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COMMUNITY DEVELOPMENT BLOCK

GRANTS (CDBG)—THE IMPACT

OF CDBG ON OUR COMMUNITIES

FIELD HEARING

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

JUNE 30, 2003

Printed for the use of the Committee on Financial Services

Serial No. 108–46

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

DOUG BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

DOUG OSE, California 

JUDY BIGGERT, Illinois 

MARK GREEN, Wisconsin 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

JOHN B. SHADEGG, Arizona 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

CHARLES A. GONZALEZ, Texas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

ARTUR DAVIS, Alabama 

RAHM EMANUEL, Illinois 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

Page

III

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

ROBERT W. NEY, Ohio, Chairman

MARK GREEN, Wisconsin, Vice Chairman 

DOUG BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

PETER T. KING, New York 

WALTER B. JONES, JR., North Carolina 

DOUG OSE, California 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

PATRICK J. TIBERI, Ohio 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

MAXINE WATERS, California 

NYDIA M. VELA ́ ZQUEZ, New York 

JULIA CARSON, Indiana 

BARBARA LEE, California 

MICHAEL E. CAPUANO, Massachusetts 

BERNARD SANDERS, Vermont 

MELVIN L. WATT, North Carolina 

WILLIAM LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

(V)

C O N T E N T S 

Page 

Hearing held on: 

June 30, 2003 .................................................................................................... 1

Appendix: 

June 30, 2003 .................................................................................................... 75

WITNESSES 

MONDAY, JUNE 30, 2003

Braithwaite-Burke, Hon. Yvonne, Chair, County Board of Supervisors, Los 

Angeles County, CA ............................................................................................. 21

Branch, Cheryl, Associate Director, Los Angeles Metropolitan Churches, Los 

Angeles, CA, Chair, Empowerment Zone Oversight Committee ...................... 70

Brego ́n, Hon. Nelson, General Deputy Assistant Secretary (acting), U.S. Department of Housing and Urban Development, Washington, DC .................... 4

Garcetti, Hon. Eric, Member, District 13, Los Angeles City Council, Los 

Angeles, CA .......................................................................................................... 24

Gay, Lori, President, Los Angeles Neighborhood Housing Service, Los Angeles, CA ................................................................................................................... 59

Graves, Clifford, General Manager, Community Development Department, 

City of Los Angeles, CA ....................................................................................... 27

Jackson, Carlos, Executive Director, Community Development Commission, 

Los Angeles County, CA ...................................................................................... 30

Merino, Felipe, Executive Director, Molina Gardens Improvement .................... 66

Mistrano, Sam, Acting Executive Director, Southern CA Association of NonProfit Housing, Los Angeles, CA ......................................................................... 62

Sausedo, Robert, Chairman of the Board, Los Angeles Community Development Bank, Los Angeles, CA .............................................................................. 33

Ybarra, Arturo, Executive Director, Watt Century Latino Organization ........... 69

APPENDIX 

Prepared statements: 

Braithwaite-Burke, Hon. Yvonne .................................................................... 85

Branch, Cheryl .................................................................................................. 76

Brego ́n, Hon. Nelson ......................................................................................... 80

Garcetti, Hon. Eric ........................................................................................... 88

Gay, Lori ........................................................................................................... 91

Graves, Clifford ................................................................................................. 91

Jackson, Carlos ................................................................................................. 114

Merino, Felipe ................................................................................................... 131

Mistrano, Sam .................................................................................................. 121

Sausedo, Robert ................................................................................................ 124

(1)

FIELD HEARING 

COMMUNITY DEVELOPMENT BLOCK 

GRANTS (CDBG)—THE IMPACT 

OF CDBG ON OUR COMMUNITIES 

Monday, June 30, 2003

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 10:01 a.m., 700 State 

Drive, Los Angeles, California, Hon. Robert W. Ney [chairman of 

the subcommittee] presiding. 

Present: Representatives Ney and Waters. 

Chairman NEY. Welcome. Today the subcommittee will hold its 

first field hearing of the 108th Congress to discuss the effects of the 

community relative to block rent or the CDBG program. And this 

is the Subcommittee on Housing Community Opportunity which is 

within the Financial Services Committee. 

