[Senate Hearing 109-964] [From the U.S. Government Publishing Office] S. Hrg. 109-964 COMMUNITY DEVELOPMENT BLOCK GRANTS: THE CASE FOR REFORM ======================================================================= HEARING before the FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL SECURITY SUBCOMMITTEE of the COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED NINTH CONGRESS SECOND SESSION __________ JUNE 29, 2006 __________ Available via http://www.access.gpo.gov/congress/senate Printed for the use of the Committee on Homeland Security and Governmental Affairs ------- U.S. GOVERNMENT PRINTING OFFICE 29-510 PDF WASHINGTON DC: 2007 --------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800 DC area (202)512-1800 Fax: (202) 512-2250 Mail Stop SSOP, Washington, DC 20402-0001 COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS SUSAN M. COLLINS, Maine, Chairman TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware LINCOLN D. CHAFEE, Rhode Island MARK DAYTON, Minnesota ROBERT F. BENNETT, Utah FRANK LAUTENBERG, New Jersey PETE V. DOMENICI, New Mexico MARK PRYOR, Arkansas JOHN W. WARNER, Virginia Michael D. Bopp, Staff Director and Chief Counsel Michael L. Alexander, Minority Staff Director Trina Driessnack Tyrer, Chief Clerk FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL SECURITY SUBCOMMITTEE TOM COBURN, Oklahoma, Chairman TED STEVENS, Alaska THOMAS CARPER, Delaware GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan LINCOLN D. CHAFEE, Rhode Island DANIEL K. AKAKA, Hawaii ROBERT F. BENNETT, Utah MARK DAYTON, Minnesota PETE V. DOMENICI, New Mexico FRANK LAUTENBERG, New Jersey JOHN W. WARNER, Virginia MARK PRYOR, Arkansas Katy French, Staff Director Sheila Murphy, Minority Staff Director John Kilvington, Minority Deputy Staff Director Liz Scranton, Chief Clerk C O N T E N T S ------ Opening statements: Page Senator Coburn............................................... 1 Senator Coleman.............................................. 6 Senator Akaka................................................ 8 Senator Carper............................................... 13 WITNESSES Thursday, June 29, 2006 Hon. Pamela H. Patenaude, Assistance Secretary, Office of Community Planning and Development, U.S. Department of Housing and Urban Development, accompanied by Todd Richardson.......... 10 Hon. Kenneth M. Donohue, Inspector General, Department of Housing and Urban Development.......................................... 110 Eileen Norcross, M.A., Senior Research Fellow for the Government Accountability Project, Mercatus Center, George Mason University..................................................... 25 Cardell Cooper, Executive Director, National Community Development Association........................................ 27 Alphabetical List of Witnesses Cooper, Cardell: Testimony.................................................... 27 Prepared statement........................................... 79 Donohue, Hon. Kenneth M.: Testimony.................................................... 11 Prepared statement........................................... 44 Norcross, Eileen, M.A.: Testimony.................................................... 25 Prepared statement........................................... 53 Patenaude, Hon. Pamela H.: Testimony.................................................... 10 Prepared statement........................................... 39 APPENDIX Questions and responses for the Record from: Ms. Patenaude................................................ 88 Ms. Norcross................................................. 97 Mr. Cooper................................................... 99 Letters submitted for the record by Senator Coleman.............. 100 National Association of Housing and Redevelopment Officials, prepared statement............................................. 120 Charts submitted for the record by Senator Coburn................ 131 COMMUNITY DEVELOPMENT BLOCK GRANTS: THE CASE FOR REFORM ---------- THURSDAY, JUNE 29, 2006 U.S. Senate, Subcommittee on Federal Financial Management, Government Information, and International Security, of the Committee on Homeland Security and Governmental Affairs, Washington, DC. The Subcommittee met, pursuant to notice, at 2:30 p.m., in room SD-342, Dirksen Senate Office Building, Hon. Tom Coburn (Chairman of the Subcommittee) presiding. Present: Senators Coburn, Coleman, Carper, and Akaka. OPENING STATEMENT OF SENATOR COBURN Senator Coburn. The hearing will come to order. This is a hearing on Community Development Block Grants: The Case for Reform. It is not a hearing on the elimination of CDBG, in spite of the buttons I see out there, which leads me to conclude that oftentimes, when somebody wants to distort somebody's position that they may, in fact, have a problem. When you have a goal of flexibility and consensus, you will have different results than if you have your goal of accountability and efficiency, and when you allow those two separate things, you never get to what we are looking for, which is accountability. And I do not think we are going to have any of the witnesses' testimony today that is going to say they do not want accountability, and I do not think we are going to have any of the witnesses say they do not want transparency. And I am sure we are not going to hear any of the witnesses say we do not have results. So the purpose of this hearing is to have a frank and open discussion about how do we do the best job with the money that we put in CDBG to make the greatest different in the most number of people's lives who are deserving? That is what it is about. It is not about playing games. It is not about politics. It is about an honest look at: Can we do this better? Can we account for it better? Can we get better results? And can we measure those results? The Community Development Block Grant program is a multibillion-dollar program that has exceptional flexibility compared to most other grant programs. That is one of the reasons it is liked so well. It operated out of the Department of Housing and Urban Development. It gives local officials broad discretion on the use of funds for housing, economic development activities, social services, and infrastructure. The authorizing legislation requires that the activity meet one of the following goals: To principally benefit low and moderate income individuals; to eliminate or prevent slums; or remedy urgent threats to the health or safety of the community. That is what the legislation says. When the program first began in 1975, HUD advertised that CDBG funds could be used anywhere within a local government's jurisdiction to serve the needs of and provide better living environments for low and moderate income persons. This flexibility continues today, and it helps our communities meet localized needs that change on a case-by-case basis. That is a laudable goal. It is a great goal. Perhaps the first and most fundamental problem with the program is its lack of sunshine. And I want to redirect you to the accountability poster that this Subcommittee uses. When there is no sunshine, there is great opportunity for mischievous behavior. Transparency is the first and necessary step towards accountability. One of the interesting things our Subcommittee has found that we have asked for months to find out how CDBG funds are used, and no one can tell us. No one has accumulated all that. Nobody knows for total, if we take $3 billion or $4 billion, where did it go? Nobody knows that answer. HUD does not compile this information, much less make the information available to the public. That lack of transparency is simply unacceptable in the fiscal situation that we find ourselves today. How can supporters make a serious claim that the program as a whole is accomplishing its goals when nobody knows how the money is spent? Nobody is measuring the goals. Not surprisingly, with no transparency, other performance problems are inevitable. Critics of Community Development Block Grants, and I am not a critic; I am supportive; I just want them to be more effective and more efficient, argue that while flexibility abounds, the program has no standardized outcome indicators, insufficient accountability, and it has ambiguity goals. In the 39 hearings I have chaired in this Subcommittee, I have found that when these factors coalesce within a Federal program, opportunities for waste, fraud, and abuse of tax dollars abound. For example, right here in Washington, DC, it has been reported $100 million in CDBG block grant funds were spent over a decade on revitalization projects, and there is little to nothing to show for it. That is $100 million. According to the Washington Post's assessment, the City's use of this Federal funding is characterized by overspending, cronyism, and conflicts of interest. Another example is CDBG funds were appropriated to help in the September 11 aftermath in New York City. But due to the program's lack of meaningful guidelines and enforcement, some of this desperately needed money went to fund very questionable projects that do not meet those three guidelines. Illustrating the lack of policy direction and management in the program, the Manhattan Institute reports that CDBG loans referred to as Section 108 loans have a 59 percent default rate. That is three out of every five loans default. Why are we looking at it? If that is the case, why are we not putting the loans into areas that will make a difference and continue to make a difference rather than default and make a short period different? Critics say that even though HUD has specific guidelines, transparency and oversight for its other lending programs under HUD, it has nothing similar for Section 108 loans. For example, after the 1992 Los Angeles riots, the Los Angeles Community Development Bank was created with CDBG funds. In that came a $6 million loan that nobody would give to this group for any other thing, and in the end of that, they put $24 million into it; lost all of it; and it closed with no effect, no positive long-term effect for the community that it was intended to help. A key flaw in the program, I believe, is its outdated funding formula. These formulas have not been updated since the midseventies, meaning the program has not updated its funding structure to reflect changes in poverty or community realization and need over the last 30 years. The grants are not consistently targeted to communities in need, and as a result, there are numerous funding anomalies. For example, the posters to my right, to your left,\1\ shows a great example: Temple, Texas has under $20,000 per year per capita income; receives $15 per capita in CDBG block grant funds. Then, if you look at Oak Park, Illinois, where they have almost double the per capita income, and they have $39 per capita in CDBG block grants. --------------------------------------------------------------------------- \1\ The charts referred to appears in the Appendix on page 131. --------------------------------------------------------------------------- Now, if we go back to what the program was intended for, to help poor and moderately low-income communities to help an ever present health situation, how do we meet that when you see these kind of funding disparities? You can also see that Newton, Massachusetts, has three times the income of Hopewell, Virginia, but this wealthy community receives three times more CDBG funding per capita than Hopewell. These are just two of hundreds of examples that we have discovered as we have gone through and looked at this program, illustrating that different communities are receiving the exact opposite of funds that you would expect from the requirements of the legislation that authorizes this program. We all know that the communities that we live in have changed in the past few decades. Some have improved miraculously. Some have declined. There is no way for a community that was needy in the seventies but is now wealthier to graduate out of the program. Once a community is placed on the list, no matter how wealthy the community becomes over time, it is guaranteed a funding of CDBG block grants, no matter what: Even if it has no need, it is still guaranteed. And that means that somebody who has a more legitimate need is denied those funds. I value the goals of this program. I have several questions, and when we get into full transparency, where anyone can see on a public website how the money is spent; that is called accountability, and anybody who wants this program to survive and grow cannot adequately create a case to oppose sunshine for where the money is spent. When will the program adopt standardized performance measures that have teeth with the ability to compare success from city to city? I think the program is overdue for some reform. I believe the funds must be targeted based on need, which means the formulas need to be revised. I believe there needs to be transparency in enforcement of the planned use of grants under this program, which means that you have to publish a community's proposal and the actual disbursements so that the community, as well as everybody else, can see where the money went. Potential waste, fraud, and abuse of funds needs to be averted before high risk plans are enacted and undertaken rather than afterwards. Funding must be conditioned also on performance. Performance measures need to be better defined, and grantees that consistently fail to perform need to face real and immediate consequences and maybe intervention, not taking away the money but intervention to show them how to use the money better. The question is not to eliminate CDBG but to make the dollars be more effective in the original intent of the authorizing legislation. Since 2000, the Administration, to its credit, has identified these program weaknesses and has attempted some reform. But these attempts have been met with open hostility in Congress. I am afraid that many of my colleagues view the program as an entitlement for their home districts. Last month, HUD delivered the latest Community Development Block Grant reform proposal to Congress. I hope that Congress will take our responsibility to Americans seriously and work to make this program for the needy communities it was created to help. As more and more accounts of waste and abuse surface, we simply cannot neglect our duty to the next generation in favor of the next election. [The prepared statement of Senator Coburn follows:] PREPARED STATEMENT OF SENATOR COBURN The Community Development Block Grant (CDBG) program is a multi- billion dollar program that has exceptional flexibility compared to most other grant programs. Operated out of the Department of Housing and Urban Development (HUD), CDBG gives local officials broad discretion on the use of the funds for housing, economic development activities, social services, and infrastructure. The authorizing legislation requires that the activity meet one of the following goals: To principally benefit low- and moderate-income individuals, eliminate or prevent slums, or remedy urgent threats to the health or safety of the community. When the program first began in 1975, HUD advertised that CDBG funds could be used anywhere within a local government's jurisdiction to serve the needs of and provide better living environments for low- and moderate-income persons. This flexibility continues today, and it helps communities meet localized needs that change on a case by case basis. Perhaps the first and most fundamental problem with the