall is not known.  Although HUD
requires grantees to report projected and actual jobs created or
maintained, HUD officials said they have not done any overall
analysis of this information to determine the extent to which actual
jobs fall short of projections. 


      RECENT LEGISLATION SHOULD
      FACILITATE DOCUMENTATION OF
      LOW- AND MODERATE-INCOME
      BENEFIT
-------------------------------------------------------- Chapter 3:1.4

The Housing and Community Development Act of 1992 allows grantees to
use additional processes to document job benefits to low- and
moderate-income people.  As a result of these changes, an employee is
presumed to have low- or moderate-income if one or more of the
following conditions apply: 

  The employee resides in, or the assisted activity through which he
     or she is employed is located in, a census tract that meets the
     eligibility criteria for a federal enterprise zone;\4 or

  the employee resides in a census tract where not less than 70
     percent of the residents have incomes at or below 80 percent of
     the area's median income. 

These changes are similar to those recommended in the February 1991
report of the HUD-sponsored paperwork reduction task force.  The task
force's recommendations were intended to reduce burdensome
documentation requirements.  HUD and others took exception to the
task force's recommendation of using the businesses' location as a
method of documenting low- and moderate-income status.  HUD's CDBG
officials maintained that it is unreasonable to assume that people
who work in a low- and moderate-income census tract are low- and
moderate-income people.  Also, the minority view of the paperwork
reduction task force emphasized that the use of census tract data as
a presumption of low- and moderate-income status could allow people
whose income is not low to benefit, in certain circumstances. 

Although it is too early to know what effect these changes will have,
they should, in some cases, make it easier for grantees to document
the benefit to low- and moderate-income people of economic
development activities.  As stated above, such documentation was
previously a significant area of noncompliance. 


--------------------
\4 HUD officials said that the term "enterprise zone" is comparable
to the term "empowerment zone" used in subsequent legislation. 


   ECONOMIC DEVELOPMENT ACTIVITIES
   MUST MEET AN APPROPRIATENESS
   TEST
---------------------------------------------------------- Chapter 3:2

In many communities, the competition among activities for limited
CDBG funds can be intense.  Grantees providing assistance to
for-profit businesses are required to meet an appropriateness test,
which, among other things, ensures that the amount of assistance is
not excessive relative to the actual needs of the business and the
extent of expected public benefit.  HUD's Inspector General has also
questioned compliance with this requirement, and the issue of
appropriateness was the subject of changes in the Housing and
Community Development Act of 1992.  The act required HUD to issue
guidelines to assist grantees in evaluating and selecting which
economic development activities should receive CDBG assistance.  HUD
officials indicated that these guidelines, which the act says must be
in the form of regulations, should be issued for public comment in
March 1994. 


      DETERMINING THAT ASSISTANCE
      MET THE APPROPRIATENESS TEST
-------------------------------------------------------- Chapter 3:2.1

The appropriateness test seeks to ensure that a for-profit business
is not unduly enriched by the CDBG assistance it receives.  The test
used during our audit work was based on the CDBG legislation, as
amended in 1990.\5 HUD's guidance to its offices has emphasized that
before providing financial assistance to for-profit businesses,
grantees must determine and document that the assistance is
"appropriate."

HUD's March 1992 guidance recommended that to meet the
appropriateness requirement, grantees determine that there is a need
for the financial assistance.  HUD also recommended that grantees
ascertain that the CDBG funds would allow a business a reasonable
return on its equity investment, consistent with industry standards
for that type of business.  According to HUD, CDBG assistance may not
be appropriate if (1) it exceeds the business's needs and the
expected public benefit, (2) it substitutes for available private
debt financing, or (3) the assisted project is not likely to succeed. 


--------------------
\5 The law originally required that the CDBG assistance be "necessary
or appropriate." The Cranston-Gonzalez National Affordable Housing
Act of 1990 deleted the words "necessary or." However, HUD does not
believe this change altered the review grantees must perform.  Nor
was this statutory change addressed in any subsequent HUD regulation. 


      CONCERNS ABOUT GRANTEES'
      COMPLIANCE WITH THE
      APPROPRIATENESS TEST
-------------------------------------------------------- Chapter 3:2.2

HUD's Inspector General has questioned grantees' compliance with the
determination of appropriateness.  In the previously cited
multiregion review, HUD's Inspector General found that 13 of the 19
grantees reviewed did not adequately perform or document the required
analyses to determine that the CDBG assistance was necessary or
appropriate.  It further pointed out that 2 of the 13 grantees failed
to do any analysis. 

Individual audits of local grantees have found similar instances of
poor documentation.  For example, in an audit conducted in 1992,
HUD's Inspector General found that Kenosha, Wisconsin, did not
document the appropriateness test and did not adequately support the
amount of loan assistance given or the public benefit derived from
the loans the grantee approved.  In a 1992 audit, HUD's Inspector
General found that Memphis, Tennessee, did not have adequate
documentation to support the eligibility of 22 economic development
loans totaling $2.7 million. 

Some of the HUD Inspector General's findings were discussed in
oversight hearings held in October 1991 and March 1992 by the
Employment and Housing Subcommittee of the House Committee on
Government Operations.  One case discussed was a $5 million
interest-free loan to a major national retailer for which HUD's
Inspector General had questioned both the need and the amount.\6


--------------------
\6 The retailer voluntarily repaid the loan after the Inspector
General's regional audit report was published. 


      FUTURE HUD GUIDELINES MAY
      ASSIST GRANTEES IN
      DETERMINING WHEN TO ASSIST
      CDBG ECONOMIC DEVELOPMENT
      ACTIVITIES
-------------------------------------------------------- Chapter 3:2.3

Compliance with the appropriateness test may be affected by changes
mandated by the Housing and Community Development Act of 1992.  The
act requires HUD to establish, by regulation, guidelines that could
be used by grantees to evaluate and select economic development
activities to be assisted with CDBG funds.  The guidelines are to
cover certain project cost and financial requirements.  The
guidelines are also to address the public benefit that is to be
derived from the CDBG funds provided. 

HUD indicated that the act's purpose for establishing these
guidelines by regulation was to ensure that grantees have the
opportunity to review and comment on the guidelines before they take
effect.  HUD officials estimate that the guidelines should be
published for comment by March 1994.  Until these guidelines take
effect, grantees are to follow the guidance last provided by HUD on
March 6, 1992. 

The 1992 act established the following objectives for CDBG economic
development activities that HUD must address in the new guidelines: 

  The costs of the projects should be reasonable. 

  To the extent practicable, reasonable financial support should be
     committed for such activities by nonfederal sources before
     federal funds are disbursed. 

  To the extent practicable, any grant amounts provided for such
     activities should not substantially reduce the amount of
     nonfederal financial support for the activity. 

  Such activities should be financially feasible. 

  To the extent practicable, such activities should provide not more
     than a reasonable return on investment to the owner. 

  To the extent practicable, grant amounts used for the cost of such
     activities should be disbursed on a pro rata basis with amounts
     from other sources. 

The act indicates that in auditing grantees, HUD cannot use a failure
to achieve one or more of the above objectives as a basis for ruling
that a project was not eligible for CDBG funding.  Therefore, it is
possible that a project could fail to comply with all of the above
guidelines and still be eligible for funding. 

The 1992 act also requires that public benefits provided by economic
development activities be appropriate relative to the amount of CDBG
assistance provided.  However, HUD can rule on project eligibility
based on compliance with the guidelines that it develops for this
requirement, unlike the case for the cost and financing objectives
discussed above. 


   CDBG SHOULD BE SAFEGUARDED
   AGAINST UNNECESSARY LOSSES
---------------------------------------------------------- Chapter 3:3

CDBG-funded economic development activities often consist of loans to
for-profit businesses that the recipient must repay to the grantee. 
Concerns have been raised by a congressional committee and HUD's
Inspector General about whether grantees are properly safeguarding
these loans. 

Loan defaults may occur when businesses are unable to make the
required payments.  Although the business may continue to operate,
some or all of the loaned money may be lost, and the default may also
result in loss of the activity's benefits, such as additional jobs
and increased taxes.  As we will discuss in chapter 5, there is no
established acceptable default rate for CDBG economic assistance
loans.  However, given that such loans are usually made to businesses
that cannot obtain sufficient private financing, a higher than normal
default rate might be expected.  HUD officials added that many of
these loans are made to small businesses located in distressed areas
that have high crime rates and lack adequate public services. 

Defaults on CDBG loans has been persistently identified as a problem
by HUD's Inspector General.  In April 1992, the Inspector General
recommended that HUD establish standards for measuring the status of
loan failure rates.  However, as of January 1994, no standards had
been issued. 

HUD's Inspector General has found many instances of for-profit
businesses in default or delinquent on CDBG loans.  In the 1992
multiregion review, the Inspector General found that 43 percent of
the loans originated by 19 grantees reviewed were either in default
or delinquent.  The report also stated that the poor management
practices of these grantees put over $10 million at risk of loss. 
Another audit found that Memphis, Tennessee, had approved 18 loans
totaling $7.3 million; 16 of these loans defaulted because the
businesses failed.  As a result, the grantee lost $6.3 million. 

Grantees' use of the Section 108 Loan Guarantee Program can place
even more CDBG funds at risk because of the larger dollar amounts of
many of the Section 108 loans.\7 Audits by HUD's Inspector General
have identified instances in which these larger loans were made for
unsound projects.  Tacoma, Washington, for example, loaned almost
$500,000 in Section 108 funds to a developer who used the money for
other than the stated purpose, never completed the project, and
defaulted on the loan.  The grantee thus had to pay the $500,000.  A
similar large default by a developer in Niagara Falls, New York, also
resulted in the grantee's incurring a loss. 

In some cases, a community may correctly analyze the risk of a loan
but still determine that its best interests are served by
underwriting it.  This was the case with a Section 108 loan earmarked
for a steel corporation that was a major employer in Pennsylvania. 
In reviewing the application, the HUD field office economist
characterized the loan as very risky because it would not ensure the
company's continued operations.  Nevertheless, the HUD economist
agreed that the community had little choice because the company was
the area's primary employer.  In short, the HUD economist agreed that
the anticipated benefit, though not guaranteed, might be worth the
high risk assumed.\8

As HUD's Inspector General recommended, HUD will be establishing a
data base to record loan defaults and delinquencies for CDBG
Entitlement Program funds and has begun requiring grantees to report
this information as part of their latest grantee performance
report.\9 An understanding of loan defaults and delinquencies is
especially important in light of changes in the National Affordable
Housing Act of 1990 that expanded the Section 108 Loan Guarantee
Program and HUD's current promotion of the use of Section 108 CDBG
funds.  Future defaults on these larger Section 108 loans could
substantially affect the grantees' abilities to fund future CDBG
activities, such as housing and public services. 


--------------------
\7 This premise assumes that grantees' use of Section 108 loan
guarantees increases the grantees' level of funding for economic
development. 

\8 The grantee did not make the loan because the company went
bankrupt. 

\9 As of January 1994, HUD was also examining the failure rate of a
judgmentally selected sample of 1988 economic development projects in
the State-Administered Program. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:4

Proper use of funds for economic development activities is essential
if the overall objective of the CDBG Program--to expand economic
opportunities for low- and moderate-income people--is to be achieved. 
Previous findings by HUD's Inspector General have identified areas in
which grantees needed to improve documentation of compliance with
existing CDBG regulations.  Although it is too early to determine the
effect, regulatory changes mandated by the Housing and Community
Development Act of 1992 may result in a higher level of compliance by
making it easier for grantees to document benefits to low- and
moderate-income populations and by assisting grantees in their
selection of activities to be funded.  However, HUD and others are
concerned that documenting benefits to low- and moderate-income
people based solely on the location of an assisted business may
result in an overstatement of such benefits. 

Delinquencies and defaults on loans that CDBG grantees make to
for-profit businesses have been another area of concern to HUD's
Inspector General.  As the Inspector General recommended, HUD now
requires grantees to report delinquencies and defaults on these loans
and is establishing a system to record this information.  In time,
this system should provide national information on grantees'
experiences that grantees would find useful in assessing the
performance of their own loan portfolios.  These national data should
also be useful to HUD and to the Congress in assessing the
seriousness of the loan delinquency and default situation.  Should
the data show that there is a serious problem, further analysis of
these data might also help determine the causes. 


   RECOMMENDATION TO THE SECRETARY
   OF HUD
---------------------------------------------------------- Chapter 3:5

The Secretary should include in HUD's annual report to the Congress
on the CDBG Program the data that HUD is starting to collect on
delinquencies and defaults on economic development loans that
grantees make to for-profit business. 