CDBG is generally recognized as the mainstay for target of community development of cities, counties and rural areas to be principally dependent as well as moderate income persons. The program attempts to strike an appropriate balance between local flexibility and national targeting to low and moderate-income persons. 

It has developed this reputation for the past 28 years, and local 

officials constantly use CDBG funds to take on new challenges in 

the areas of housing, neighborhood development, public facilities in 

the division of Social Services. 

The CDBG program emphasizes HUD’s division of partnerships 

with State and local governments. Due to the flexibility and uses 

of CDBG funds, the program is in conjunction with many other 

HUD programs to target specific populations. Notwithstanding the 

flexibility of the program, rehabilitating and producing housing is 

the largest singular use of approximately 31 percent of the funds 

by entitlement communities. 

Housing activities include rehabilitation of ownership and rental 

units assisting new construction, transitional, temporary housing 

as well as necessary site improvements and administrative assistance. The second largest use of the funds is approximately 25.6 

percent of public facilities and prudent, and, I think, in that area 

as a more generalized area where we could find out the answers 

to questions where does it is actually go, and how does—how are 

those decisions actually determined? 

2

Every year HUD provides block raised eligible communities to, 

one, central cities of metropolitans, MSAs; two, other population 

cities for the population of at least 50,000; three, qualified urban 

counties with populations of at least 200,000, excluding the population of entitlement cities; and four, State distributed funds to 

small communities that are not otherwise eligible. 

HUD determines the amount of each entitlement rent by statutory dual formula uses several measures of community needs, including the extent of poverty, population, housing, overcrowding, 

age of housing and population growth in relationship to other metropolitan areas. I also want to at this time applaud the leadership 

of my colleague, our ranking member, Maxine Waters. She asked 

for this hearing, and the Congresswoman has invited me out to 

California here, and I want to preapologize to my relatives in El 

Monte, South El Monte, Fontana when they find out I’m here, I’m 

not able to get to their house. So it will cause a—I am going to 

make a phone call to them. I want to assure myself of that. 

But I want to again thank Maxine Waters. She’s played an active 

role in helping her property maximize their use of CDBG. We also 

support funds coming from the Federal government, but frankly 

loan members that have urban or rural settings, where are the 

funds going, where do they go, what type of input is out there from 

the Federal representatives of members of Congress themselves 

and how can they play a part in this process? 

I’m from a very rural area of Appalachia in Eastern Ohio, and 

I just really want to thank the cooperation and spirit of cooperation 

that my colleague, our ranking member, Maxine Waters has shown 

in the U.S. Capital. 

But I also would like to share that I appreciate the working relationship that we have developed. We have both discovered that 

working together, we can deal with the problems of rural America 

as well as the problem of urban America, and we are attempting 

to forge an alliance wherever we can to make sure that resources 

are directed both to rural and to urban. So my—my work on this 

committee has been extremely enjoyable because we have found 

that we can, indeed, have bipartisan efforts to deal with the problems that we’re charged to take care of. 

The Community Development Block Grants are important, too, 

in the economic development care to revitalizing neighborhoods and 

providing social services. CDBG funds may be used for a wide 

range of activities, including acquisition of real property, relocation 

and demolition, public services and assistance to profit-motivated 

businesses to carry out economic development and job creation, retention programs. 

The City and County of Los Angeles received 92 and $38 million 

to deliver services. Section 108, the loan guarantee provision of the 

Community Development Block Grant program is one of the most 

potent and important public investments materials that HUD offers to local governments. It allows them to transfer a small portion of the CDBG funds into federally guaranteed loans large 

enough to pursue fiscal and economic revitalization projects that 

can renew entire neighbors. Such public support is often needed to 

inspire private and economic activity providing the initial resources 

3

or simply the confidence that private firms and individuals may 

need to invest in distressed areas. 

Section 108 loan guarantee funds are extremely important to me. 

One of my early accomplishments, when I went to Congress, was 

to discover Section 108 funds that were underutilized, and at that 

time, they were being scored in the budget. And they were not as 

attractive because they were being scored, and we went to work. 