program is the lack of sunshine. Transparency is the first and necessary step towards accountability. We asked for months to fund out how CDBG funds are used and no one knows. HUD does not compile this information, much less make that information public. That lack of transparency is simply unacceptable. How can supporters make a serious claim that the program as a whole is accomplishing its goals when nobody knows how the money is spent. Without transparency other performance problems are inevitable. Critics of Community Development Block Grants argue that while flexibility abounds, the program has ambiguous goals, insufficient accountability, and lacks standardized outcome indicators. In the 39 hearings I have chaired in this Subcommittee, I have found that when these factors coalesce within a Federal program, opportunities for waste, frauds, and abuse of tax dollars abound. For example, right here in Washington, DC, the Washington Post reported in 2002 that more than $100 million in CDBG funds were spent over a decade on revitalization projects--and there is little to show for it. According to the Post's assessment, the city's use of this Federal funding is characterized by overspending, cronyism, and conflicts of interest. As another example, CDBG funds were appropriated to rebuild New York City in the aftermath of 9/11, but due to the program's lack of meaningful guidelines and enforcement, some of this desperately needed money went to fund questionable projects like the Tribeca Film Festival. Illustrating the lack of policy direction and management in the program, the Manhattan Institute reports that CDBG loans, referred to as Section 108 loans, have a 59 percent default rate. Critics say that even though HUD has specific guidelines, transparency and oversight for its other lending program, they have nothing similar for Section 108 loans. For example, after the 1992 Los Angeles riots, the Los Angeles Community Development Bank was created using CDBG funds. This program initially awarded a $6 million loan to an individual who was turned down by every commercial lender he met with due to his extremely risky business plan. Violating its own spending limit, the CDBG funded bank ended up pouring $24 million dollars into this unsound business in a misguided attempt to keep the business afloat. While politicians were congratulating themselves, the business defaulted and was forced to shut down. Two-thirds of the businesses assisted through this loan program failed to create the required number of jobs and only a meager 11 percent created jobs that went to the area's residents. A key flaw in the program is the outdated funding formula. These formulas haven't been updated since the 70's--meaning the program has not updated its funding structure to reflect changes in poverty over the past 30 years. The grants are not consistently targeted to communities in need, and as a result, there are numerous funding anomalies. For example, Temple, Texas has just under $20,000 per capita income and receives $15 per capita in CDBG funds. But Oak Park, Illinois has almost double the average per capita income of Temple and receives $39 per capita from the program. Newton, Massachusetts has three times the income level of Hopewell, Virginia but this community receives three times more CDBG funding per capita. These are just two of hundreds of examples illustrating that different communities are receiving the exact opposite amount of funds you'd expect. We all know that the communities we live in have changed in the past few decades--some have improved, some have deteriorated. There's no way for a community that was needy in the 70's but is now wealthy to ``graduate'' from the program. Once a community is placed on the list, no matter how wealthy the community becomes over time, it is guaranteed a portion of the CDBG funding every year. Even though I value the goals of the program, I have several questions. When will we get full transparency with a public website where anyone can see how the money is spent? When will the program adopt standardized performance measures to be used in comparing successes from city to city? The program is long overdue for meaningful reform. There are several key points that must be addressed in order for this program to be both effective and accountable.Funds must be targeted based on need. This means the formulas need to be updated and wealthy communities need to graduate from eligibility. There must be transparency and enforcement of the planned use of grants under this program--publish a community's proposal and actual disbursements on a public website. HUD needs to provide consistent oversight and transparent monitoring of what goes into a plan and how it is carried out. Communities must be able to comment on a grantee's planned use of CDBG funds. Potential waste, fraud, and abuse of funds need to be averted before high-risk plans are enacted. Funding must be conditioned on performance. Performance measures need to be better defined, and grantees that consistently fail to perform need to face real and immediate consequences. Since 2000, the Administration, to its credit, has identified these program weaknesses and attempted reform. But, these attempts have been met with open hostility in Congress. I'm afraid that many of my colleagues view the program as an entitlement for their home districts. Last month, HUD delivered the latest Community Development Block Grant reform proposal to Congress. I hope that Congress will take our responsibility to Americans seriously and finally make this program work for the needy communities it was created to help. As more and more accounts of waste and abuse surface, we simply cannot neglect our duty to the next generation in favor of the next election. I want to thank all the witnesses for being with us here today. I look forward to hearing your testimony. Senator Coburn. I want to personally thank all of our witnesses for being here and the efforts that you put into your testimony. I welcome my two companions on the panel, and I will go on the order of first here, first to speak. Senator Coleman, you are recognized. OPENING STATEMENT OF SENATOR COLEMAN Senator Coleman. Thank you very much, Mr. Chairman. Let me first start by applauding your passion and your focus to deal with fraud and to try to ensure transparency and accountability in government programs. In your time in the Senate, you have been a true champion. As a former prosecutor, and as the Chairman of the Permanent Subcommittee on Investigations, I think if we totaled it up, we would identify about $11 billion in fraud and mismanagement that we have been in the process of correcting, and by the way, even for government, that is a lot of money. I share a similar passion, and I also am appreciative of what you stated that the goal here is not to eliminate CDBG. I think we all agree on that. But a couple of observations, and I have a fuller statement I will enter into the record. No program is sacrosanct. Clearly, spending government dollars, there needs to be accountability. There needs to be transparency. I would like to commend the efforts of the HUD Inspector General to fight CDBG waste, fraud, and abuse. There are bad characters who fail their communities through criminal acts, and we have to kind of root those out. There is no question about that. My concern is, and let me just be very blunt here: For those of us who have seen CDBG work, as a former mayor, and I have, and we have seen the incredible positive things that they do in communities, urban communities, rural communities, that without them, we would lose the opportunity for jobs. We would lose the opportunity for economic development. Our communities would be much worse off. This is an important program. And part of the concern as we look at the last year, where the Administration was, for instance, last year, which was essentially to combine CDBG, kind of lump it in with a number of programs, that raises, I think, a degree of cynicism out there as to what the intention is towards this program, which across the board, and I appreciate the Assistant Secretary being with us today; my colleagues have spoken loud and clear. I think we had 65-plus votes last year to oppose the Administration's proposal to essentially eliminate CDBG at least in its present form by combining it with a multitude of other programs and cutting its funding. So you have a very clear will of the Congress here, which is not inconsistent with anything the Chairman has talked about. Those of us who are passionate about this program and who know its successes are also passionate about it working effectively. And so, the issue becomes how do you do that? How do you get there? One of the challenges that we have that if we make any changes, and I am very sensitive as a former mayor, is you have to look at the impact it has on communities and give people the opportunity to kind of weigh that and to measure it. And if we are going to change it, you have to understand that. I am a great believer in public-private partnership. I am a great believer in folks working together. We have had cooperation between OMB, HUD, CDBG stakeholders, and they have produced an increased, improved performance system. We have to get about implementing that, that improved performance system, and improved performance measures. But I have serious reservations with HUD's reform plan. I have serious reservations with respect to the formula change. I have serious reservations with respect to the minimum grant threshold proposals. I would hope that we would, as we go about doing the reform that we all agree needs to take place, we want a better system, that we work closely with the shareholders; that we work closely with those who are impacted, and we figure out the right way to do it. We just want to do it the right way here. [The prepared statement of Senator Coleman follows:] PREPARED STATEMENT OF SENATOR COLEMAN Thank you Mr. Chairman. I appreciate the opportunity to be a part of this hearing on a most important program for communities all across this country. Mr. Chairman, as you know, I have been a strong champion of the Community Development Block Grant (CDBG) program. I come to this afternoon's hearing to tout the vital importance of this program to our communities. CDBG is a community development program that helps State and local governments tackle their most serious community development challenges. CDBG and public-private partnerships like it are the cornerstone for the economic revitalization occurring across the country and in many of our urban and rural communities in recent years. But just as importantly I also come to this hearing as someone who believes any government program can improve its performance and accountability. I can personally attest that dollar for dollar there is no better program to help States and localities renew and rebuild their communities and economies than CDBG. For every one CDBG dollar, nearly three dollars are leveraged from the private sector. I know CDBG works because I was the mayor of St. Paul before coming to Washington. During my time as Mayor, over 18,000 jobs were created in St. Paul and CDBG was undoubtedly a part of that success. CDBG grows jobs; CDBG builds communities. Whenever I talk to the folks back in Minnesota--to city administrators, mayors, or county commissioners, they all tell me the same thing--that CDBG is the lifeblood of their communities. That said, Mr. Chairman, I share the President's goal of reducing the deficit and exercising strong fiscal accountability in Washington. As a former mayor, I know something about the challenges of crafting fiscally responsible budgets. during my time as mayor I streamlined the city's bureaucracy and helped to turn budget deficits into surpluses-- all without raising taxes. In my view CDBG is a fiscally responsible program that exponentially produces more than it costs and it is a truly conservative initiative enabling local leaders to meet local needs. I believe that government is beholden to the people. That individuals with the help of their local representatives can plan their lives better than bureaucrats in some distant capital. CDBG is a very conservative idea that we should not have command and control programs run out of Washington. Rather, we should help communities meet those needs and priorities through one block grant. With that in mind, I have respectfully disagreed with the Administration's decision to eliminate the program last year and to effectively starve the program of the funding necessary to undertake its mission. Mr. Chairman, I do find it strange that while the Administration is seeking to undermine this successful program it is at the same turning to this program to provide emergency reconstruction relief to the Gulf Coast in the amount of $16.7 billion or more than five and a half times more than its FY 2007 budget request. I see that the Assistant Secretary is with us today and I would just like to relate to her that the Administration needs to accept the political reality here that there is overwhelming bipartisan support for this program and that it is unnecessary to fight a battle that it will consistently lose. As I am fond of saying, it is better to measure twice before cutting once. That said, Mr. Chairman, I also come to this hearing as a strong advocate for reasonable and appropriate reform of CDBG. Despite its past success, I do believe there is room for improvement within CDBG. On that account, I applaud the efforts of HUD, OMB and CDBG friends on developing a new performance measurement system for CDBG. I believe this new performance system is a significant step towards improving the transparency and accountability of CDBG. I would also like to commend the efforts of the HUD inspector general's efforts against CDBG waste, fraud, and abuse. Unfortunately there are some bad characters who are failing their communities through their criminal acts. As a former prosecutor and Chairman of the Permanent Subcommittee on Investigations, I take very seriously waste, fraud, and abuse of taxpayer's dollars. I have worked with my colleagues on identifying $11 billion in waste, fraud, and abuse. We must be the best stewards of taxpayer dollars and to the end I appreciate the efforts of HUD's IG. Now while I am supportive of efforts to improve the performance, I do have serious reservations with HUD's reform plan with respect to the formula change and minimum grant threshold proposals. According to HUD projections, my State's CDBG program would experience a 31 percent reduction in funding, and entitlement cities such as Minneapolis and St. Paul would respectively experience a 54 and 44 percent reduction in CDBG funding in FY 2007. Furthermore, the proposal would no longer provide guaranteed funding for Bloomington, Eden Prairie, Moorhead and several other smaller communities. These reductions would have a devastating impact on the ability of the State and communities to effectively undertake vital community development programs. Mr. Chairman, I have heard from the State, many of the affected communities such as Coon Rapids, Duluth, and St. Paul, and the U.S. Conference of Mayors and many other organizations as to the importance of this program. I request these letters be made a part of the record. Now I do believe that it is important to have a serious discussion regarding the formula. However we should not act in haste given the significant impact such a change would have on communities across this country. It is my understanding that GAO is currently studying this issue and is expected to issue a report within the year. I would say that since CDBG is a public-private partnership, all stakeholders should be brought together to address difficult issues such as a formula change. We have seen how cooperation between OMB, HUD, and CDBG stakeholders produced an improved performance system. I am optimistic that under a similar model we can also appropriately address the difficult issue of formula change and other reform issues. Mr. Chairman, I thank you for holding this hearing and I look forward to hearing from the witnesses. Senator Coleman. Mr. Chairman, I have a number of the affected communities in my State, 13 communities plus the State itself have submitted letters in support of the program, and we have a good conservative Governor in Minnesota, and his principal has submitted a letter in support of this program. So I would like to have those entered into the record.\1\ --------------------------------------------------------------------------- \1\ The letters submitted for the record by Senator Coleman appears in the Appendix on page 100. --------------------------------------------------------------------------- Senator Coburn. Without objection, so ordered. Senator Coleman. And then, again, I want to thank you for holding this hearing. I want to thank you for your diligence is pursing these matters, and I just hope that we can work together in a way that continues to build strong communities, that recognizes that if something works, that is a thing you have got to keep. We have got enough that does not work in the Federal Government. CDBG works. It is working well, and if we need to make it more transparent, more effective, we will do that, but let us do it the right way with the right folks at the table. Senator Coburn. Thank you, Senator Coleman. I would make note that the reform proposal that is before us today does not combine CDBG with other grant programs, and I would also make note that if you got CDBG where it was transparent and working well, what you might see is those grant programs would be folded into CDBG rather than the other way. Senator Akaka. OPENING STATEMENT OF SENATOR AKAKA Senator Akaka. Thank you very much, Mr. Chairman, for holding this hearing, and I want to add my welcome to our witnesses as well. As you know, the Community Development Block Grant program provides essential Federal resources to help meet the specific needs of communities, and this is a special program, because it empowers communities in determining their priorities. In Hawaii, our counties have recently used CDBG resources to help provide affordable housing, assist the homeless, expand day care facilities, provide meals to low-income families, strengthen our medical infrastructure by making physical improvements to our community health centers, and expand opportunities to help individuals with disabilities find employment. As a former director of the Hawaii Office of Economic Opportunity, I care deeply about the success of these programs. I did work in and work on it and did help people in Hawaii over the years. Today, we face a severe shortage of affordable housing in Hawaii. In addition, increased construction costs have made building houses, apartments, community health centers, and other structures much more costly. Without Federal support, these programs will no longer be possible, as construction costs continue to rise. With CDBG facing cuts, we should be advocating for additional resources to provide our communities to meet their unique needs instead of having a formula fight to divide whatever scarce resources we have. I will continue to work to protect my home State of Hawaii and the CDBG program. We need to give our communities more resources to meet their needs, not less. As our counties struggle to meet the increased costs of providing housing, ensure that low and moderate income individuals have access to quality health care, and help expand access to economic opportunities, the Federal Government has an obligation to support these programs. Instead of misconceived tax cuts that benefit a small number of wealthy taxpayers, we must find the resources necessary to help our local communities find the solutions to their problems. It has been mentioned by the Chairman that there are problems and in some cases that reflect mismanagement. These, we need to take care of, but there are these communities that really need the help, and CDBG can help to do it. Thank you very much, Mr. Chairman. Senator Coburn. Thank you, Senator Akaka. I appreciate you being here. I am going to recognize our first two witnesses and introduce them. Your full testimony will be made a part of the record, and I have read your full testimony. I have spent a great deal of time looking at this program, and I recognize its value. Pamela Patenaude became Assistant Secretary for Community Planning and Development at the Department of Housing and Urban Development. Prior to this appointment, she served as HUD's Assistant Deputy Secretary for Field Policy and Management, and before coming to HUD, she served as State Director and Deputy Chief of Staff for U.S. Senator Bob Smith. Kenneth Donohue is the Inspector General of Housing and Urban Development. Before serving at HUD, he had a distinguished 21-year career with the U.S. Secret Service as a Special Agent, culminating with the Assistant Director assigned to the CIA's Counterterrorism Unit. Ms. Patenaude, we will recognize you now, and as you finish, we will then recognize Mr. Donohue. TESTIMONY OF HON. PAMELA H. PATENAUDE,\1\ ASSISTANT SECRETARY, COMMUNITY PLANNING AND DEVELOPMENT, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, ACCOMPANIED BY TODD RICHARDSON. Ms. Patenaude. Thank you, Mr. Chairman. Good afternoon, Senator Coburn, Senator Akaka, and Senator Coleman. I am pleased to be here today on behalf of Secretary Jackson to share the Administration's proposal on the CDBG reform. The President's fiscal year 2007 budget retains and consolidates the CDBG program at HUD. We have proposed the reform because the program's intended impact to the Nation's neediest communities has decreased over time. Quite simply, the current formula that allocates billions of dollars is no longer fair. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Patenaude appears in the Appendix on page 39. --------------------------------------------------------------------------- Over the past three decades, demographic and socioeconomic changes, development patterns, and other factors have created significant distortions in the distribution of CDBG funds. There has been a steady erosion in the ability of the formula to target funding to places with greatest needs. The CDBG formula has remained untouched since the 1970s. Reform is also necessary because HUD must be able to hold grantees accountable for performance and provide incentives to maximize the impact of these limited and valuable funds. To address these issues, the Administration proposes the CDBG Reform Act of 2006. The three main elements of the Act are formula reform, the introduction of a competitive challenge grant, and enhanced performance measurement requirements. To explain further, Dr. Coburn, I call your attention to the irregular EKG on the chart to my right. [Laughter.] Senator Coburn. That patient is dead. [Laughter.] Ms. Patenaude. We have three charts here: Chart one, the solid red line on the chart indicates the community index needs. The jagged lines, the irregular lines, represent the more than 1,100 entitlement grantees, and each individual line represents the per capita grant for the entitlements. The Community Development Needs Index was developed as a measuring stick. On the left hand side of the chart, we have our low need grantees. On the right side, we have our high need grantees, and the numbers on our left are the actual per capita grant amounts. As you can see on the right, under the current formula, many high need grantees are receiving significantly smaller grants relative to the needs index. The biggest problem with the current formula is that grantees with similar needs are receiving widely different grant amounts, and that is where you see the swings. Chart two shows a more equitable distribution of the Community Development Block Grants under the new formula or the proposed formula. It demonstrates the ability of the new formula to more fairly target funds to communities with greatest needs. And finally, the lightly shaded area represents the current formula, and the dark vertical jagged lines represent the entitlement grantees under the proposed formula. As you can see, there is significantly better targeting to communities with the greatest need. Grantees with similar need profiles will receive a more equitable amount per capita, and most importantly, the proposed formula will ensure more funding to the most needy communities. The second element of the CDBG Reform Act is the introduction of a $200 million competitive challenge grant. This fund would give communities the opportunity to compete for additional funding to carry out economic development and revitalization for distressed neighborhoods. In order to be considered for the challenge grant, distressed entitlement communities are required to have both a strategy and a track record of concentrating investment in distressed neighborhoods. Communities are selected based on objective criteria, including the extent to which they target assistance to distressed neighborhoods. HUD will award the challenge grants to communities that achieve the greatest results in their neighborhood revitalization strategies. And finally, the third element of CDBG reform strengthens the performance measurement requirements to improve the effectiveness and the viability of the program. HUD is currently implementing this new framework that clearly establishes measurable goals. The CDBG Reform Act of 2006 reaffirms the national objectives of the program and preserves local flexibility. By revising the formula, adding a challenge fund, and implementing performance measurement frameworks, we will improve the effectiveness of the program. Thank you, Mr. Chairman, for this opportunity to present the Administration's proposal. Senator Coburn. Madam Secretary, thank you very much. Mr. Donohue. TESTIMONY OF HON. KENNETH M. DONOHUE,\1\ INSPECTOR GENERAL, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Mr. Donohue. Senator Coburn, Senator Coleman, and Senator Akaka, thank you for inviting me to testify today on this important topic. Through our audits and investigative efforts, the OIG hopes to strengthen HUD programs such as CDBG grants into a more targeted, unified program that sets accountability standards in exchange for the flexible use of the funds. The CDBG program provides annual grants to 1,180 general units of local governments and States, and results reflect each community's ideas of a good use for the money that will, at least in the design, result in the elimination of slum and blight and foster economic development. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Donohue appears in the Appendix on page 44. --------------------------------------------------------------------------- Some community projects, however, do not always match the intent of their paper submission. We continue year after year to identify the same problems in our audit investigative efforts for the program and CPD activities in general. HUD OIG audit reports show that repeated problems fall into the following six categories: The improper use of funds; the lack of capacity; requirements are not followed, a lack of adequate management; national objectives not met; and a lack of monitoring and reviews. Over the past 2\1/2\ years, we have issued over 35 audit reports. We have among other things identified $100 million in questionable costs and funds that could be put to a better use. We have indicted 159 individuals, pursued administrative actions against 143 individuals, and made over $120 million in recoveries. An example of the lack of policy or adequate management is a community association in Kansas City, Missouri, that squandered CDBG funds to include company picnics, Christmas tree lighting ceremonies, luncheons, gifts, and bonuses. You see by the first chart, the poor recordkeeping, and that was one example of the office recordkeeping. An example of the entity now following HUD requirements is a nonprofit corporation in San Juan, Puerto Rico, which could not demonstrate that activities met at least one of the three block grant national objectives: That it directly benefits low and moderate income persons, that it aid in the elimination and prevention of slums or blight, and that it met other community needs that have a particular urgency. In another review, the Department repeatedly warned Utica, New York, that construction of a boat marina and ski chalet were not eligible activities. The city incurred $903,000 in ineligible costs and $214,000 in questionable costs for the marina. The city is still trying to establish that $255,000 of the ski chalet was an eligible activity; as you see in the right, a picture of the ski chalet. In reference to the lack of monitoring reviews, we found that CPD has management controls to minimize the risks that grantees and some grantees lacking capacity receive funding; however, unverified assumptions, incomplete and outdated guides, and limited ongoing monitoring undermine these controls. I have seen the success of active monitoring efforts with monitors used by the Lower Manhattan Development Corporation in preventing waste and fraud in post-September 11 rebuilding activities, and I have testified previously to this effective concept for use in disaster relief efforts in the Gulf States. Our investigative activities show there are five major fraudulent types of schemes affecting the program: False claims, soliciting bribes and kickbacks, procurement and contracting, theft or embezzlement, and public corruption. The City of Springfield, Massachusetts, was especially hard hit by the public corruption. In the past several years, a number of officials, including the public housing authority director and the directors of at least two CDBG-funded nonprofits or public agencies have been indicted and/or convicted of crimes that run the gamut, including conspiracy to defraud the United States, obstruction of justice, extortion, false statements, perjury, criminal contempt, and witness tampering. We endorse efforts to improve performance and accountability within the CDBG program and support some of the proposed changes by the Assistant Secretary. For example, I believe it is a worthy endeavor to give policy makers the opportunity to weigh new proposals to more fairly distribute the funds to address inequities that have arisen as demographics have changed. This said, I must say that we are concerned that what appears to be language designed to insert objective performance criteria into grant language by the Administration will be undermined by the implementation of vague criteria and a failure to improve deficient enforcement tools. These criteria may not be adaptable to quantitative measurement. CPD has not always established a consistent history in performance monitoring, specifically between its headquarters staff and field sites. I am concerned that this may set standards that are simply achievable rather than accountable. In some instances, CPD refused to pursue any type of