TYPES AND QUALITY OF CDBG-FUNDED
JOBS
============================================================ Chapter 4

No requirements govern the specific types of jobs that can be funded
through CDBG, and little information is available on the jobs that
have been funded.  As noted in chapter 2, grantees have considerable
discretion in funding a wide range of businesses.  The limited data
available suggest that grantees have funded a wide variety of jobs
earmarked for low- and moderate-income people.  Judging the quality
of these jobs would require both an accepted definition of quality
and detailed data on the jobs' characteristics, such as pay,
benefits, and opportunities for advancement.  However, neither of
these elements is currently available. 

Certain circumstances mitigate against attempting to establish a
national quality standard for the jobs that CDBG grantees fund for
low- and moderate-income people.  To some extent, national economic
conditions, such as employment trends, affect the types of jobs being
created.  Also, local factors, including local economic conditions
and the community's economic development strategies, affect
perceptions of quality and the types of jobs that can be funded. 
Nevertheless, setting expectations for job quality and encouraging
the funding of such jobs at the local level is a desirable goal that
some grantees are already pursuing.\1


--------------------
\1 As noted in chapter 1, it is difficult to estimate the net effect
the CDBG program has on either job creation or job quality because
some of the same employment decisions may have occurred in the
absence of CDBG funding. 


   HUD HAS LIMITED DATA ON THE
   TYPES OR QUALITY OF CDBG-FUNDED
   JOBS
---------------------------------------------------------- Chapter 4:1

Activities that qualify for CDBG funds on the basis of the jobs they
will create or retain are not required to provide jobs with a certain
wage, specified level of benefits, or potential for advancement.  The
principal requirement is that 51 percent of the jobs created or
retained must be either taken by or made available to low- and
moderate-income people.  HUD does not systematically collect data on
the types of jobs created or retained.  Nor has it done any formal
analysis of jobs created by the CDBG Program to ascertain their
characteristics. 

For each job creation or retention activity, grantees are required to
maintain records of the titles of the permanent jobs filled by or
made available to low- and moderate-income people.  Entitlement
grantees are required to attach a narrative describing the titles of
the jobs made available to low- and moderate-income people to their
annual GPRs.  (The titles of jobs actually filled by low- and
moderate-income people do not have to be identified.) These
narratives rarely contain any data on job characteristics, such as
pay rate or benefits.\2 However, HUD officials said that some limited
data on pay levels will be gathered in a HUD-funded study of the
Entitlement Program being conducted by the Urban Institute. 


--------------------
\2 States are not required to include this information in their
annual PERs. 


   LIMITED AVAILABLE DATA SUGGEST
   GRANTEES HAVE FUNDED MANY TYPES
   OF JOBS FOR LOW- AND
   MODERATE-INCOME PEOPLE
---------------------------------------------------------- Chapter 4:2

In a review of selected GPRs from fiscal year 1990, we found that the
types and likely salaries and advancement potential for CDBG-funded
jobs varied widely.\3 Reported jobs were distributed among many
different occupations, which have a wide spectrum of pay rates and
potential for advancement, according to Department of Labor
occupational guides. 

We used the Bureau of Labor Statistics' (BLS) Occupational Outlook
Handbook to categorize the job types reported in the GPRs.  This
publication classifies jobs into 12 major civilian occupational
categories.  Jobs reported as available to low- and moderate-income
people in the 1990 GPRs fell primarily into four of these categories. 
(See fig.  4.1). 

   Figure 4.1:  Types of Jobs
   Funded by Grantees

   (See figure in printed
   edition.)

The 12 major civilian occupational classifications are each composed
of a wide range of more specific positions, with a correspondingly
wide range of salaries and potentials for advancement.  For example,
the administrative support occupations category consists of 16
positions, such as general office clerks, hotel clerks, messengers,
secretaries, bookkeepers, and word processors. 

Some grantees and experts associate lower quality characteristics
with the types of jobs created for low- and moderate-income people
using CDBG funds.  For example, although CDBG-funded hotel projects
can create administrative support, service, executive, and managerial
jobs, hotel positions available to low- and moderate-income people
are often the lower-quality service jobs like housekeeping and
janitorial work. 


--------------------
\3 Although these jobs are not necessarily representative, they
provide an overview of the type of jobs that grantees are funding. 
Of the 343 GPRs that reported activities justified on the basis of
jobs, we reviewed the 81 GPRs that contained a narrative on the job
types. 


   NEITHER A DEFINITION NOR DATA
   SOURCES EXIST TO DETERMINE JOB
   QUALITY
---------------------------------------------------------- Chapter 4:3

The federal government has not defined what a quality job is, nor is
there a generally accepted definition.  Without an accepted
definition of job quality, there is no objective way to determine
whether the jobs funded are quality jobs.  In addition, even if such
a definition existed, data would have to be collected on job
characteristics, such as pay rate, benefits, and job progression, to
determine whether a job actually met the defined quality components. 
Currently, data on such job characteristics are not widely available
for CDBG-funded jobs. 


      THERE IS NO STANDARD
      DEFINITION OF JOB QUALITY
-------------------------------------------------------- Chapter 4:3.1

According to labor experts, including officials from the Department
of Labor and the Congressional Research Service, there is no federal
definition of job quality.  However, these officials said that
potential broad indicators of quality may include (1) the level of
pay; (2) the promotion and pay potential; (3) the availability of
benefits like health insurance; (4) the availability of training to
enhance work skills; (5) the job duration (all year versus seasonal);
(6) the workweek length (full-time versus part-time); (7) the working
conditions, including a safe working environment; and (8) access to
the place of employment. 

If such broad indicators are to be useful in promoting job quality,
appropriate indicators would have to be selected and specific desired
criteria established for each.  For example, a desired pay criterion
might be a rate that is a certain level above the minimum wage or a
certain percentage of the average local pay rate.  Similar
refinements could be developed for other potential quality
indicators.  However, the grantees themselves are probably best
suited to perform this task because, as discussed later in this
chapter, a number of local variables can shape a community's
perception of job quality and its ability to fund higher-quality jobs
through the CDBG Program. 


