HUD Testimony

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Statement of Roy A. Bernardi, Deputy Secretary, United States Department of Housing and Urban Development, before the United States House of Representatives, Committee on Government Reform, Subcommittee on Federalism and the Census

April 26, 2005

HUD Report "CDBG Formula Targeting to Community Development Need"

On behalf of the President and Secretary Jackson, I would like to thank the subcommittee and Chairman Turner for the opportunity to speak to you about a recently released HUD report on how the CDBG formula targets toward community development need.

This is the fifth time HUD has prepared a report like this since 1974 on how the CDBG formula targets to need. Like our previous reports we've generally asked the question…how is the CDBG program doing in terms of meeting the community development need in this country?

The first report provided the framework for creation of the dual formula that first allocated funds in 1978.

In 1983 and 1995 we found that CDBG's formula was increasingly LESS effective in targeting need. The problem is that while the variables in the formula have not changed since 1978, this country has. I'm sure it comes as no surprise to any of you the United States is a significantly different country than it was nearly 30 years ago. We've seen significant demographic change…some communities experiencing tremendous growth while others facing decline.

Not surprisingly, when we began to crunch the numbers from the latest Census, we noticed that the CDBG formula continues to be a less effective vehicle for targeting need. Today, I'd like to outline our findings and offer some options should you consider changing the program's formula to meet today's needs.

As with prior studies, we designed an index to rank each community based on its relative level of community development need. This needs index uses variables that directly relate to the statutory objectives of the CDBG program such as poverty, crime, unemployment, and population loss. A total of 17 variables were identified for entitlement communities…those are cities and larger urban counties that receive direct funding. For the states or "non-entitlement" program, we created a needs index using 10 variables.

Applying techniques used in the previous four studies, those variables are combined into a single score for each community.

When we compare how the current formula is allocated against this needs index, we see some stark examples of funding disparity. For example, communities with similar need may receive significantly more…or less funding on a per capita basis. We also find examples of communities with absolutely less need receiving roughly the same amount of funding than higher need areas.

Exhibit 1 illustrates this point. I apologize for the complexity but I think this will become clear shortly.

This chart shows how CDBG's current formula is targeting need today. You'll see along the bottom of this chart, communities are ranked by their relative level community development need, starting with the lowest need communities on the left and ending with the highest need communities on the right. The solid line represents our goal for what would be an appropriate funding level relative to need for the per capita grant amount of the grantee community. The jagged line represents the per capita allocation for grantees under the current formula.

This chart demonstrates that CDBG's current formula is far from perfect. For example, some low-need communities such as Newton, Massachusetts; Portsmouth, New Hampshire; and, Royal Oak, Michigan are allocated more than 25 dollars per person while other low-need communities are receiving five-to-seven dollars per capita.

The starkest contrast, however, is among high-need communities on the right side of the chart. I will use three communities as an example. The cities of Saint Louis, Miami, and Detroit have similar needs according to our needs index, but get very different grant amounts. Saint Louis gets $73 per capita, well above the needs index line; Detroit gets $50 per capita, roughly matching the needs index; and, Miami gets $26 per capita, well below the needs index. If the existing formula were fair in targeting to the same level of need, each of those cities would receive approximately $50 per capita.

Why is this? There are several reasons, but two big reasons are in respect to the pre-1940 housing variable and growth lag variable in formula B. As distressed communities have demolished their older housing and the less distressed communities renovated their older housing, the pre-1940 housing shifted money from distressed communities to less distressed communities. In terms of growth lag, the relatively few communities that get funding under this variable get a lot of funding. It is the communities with growth lag that represent the "spikes" you see in the charts.

There are other elements to CDBG's current formula that tend to benefit smaller college towns with a high population of students earning little or no income. When you consider these students in measuring poverty, you get a relatively higher grant as compared with similar communities with no significant student population but with absolutely higher poverty. Finally, the dual formula structure tends to provide greater funding to communities funded under formula B than equally needy formula A grantees.

Before I talk about how to improve targeting, let me take a moment to talk about the NON-entitlement formula that allocates 30 percent of CDBG funds to the States. The non-entitlement formula does not have the wild swings in funding as the formula our cities and counties use. As a result, there are no stark differences in funding between states, no matter their need. With the exception of Puerto Rico, the formula for the 50 States doesn't really target need at all.

The report offers four alternatives that all improve targeting to need. The report provides detailed information on each alternative including their impact on individual jurisdictions. HUD offers these alternatives to illustrate some of the options Congress might consider. It is quite simply, food for thought. Here is a brief summary of each:

Alternative 1 keeps the current dual formula but corrects some of the more serious problems. For example, it defines the age of the housing stock a little more precisely. Inside of counting the number of units built before 1940, this option would measure "housing older than 50 years" and occupied by a person in poverty. By establishing a means test on this housing variable, Alternative 1 generally redistributes funds from less needy communities to communities in decline.

Exhibit 2 shows the impact of these corrections. While Alternative 1 substantially reduces the over funding of low-need communities like Newton, Portsmouth, and Royal Oak, it only modestly reduces the funding difference between Miami and Saint Louis. Similar changes to the nonentitlement formula also have positive effects on targeting.

Alternative 2 is a very simple approach designed to minimize differences in funding among places with similar need. It is a single formula that uses four measures of need - poverty, female-headed households with children, housing 50 years and older and occupied by a poverty household, and overcrowding. As Exhibit 3 shows, this alternative greatly improves the fairness of the formula by reducing the per capita grant variation. The disadvantage of alternative 2 is that high need communities tend to fall below our target needs line. Miami, St. Louis, and Detroit all get the same amount, approximately $38 per capita, significantly below the $50 per capita HUD had set as a goal for high-need jurisdictions.

Alternative 3 adjusts Alternative 2 to increase funding for communities in decline and exhibiting fiscal distress. As shown on Exhibit 4, this does improve targeting to the most needy compared to alternative 2. For example, under Alternative 3, Detroit and Saint Louis would receive grants of about $50 per capita and Miami would receive a grant of about $44 per capita. Alternative 3 has somewhat greater variation between similarly needy grantees relative to Alternative 2. However, Alternative 3 achieves greater targeting to the most needy communities.

Alternative 4 resembles Alternative 3 but eliminates the 70/30 funding split between entitlement and nonentitlement communities. That is, CDBG funding for nonentitlement areas and entitlement areas would be allocated under a single formula. This approach would currently result in a split of 69/31 of funding between entitlements and nonentitlements, very similar to the current split of 70/30. A chart for Alternative 4 would show the same distribution as the chart for Alternative 3, Exhibit 4.

In conclusion, today's formula…again, a formula that hasn't been modified since 1978…places great emphasis on certain variables that may not be a true reflection of today's need. The purpose of the Alternatives we offer you is intended to:

• Improve targeting to Community Development Need
• Simplify the current formula
• Minimize disruption in funding.
  

As you read this report, you'll find some of the Alternatives satisfy these goals to varying degrees. There are tradeoffs.

Finally, any change to the current formula would result in significant adjustments for the CDBG grantees. If Congress decides to adopt a change to the formula, the Department suggests that Congress consider a gradual phase-in period.

I want to thank you for your time. If you have any questions I would be happy to answer them.