sanctions against grantees on the ground that they should not be held responsible for the lack of success of the proposed activities as long as those activities are consistent with the statutory objective of the grant. In addition, if a grantee has not performed for 2 years, then, HUD should be required to intervene. Moreover, this legislation also appears to lack adequate enhancement to improve CPD enforcement tools under 42 U.S.C. Section 5311. In regards to 42 U.S.C. Section 5311, we also believe it needs to be amended to eliminate the requirement for a formal hearing. In my view, without the authority to take prompt enforcement action, grantee noncompliance will not be deterred, and performance will not be encouraged. Alternatively, the CDBG program should retain the process of giving notice to the community of a grant and allow the community to comment on proposals. This check and balance and transparency appears to have been deleted in the proposed amendment, 42 U.S.C. Section 5304 (e). That concludes my testimony. I thank the Subcommittee for holding this important hearing. I look forward to answering any questions you may have. Senator Coburn. Thank you, Mr. Donohue. I want to welcome my co-chairman, Senator Carper from Delaware. I know he has a lot of experience with this program. We have already established that this is not a hearing about eliminating CDBG block grants, and we did that from the outset. And if you would care to say something, Ms. Patenaude, you are welcome to. OPENING STATEMENT OF SENATOR CARPER Senator Carper. First, let me say that I am delighted to hear that. The second thing I want to say is welcome to our witnesses. I apologize for having missed all of your testimony and part of yours, Mr. Douglas. Senator Coburn and I were part of a discussion that went well into the night last night trying to figure out what we can do to rein in our very large Federal budget deficits, and I think in the end, we have to look at everything and figure out what is working well and what is not, and programs I support as much as CDBG, we need to look at these programs, too, and figure out what we can do better. And so, we approach it with that spirit. I have a statement for the record, and I just look forward to the opportunity to question our witnesses and to maybe hear from some others. Thank you. Senator Coburn. Thank you. Madam Secretary, can you give me some examples of wealthy communities receiving larger CDBG grants than those given to poorer communities with much higher needs? Ms. Patenaude. Yes, I can. Thank you, Mr. Chairman. As a native New Englander, I think a very obvious example is Newton, Massachusetts, and Lawrence, Massachusetts, which is a declining community, an old mill town. Newton, Massachusetts is a wealthy community, a suburb of Boston, and under the proposed formula, it would be corrected, and we would restore equity. Senator Coburn. Do you think the resistance to restoring equity is that there are going to be some losers in terms of total dollars to communities? Is that the resistance that you are hearing as you talk about your reform plans? Ms. Patenaude. The most difficult part of the CDBG reform proposal is that some communities with high needs will lose, but it is relative to the needs index, and until 2 days ago, we had not received any formal feedback from our stakeholders, but we are in receipt of that now. Senator Coburn. So if a community, based on your minimum grant criteria, did not have enough to get the minimum grant, what happens to that money that they did not get? Where does it go? Ms. Patenaude. As you know, we have proposed a minimum threshold, which is a percentage of the appropriation, so that we will not have entitlement communities coming in and out of the program and that based on 2006 appropriations is approximately $500,000. So communities that do not meet the minimum threshold will be eligible to participate either through the State program or join an urban county. The demographics is not going to be a one-for-one, but the money should be redistributed based on that population and the poverty of the entitlement community. Senator Coburn. But the State does not really lose the money. Ms. Patenaude. No, I do not believe they do. Senator Coburn. The State still gets the money; the money just gets redirected in a priority that the State then makes a decision; is that correct? Ms. Patenaude. That is correct, Mr. Chairman. Senator Coburn. So even though you have a very wealthy community, and they fall out of this direct block grant does not mean they are not going to get money, correct? Because if the State decides to take that money through their State allocation, the State could very well still give it to them. Ms. Patenaude. That is correct. Senator Coburn. OK; when my staff attempted to obtain grantee-level spending data, it became evident that there is no consistent data collection process. Some cities have their reports online, while others have them only in paper format. Some even had them in the form that what we saw from Mr. Donohue, which is not in any format at all. Each city had a different process for sharing information. Furthermore, the data was not collected in a central location at your headquarters but rather stored all around the country. Most of the time, it was not computerized, even though it may have been computerized originally. Why does HUD not have a consistent reporting requirement for the grants today? Ms. Patenaude. Senator, I believe we do. All grantees are required to enter data into the IDIS system, and that system is currently going through a reengineering to make it more user- friendly. We are moving to a web-based platform. But all grantees are required, with the new performance measurement framework that we are currently implementing, and we are training all of our grantees this summer in 10 locations throughout the country, we will obviously be requiring grantees to enter additional data under the performance measurement framework. Senator Coburn. What about Mr. Donohue's idea that the language that you all have floated before the Congress is that you may intercede when there are vague criteria, lax enforcement, or problems versus should or shall? Why did you choose the option of could? Why should you not intercede? Why should you not intervene if somebody is failing? And why should the language not be that you have to intercede? Ms. Patenaude. The proposed legislation does give the Secretary the authority to take---- Senator Coburn. But it does not say they have to. Ms. Patenaude. It does say he may, but I do believe that Secretary Jackson was instrumental in the development of this legislation, and I believe that we interpret that the Secretary will take action when appropriate. Senator Coburn. Well, I certainly do not read it that way. I read it that it is an out. You do not have to enforce it if you do not want to. And I think it should be if you are going to have that type of program, you certainly ought to have that. Mr. Donohue, are there outstanding recommendations for increased accountability that your office has made to HUD which could be immediately enacted by Congress, by action from Congress, that would result in improvements in both the fraud, the lax enforcement, the vague criteria, and other things? Have you all made recommendations that we could act on? Rather than a reform, could we do something that would help us get more bang for the buck Mr. Donohue. Senator, we submit proposed legislation to the Hill annually, and two of the issues that we have spoken to is the ones that Madam Secretary has spoken about. One is the formal hearing requirement. I would submit to you that the Secretary should, as you indicated, should have the right to weigh in on programs that are ineffective and misspent funds and whatever. And I think that as the request indicated that if there were going to be hearings required and an appeal, I think that could take place, and there is ample room to go back and address those matters that might come back up. The other matter is the national objectives. The way it is designed right now is the applicant applies for a national objective, and then, what we found in some cases were they either did not meet that objective, or at the time of our audit or thereof, the objectives were reapplied. One of the other objectives was reflected. And we feel as though that if these objectives are part of the application process that at least the grantee should go back and submit a change at some appropriate time for HUD's approval to go forward on the applied grant that they have now changed to. Senator Coburn. Senator Carper. Senator Carper. Thanks, Mr. Chairman. I hate to mispronounce the names of our witnesses, and I pronounce your last name Donohue. Mr. Donohue. That is right, sir. Senator Carper. I have no idea how to pronounce your last name. Would you just say it for me? Is it Patenaude? Ms. Patenaude. Patenaude. Senator Carper. OK; good. I missed your testimony, as I said earlier. And would you just take the a minute and just give me my take-aways? If we remember nothing else from what you have had to say today, what are the couple of things that you would have us remember? Ms. Patenaude. The three elements of the CDBG reform: The proposed formula revision, the introduction of a competitive challenge grant, and the performance measurement requirements. Senator Carper. OK; take a few more seconds and maybe another minute and talk about the three elements. Ms. Patenaude. Under the proposed formula revision, we believe it would restore equity. The current formula, as you can see from the chart, if we could put Chart One back up, that demonstrates the lack of targeting under the proposed formula. Senator Carper. And how does it do so? Ms. Patenaude. The solid red line is a community needs index that was developed as a measuring stick. The light or the pink vertical jagged lines represent each entitlement community, more than 1,100 communities are laid out on this chart. Senator Carper. Somewhere on that continuum, one of those spikes, probably right along the solid line, is Delaware? Ms. Patenaude. Todd, can you point out Delaware? [Laughter.] Senator Carper. That is OK, Todd. I think she was kidding. Ms. Patenaude. Well, we could. It is in the 30--right there. Senator Carper. Above average? Mr. Richardson. It is above the line. Senator Carper. That is pretty impressive. [Laughter.] Senator Carper. OK; what else would you have me know about what you had to say? Ms. Patenaude. That HUD needs the ability to hold grantees accountable with this new performance measurement framework and also that the performance measurement framework was not developed in a vacuum. It was a 2-year process working with stakeholders and the Office of Management and Budget, and it was very much a consensus document. And because the program has such flexibility, it was obviously a very difficult framework to come up with. Senator Carper. Does the new formula take into account the cost of housing and services in the local areas? Ms. Patenaude. Under the proposed formula, we have a fiscal capacity adjustment, and I believe that the fiscal capacity adjustment---- Senator Carper. When we say fiscal capacity adjustment, can you just kind of translate that for me? Ms. Patenaude. I am going to attempt to. Senator Carper. And you are welcome to bring somebody up to the desk who can translate it for me as well, just in layman's language. Ms. Patenaude. That is the most complicated part of the formula, but we have the variables that play into the formula. And at the end, a fiscal capacity adjustment is applied so that communities with high per capita incomes we believe would have high cost of services, there is an adjustment made but no more than 25 percent based on the per capita income. Senator Carper. OK; I will have Senator Coburn explain it further to me later. [Laughter.] Senator Coburn. Does that mean there is a minimal penalty for the lower needs but yet higher income communities? Ms. Patenaude. Can you clarify what you mean by penalty? Senator Coburn. Well, the adjustment, it is limited to 25 percent, right? Ms. Patenaude. Todd, do you want to address that, please? Senator Carper. And you may want to identify yourself, sir. Mr. Richardson. My name is Todd Richardson. I am an analyst at HUD. The per capita adjustment essentially says that if you are a community whose per capita incomes are higher than the per capita incomes of the metro area, your grant is adjusted downwards, and if you are a community where your per capita incomes are lower than the metro area, your grant is adjusted upward. So if you are a particularly poor community--think about Camden, New Jersey, in the Philadelphia metro area--your grant, there is a base grant that is provided, and that grant gets adjusted upward, because your average per capita incomes are lower than the metro area. Whereas, if you were a wealthy suburb, for example, your grant would be reduced to reflect having higher per capita incomes relative to the metro area. Senator Carper. My first reaction to that is that seems to make sense. What do you all think? Ms. Patenaude. Todd is the author of the formula study, so I think he would agree. [Laughter.] Senator Carper. All right. Todd, who is your boss? [Laughter.] Ms. Patenaude. It is actually another Assistant Secretary. I am not his boss. Senator Carper. Just checking. [Laughter.] Senator Carper. Sort of a follow-up, because I want to make sure I got this right. So somebody in Delaware at the median income has to pay more relative to housing costs both to buy and to rent a home from someone in Oklahoma, for example? Delaware loses money, and Oklahoma gains? I am told by my staff that this gap could be even more pronounced in places like Hawaii, with very high housing costs. And I would just ask if that is true, and also, might it make more sense to consider the purchasing power of the grants, not just the absolute amounts of the grants themselves? Ms. Patenaude. I am looking at the numbers for Delaware and Oklahoma, and again, it is relative to the community needs index, so if a community was receiving a higher per capita grant under the current formula, they will lose under the proposed formula so that it is closer to the community needs index. Senator Carper. Does the formula take into account other things that a State may try to do to address poverty, such as what we spend on education, on our schools, what we are spending on health care, Medicaid, and other things or spending on housing itself? And if so, how? Ms. Patenaude. Well, the formula is based on persons in poverty, excluding college students, female-headed households with children under 18, housing overcrowding, and housing 50 years or older occupied by a poverty household. And then, the fiscal capacity adjustment is applied. So I do not believe that the items that you listed would come into plan in the proposed formula. Perhaps they are recognized in the 17 variables that are used for the community needs index. Senator Carper. OK; thanks very much. Thanks, Mr. Chairman. Senator Coburn. Senator Coleman. Senator Coleman. Thank you, Mr. Chairman. First, I have to ask you a question, Mr. Donohue: Are you aware of a GAO review of CDBG? Mr. Donohue. I believe I am, sir, and I looked over it a bit as well. Senator Coleman. And I read somewhere that there was an OMB PART evaluation. Do you know what that is? Mr. Donohue. I do know what that is. Senator Coleman. And are you familiar with that regarding CDBG? Mr. Donohue. I cannot recall, sir. Senator Coleman. Can you just tell me briefly what an OMB PART evaluation is? Mr. Donohue. I am going to have to bring one of my staff up to explain that if I can, sir. Senator Coburn. Can I answer that? Senator Coleman. Yes. Senator Coburn. It is a Program Assessment Rating Tool, and this program has a 17 score out of 100, 100 being running the program grant based on performance measurements--27 out of 100; I am sorry, not 17--which means this, in terms of measurement tools, we do not have measurement there. And that is part of the management, trying to get measurement to see if we are effective in how we are spending money. Senator Coleman. Assistant Secretary Patenaude; is that---- Ms. Patenaude. That is correct. Senator Coleman. When you are talking about the change in the program, one of the changes is in the amount of funding for CDBG under the Administration's request. Was CDBG appropriated $3.7 billion last year? Ms. Patenaude. This fiscal year, 2006, that is correct. Senator Coleman. And that the Reform Act of 2006 posits a $200 million set aside, so if you take that, so we put the challenge grants aside, then, you have $2.7 billion. You talk about one of the concerns, you are starting out with a 25 percent cut. Ms. Patenaude. Well, they are separate issues. The President's fiscal year 2007 budget does propose a cut for the CDBG program. Senator Coleman. Is it about 25 percent? Are the numbers I have given you---- Ms. Patenaude. They are correct, sir. Senator Coleman. And so, and I am one who measure twice, cut once. [Laughter.] Measure before you do your cuts. And I think that is part of the issue here. I think the work being done by the Inspector General in terms of performance measures, formal hearings, giving the Secretary a chance to be involved when there are problems, I do not think anyone is going to argue with that. So when you kind of look at the hallmarks of this, it is not just fairness in the program. One of the hallmarks of it is a substantial cut in the program before we even begin. That raises a level of concern. I think there is also a level of concern, at least I read it. I have had a chance to review the National Association of Housing and Redevelopment Officials' document which is now part of the record.