      LONGITUDINAL DATA ARE NOT
      COLLECTED TO DETERMINE
      LONG-TERM JOB QUALITY
      FACTORS
-------------------------------------------------------- Chapter 4:3.2

Setting an acceptable definition is just one element in determining
whether jobs are quality jobs.  Because potential indicators, such as
promotion, pay progression, and job training, span a period of time,
data need to be gathered from the employer on whether such events
have occurred.  Collecting such data could impose a costly regulatory
burden on both the grantee and the assisted business if the
information is not already being compiled.  Yet without such data, it
may be difficult for grantees to demonstrate that the low- and
moderate-income employees hired ever obtained a quality job. 

Currently, HUD does not require grantees to collect data on
characteristics, such as pay rates, benefits, and opportunities for
advancement, for low- and moderate-income jobs.  HUD officials
indicated that such information is rarely maintained by grantees,
primarily because of the paperwork burden.  Grantees told us that
adding additional CDBG requirements would make the program far less
appealing to businesses and reduce its usefulness as a vehicle for
economic development.  Also, requiring such documentation may clash
with previously discussed changes mandated in the Housing and
Community Development Act of 1992, which may reduce the documentation
certain CDBG-assisted businesses must provide. 

In lieu of collecting actual data on the quality of CDBG-funded jobs,
job quality could be estimated using the Department of Labor's
Occupational Outlook analysis.  However, Labor's analysis is not
employee specific and generalizes such factors as pay and potential
for advancement.  For example, opportunities for advancement for
hotel clerks, as described by Labor's 1992-93 Occupational Outlook
Handbook, will depend on additional training and/or education.  A
full-time clerk may have median weekly earnings of $230, but this
figure may vary significantly depending on the location, type, and
size of the hotel.  For example, hotels in metropolitan areas pay
clerks more than those in other locations. 

A 1990 study of the State-Administered Program conducted by the
Council of State Community Development Agencies looked at several
elements that could be associated with job quality.  The study found
that about 70 percent of jobs funded by CDBG in these small,
predominately rural communities paid less than $300 per week, while
more than 50 percent of U.S.  workers earned over $373 per week. 
However, the study also found that 96 percent of the jobs created
offered year-round employment and that almost 20 percent of the
workers hired under the CDBG Program were subsequently promoted. 


   LOCAL PERCEPTIONS AND TARGETED
   POPULATIONS AFFECT THE
   DEFINITION OF ACCEPTABLE JOB
   QUALITY
---------------------------------------------------------- Chapter 4:4

The local economic conditions and employment base often affect how a
quality job is defined.  For example, HUD officials and many others
have indicated that almost any job in some locations of high
unemployment may be viewed positively.  In some economies, there may
be a shortage of employees with skills in a particular field. 
Therefore, an entry-level job in that field may be considered a
quality job.  The circumstance at a firm in Michigan, where the
economy is getting stronger, illustrates this point.  At this
furniture manufacturer, individuals are often hired with no skills
and apprenticed in skilled positions.  Because a number of furniture
manufacturers in the area require these skills, the firm was
reluctant to lay anyone off, even temporarily, because that person
would be immediately hired by a competitor. 

According to many grantees, the people targeted by the CDBG Program
often have no work experience, so the goal is to introduce them to
the work environment.  These first-time jobs are often low-paid,
low-skill retail or service jobs.  However, the National Community
Development Association argues that such jobs often provide people
with experience in full-time, long-term employment.  Getting these
people into a first job improves their future productive capacity and
earning potential. 

For example, a battery manufacturer in Michigan provides employment
to individuals referred to the company through the local Job Training
Partnership Act organization.  Many of these individuals have very
poor math skills, and some are mentally impaired.  The company offers
remedial math classes for all its employees and promotes individuals
who are successful on the production line. 


   VARIOUS CONDITIONS AFFECT
   GRANTEES' ABILITY TO FUND
   QUALITY JOBS
---------------------------------------------------------- Chapter 4:5

Various economic factors, both national and local, affect grantees'
ability to fund economic development activities that produce quality
jobs.  These factors include national employment trends, the
practices of the firms assisted, and economic development strategies
that are particular to the local geographic area. 

The national employment trend is toward growth in the service
industry, in which many positions do not pay high wages.  According
to Labor's 1992-93 Occupational Outlook Handbook, the service
industry--which includes a wide range of jobs in the protective
services, food and beverage preparation, health services, cleaning,
and other personal services--is expected to grow faster than other
industries.  Many of these jobs pay at or just above the minimum
wage. 

The quality of the local work force may also influence the ability of
grantees to create quality jobs.  For example, in Shandaken, New
York--an area facing high unemployment--there is a need to provide
jobs for low- and moderate-income residents with limited job skills. 
One-third of these residents have not completed high school. 
Therefore, the local strategy is to fund economic development
activities that create jobs that do not require extensive training or
education. 

A CDBG grantee's emphasis on providing financing to smaller
businesses may also affect whether the grantee can provide jobs with
good fringe benefits.  In a June 1993 survey of small and mid-sized
businesses, the Arthur Andersen Enterprise Group reported that the
size of the business affects employee benefits:  Smaller firms are
less likely to provide such benefits.  The study reported that 54
percent of firms with fewer than 20 employees offered health and
medical insurance, while 99 percent of businesses with 100 or more
employees did so.  The study also indicated that only 9 percent of
the firms with fewer than 20 employees provided tuition
reimbursement, compared with 55 percent of those firms with 100 or
more employees. 

CDBG grantees face a diverse range of economic conditions requiring
flexible economic development strategies to meet local needs.  The
economic strategies of grantees in areas with high unemployment may
differ from the strategies of grantees in areas that have low
unemployment rates.  Also, other factors may take precedence over the
quality of the job created.  For example, assisting a grocery store
that operates in an underserved inner-city neighborhood may be of
considerable benefit to low- and moderate-income residents, yet it
may result in mostly minimum-wage jobs.  Similar arguments could be
made for other retail establishments, such as department stores. 
Economic development officials in Buffalo, New York, indicated that
as part of their downtown revitalization strategy, they were
attempting to attract a department store to fill a retail gap created
when a department store previously located in the area closed.  Such
a store may create mainly low-paying clerk positions yet contribute
significantly to Buffalo's revitalization efforts. 

Also, some assisted businesses may be unable to afford to offer
benefits.  As discussed in chapter 5, many companies qualifying for
loans under the CDBG Program are not as strong financially as other
entities in the marketplace.  If they were, they could qualify for
100-percent conventional financing.\4

Requiring these businesses to provide extra benefits would not only
be costly but may make their labor costs more expensive than those of
their competitors who are not funded by CDBG.  Increased labor costs
would adversely affect their chances for success.  Indeed, the added
cost might affect their projected cash flow so much that they would
no longer be a viable project able to qualify for funding. 


--------------------
\4 This point is vividly made in the slogan for the Southern Dallas
Development Corporation (SDDC), the organization that Dallas
contracts with to provide CDBG business loans:  "SDDC is a place to
go when the bank says no."


   GRANTEES CAN PROMOTE QUALITY
   JOBS IN CDBG PROJECTS
---------------------------------------------------------- Chapter 4:6

Despite the potential difficulties, many grantees have developed
strategies to encourage the funding of CDBG projects that promote
quality jobs.  Within the framework of the CDBG Program, they choose
projects that are likely to result in quality jobs.  In our review of
fiscal year 1992 program documentation\5 for the State-Administered
Program, we found that 18 states give additional weight to projects
offering competitive wages, fringe benefits, training opportunities,
or the potential for advancement.  For example, in determining which
projects to fund, New Hampshire provides additional points for
projects offering competitive wages and benefits, full-time hours,
nonseasonal jobs, and job training.  Likewise, both Florida and
Massachusetts give preference to projects that offer higher wages and
benefits.  New Jersey, in its evaluation of proposed projects,
considers the potential for career development and advancement as
well as the training opportunities provided. 

Communities in the Entitlement Program have the same flexibility to
promote job quality if they desire.  For example, a local official
administering the CDBG Program through an economic development
corporation in Portland, Oregon, categorized that city as having a
healthy and growing economy.  The official added that, at a minimum,
any projects funded must pay $6.50 per hour--150 percent above
minimum wage--and offer health benefits. 

We also found examples of individual CDBG-funded businesses that
emphasized various job quality characteristics at the four sites we
visited.  The owner of a distribution business in southern Dallas
stressed formal education.  The owner expected employees to attend
school and paid 100 percent of the costs, provided the majority of
the courses were on business subjects.  In addition, this owner paid
employees an average of $23,500 annually.  A cabinet manufacturing
company located not far from the Dallas downtown area offered its
employees a complete occupational benefit package.  Management
believed that in order to improve production, the company had to
offer its workers certain incentives.  Therefore, in addition to
providing health and life insurance and paid holidays, the company
was also studying the possibility of assisting the workers in
obtaining their own homes in the area. 

In Michigan, we visited two manufacturing firms that had received
CDBG loans.  Starting salaries for entry level jobs at both were
between $5 and $7 per hour, and employees could not only earn salary
increases but also move to positions with increased responsibility. 
These two firms offered medical insurance as well as some additional
benefits, such as life insurance, dental insurance, and retirement
plans. 

Giving priority for CDBG funding to firms that pay a decent wage or
allow for upward mobility has been recommended by several national
low-income economic development organizations.  These include the
Center for Community Change, the National Council for Urban Economic
Development, and the National Economic Development Law Center.  Other
national organizations, such as the National Community Development
Association, while supportive of the goal of creating higher quality
jobs with CDBG funds, argue that doing so might conflict with the
grantees' ability to principally benefit low- and moderate-income
people. 


--------------------
\5 States are required to submit annually to HUD a statement
outlining their CDBG program objectives and method of funding
distribution.  In their annual final statements outlining their
program objectives, states may include their criteria for deciding
which CDBG jobs to fund. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 4:7

The limited data available suggest that there is no typical
CDBG-funded job.  Job types vary in part by the type of business
assisted.  Determining whether the jobs funded are quality jobs will
require both criteria on what constitutes quality and more detailed
data on the characteristics of the jobs.  Neither element is
currently available.  However, there are potential indicators that,
with refinement, may be useful in helping to define job quality
characteristics. 

We believe that setting job quality criteria and expectations is a
task best left to the individual grantees.  Numerous local variables
can affect grantees' job needs, perceptions of quality, and ability
to fund jobs meeting a certain definition of quality.  Mandating any
standard job quality measurements that CDBG-funded jobs must meet may
also (1) significantly reduce the flexibility of the grantees to
carry out their local economic development initiatives and (2) result
in another regulatory burden if such quality measurements need to be
documented or monitored by the grantees. 

Nevertheless, we believe the creation or retention of quality jobs is
a desirable goal that should be encouraged.  The CDBG Program
currently allows grantees the flexibility to consider job quality in
their funding decisions, and some grantees already give preference to
projects that provide desired jobs quality elements. 


   RECOMMENDATION TO THE SECRETARY
   OF HUD
---------------------------------------------------------- Chapter 4:8

The Secretary should instruct HUD's CDBG program managers to
encourage grantees to establish and apply goals for job quality
through means such as distributing to them information on useful
criteria that other grantees have developed and used. 


NUMEROUS MEASUREMENTS MAY BE USED
TO GAUGE THE EFFECTIVENESS OF
ECONOMIC DEVELOPMENT UNDER CDBG
============================================================ Chapter 5

While the CDBG Program can stimulate economic development within
communities, without a comprehensive set of accepted performance
measurements, it is difficult to evaluate how effective these
activities are.  Numerous performance measurements could be used by
CDBG grantees to evaluate the effectiveness of their economic
development initiatives. 

Regardless of what measurements are used, they need to be applied in
the context of local economic conditions and conform with the overall
objective of the CDBG Program to principally benefit low- and
moderate-income people.  Key indicators of effectiveness could
measure one or more of the following outcomes:  (1) the number, cost,
targeted population and type of jobs funded; (2) the increases in the
community's tax base; (3) the leveraging of public and private funds
relative to the CDBG investment; (4) the level of loan defaults; (5)
the creation of needed essential services and facilities; and (6) the
types and sizes of businesses assisted.  In addition, indicators
could attempt to measure CDBG's contribution to an overall effort to
revitalize a neighborhood.  However, doing so would likely be
difficult and costly. 

As previously noted, measuring the results of local CDBG programs is
difficult because some of the results attributed to CDBG funding of
economic development activities may have occurred anyway.  In the
absence of a control group or some other suitable methodology, it is
difficult to accurately estimate what results would have occurred
without the CDBG funding.  This limitation needs to be kept in mind
in this discussion on performance measurements. 

In response to the Housing and Community Development Act of 1992, HUD
is developing guidelines to assist grant recipients in evaluating
economic development activities assisted with CDBG funds.  HUD
officials indicated that these guidelines should be issued for public
comment in March 1994.  To some degree, these guidelines may assist
grantees in establishing their own performance measurements. 


   MEASUREMENTS SHOULD REFLECT THE
   NATURE OF THE CDBG PROGRAM
---------------------------------------------------------- Chapter 5:1

Regardless of what performance measurements are used, it is important
that they recognize the nature of the CDBG Program.  As a block grant
program, it is intended to be flexible and allow grantees to match
CDBG resources to their individual needs.  Furthermore, performance
measurements should reflect the overall goal of the CDBG Program,
which is principally to benefit low- and moderate-income people. 

According to grantees, federal officials, and economic development
experts, the flexibility of the CDBG Program is its greatest
strength.  They acknowledge that given the variety of local
circumstances and conditions, it would be difficult to choose a
standard set of measurements that would apply to all grantees.\1
Instead, grantees could measure the outcomes of their economic
development activities against their own local economic development
goals. 

Furthermore, because the program's mission is to benefit low- and
moderate-income people, performance measurements must be based on
considerations other than measurements of economic development in
general.  For example, default rates--a common measurement for other
economic development programs--may be expected to be higher for CDBG
loans, since they are targeted to higher risk businesses that are
often located in distressed areas.  However, they should not be so
high as to imprudently waste limited funds to the detriment of all
community residents, including the low- and moderate-income
residents. 

The Housing and Community Development Act of 1992 requires HUD to
issue guidelines to assist grantees in evaluating the public benefit
of CDBG-funded economic development activities.  These guidelines,
which may address such factors as the types and characteristics of
CDBG-funded jobs, may assist grantees in measuring some elements of
program effectiveness.  According to HUD officials, the guidelines
are being drafted and should be issued for public comment in March
1994. 


--------------------
\1 The need to account for individual local circumstances was
recognized by HUD in its current evaluation of the impacts of the
CDBG Entitlement Program.  In this evaluation, being conducted by the
Urban Institute, local urban development experts are helping assess
the impact of the program in each of the locations studied. 


   JOBS AS A PERFORMANCE
   MEASUREMENT
---------------------------------------------------------- Chapter 5:2

Indicators related to jobs are frequently used to measure the
effectiveness of economic development initiatives.  The number of
jobs funded, the cost per funded job, the targeted population hired,
and the type of job created or retained can all be used to measure
effectiveness.  In varying degrees, these measurements are currently
being used by CDBG grantees. 


      NUMBER OF JOBS
-------------------------------------------------------- Chapter 5:2.1

Currently, CDBG grantees are required to document the total number of
jobs created or retained as a result of CDBG-funded activities that
are justified on the basis of job creation.  Although HUD does not
require that a specific number of jobs be created, grantees often use
this as a criterion in their decisions about funding projects or
businesses.  Grantees may waive certain program requirements if the
number of jobs created surpasses a certain amount.  For example, in
Missouri, if a new or expanding company creates more than 1,500 jobs,
the maximum grant award can be raised from $400,000 to $2 million. 


      COST PER JOB
-------------------------------------------------------- Chapter 5:2.2

Although HUD does not prescribe any limits on the total cost per
CDBG-funded job, we found that some grantees use maximum-cost-per-job
funding criteria, ranging from $2,000 to $50,000 depending on the
local conditions and type of economic development activity funded. 
This ratio could be based on either the total investment or the CDBG
investment per job.  For example, Nebraska imposes a maximum cost of
$20,000 in CDBG funds per job created or retained.  HUD officials
also pointed out that the cost per job may vary depending on the
industry assisted. 

Unlike CDBG, some federal economic development programs attach a
maximum dollar amount to jobs funded.  For example, in SBA's 504
program, which provides long-term financing to small businesses, the
amount of SBA loan per job created cannot exceed $35,000. 


      TARGETED POPULATION
-------------------------------------------------------- Chapter 5:2.3

Potential performance measurements also include the percent of jobs
that benefit a specific population, such as low- and moderate-income
people.  As discussed previously, CDBG rules require that at least 51
percent of jobs created be either taken by or made available to low-
and moderate-income people.  However, grantees can and have set
higher standards.  For example, Wisconsin's State-Administered
Program requires that at least 70 percent of all CDBG-funded jobs be
filled by low- and moderate-income people.  Louisiana requires that
at least 60 percent of CDBG-funded jobs be made available to low- and
moderate-income people. 

Another job-related indicator could be the extent to which a specific
target group of low- and moderate-income people benefited.  One such
measurement could be how many CDBG-funded jobs were taken by clients
of various local job training programs, such as those funded by the
Job Training Partnership Act or HUD's Family Self-Sufficiency
Program.\2 This measurement could be further stratified.  For
example, the National Economic Development and Law Center has
suggested that in pursuing job strategies, jobs could be targeted to
the (1) working poor, (2) unemployed, (3) persistently unemployed,
(4) dependent poor, and (5) indigent. 


--------------------
\2 The Job Training Partnership Act authorized the primary federal
employment and job training programs, which provide employment and
job training to economically disadvantaged and dislocated workers
requiring retraining.  HUD's Family Self-Sufficiency Program provides
services to enable a family to achieve economic independence and
self-sufficiency.  Each housing authority that receives additional
rental assistance funding, unless granted a waiver, must operate a
Family Self-Sufficiency Program. 


      TYPE OF JOB
-------------------------------------------------------- Chapter 5:2.4

Other job-related performance indicators could measure the type and
quality of the job created or retained, which would require assigning
desirability factors to define the quality of the jobs.  For example,
many state grantees emphasize manufacturing industries because jobs
in these industries are often associated with higher wages.  At the
same time, some state grantees either discourage or disallow funding
for retail and service positions because they are often considered
low-wage, low-quality jobs.  Also, Nebraska's State-Administered
Program specifically states that it will not fund retail businesses. 
The difficulty of measuring the quality of CDBG-funded jobs and the
need to tailor measurement indicators to local priorities was
addressed in chapter 4. 


   TAX REVENUES AS A PERFORMANCE
   MEASUREMENT
---------------------------------------------------------- Chapter 5:3

An increase to the local tax base resulting from assistance to a
business, such as increased property and sales taxes, may take time
to materialize but is a potentially measurable performance indicator. 
This indicator could also include additional local income taxes paid
by the newly hired employees--employees who previously may have been
unemployed or receiving public assistance.  Increasing or maintaining
the local tax base enhances the ability of a community to provide
essential services. 

