This is the accessible text file for GAO report number GAO-06-904T 
entitled 'Community Development Block Grant Formula: Options for 
Improving the Targeting of Funds' which was released on June 27, 2006. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

Testimony: 

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

United States Government Accountability Office: 

GAO: 

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

Tuesday, June 27, 2006: 

Community Development Block Grant Formula: 

Options for Improving the Targeting of Funds: 

Statement of Stanley J. Czerwinski, Director, Strategic Issues: 

GAO-06-904T: 

GAO Highlights: 

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

Why GAO Did This Study: 

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

What GAO Found: 

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

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

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

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

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

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-904T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Stanley Czerwinski at 
(202) 512-6806 or czerwinskis@gao.gov. 

[End of Section] 

Mr. Chairman and Members of the Subcommittee: 

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

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

21st Century Challenges Drive Need for CDBG Formula Reassessment: 

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

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

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

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

[See PDF for image] 

Source: GAO analysis of Census, HUD, and OMB data. 

[End of figure] 

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

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

Changing Circumstances Call for CDBG Formula Reassessment: 

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

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

Administration Proposes to Reform the CDBG Program: 

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

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

* the per capita income (PCI) of the community relative to the PCI of 
its metropolitan area; 

* the number of overcrowded housing units; 

* the number of households living in poverty, excluding full-time 
dependent college students; 

* the number of female heads of households with minor children; and: 

* the number of homes 50 years or older occupied by a low-income 
family. 

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

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

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

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

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

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

Concluding Remarks: 

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

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

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

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

FOOTNOTES 

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

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

[3] 42 U.S.C. §5306.

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts 
newly released reports, testimony, and correspondence on its Web site. 
To have GAO e-mail you a list of newly posted products every afternoon, 
go to www.gao.gov and select "Subscribe to Updates." 

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to: 

U.S. Government Accountability Office 441 G Street NW, Room LM 
Washington, D.C. 20548: 

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202) 
512-6061: 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 U.S. 
Government Accountability Office, 441 G Street NW, Room 7125 
Washington, D.C. 20548: 

Public Affairs: 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800 
U.S. Government Accountability Office, 441 G Street NW, Room 7149 
Washington, D.C. 20548: