United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Federalism 

and the Census, Committee on 

Government Reform, House of 

Representatives

COMMUNITY

DEVELOPMENT BLOCK 

GRANT FORMULA 

Options for Improving the 

Targeting of Funds 

Statement of Stanley J. Czerwinski, 

Director, Strategic Issues 

For Release on Delivery

Expected at 10:00 a.m. EDT 

Tuesday, June 27, 2006

 

GAO-06-904T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 27, 2006

COMMUNITY DEVELOPMENT BLOCK 

GRANT FORMULA 

Options for Improving the Targeting of 

Funds 

Highlights of GAO-06-904T, a testimony 

before the House Committee on 

Government Reform, Subcommittee on 

Federalism and the Census 

The subcommittee asked GAO to

testify at this hearing whose 

purpose is to examine the 

Community Development Block 

Grant (CDBG) Program 

administered by the Department of

Housing and Urban Development 

(HUD) and the Administration’s 

proposal to reform this federal 

government program. This

proposal would use a single

formula and five variables to

allocate funds. This hearing is a

follow-up to a series of

subcommittee hearings that GAO 

participated in during 2005 on the 

CDBG program. Based on the

principles of formula design that 

GAO outlined in its 2005 testimony,

the subcommittee had requested

GAO to undertake a body of work 

to help the Congress explore 

alternative formulas to allocate

CDBG funds among the nation’s 

diverse communities. This work is 

underway. In this hearing, GAO

addresses its ongoing work on 

options for improving the targeting

of CDBG funding as contributions 

to these efforts and to determining 

next steps. 

The CDBG is a significant direct federal-to-local grant program, supporting a 

wide range of local community development activities that benefit low- and 

moderate-income people. Since its inception in 1974, the program has 

provided about $113 billion to help the nation’s communities focus on 

challenges ranging from reducing economic isolation to the elimination of 

neighborhood blight. 

Due to the long-term fiscal crisis the nation currently faces, GAO advocates a 

thorough assessment of all federal tax and spending programs and policies 

across the board. In particular, GAO has suggested that programs such as 

the CDBG be measured according to the degree to which assistance is 

targeted to those with the greatest needs and the least capacity to meet 

them. 

Since 1978, real per capita spending for the CDBG has declined by almost 

three-quarters from about $48 to about $13 per person. Limited resources 

coupled with increasing concerns with effectiveness require better targeting 

to high-need communities. This involves a new look at the way the CDBG 

program assesses community needs and the capacity to meet those needs.

The significant economic and demographic changes that have occurred over 

the last three decades make this reassessment especially important. Not 

only have the economy and population changed, but we have a better 

understanding of community problems like concentrated poverty. In light of 

such change, the Administration introduced its latest CDBG reform proposal 

which would use a single formula and five variables to allocate funds. The 

Administration’s proposal raises important issues regarding how to 

systematically allocate funds based on community need. 

In ongoing work for this subcommittee, GAO is looking at additional options 

for the CDBG formula, focusing on 1) refining a set of indicators of the 

development needs facing the nation’s communities, 2) assessing potential 

indicators of communities’ capacities to address those needs on the basis of 

their own fiscal and economic resources, and 3) exploring ways to adjust 

such indicators for local cost-of-living differences. The objective is to design 

a set of options to assist the Congress in addressing critical policy choices in 

choosing a formula to allocate CDBG funds. 

www.gao.gov/cgi-bin/getrpt?GAO-06-904T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Stanley 

Czerwinski at (202) 512-6806 or 

czerwinskis@gao.gov. 
Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss our ongoing work on options for 

improving the targeting of Community Development Block Grant (CDBG) 

funds as the subcommittee examines the CDBG program and the 

Administration’s proposed reforms. CDBG is a significant direct federal-tolocal grant program, supporting a wide array of local community 

development activities that benefit low- and moderate-income people. 

Since its inception in 1974, the program has provided about $113 billion, 

according to the Department of Housing and Urban Development (HUD), 

to help the nation’s communities focus on challenges ranging from 

reducing economic isolation to the elimination of neighborhood blight. To 

do this, HUD is required to use a complex dual formula system to allocate 

CDBG funding. Under this dual formula approach, grants are calculated 

under two different formulas and grantees receive the larger of the two 

amounts. The formulas take into account poverty, older housing, 

population, housing overcrowding, and other factors. 

Much has transpired over the past three decades and it is time to carefully 

consider whether the program’s funds are directed towards those 

communities with the most compelling needs and the least capacity to 

address them from their own resources. As you have asked us, we have 

begun a body of work to help the Congress explore alternative formulas to 

allocate CDBG funds among the nation’s diverse communities. 

As discussed in our 2005 report on 21st Century Challenges,1

 the federal 

government’s financial condition and long-term fiscal outlook present 

enormous challenges to the nation’s ability to respond to emerging forces 

reshaping American society. Given the size of our projected deficits, 

traditional incremental approaches to budgeting will need to give way to 

more fundamental and periodic reexaminations of existing spending and

revenue policies and programs. A periodic reexamination offers the 

prospect of addressing emerging needs by weeding out programs and 

policies that are outdated or ineffective and updating those policies and 

programs that remain relevant by improving their targeting and efficiency. 

For example, programs such as the CDBG should be judged according to 

whether they target assistance to those with the greatest needs and the 

21st Century 

Challenges Drive 

Need for CDBG 

Formula 

Reassessment 

 1

GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: February 2005). 

Page 1 GAO-06-904T 
least capacity to meet them. While prompted by fiscal necessity, such a 

fundamental review also provides an opportunity to address the role and

responsibility of the federal government in responding to challenges faced 

by communities throughout the nation. The Administration’s proposal to 

restructure assistance for community development opens up important 

issues regarding systematically allocating funds based on community 

need. 

Since 1978, real per capita funding for the CDBG has declined by almost 

three-quarters from about $48 to about $13 per capita. (See fig. 1.) 

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

Budget Resource 

Trends Underscore 

Need for More 

Effective Targeting of 

Available Funding 

The number of communities receiving funds directly from the federal 

government through the CDBG formula grant has nearly doubled from 606 

in fiscal year 1975 to 1,128 in fiscal year 2006. This trend can be expected 

to continue both because population will continue to grow and because 

new standards for designating metropolitan areas, as promulgated by the 

Office of Management and Budget and used by the program, are also likely 

to increase the number of eligible communities. In addition, provisions in 

the current formula allow communities to continue to receive funds even

if they lose their eligibility. 

Page 2 GAO-06-904T 
The policy implications of these trends are that with more limited 

resources, increases in concerns with effectiveness require better 

targeting to high-need communities. This involves a new look at the 

program’s uses and the way it assesses community needs and capacity to

meet those needs. Given these implications, you have asked us 1) to 

review the use of CDBG funds and how HUD oversees the CDBG program 

and 2) to assess alternative formulas to allocate CDBG funds among 

localities, including evaluating formula options that take into account both 

community development needs and localities’ abilities to fund their needs 

from local resources. In response to your first request, we will be issuing a 

report to you later this summer which will examine the uses and oversight 

of CDBG funds. Our work on your second request, which I will be 

discussing today, will focus on developing various formula options and 

highlighting the key policy choices that the Congress will have to make 

when selecting from among those options. 

The CDBG program was originally designed to address the pressing urban 

problems the nation faced in the mid-1970s. However, as HUD has rightly 

noted, the formula for allocating CDBG funds is today no longer as good a 

measure as it once was of communities’ needs. For example, the amount 

of pre-1940s housing no longer works very well as a proxy for community 

development need. Communities that embraced urban renewal and tore 

down their blighted housing—a statutory goal of CDBG—are penalized, 

while cities with older rehabilitated housing occupied by higher income 

families are rewarded. 

Changing 

Circumstances Call 

for CDBG Formula 

Reassessment 

At the same time, since the inception of CDBG in 1974, the understanding 

of the underlying problems facing the nation’s communities has 

expanded.

2

 For example, we have become more aware of the adverse 

consequences of geographic concentrations of very low-income 

households and the negative effects of growing up in a single parent 

household regardless of income. This greater awareness has led to a 

variety of federal programs such as HUD’s “Moving to Opportunity” 

initiative, which allows low-income households to move out of areas of 

concentrated poverty, and a variety of efforts to keep nonresident fathers

involved in their children’s lives. It is now time to use the knowledge we 

have gained to reassess the CDBG program. 

 2

See, for example, HUD’s series of five studies on the CDBG program from 1976 through

2005. 

Page 3 GAO-06-904T 
Administration 

Proposes to Reform 

the CDBG Program 

HUD is required to use a complex dual formula system to allocate CDBG 

funding.3

 Under this dual formula approach, grants are calculated under 

two different formulas and grantees receive the larger of the two amounts. 

The existing approach takes into account poverty, older housing, 

population, housing overcrowding, and other factors. However, it provides 

widely differing payments to recipients with similar needs and funds going 

to the neediest communities have decreased over time on a per capita 

basis. 

In recognition of the significant and dynamic demographic and 

socioeconomic changes the country has undergone since the mid-1970s, 

on May 25, 2006, the Administration introduced its latest proposal to 

reform the CDBG program. At the heart of the Administration’s proposal is 

the use of a single formula. This proposed formula would use five 

variables to allocate funds: 

• the per capita income (PCI) of the community relative to the PCI of its 

metropolitan area; 

• the number of overcrowded housing units; 

• the number of households living in poverty, excluding full-time 

dependent college students; 

• the number of female heads of households with minor children; and 

• the number of homes 50 years or older occupied by a low-income 

family. 

