CDBG Formula

A common complaint about CDBG is that the dual formula[1] often allocates funding to communities not in need, in the process reducing funding available for those most in need. OMB, in criticizing the formula in its FY2003 PART assessment, found, for example, that the “200 communities with the highest poverty rates received 35% less CDBG funds for each poor resident than 200 communities with the lowest poverty rates."[2]

There appears to be little impetus to radically change the formula. HUD's PD&R recently prepared an analysis – CDBG Formula Targeting to Community Development Need – exploring possible revisions to the existing CDBG formula. GAO also explored several options in its report CDBG Formula (GAO 2006a, 2006c). Although the revisions posed some interesting options that address some of the current formula's deficiencies – investing funding in well-off communities who are able to fend for themselves – PD&R and GAO basically tinkered with the existing ranking data without exploring more innovative possibilities. GAO has also explored the formula in a working group of experts under the auspices of the National Academies of Science but did not consider any innovations. Every interest group representing CDBG grantees – nine or so – opposed anything but minor tinkering with the formula (see Ramirez 2005).

Following is a summary of several major formula issues and possible alternatives that merit further exploration to assess their feasibility.[3] None of the issues and alternatives presupposes a coherent definition of what community development is and how it should be achieved by communities and states using federal money. Again, some see the CDBG program as being everything to everyone rather than focused on a tight set of needs. Some see CDBG as an antipoverty program, others as an infrastructure initiative. Still others believe it duplicates numerous other federal programs or displaces state and community investments. None are right or wrong, but they can greatly affect how funding is allocated and for what purpose.

1. Allocating Funding Based on Need and Fiscal Capacity

The current CDBG formula and PD&R's revisions reward entitlement communities on the basis of demographics such as numbers of poor people, poverty rates, income levels, and the like that measure need. However, communities that, by these measures, have needs may in some cases also have the fiscal capacity to meet those needs with their own resources. In these cases, the formula directs federal government resources both to places that can and places that cannot meet needs from their own resources. A proposed alternative: If the policy goal is to channel CDBG funds to poor communities, one alternative is to base the formula ranking of entitlement communities on a combination of poverty indicators and fiscal capacity. To receive CDBG funding, communities would need to score high on need and low on fiscal capacity. The portion of the formula ranking communities on need – measured by numbers of poor people, poverty rates, average incomes, and the like – lias been demonstrated under PD&R proposals. The other portion on fiscal capacity is more difficult to measure, because there is limited experience in ranking communities this way, and federal data are less frequently gathered for this purpose. One way would be to create measures of fiscal capacity from the Census of Government survey (census.gov/govs/www/cog2002.hhnl):

Census of Government Finance: Revenues [taxes], debt, intergovernmental transfers from all sources, as proxy measures of capacity.

Census of Business: Industries [sales receipts, payroll, etc.] as proxy measures of local economies' ability to pay.

Per capita income: The average incomes of residents are likely to be highly correlated with fiscal capacity. Income may serve as a proxy for fiscal capacity.

Or, HUD could require entitlement communities to report local government fiscal information as part of the CDBG applications, through the annual Consolidated Planning process (see the section, “Reforming the Consolidated Plan”). If Congress wanted to increase funding to distressed communities that have fiscal capacity, it might legislate a matching fund requirement for wealthier places.

2. Targeting Funding Geographically Within Communities

Some believe that targeting relatively scarce CDBG resources into distressed communities will benefit poor people more than will the scattered investment approaches. It should be noted that there is no large body of scientific research supporting or refuting the viability of this investment strategy. At present, many communities target, others do not, but there is no targeting requirement in CDBG legislation. A proposed alternative: If the policy objective is to target CDBG funding to America's most distressed communities, then one approach under the formula would be to take ah U.S. Census tracts in the country and rank them according to absolute distress and distress with growth potential – this measure is potentially complex and would need careful development and refinement. Set an appropriate cutoff in the rankings, and provide CDBG funding for these tracts. Funding could be provided outside tracts when it is determined to be critical to the successful investment and performance of the eligible tract. Another approach would be to rank tracts within states or communities, and fund those that meet a minimum threshold of need. This approach can be combined with the fiscal capacity ranking option suggested in the previous section (first bulleted item).

3. Reducing Administrative Burden on Smaller Communities

Small entitlement communities – with populations of at least 50,000 people – are perceived by some to be burdened with planning and reporting requirements – Consolidated Plans – that divert funding into planning for which they may lack sufficient capacity. The objection is that small communities do not receive much funding, but they are nonetheless required to prepare the same plans and reports as larger communities. A proposed alternative: If the policy objective is to relieve smaller communities of planning and administrative burdens that limit availability of funding for projects, then one option is to raise the statutory minimum population required for eligibility as an entitlement community to a threshold population greater than 50,000. The precise threshold at which a community becomes entitled to direct CDBG funding would have to be systematically assessed. Communities not making the threshold as an entitlement would become eligible for funding under the state CDBG program, which has no planning and minimal administrative requirements.

4. Rewarding Communities That Stress Economic Development Activities

Some observers say that although economic development (ED) activities are eligible expenditures under CDBG, few entitlement communities invest much funding in them. They also say economic development spurs community development by creating new fiscal resources the community can use to address its other development needs. Extensive research does not exist to support of refute this contention. A proposed alternative: If the policy goal for CDBG is to encourage ED investments, then the CDBG formula might be altered to encourage such investment by moving communities that have economic development deficits – a precise measure would need to be defined – up in the rankings to receive funding. To do this, the formula might include numbers of unemployed and/or unemployment rate, numbers of discouraged workers and rate, numbers of workers affected by mass layoffs, and small business job creation as components. But entitlement communities could, under CDBG, still invest funding in community development. To channel investment into economic development, HUD would likely have to establish performance goals in economic development that communities would have to achieve in order to qualify for funding in future years.

5. Assisting Communities Impacted by Immigration

Some have raised the issue of the burden that large-scale immigration – especially when it includes a high proportion of undocumented aliens – places on some communities. Because they are undocumented, some immigrants may not appear in Census counts or other federal data, yet communities still bear the cost of providing services. HUD recognized needs of those living along the U.S. Mexican border by requiring states to set aside CDBG funding for "colonias" along the border.[4] A proposed alternative: If communities affected by heavy immigration – undocumented or otherwise – are to be assisted, the CDBG formula could be revised to include an immigration component based on census data.

  • [1] CDBG Formula Targeting. Washington, DC: Policy Development and Research, HUD, February 2005, huduser.org; see also Statement for the Record, Community Development Block Grant Formula, May 26, 2005, before the U.S. House of Representatives, Committee on Government Reforms, Subcommittee on Federalism.
  • [2] See the FY2003 CDBG PART, Section 1.5, note 3.
  • [3] See note 10.
  • [4] hud.gov/offices/cpd/communitydevelopment/programs/colonias/cdbgcolonias.cfm. (Accessed 3-26-08.)
 
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