As noted in chapter 1, measuring whether or how CDBG can affect tax
revenues could be difficult.  However, it may be possible.  Increases
in tax revenues were considered in the past in the UDAG program.  In
selecting projects to receive UDAG awards, HUD considered the amount
of tax revenues to be generated from these projects. 

Several grantees in CDBG's State-Administered Program indicated that
they currently consider the anticipated increase to the local tax
base when evaluating potential CDBG investments.  For example, in
Missouri's program, CDBG-funded infrastructure projects should
generate new tax revenues at a level more than triple the CDBG
assistance within a 5-year period.  New Jersey's program gives
funding preference to the economic development projects that will
create or maintain tax revenues with the least amount of CDBG funds. 

Enhancement of the tax base can also ease the tax burden on low- and
moderate-income residents.  For example, in Shandaken, New York, tax
rates are high in relation to average income.  This puts a
significant burden on low- and moderate-income families, who must pay
a disproportionate share of their income in real estate taxes. 
Therefore, this small town plans to use CDBG funds to support
economic development that will increase its tax revenues. 

Other grantees with significantly declining local economies stress
the need to simply maintain their tax base.  Such may be the case in
communities experiencing corporate and defense industry downsizing
and reductions.  For example, Maryland's State-Administered Program
gives priority consideration to projects that maintain the existing
tax base by diversifying the local economy. 


   LEVERAGING AS A PERFORMANCE
   MEASUREMENT
---------------------------------------------------------- Chapter 5:4

In the current tight fiscal climate, with limited federal, state, and
local dollars available to meet local community needs, communities
need to stretch their public funds as far as possible.  Therefore, an
important potential performance measurement could be how effectively
grantees can leverage their scarce public resources.  CDBG economic
development funds have been used as a stimulus to generate other
financing for projects that could not have been undertaken otherwise. 

CDBG funds are typically funneled through quasi-public economic
development corporations that package public and private sources of
funds together to make a project feasible.  The percentage of private
funds invested in a project relative to the CDBG and other public
funds invested can be a measurable performance indicator. 

Some grantees are already applying this indicator.  For example,
Tennessee requires that start-up firms have a 20 percent equity stake
and that 30 percent of the project's financing come from private
sources.  Michigan requires at least a 3 to 1 leverage ratio of
non-CDBG public and private dollars to CDBG funds.  A battery
manufacturer in Muskegon County, Michigan, received a CDBG working
capital loan of about $500,000, which leveraged an additional $2.5
million--a ratio of 5 to 1. 

The CDBG Section 108 Loan Guarantee Program is another facet of the
CDBG Program that, under the current administration, is receiving
additional emphasis.  The Section 108 program guarantees funding for
larger, more costly projects.  This program can maximize the
leveraging of private resources without the investment of CDBG
funds.\3

Other federal loan programs, such as those administered by SBA,
already have performance thresholds that CDBG grantees might
consider.  SBA's 504 loan program requires that for every two dollars
that SBA guarantees, at least three additional dollars must be
invested.  For example, Riverside County, California (an urban county
in the CDBG Entitlement Program), financed the start-up of a car
dealership by packaging together over $3.2 million in private
financing, equity investment, and a CDBG loan to use with a $750,000
SBA 504 loan guarantee.  This package exceeded the required 2 to 3
ratio. 

The achievement of high leveraging ratios may negatively affect other
performance measurements.  For example, high leveraging ratios may
result in the need to accept increased risk.  In the Riverside
example, the CDBG loan was subordinate to both the SBA and private
loans.  That is, if the Riverside loan defaults, the CDBG loan is the
last to be paid off, because SBA regulations require that their loan
guarantees take precedence over other federal funding sources such as
CDBG. 


--------------------
\3 A Section 108 Demonstration Program targeted to small businesses,
which operated in the early 1980s and which required leveraging of
private funds, effectively leveraged CDBG funds for economic
development at a ratio of 30 to 1. 


   LOAN DEFAULTS AS A PERFORMANCE
   MEASUREMENT
---------------------------------------------------------- Chapter 5:5

Perhaps one of the most controversial potential performance
indicators for CDBG economic development activities is the percentage
of loan defaults.  Given the nature of CDBG assistance, which in some
cases can be considered as a last resort source of funds, as well as
different economic circumstances in different regions of the country,
it is difficult to establish an appropriate default rate.  A zero
default rate may indicate that local grantees are too conservative in
the loans they make.  In contrast, a default rate that is too high
may indicate imprudence.  Also, different default rates could be
expected in various regions of the country based on regional
economies.  In the SBA program, for example, default rates were
higher in certain parts of the south when the oil industry
experienced serious downturns in the 1980s. 

Moreover, a group of community development and financial lending
institutions stated in the group's lending principles that federal
attempts to micromanage lending by requiring federal underwriting
standards would be counterproductive.  Instead, these organizations
recommend that communities be provided with a range of acceptable
outcomes, such as portfolio performance. 

Some grantees already track portfolio performance.  For example, the
Buffalo Enterprise Development Corporation--the organization that
manages the city of Buffalo's CDBG economic development program--has
experienced only a 4-percent default rate on a loan portfolio
exceeding $71 million.  This corporation reports that area banks
historically have experienced a higher default rate. 

Since there are no established default rates for the CDBG Program,
one approach could be to look at default rates of other federal
economic development programs, especially those that target
distressed areas.  The Rural Development Administration's business
and industry loans have had a default rate close to 22 percent for
the program's overall history.  Yet, the default rate from 1987
through 1993 has been 6.3 percent.  As of August 1993, the default
rate for SBA's 504 program was about 4 percent. 


   ESSENTIAL SERVICES AND
   FACILITIES AS A PERFORMANCE
   MEASUREMENT
---------------------------------------------------------- Chapter 5:6

The extent to which economic development activities provide essential
services and facilities to communities is also a potential
performance measurement.  Vermont's State-Administered Program, for
example, gives preference to projects that provide goods or services
needed by and affordable to low- and moderate-income residents. 
Dallas used CDBG funds to help finance a large grocery store in an
inner-city area.  A CDBG-funded grocery store in an inner city
community often fills a void:  Inner-city residents may previously
have had to travel outside of their community to do their food
shopping or pay higher prices at stores that offer a limited range of
goods. 