Because we have not yet reviewed HUD’s proposal in detail, we cannot 

comment on it as a whole at this time. However, we do have some 

observations on some of the variables that HUD has included. Although 

we recognize the potential value of introducing a relative PCI variable as 

HUD has done, we are concerned about HUD’s decision to use 

metropolitan PCI. For example, if there were two identical communities 

located in different metropolitan areas, the community in a metropolitan 

area with a lower PCI would receive less aid than the community in a 

metropolitan area with a higher PCI. In another case, HUD’s continued use 

of overcrowded housing, one of the variables included in the current 

formula, may be more indicative of a strong local economy that reflects 

strong demand pressures in the local housing market than it is indicative 

of economic decline. Nevertheless, HUD’s proposal certainly represents a 

 3

42 U.S.C. §5306. 

Page 4 GAO-06-904T 
significant contribution to serious discussions of options for allocating 

CDBG funds. 

In response to your request that we assess alternative formulas to allocate 

CDBG funds among localities, it is our intent to build on the foundation 

created by HUD’s work. Our ongoing work is focusing on 1) refining a set 

of indicators of community development need among the nation’s 

communities, 2) assessing potential indicators of the capacities of 

communities to address those needs on the basis of their own fiscal and 

economic resources, and 3) exploring ways to adjust such indicators for 

local cost-of-living differences. Designing formulas to allocate CDBG funds 

among the nation’s communities involves more than technical issues. It 

also involves difficult policy choices which are most appropriately the 

province of the Congress. Our objective is to design a set of formula 

options that will assist the Congress in making the critical policy choices 

inherent in choosing a formula to allocate CDBG funds. 

GAO Is Assessing 

Additional Options to 

Improve Targeting 

under the CDBG

Formula 

In our work to refine indicators to more accurately capture key aspects of 

community need, we intend to take a fresh look at indicators that are 

being used in the current formula and those in the Administration’s 

proposal as well as to explore the use of some new need indicators. Next, 

we will consider whether a CDBG allocation formula can be designed to 

reflect variations in local funding capacity in order to address local 

community development needs with local resources. This is because highincome communities generally have stronger tax bases from which to fund 

program needs without relying on federal assistance than lower-income 

areas do. Additionally, we plan to explore options for making cost-of-living 

adjustments within the formula, such as size of population in poverty 

based on poverty thresholds adjusted for variations in the cost of living.

One area we intend to look at for arriving at a cost-of-living factor is the 

use of fair market rents. 

In our analysis, we will use statistical techniques to calculate and weight

the relative influence of the indicators, identifying a set of them that 

effectively represents community development need. Additionally, we will 

consider potential indicators of the ability of CDBG grantees to address 

their community development needs from their own resources. We will 

use the findings from these analyses to develop formula alternatives that 

link closely to need, incorporating appropriate variables and weights. For 

the formula options that we develop, we will highlight the key policy 

choices inherent in selecting a formula to allocate CDBG funds. 

Page 5 GAO-06-904T 
Fully recognizing the complexity and controversial nature of the work that 

lies ahead of us, we are reaching out widely for input and ideas. First, the 

National Academies of Science are assembling a panel of experts to 

provide input throughout our project on all phases of our work. The 

Academies are seeking individuals with both high levels of technical 

expertise and practical experience regarding community development in 

local communities. Next, we are working and will continue to work closely 

with representatives from national organizations of state and local 

governments and community development associations to obtain their 

uniquely related perspectives and to identify the concerns of those most 

responsible for making the CDBG program work. And lastly, but no less 

importantly, HUD staff have been generous in sharing their considerable 

expertise and knowledge with us on the CDBG formula and the work they 

have done. We will continue to consult and discuss technical issues with

them. 

As we work through the ways that formula options could be shaped, the 

critical policy choices that will have to be made are most appropriately in

the hands of the Congress. Our goal is to provide the necessary 

information and analyses so that the Congress can systematically examine 

the implications and make informed choices. 

In closing, I would like to emphasize that the targeting issues raised by 

HUD’s proposal are important no matter what level of financial support 

the Congress provides for community development activities. Additional 

formula options do need to be explored as part of the process of reaching

a decision on how best to target CDBG funding, and we plan to continue to

participate in that process with our work for you. Central to any 

reexamination is assessing how to better target federal assistance to those 

with the greatest needs and the least capacity to meet those needs. 

Mr. Chairman, this concludes my statement. I would be happy to answer 

any questions you or other members of the subcommittee may have. 

For future comments or questions regarding this testimony, please contact 

Stanley J. Czerwinski at (202) 512-6806. Individuals making key 

contributions to this testimony included Michael Springer, Joyce D. Corry, 

Katherine Wulff, Sara Williams, Anna Maria Ortiz, Jerry C. Fastrup, and 

Bob Dinkelmeyer. 

Page 6 GAO-06-904T 

Concluding Remarks 

(450508) 
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