\1\ I cannot tell you whether it is gospel or not, but they give figures here in terms of the impact of these cuts that are pretty substantial. And in fact, every grantee in Minnesota, which sees its allocation decline by at least 18 percent; all three of Delaware's entitlement communities would lose at least one-third of their funding. --------------------------------------------------------------------------- \1\ The prepared statement of the National Association of Housing and Redevelopment Officials appears in the Appendix on page 120. --------------------------------------------------------------------------- Senator Coburn. Do we lose any money? Senator Coleman. Norman, Oklahoma would experience a 35 percent reduction in CDBG grant. One of the concerns here, and I say this as a former mayor, is these kind of ups and downs. You cannot plan a city's future, you cannot do long-term development unless you have a process by which you look at these and you measure the impact. That is why the GAO has a study. And the GAO report, as I understand it, is working with stakeholders. I think it may be a good model. Did you work with the Conference of Mayors when you proposed the Reform Act of 2006? Ms. Patenaude. The performance measurement framework that was---- Senator Coleman. No, the funding of the other formula. You are talking about getting fairness. Let me say that one of my concerns is that mayors who deal with this thing--I have to tell you, they have not been knocking on my door about lack of fairness. And so, you have the folks who are most directly impacted, who are your stakeholders, and I think the GAO is working with them; I think it is a good model, and I am just not sure whether HUD has had that same kind of consultation, discussion. Can you help me on that? Ms. Patenaude. Sure; I do not believe that HUD consulted with the stakeholders on the actual funding proposed in the President's budget, but we did have consultations over a 2-year process developing the performance measurement framework. Senator Coleman. One of the other issues, and it goes to this question of why there are concerns. I think there are concerns about the real impact. One of the great sins in Congress is the law of unintended consequences. We say we are going to do something, and then, we get an impact and then try correcting it afterwards. Again, I am just relating to this report. They cite your testimony before the Subcommittee on Housing and Community Opportunity held on the House side, Financial Services Committee, Housing and Community Opportunity, in which you indicated you gave an example of two cities, Santa Monica and Santa Maria. And this is your quote: ``Under the current formula, they receive about $1.3 million. In terms of need, they are very different. Santa Monica, large per capita income; Santa Maria, low per capita income. Under the formula the Administration will propose, Santa Maria's grant would increase to $1.6 million, while Santa Monica's would fall to $750,000.'' That sounds reasonable. Their analysis says Santa Monica received a CDBG formula grant in the amount of $1.382 million for fiscal year 2006; Santa Maria received $1.307 million. If Congress were to adopt the Administration's proposal exactly as written, Santa Monica's grant would in fact fall to $558,000, while Santa Maria's grant would fall to $1.180 million. So in other words, what you have there is a 60 percent cut for Santa Monica, and you have a 10 percent cut for Santa Maria. Ms. Patenaude. I believe they are using two fiscal years, though. They are not using level appropriations for 2006. They are comparing 2006 to proposed 2007. Senator Coleman. Right; so they are looking at your 2007 budget. And your 2007 budget, this community that has great need, they are going to also get a cut. And I have trouble with that. And so, I think we agree on the goals, but we are looking at communities that have need that are going to be cut, and I have trouble explaining that. And so, I think as we go forward in this, let's bring in the mayors. Let's bring in the folks who are supposedly impacted by the lack of fairness and other local officials and have them talk about this and see if we get where the Chairman and the Ranking Member want us to go, because that is where I want to go: Transparency and accountability. But I do not want to see cuts if something is working. And that is my trouble: If it is working, if it is actually growing jobs and doing the housing things and growing our communities, cut somewhere else where it is not working. But this program and this proposal cuts, using your own example, you are going to see a cut in a program that you are touting perhaps as something that has the need. And I just find that problematic. Ms. Patenaude. Senator, if I may, we do have an increase in other areas in CPD. There was an increase in the proposed 2007 budget for the homeless and for the Home Program. Senator Coleman. I am just saying I know this program, and I have seen the impact in communities across Minnesota, rural as well as urban, and my deep concern is--again, I spend my time fighting fraud and abuse. But if I have something that is working, and my mayor is telling me they are getting something out of this, I want to be real careful about what we cut. Senator Coburn. I want us to go back and clarify. The Administration proposes a budget, and that does not mean we are going to do it. And you know we are not going to probably do it on CDBG grants. So I want us to clarify what the reform proposal is outside of what that is. Because if we get caught up in what the Administration is proposing in terms of their total budget, which they get the right to recommend; we get the right to legislate what it will be. If we get caught up in that, we take our eye off the ball. The problem is you cannot measure whether this program is effective. You can on an anecdotal basis, and that is the whole point of trying to get some measurement data to see if what we are accomplishing is worth the value of what we are putting into it. And I think that is important. The other thing, the point I would make is one of the reasons that the Administration comes by and cuts this is because of what the IG says in terms of fraud, what the GAO says, what the PART analysis says, says that it is not working. There is no measurement goal. So the whole purpose for thinking about reform--and I will tell you right now, I do not think this reform proposal as it is written is probably not going to go anywhere in Congress, but that does not mean that we do not need to have some reform in terms of measurements and refinements and how do we measure outcomes, and how do our grandchildren, since we are borrowing this money from them, get the best value for their dollar? And so, I would hope that what we would do from the basis of this hearing is establish a way to--how do we measure fairness? How do we measure the effectiveness of the program? There is no measurement. That is one of the reasons we are having this hearing is we need to find out. We have less than 9 years before this program is really going to get crunched. I mean, everybody can deny that is all they want, but we are on a path to where discretionary spending is going to get squeezed. And the way to protect CDBG is to put in a system that shows how effective it is so it will be able to compete for the dollars that should be there to help these very communities. And so, I hope we will keep our focus on measuring--maybe we do not need to reform it at all until we have measured it. Maybe what our reform needs is let us put in good measurement criteria, performance criteria, reporting criteria, and sunshine criteria so we can really find out what we are doing. Senator Carper, your turn. Senator Carper. Mr. Donohue, I think you may have mentioned before I came in something about a project in Utica, New York, that may have involved a chalet. And would you just go back and just tell me again what you were talking about? Mr. Donohue. Well, sir, this was a program funded in Utica. It was, I believe, a CDBG program, and the money turned up based on our audit. We did, as was mentioned, about 1,180 grants that were awarded in the past year, we have done 35 audits over the past 2\1/2\ years, which is very few, actually. One is this Utica. What we found in the case was this was a sampling and a photograph, we found the ski chalet and a marina being built and completed on that same money. That was not its intended purpose as designed and did not fit into the application in any way whatsoever. Senator Carper. The project did not marry up with the application? Mr. Donohue. That is correct, sir. Senator Carper. And is there no way under current laws or regulation that could have been caught? Mr. Donohue. Well, that is the whole question, sir, is that what happens is when we go back and take a look at these, and we have just got into this about 2\1/2\ years ago on the CPD program, the ones we have seen is--really, the concern that I have is at the subgrantee level, and their application process, what they are asking to do, it seems to change at times. And when we look at these audits, we find more times than not that it is used for criminal activity often the case. We have had a host of indictments. But we also find that there is a lack of capacity in many of these audits as well. Senator Carper. I am sorry; lack of---- Mr. Donohue. Lack of capacity; lack of being able to deliver on what their intended purpose was, particularly on the subgrants. Senator Carper. So, it seems to me that you have a jurisdiction; they applied for a grant for a particular purpose. Somebody, presumably HUD, reviews that grant application and decides whether or not it has merit and comes up with a dollar value. Later on, once the project is underway or completed, who has responsibility to make sure that what is being done with the money is what was initially proposed? Mr. Donohue. Well, that really gets to the heart of my point today, sir, is that what I believe, one of the things I found, a classic example was the Lower Manhattan Development Corporation. We went in there and took a proactive approach to the expenditures of about $2.5 billion, and one of the things we came away with was the need and the success of monitors. I truly believe that if I leave anything with you today, it is the idea that I believe that in the disbursement of these funds, the administrative funds or some of these funds of those grants need to include a monitor or monitors that will literally look at these programs, development utilization of the funds, and report back to us in this case to let us know it is being effectively applied. It has been a success, I believe, in the Lower Manhattan Development Corporation, and it is one of the things I am trying to spearhead in the Gulf States region. Senator Carper. Ms. Patenaude, would you respond to that recommendation, please? Ms. Patenaude. Thank you, Senator Carper. Under the current statute, if an activity is eligible, the grantee can change the activity as long as it still meets one of the three national objectives. And if I could comment on the ski chalet, the creation of jobs that benefit low and moderate income, that is eligible under the statute, so we would have to respectfully disagree that we do not have the authority to tell a grantee they cannot do something if it is an eligible activity. Senator Carper. Whose job is it to catch it if it is not? Ms. Patenaude. We have very effective monitoring in place. We monitor more than one-third of the 1,100-plus grantees a year. We do front-end risk assessments to identify activities that could be high-risk, and we have more than 600 employees located in 45 field offices that conduct these. And if I may comment on the application, grantees are required to submit a consolidated plan. And then, we look at the reports at the end of the year to compare them, and there is a requirement to hold a public hearing. Senator Carper. Mr. Donohue, would you respond to that? Mr. Donohue. Yes, I would, sir. I have looked at my audit report. It states the fact that the grantee in a case with regard to the ski chalet used the CDBG funds to help finance the renovation of a ski chalet in spite of a warning by HUD that the activity may not have been a national objective of the CDBG program. And that was not its intended purpose, and yet, it went ahead and built it anyway. Senator Carper. Last word, Ms. Patenaude. Ms. Patenaude. I think we have a wonderful partnership, and we cooperate fully with the IG. We have, since Labor Day, been working with the IG on the appropriations. Now, there are the two supplementals for the Gulf Coast. We do follow up. We take their audits very seriously, and oftentimes, there is some disagreement at the end whether or not an activity was eligible. Senator Carper. All right. My colleagues, Mr. Chairman and Senator Coleman, sounds like we have a difference of opinion here. Senator Coburn. We have a vote on. What we are going to do is give you an opportunity, if you like. Senator Coleman. I just wanted to put a couple of things in the record. I know the Chairman raised a concern about Section 108. I went back; I used Section 