The essential facilities a business brings to a community through
related infrastructure improvements can also be potential indicators
of the effectiveness of the project.  For example, rural
infrastructure improvements, such as sewers and streets, made with
CDBG funds to attract new businesses often directly benefit local
residents. 


   TYPES AND SIZES OF BUSINESSES
   ASSISTED AS A PERFORMANCE
   MEASUREMENT
---------------------------------------------------------- Chapter 5:7

The types and sizes of businesses assisted, if part of a local
economic development strategy, may be a potential performance
indicator.  As part of a local strategy, grantees may target certain
types of businesses or industries.  A locality may take into account
the local labor supply or the mix of local businesses that can be
tapped to supply inputs to the business.  For example, Idaho gives
preference to projects that will use Idaho products.  Grantees may
also seek to target businesses that will broaden the local economic
base.  As noted previously, Maryland gives priority to assisting
businesses that will diversify the local economy, particularly in
those areas dependent on the defense industry. 

Another popular strategy is to target businesses whose products or
services are exported outside the local area.  Some communities
believe that these export-oriented businesses tend to have more
growth potential than those looking primarily to their own community
for markets.  The popularity of this strategy was demonstrated by the
1990 study by the Council of State Community Development Agencies. 
The study found that 93 percent of businesses receiving CDBG loans
sell over 50 percent of their output outside a radius of 50 miles
from their place of business.  Manufacturing is a typical example of
an export-oriented business.  In their 1992 final statements, ten
states gave preference to manufacturing firms in funding CDBG
economic development projects. 

Communities may choose to target a particular size of business
because they associate certain positive benefits with that size.  For
example, large companies have historically offered benefits such as
health insurance in a greater proportion than small businesses. 
Others may choose to target small businesses.  According to SBA,
small businesses employ almost 60 percent of the private work force
and represent 54 percent of all sales in the country.  Furthermore,
from 1977 to 1987, small businesses were key generators of new jobs,
accounting for 68 percent of net new job growth.  However, this
strategy is not without risk, as officials state that the survival of
small businesses in distressed communities is low. 

Assistance to resident-owned businesses and microenterprises has been
highlighted in recent legislation.  The 1990 Cranston-Gonzalez
National Affordable Housing Act reemphasized that businesses owned by
community residents are eligible for CDBG economic development
funding, and the 1992 Housing and Community Development Act
reemphasized that microenterprises are eligible.\4 The 1992 act also
noted the importance of microenterprises to economic development by
encouraging grantees to set aside 1 percent of their CDBG allocations
for these businesses. 


--------------------
\4 A microenterprise, as previously noted, is a commercial enterprise
employing five or fewer people, one or more of whom owns the
enterprise. 


   MEASURING CDBG'S CONTRIBUTION
   TO BROAD NEIGHBORHOOD
   REVITALIZATION EFFORTS IS
   DIFFICULT
---------------------------------------------------------- Chapter 5:8

One of the major goals of the CDBG Program is neighborhood economic
revitalization.  Such revitalization is part of many cities' economic
development strategies.  In many cases implementing this strategy
requires the use of CDBG funds in conjunction with other public and
private funds and initiatives, including local enterprise zones. 
However, measuring the extent of any revitalization achieved and
CDBG's contribution to the overall outcome is difficult.  Yet some
qualitative recognition of this contribution seems desirable. 

The difficulty in measuring neighborhood revitalization stems in part
from the nature of economic revitalization, which goes beyond
individual project outcomes, such as the number of businesses
receiving CDBG financing.  Measuring the effectiveness of
revitalization requires capturing the synergistic effect of a
combination of public and private efforts as well as other
socioeconomic variables.  No one factor may dominate in influencing
the outcome of a community's strategy.  The difficulty of measuring
revitalization is exacerbated because these efforts often take a
number of years to produce a measurable impact. 

For example, a community strategy to entice an "anchor" store, such
as a large department store, to locate in a distressed downtown
neighborhood could attract other businesses, some of which could be
assisted by CDBG funds.  Beyond any increases to employment or taxes
that might occur, such commercial activity could also provide local
residents with better services.  In addition, increased commercial
traffic could restore vitality to the neighborhood, thereby reducing
physical blight.  Private lenders might then be encouraged to provide
both commercial and residential loans to the neighborhood, further
contributing to the revitalization. 

In the above example, it is possible to measure the CDBG contribution
in terms of individual performance indicators, such as the number of
jobs created.  However, such measurements may fail to capture the
contribution of the CDBG assistance to the overall revitalization
effort.  More subjective qualitative analysis may be the best
available approach for assessing the contribution made by CDBG. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 5:9

Performance measurements are essential for assessing the impact of
CDBG-funded economic development activities, but the grantees are in
the best position to determine how their economic development
activities should be specifically measured.  Some CDBG grantees are
already using one or more of a wide range of potential performance
indicators.  In issuing guidelines required by the Housing and
Community Development Act of 1992, HUD has the opportunity to help
CDBG grantees better define the performance indicators that would
serve them best.  However, given the CDBG Program's intended
flexibility and the unique economic conditions facing each grantee,
federal performance measurements, if promulgated, should be expressed
only as broad benchmarks. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I


   RESOURCES, COMMUNITY, AND
   ECONOMIC DEVELOPMENT DIVISION,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:1

Marnie S.  Shaul, Assistant Director
Walter J.  Hess, Assistant Director for Product Quality Review
 and Assistance
Charles W.  Bausell, Jr., Assistant Director, Economic Analysis
 Group
Woodliff L.  Jenkins, Jr., Assignment Manager
Valerie A.  Rogers, Evaluator
Phyllis Scheinberg, Report Reviewer
Phyllis Turner, Reports Analyst


   NEW YORK REGIONAL OFFICE
--------------------------------------------------------- Appendix I:2

Thomas A.  Repasch, Jr., Core Group Manager
Thomas C.  Bittman, Co-Evaluator-in-Charge
Frank F.  Putallaz, Co-Evaluator-in-Charge
Wendy P.  Bakal, Site Senior
Angelia L.  Collier, Evaluator
Sarita Valentin, Evaluator


   OFFICE OF THE GENERAL COUNSEL
--------------------------------------------------------- Appendix I:3

John T.  McGrail, Senior Attorney


   OFFICE OF THE CHIEF ECONOMIST
--------------------------------------------------------- Appendix I:4

Timothy J.  Carr, Economist