108. I thought it was a pretty good program, and I am going to have to check the record on this, but your figure was pretty substantial before. At least in Minnesota, I do not have any default rate. I have got to go back and find any; so there is a huge---- Senator Coburn. That is why you are from Minnesota. [Laughter.] Senator Coleman. That is why I do not want to kill the program. Senator Coburn. Again, there is no intention to kill programs here. And that is the problem. And there is a real structural problem. You get accused that you want to eliminate a program if you want to make it efficient. And that is a political bushwhack that belies what we need to do for our kids. The fact is if we spend $10 million on something we should not be spending, that is $10 million that did not go to help somebody accomplish something better and give jobs. But it is also lost opportunity to do it right, get it right, and make it meet one of the three goals. Senator Coleman. Just for the record, the two other things, because I have a copy of the OMB program evaluation. And on the question has the program taken meaningful steps to correct its strategic planning deficiencies? The answer is yes. And they are saying that HUD is actually in the process of correcting these. Are all funds, Federal and partners, obligated in a timely manner and spent for the intended purpose? And the answer to that is yes. There are challenges in this. And we are in fundamental agreement on the need to fix this program. My big concern, Assistant Secretary, is the process. My big concern is moving forward with a significant budget cut in a program that universally among cities and throughout this country, urban and rural, I think it is making a big difference. It is growing jobs; which, by the way, HUD says that in its own--I think I have the 2004 highlight accomplishments of fiscal year 2004 CDBG, ``this is a HUD document, approximately 95 percent of the funds expended by entitlement grantees and 96 percent of State CDBG funds were expended for activities that principally benefited low and moderate income persons; overall, a full half of persons directly benefitted from CDBG assisted activities, minorities, including African-American, Hispanic, Asian- Americans, or American Indians.'' This is a program that is making a difference. And so, I think we have a shared interest. I am going to work with the Chairman to make sure that we put in place, make sure there are strong performance measures; make sure that we can root out the specific instances of abuse. But I am also going to urge the agency to work with your shareholders. If you are going to talk about redistributing funds that are going to have a significant impacts on the communities of all of us, and make it very difficult to plan long-term to meet the economic and housing needs in those communities, you have got to work with them. And I do not think that has been done to date, and I think that is the need that changed. And then, we do that and work with the GAO, then, I think we can agree, Mr. Chairman, on some changes that need to be made. Senator Coburn. One comment I would make is there is no way HUD can make that statement, because they do not have the performance criteria or measurements as stated by PART, as stated by IG, as stated by GAO. So there is no way that they know that, for sure, that 95 percent of the funds were spent in the way that they were intended, and that is the whole purpose of the hearing is let us put the measurement--and much like you said, measure twice, cut once--and let us put the measurement functions in in terms of reforming so that we can know what we are getting and then move from there. It is important to know, I think we need to reform the program. In declining dollars, we are going to have to redirect some of the funds to the poorer communities. We have to have some change in the funding formula if, in fact, we are going to accomplish the purposes of this program, which means the wealthier communities may have to take a little bit less so that those who are most dependent can have more, and we can really create more opportunity. I am going to ask, if we could, if both of you could have someone stick around for our second panel; we will empanel the second group when we come back from the vote, and we will recess until that time. Thank you. [Recess.] Senator Coburn. The hearing will reconvene. For the record, I want to make sure we clarify that the information submitted for the record by Senator Coleman on the cuts for the cities reflected, the cuts in the Administration's requests for total CDBG and they were not necessarily reflective of the cuts from the reform bill before us. Eileen Norcross is a Research Fellow at the Mercatus Center at George Mason University, where she works on the Government Accountability Project. Before coming to the Mercatus Center, she was a fellow in journalism at the Competitive Enterprise Institute, a consultant with KPMG, and a research analyst with Thompson Financial Securities Data. Cardell Cooper is the Executive Director of the National Community Development Association. He is the former mayor of East Orange, New Jersey, and served as the Assistant Secretary for Community Planning and Development at the Department of Housing and Urban Development in the Clinton Administration. Ms. Norcross, you are recognized. Your complete testimony has been made a part of the record. TESTIMONY OF EILEEN NORCROSS, M.A.,\1\ SENIOR RESEARCH FELLOW FOR THE GOVERNMENT ACCOUNTABILITY PROJECT, THE MERCATUS CENTER AT GEORGE MASON UNIVERSITY Ms. Norcross. Thank you, Senator Coburn, Senator Carper, and Members of the Subcommittee for inviting me to testify on the Community Development Block Grant case for reform. I am currently engaged in a study to determine whether Federal economic development programs are able to meet their intended goals. Our research does not reflect an official opinion of George Mason University. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Norcross appears in the Appendix on page 53. --------------------------------------------------------------------------- According to its statute, CDBG was created to increase the viability of urban communities by addressing housing needs and creating healthy living environments by expanding economic opportunity, primarily for low and moderate income persons. The activities grantees engage in must principally benefit low and moderate income people, eliminate or prevent slums, and remedy urgent threats to the health or safety of the community. CDBG faces several barriers to assessing its impact. First, it is difficult to obtain data. For now, only aggregate data is available on HUD's website. Grantee-level data is available from local HUD offices. We tried to get this information for 71 cities and could obtain most reports online or through the mail, though 15 cities did not return our calls, and several cities could not mail or upload the report due to the size of the document exceeding 1,000 to 2,000 pages in some cases. Providing grantee-level data in a more easily accessible format allows citizens to better understand how the program operates in their community as well as throughout the Nation. It permits enhanced monitoring of how funds are used, and it improves oversight, and it also permits researchers to analyze the program's effects. Second, outcome measures will better enable data collection. HUD has developed and is beginning to use more measures, though many are still output-oriented, and must also show that grantee-reported outputs serve the program's goals. I applaud HUD's efforts but caution that a simple count of jobs or businesses assisted is not enough. We need to know if the creation of jobs or businesses led to economic revitalization that would not have occurred in the absence of CDBG dollars in order to truly assess the program's effectiveness. And third, determining the effects of CDBG rests not only on the quality and consistency of the data but also on the difficulty of establishing what would have happened in the absence of funding. We can use econometric studies or case studies. These should rely on good economic theory. If done correctly, empirical studies that involve field work, interviews, and surveys can be valuable and complement statistical inference. Case studies are not anecdotes. The hazard with anecdotes is that the experience of one community is offered as evidence for what all communities are accomplishing nationwide. Depending on their quality, they may not tell the full story. The following is not a case study but an example of how CDBG dollars are spent in Madison, Wisconsin, highlighting the need to dig deeper behind the current measures in order to get a picture of its effects. In 2005, Madison, Wisconsin spent over $1.4 million of its CDBG funds on economic development, claiming the creation of 99 jobs, including jobs for two coffeehouses, a bakery, restaurant, several biotech firms, and information technology companies. Madison, Wisconsin is a college town. Fifty-nine percent of its students are classified as living in poverty, and the current formula does not exclude them. Eight percent of Madison's residents are actually in poverty. According to the CDBG statute, these loans in Madison are legitimate uses of CDBG funds, and these 99 jobs went towards HUD's 2005 total of 91,237 jobs created. The deeper question is was CDBG created to create coffeehouse jobs for college students in relatively wealthy communities? Did the biotech firms create jobs for truly low to moderate income people as envisioned by the statute's intent or for graduate students? Did taxpayers subsidize private businesses to do something they would have done anyway? Are these negative outcomes? It depends on whether you consider this an effective use of CDBG dollars. Could these funds have been used to help with disaster relief in the Gulf, an area in urgent need of revitalization? Madison, Wisconsin, was legitimately awarded funds according to the current formula to legitimately fund economic development activities to serve the objective of job creation. Congress must determine if this is the outcome they are seeking to achieve with this program. CDBG was created with a particular outcome in mind: Alleviate slums and blight to revitalize communities and generate economic opportunity for residents. However, it has drifted from its original mission. I believe Congress should change the formula recommended by HUD, improve transparency, and make grantee-level data publicly available; require the measures designed by HUD; and consider what aims Congress is trying to accomplish when it created this program to determine if current activities are serving that aim. Further empirical testing of this program is needed to know its effects. This is only possible with better data collection. The measures offered by HUD will facilitate this. HUD is to be commended for identifying structural and management deficiencies in the CDBG program. Better targeting of funds, data collection, and empirical evaluation of this program will help HUD and the public identify what activities are best serving the communities this program was designed to help. Thank you. Senator Coburn. Thank you, Ms. Norcross. Mr. Cooper, welcome. We are glad you are here. You obviously have a great deal of experience with this, and we look forward to your testimony. TESTIMONY OF CARDELL COOPER,\1\ EXECUTIVE DIRECTOR, NATIONAL COMMUNITY DEVELOPMENT ASSOCIATION Mr. Cooper. Thank you very much, Chairman Coburn. It is an honor to be before the Subcommittee today, to Senator Coleman; I always affectionately called him mayor. We served together as colleagues during my tenure as mayor. It is good to see you, and certainly, Senator Carper hopefully will be back for the rest of the hearing. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Cooper appears in the Appendix on page 79. --------------------------------------------------------------------------- As the Executive Director of the National Community Development Association, I am pleased to appear before you today. I have served previously, as you know, as an Assistant Secretary of Community Planning and Development at U.S. Department of Housing and Urban Development. And it is sort of interesting: You are seeing the person who has to do it now and the person who was there. I have spent time in various hearings, and we tend to have a need to change things and fix things, and clearly, when they are broken, they ought to be fixed. There is no question. I commend the Assistant Secretary for her presentation. However, I do not necessarily agree that the answer is that CDBG is in need of reform. I believe, Senator, that you made a very cogent point, as other Members did. There is no one who can disagree with that accountability chart, and agreeing with the accountability chart, if there was enforcement and monitoring is done correctly, we can achieve that goal. Back in January 2001, the GAO submitted a report to the Congress specifically about HUD being on the high-risk list as an agency within the Federal Government. At the same time, during that report, it submitted that CPD programs, in particular CDBG, had made significant strides and improvements that warranted it to be taken off of the high-risk list. That was done with a combination of partners, both mayors and practitioners as well as the Department, to come up with a better tool of how we measure and monitor those programs. I commend the U.S. Department of Housing and Urban Development for working on performance measures. That was a time where partnership did exist. The Conference of Mayors, the NCDA, a number of other national organizations were all involved in having a candid discussion about how do you best measure a program for the 30 years that it has been in existence, has proven results, but at the same time, the data collection to support that and back that up needed to be improved? And that is what the performance measures under their proposal would do. That does not require reform. That was a partnership. It is being implemented. They are starting, as we speak, to train the various communities how to access that system, how to use it, how to report the very data, Mr. Chairman, that you talked about. And I believe that if we give that an opportunity to work, then, some of the underlying questions automatically get answered. Let me for the record also state I heard the IG talk about the anecdotal stories of people who have done some things that quite frankly, if they do not meet the smell test and are against the laws of this land, there is enforcement capability in that Department, and I know Senator Coleman as a former prosecutor would agree. When people violate the law, and it is proven that they have violated the law, there are measures that can be taken to deal with that. Unfortunately, when we use anecdotal stories on the negative side, it gives the general appearance of waste, fraud, and abuse. The issue of waste, fraud, and abuse for any community, if it is monitored correctly on the front end and enforced on the back end, I think you could limit that problem, and over the years, that has been the tool that has been used and constructively. I also want to add that as we talk about CDBG and its flexibility, over the 30 years of being a practitioner as a mayor and one who had to govern in a very difficult community under deep financial constraints and as a former Assistant Secretary who has traveled around the country in both urban and rural areas, large cities and small cities, for the majority of people who are involved in this program, they are doing the job, and they are doing it well. And what is being produced is lifting people who are low- income and moderate income people to a level where they can sustain themselves. We are talking about families where two parents are working. CDBG was not designed as a poverty program only, and I think sometimes, we get caught up in that side of it. And the reality is that we have lifted people up and moved them to a point where they are contributing to society. They are paying taxes. The neighborhoods are improving. And I think that it is important for us as we make these efforts to enforce the accountability issue that we not lose sight that we do not need to reinvent the wheel and reform something that works. We need to enforce that which is working, and we need to hold those who are accountable for the things that they do that are not within the construct of what CDBG was designed for. We also recognize that CDBG is flexible because the answer to Hurricane Katrina was let's use CDBG because of its flexibility on the grounds to help those who were devastated by this major disaster in our Nation. In New York City, when September 11 happened, CDBG was one of the answers. The point I want to make, though, in New York City, because it was labeled a disaster, as many of these other issues are, the Department has the authority to grant waivers, and when they grant those waivers, it changes how those regulations are employed, and I think they need to be very honest about when that occurs, whether a waiver was granted that allowed them to do an activity that may be out of the general scope under those rules. I do believe that if we talk about winners and losers, the American people lose when we make disinvestment. We have finally gotten to a point where you have the business community and bankers and developers who are willing to step deep into the pool because of the Federal investment in neighborhoods and communities around this country. They have been our partners; they continue to be our partners; the money is spent wisely; it helps produce jobs; it changes the face of neighborhoods. The losers in this deal, quite frankly, are all of America. We look at the various States. I will give you an example: In Alaska, 16 percent decrease; Ohio, 10 percent; Utah, 13 percent; Michigan, 6 percent; Hawaii, 19 percent; Minnesota, 26 percent; New Jersey, 11 percent. I could go down the list. And where we are making what appears to be increases, at the same time, we are reducing the budget on the other side; it is going to have some devastating consequences. So I ask you and implore you on behalf of the people who are the practitioners to ask HUD, in fact, if we work together so well on the performance measures, and we all agree that is a proper way to go, then, they need to sit down and talk to the practitioners and those who are responsible on the ground and come up with a workable way to deal with this formula issue. And the answer is not in this reform package. There are so many things that are going on right now. The GAO has a study. Congressman Turner has a study. The Department is rolling out reform. The Department rolled out reform and had not had one conversation, as my dear friend Assistant Secretary Patenaude said, and not that that makes them bad people; it is just that if that dialogue had taken place, we might be here talking about how we get to the accountability pieces without going through a reform track but simply enforcing and holding people accountable for their responsibility, because after all, the Federal dollars belong to the American people, and we should be good stewards of the public trust. Let me conclude by saying that our partners stand ready, as we always have, to work closely with the Department, but there are many mixed signals that are being sent. And I appreciate the fact this Subcommittee has this hearing today, but then, again we do not always have to reinvent something in order to correct it. I do believe that the rules and the tools are in the Department to correct the very things that the Secretary and the Department are trying to cure. Having sat in that seat, I know it is easier said than done. But the independent remarks of GAO over the last few years of where we are headed make sense, and the GAO, to their credit, called in all of the stakeholders most recently, all of the stakeholders, spent an entire morning with them---- Senator Coburn. Could you summarize, if you would? Mr. Cooper. I will summarize by saying that if we want to get to the heart of the issue and to use the public funds in the way they were designed, to continue the most flexible program in the Federal portfolio that was created out of a Republican Administration and enacted by a Democratic Congress in a bipartisan spirit, delivering services to America and improving these communities, then, CDBG reform is not the answer. It is a matter of working together collectively on the accountability issues. Thank you, Mr. Chairman. Senator Coburn. I am a little bit confused because of your written statement that says, ``holding grantees accountable for performance is redundant, and you oppose the accountability provisions in the reform package.'' Mr. Cooper. No, I said it is redundant in the sense that the Secretary needs a special provision to enforce that which they have already enacted. That is the point. The performance measures were part of the Department of Housing and Urban Development and the list of organizations who helped develop those standards. And they are now training people to put those standards into place. To say that now, in addition to that, there should be another review by the Secretary, give the standards that they have put into place that OMB agrees with an opportunity to work. Senator Coburn. One of the things, and it is important, and I tried to define this with Senator Coleman a little bit, and the last part of your testimony, not just the most recent but before, confused a declining request for CDBG funds with reform. My goal would be that we could measure performance and that measurement--accountability without teeth, accountability without the ability to change things is not accountability. If, in fact, you have to report, but there is no problem if you are not reporting accurately or the fact that, which is my greatest worry, is there is great flexibility in this program, and it does accomplish a great deal of good. In a declining budget, and everybody here in this room; you can kid yourself, but 10 years from now, there is not going to be a $5.2 billion CDBG supplemental, and there is not going to be a $3.7 billion CDBG appropriation, because the money is not going to be there. So the way to assure that it is more likely that the money is going to be there is to design a measurement and management assessment program that assures that this money is well spent. And I do not think anybody would disagree with that, and I do not think your testimony disagrees with that. Mr. Cooper. My testimony does not disagree with that at all. Senator Coburn. You do not oppose outcome measures. Mr. Cooper. I am a firm believer in outcome measures. I think during my tenure as the Assistant Secretary, of all reports submitted by GAO and OMB that yes, indeed, we do support that. What I am saying is that you have the ability within the Department, as they have stated, and we support, we were part of developing these outcome measures. So, yes, we are on the same page. Senator Coburn. And you would not oppose online data collection for the materials associated with the CDBG block grants so that what is out there is easily accessible not only by HUD but by the members of the community that know where their tax dollars are going? Mr. Cooper. What I am saying to you is that they have to have a system to do that. The IDIS system has been that four- letter word that has plagued everyone on the Hill and in the Department for so many years as a corrective system and the data that is entered into the system; the data which is public information ought to be able to be made available. Senator Coburn. OK. Mr. Cooper. The question that I think the Assistant Secretary, if she was here, would agree, any sensitive data as it relates to individual people and that kind of thing ought not be there. Senator Coburn. We are not talking about that. I want to get a yes or no answer. Your group and you do not oppose online data collection for CDBG grants, protecting privacy information---- Mr. Cooper. As long as it protects privacy information. That information is public information. Senator Coburn. You would support that. Mr. Cooper. That is public information. Senator Coburn. And you all would support that. Mr. Cooper. I have no objections to it. Senator Coburn. Would you also, and Ms. Norcross, comment, if you have outcome measures, and there is no consequences to the outcome measures, what good are the outcome measures theoretically? Mr. Cooper. It is not a theoretical question. It is a very honest question. The Department has within its ability that when people are not meeting the standards that are set by the Department, there are certain actions the Department can take. The question that I would have is why not on the enforcement end through the Department? If the issue is capacity, and I heard that argument, then, we have in the past, you work with those communities to give them assistance in capacity-building. Senator Coburn. OK; but the Department can. My question is should the Department? And that is the difference between the authority they have now versus what I would like to see is I would like to mandate that the Department help those people be compliant. I would like to mandate if their outcome is not good that there is a consequence to it. Mr. Cooper. I always believed, at least in my tenure, that was the case, and that is what they did. I do not know why they believe they cannot do it. Senator Coburn. They did not testify they could not do it. That was not their testimony. What I am saying is something very different, and that is having oversight to where they have to so that we can hold the Department accountable of doing the best management techniques. They can do it, and I agree. I am saying they should do it. Mr. Cooper. I believe in many cases, they do, but perhaps they need to document for this Subcommittee where they have enforced those things, and I think you will find that for the most part, they can. And if you are suggesting that language is placed there that says they shall or they must, I would think that should apply to every Department in this country. Senator Coburn. Don't worry. I am getting to all of them. Mr. Cooper. I figured you would be. Senator Coburn. This Subcommittee is getting to all of them. Under the current formula, East Orange, New Jersey, is a very distressed community with high needs and currently receives about $25 per capita. Bloomfield, New Jersey, on the other hand, according to HUD's need index, is not as needy. I am not saying they are not needy; I am just saying they are not as needy, about half as needy as East Orange by their index. The City of Bloomfield receives the same amount per capita as East Orange. As the former mayor, do you really think that meets the intent of what was intended when this legislation was originally put into effect, that somebody who has less need gets the same amount of money as somebody who has more need? Mr. Cooper. It all depends on how you identify need, Senator. Bloomfield, New Jersey is located directly next to East Orange, New Jersey. I represented both East Orange and Bloomfield in the county legislature. There are pockets of poverty in very wealthy communities, and those pockets of poverty that are in those communities are just as entitled, the low and moderate income people in those communities, to benefit from this program as any other community. Senator Coburn. So therefore, the assumption would then be that every community ought to get the exact same amount per capita. Mr. Cooper. No, that is not what I am saying, Senator. If we want to get to the heart of the issue, I think if appropriate funding was made, we could eliminate this debate because---- Senator Coburn. That is not going to happen. Mr. Cooper. Whether it happens or not is not my call. I can only express to you how I see it. If we address the accountability issues, get the data that is required, that everyone wants to see and let the performance measures work once they implement them, and to say that--you mentioned that in 10 years, the program will not be here unless people can defend it, well, let's do the first part right first. Senator Coburn. That is not the question I am asking. The question I am asking you: Is it fair or is it appropriate, let me ask it that way, is it appropriate; take fairness out that if we have a community that gets $45 per capita, that has twice the per capita income as the community over here that gets $22 and has one-half the per capita income, is that an appropriate response for the needs in terms of CDBG block grants? Mr. Cooper. If you talk about low and moderate income people. Senator Coburn. I am talking about low and moderate---- Mr. Cooper. No, because---- Senator Coburn. So you are saying that it is an appropriate response? Mr. Cooper. They are targeting down, and we are turning the issue to having CDBG no longer as a low and moderate income program but a program that will address the poverty in the Nation. It was not created as a poverty program, and perhaps we need to look at what we are doing to tackle poverty overall in the Nation. But if that is the case, low and moderate income is the standard in which CDBG---- Senator Coburn. So the answer is either yes, it is appropriate, or no, it is appropriate. Mr. Cooper. I believe that it is the will of the people in those communities to provide for the people under current law, and that is the law, so I do not support the HUD Reform Act as defined---- Senator Coburn. I am not talking about the Reform Act. I am just asking you is it appropriate? Do you believe it is appropriate? Mr. Cooper. Senator, I have answered your question. For the record, I believe that people at the local community under the rules of this program have the right to deal with low and moderate income people in their community who are in need. That is the answer, and that is what the program has done for 30 years. Senator Coburn. So it is appropriate, and we will let the record show that. Mr. Cooper. In your words. Senator Coburn. Senator Coleman. Senator Coleman. Thank you, Mr. Chairman. First, a general statement. I think we are in agreement about 90 percent of things here. I think we are in agreement about transparency; I think we are in agreement about performance standards. I think we are in agreement about outcome measures. I think we are in agreement about accountability. It is how you get there. My frustration has been how we have gotten there. As the Secretary said, there has not been a conversation with the stakeholders. Mr. Cooper. No, there has not. Senator Coleman. GAO is doing it, but there has not been that. And as I look at the bottom line, not philosophical discussions about East Orange versus somewhere else. If you took the change in this Department that was recommended, Anoka County, Minnesota, 34 percent reduction; Dakota County, 41 percent; Duluth, 57 percent; Hennepin County, 45 percent; Minneapolis, 54 percent; Webster County, 42 percent, in all of these, there are some communities that are strong, and there are some that are very weak. Senator Coburn. Senator Coleman, is that relationship to the formula? Senator Coleman. To the formula. Senator Coburn. Or the reduction plus the formula? Senator Coleman. It is proposed 2007 appropriation based on the formula that is there. Senator Coburn. But that is based on a decreased funding. I will make that real clear in the record. Senator Coleman. A decrease overall of 25 percent; in many cases, almost double that. And these are communities, every one of them have--and I do not want to debate; just to say that you look at that, well, we have agreement on these things. How do we get there? And the other issue I want to talk about, I think there is agreement, and Ms. Norcross, I was going over your recommendations, which actually, as I kind of went through them, I am for changing the formula, but I want to have a discussion about how you get there. I do not want to impose upon communities massive reductions, 54 percent, when they have not been part of the conversation. I think it is the arrogance of Washington. I think it is the arrogance of the Federal Government to come in and to tell communities this is what we are doing without having them at the table. I agree with your recommendations, but I have one, Ms. Norcross, I want to ask you about: Improved transparency; require performance measures; we can reconsider what the mission is, take a look at that; the question about infrastructure, I do want to stress that. I have a community, Brewster, Minnesota; got a half million dollar CDBG grant for infrastructure. As a result of that grant, they were able to accommodate a soybean oil processing plant about, I do not know, about $30 million worth of new investment and jobs in a small rural community. Ms. Norcross, the one thing I have to ask about your testimony is, at least in your testimony, you talk about San Jose State economist Benjamin Powell summarizes the misguided idea behind the government directly financing job creation. What I want to understand, does that mean 7(a) loans, small business loans? Is that directly financing job creation? Ms. Norcross. That is correct; if you are subsidizing job creation in that way, by handing a loan to business rather than the---- Senator Coleman. So you would think that is misguided. Ms. Norcross. I think that first, you would want to identify there is a market failure. Senator Coleman. We may have a disagreement. Ms. Norcross. I respect that. Senator Coleman. And again, I think there are a number of things government does, and government does not grow jobs. The private sector grows jobs. We shape an environment. We do infrastructure; that is pretty clear. But there are other things we do to support, I think, the entrepreneurs. And you look at some companies, I mean, they start in a garage because they got a 7(a) loan or something like that. They are producing a lot. So we may just have a philosophical disagreement about that. I hope where we go from here, Mr. Chairman, is that we take a look at these things upon which we agree and that we engage the communities that are impacted, that we make sure that we do not impose drastic cuts on folks without having them part of the conversation. And I want to work with the GAO, work with some others, and I think we can have a better program. But I do think it is one in which job creation is part of it, and that is where we disagree. Mr. Cooper. Mr. Cooper. Senator Coleman and Senator Coburn, perhaps some of the contentions that you see is because as part of a major reform without having had a meeting with the stakeholders and the providers, it leads to a bit of distrust, whether it is imaginary or not. There are those who believe that when the Department was scheduled to--and I know this meeting is not for that, but when it was scheduled to go to Commerce, there was almost a closing out of CDBG; then, the cuts. And people began to think that it is being bled to death quietly. And then, when you have this massive reform that is introduced without the dialogue without any partners involved, it does send very bad signals. Senator Coburn. That is an absolutely legitimate criticism. Mr. Cooper. And I think your point you made earlier to the Secretary that if, in fact, the kind of dialogue that has taken place, we might really be here getting to the accountability questions that you want to get to. Because I think in that kind of meeting with mayors who are practitioners and community activists and other people, they would absolutely agree that there are priorities here that need to be corrected. So again, just for the record, I just want to state that if in fact we are talking about accountability, let us wrestle with the accountability issue and come up with the kind of accountability that we all know is required, but at the same time, you cannot do that if your partner is not dialoguing at all. So you have some people who are feeling pretty blue about this these days, because for the last 3 years, there has been this consistent sort of slicing away, bleeding, if you will, of a program. Senator Coleman. And if I could say just one more thing for the record, Mr. Chairman, as I sit here and defend this program, I was a mayor for 8 years. I did not raise taxes in 8 years; cut my economic development agency at least by a third. And I was a conservative mayor. I merged, consolidated units of government. I was a conservative mayor, and those principles work. But as a conservative mayor, one of the things that I saw, and this was where we simply philosophically disagree: I think there are things that we do, infrastructure being part of it, some others that CDBG does, housing for first-time employees; you cannot grow jobs unless folks have a place to live that in the end made my community much stronger, much less reliant in the end. I tell people I may have Senator in front of my name. I still have mayor stitched in my underwear. You do not forget where you come from. And I think CDBG is a conservative program that allows--and my concern is I think there is an arrogance in the way this proposal was laid out there, that the Federal Government telling people here is what we are going to do; major shift in a program without being part of the conversation. And I think that has to change. Senator Coburn. Thank you. First of all, Mr. Cooper, you have a legitimate complaint. Mr. Cooper. It is just an observation. Senator Coburn. No, it is a legitimate criticism. And the fact is that is what is wrong with the Federal Government. Just to clarify for the record, the SBA 7(a) program has never been measured effectively. How it is measured is how many dollars it has loaned, not how many jobs it has created. So we are trying to do that. We are trying to get how do you measure the effectiveness? Because the problem is with the 7(a) loan, we know that we have got $70 billion on the hook for loans, but nobody has ever actually done the matrix to make the measurements is did those loans create those jobs? We ought to know whether or not that did that. So the whole purpose of this hearing is not to endorse or not endorse a reform movement. The purpose of this hearing is not to say we want CDBG to go away. The real purpose of this hearing is like in every other hearing is how do we put measurements on so we know how to make the best decisions with the limited dollars that are going to be coming forward? And I believe that Senator Coleman has hit it right, and I think everybody agrees: The question is what are the parameters that we measure? What are the teeth that we put into those so that if somebody is not working, not appropriately responding, that we can measure, can we send the money somewhere where it will? In other words, the whole goal, if this is a legitimate function of the Federal Government, and I believe it to be, if it is, how do we make it the best it can be, and how do we assume to move to that point? And I think Senator Coleman and I agree, and I think Senator Carper would agree, and we are looking forward and how do we put the type of parameters and measures on. I am not convinced that the performance measures that they have now have any teeth with them. And I also am not convinced that they create the proper expectation from the grantees to comply. What I would like to see is not create a burden on them but make it easy, make it streamlined and easy for them to do it and have a program that has some teeth. Because what happens is when you change expectations that you are going to be accountable in a program, people become accountable, because there is a consequence to it. If there is no consequence to it, and you are not accountable, then they will not be. And so, the goal is not to micromanage but is to set out some parameters and make sure that we get some--and I agree with you that once we get the measurements, then we can know what to do, and then we have to work with the agencies to do that. There are some good ideas in this program of reform. I am not saying there are not some. I think the idea, if we increased CDBG block grants $200 million so we could create this challenge, there are things you could have done in East Orange, New Jersey, where you were doing better, and you could have gotten some extra money for that to make it even better. So that idea is not necessarily a bad one. It is a bad one because you are taking it away from the shrinking pool. Would you agree with that? Mr. Cooper. Well, there were other incentives that we granted to communities who were doing well, and just for the record, and I think it is good work of the Senate as well as the House some years ago; remember the issue years ago was that people were not spending their money out at a certain rate. We could not figure out why, and we got together with all of the partners involved, and we did the analysis. We found out that there were certain communities who had phase one, two, and three of projects that, for example, in land acquisition, they purchased the land, so they got that part done, and they went to develop, and they found out they had environmental problems, and then they got a lawsuit. So those things are real problems that communities have, and it should not be viewed that we cannot fix those things. There is enforcement, and I agree with you: If you really think about this whole accountability issue, and I know you have, I do not think there is an argument anywhere against that. I would just like us to be able to get to those measurement tools so when OMB raises the question of how can we account for the number of jobs developed, and how do we know the impact of this, that we have a series of accountability tools to get there, and I just do believe that there are enough wheels on the wagon, quite frankly, right now to do that, and let us get that part fixed first, and then, we can determine where we go from there, because right now, we are sort of chasing budget fights and reforms and hearings---- Senator Coburn. We do not want to confuse the two. Mr. Cooper. Exactly, and I think the safest way not to do that, and you could attach, I believe that you can have the accountability discussion, but if you get into the reform discussion, particularly if you look at how the dollars are going to be generated in and out in any given community; politically, it may be a difficult job for the Congress and the Senate to deal with, but in reality, it is even a greater difficulty for mayors on the ground to deal with, because if you are losing money, and you still have people who are in need of services, and if you are gaining money, people go where the services are provided, Senator. And we have seen that. Senator Coburn. A couple of final questions for Ms. Norcross. Ms. Norcross, in your testimony, you make the important point that jobs do not create economic growth but rather the exact opposite: Economic growth creates jobs. Besides the number of jobs created, what performance measures do you think would best gauge whether or not the use of CDBG funds is stimulating economic development in communities? Ms. Norcross. I would like to see if unaided capital investment came into that community; what were the overall economic effects, the macroeconomic effects; what does employment look like; the number of people on public assistance. And I am glad that HUD is going down the road of establishing these outcome measures, jobs created, businesses assisted but want us to go further and show that these measures are having overall macroeconomic effects in a community, and I think that is the way they need to go. Senator Coburn. And you do not disfavor the Federal Government having a role in that. What you are saying is you ought to measure it to make sure the dollars go to the best place to get the greatest impact? Ms. Norcross. That is correct; I think there is disagreement among economists as to whether job creation should be a goal, but that is for Congress to decide. If that is to be a goal, then, let us try to tease out whether CDBG dollars are having larger economic effects. Are they leading to increased prosperity in that community? And that would be HUD's role to take the grantee data that is being reported on jobs created and try to demonstrate if that is having a larger impact, economic impact, on that community. Senator Coburn. Are there ways a grantee could game a new performance measurement system and appear to be meeting goals when, in fact, they are not? Ms. Norcross. I do not know if I would use the word game. When I looked more closely at Madison, Wisconsin, what I saw was here, we have HUD reporting it created 91,000 jobs last year. I looked a little deeper at Madison, Wisconsin, and I inferred that these jobs were going to potentially college students in that town. Here is a case where, looking at the macro number, we get the impression that HUD is creating jobs for low to moderate income people. When you look a little more deeply behind the numbers, is that necessarily the case? So I think with a job creation figure, you want to be certain that you go a little deeper, make sure that these jobs are actually going to low to moderate income people as envisioned by the program's intent. Are these temporary jobs? Senator Coburn. How do you differentiate a job created by a CDBG program versus a job created by somebody coming in at the same time with capital and then assessing, either rightly or wrongly, that came from the CDBG money? As an economist, can you have metrics or statistics where you can ferret that out? Ms. Norcross. I think it would be fairly difficult to establish the counterfactual, but I think there are ways around that, and certainly, that was one of my motivations in trying to get HUD data. So I think there are methods, econometrics you can use. Senator Coburn. I want to thank all our witnesses for being here today. We will be submitting questions to each of you that I would very much appreciate that you would answer, questions that I would like to ask but we do not have the time here today to do it. Mr. Cooper, thank you for your experience. Thank you for your service in the Clinton Administration and serving our country, and thank you for serving the people that you represent today. We appreciate it very much. Mr. Cooper. Thank you very much, Senator. [Whereupon, at 4:36 p.m., the Subcommittee adjourned.] A P P E N D I X ---------- [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]