And we helped move the Congress to not score the CDBG, and that 

year, I was able to pass legislation to identify $10 billion in 

CDBG—I mean, in Section 108 to be used 2 billion per year for five 

years to get into the cities to get involved with economic development. I understand some things have changed now in the way that 

Section 108 is looked at, but I think still, it’s a very important tool 

that is either underutilized, misutilized or just misunderstood. And 

so we want to find out today what’s happening with Section 108 

here in Los Angeles. 

Ms. WATERS. Thank you, Mr. Chairman. 

It’s eight years later, and LACDB will be dissolved at the year 

2003. The City of Los Angeles will have access to $190 million of 

Section 108 guarantee authority available to the LACDB, and I 

would like to hear what their plans are for the reallocation of this 

money. 

Earlier this year, the city requested that $50 million of the 196 

million go to the city’s community development division. I and the 

affected community specifically would like to know which projects 

or proposals does the city plan to fund with this funding? Also, I’d 

like to hear how does the city and the county plan to address their 

affordable housing needs? We understand that the mayor has organized $100 billion housing trust fund, and hopefully, we can learn 

some more about that today. 

The primary purpose of the Community Development Bank programs were designed to create and to retain jobs in the empowerment zone, and I hope that our witnesses today can talk about jobs 

in relationship to the Community Development Bank programs. 

Because of the problems that we had here in Los Angeles, we were 

hopeful—we were supportive of the city and the county receiving 

exemption of the CDBG cap, and we increased the social services 

from 15 to 25 percent. 

Some of the conditions that were identified when we had our 

problems here, certainly still exist and remain, and we need to examine the possibility of—as we have been requested to do, to look 

at permanent exemption for the 25 percent public services cap. I 

don’t know where we are with that at this time. 

Again, I’d like to thank the Chairman for holding this field hearing here in Los Angeles. I look forward to hearing from the witnesses today. 

Chairman NEY. Thank you. Gentlelady, ranking member of the 

committee. And our first panel and the first witness. 

By the way, this is in the 108th Congress the first time we have 

ventured outside the capital for a public hearing, so you’ll be our 

first witness on this. 

Nelson Bregon is the Deputy Assistant Secretary for the grant 

programs in the office of Community Planning and Development of 

HUD. And he’s responsible for the management oversight of the 

4

CDBG program the Section 108 loan guarantee problem and the 

home investment partnership program. He has a Bachelor of Arts 

from the InterAmerican University of Puerto Rico in 1976, and although he didn’t attend the Ohio State University, he got close 

with Kent State University in Ohio in 1978. Prior to accepting his 

appointment at HUD, he was the Senior Vice President for the officer of community based securities of Ginny Mae, the Government 

National Mortgage Association, and we appreciate you and your 

staff for traveling to California. We’ll begin. 

STATEMENT OF NELSON BREGON, GENERAL DEPUTY ASSISTANT SECRETARY, COMMUNITY PLANNING AND DEVELOPMENT OF HUD 

Mr. BREGON. Good morning, Chairman Ney, ranking member 

Waters, Mr. Clinton Jones and other members of the subcommittee. Thank you for giving me the opportunity to be here this 

morning as part of the subcommittee’s examination of community 

and economic development activities for the City of Los Angeles. 

As Chairman Ney indicated, my name is Nelson R. Brego ́n. I am 

the General Deputy Assistant Secretary for the Office of Community Planning and Development with the U.S. Department of Housing and Urban Development. I am a career employee with the department. I started with the department some 22 years ago, and 

I’ve been in and out of the private sector and the public sector on 

numerous occasions, and here I’m back with the public sector. 

I’m here today on behalf of Secretary Martinez and Assistant 

Secretary Bernardi to discuss one of HUD most important tools for 

community housing and economic development. That is the Community Development Block Grant program which most of us refer 

to as ‘‘CDBG.’’ As you are aware, State and local governments depend on HUD and a system of grants to support community economic development projects that revive troubled neighborhoods and 

spark urban revitalization. This year, HUD has requested nearly $4.5 billion for the CDBG 

program to meet local community housing and economic development needs in more than a thousand eligible cities, urban counties, 

the 50 States, the Commonwealth of Puerto Rico, the U.S. Virgin 

Islands and in the Insular Areas. 

For fiscal year 2003, which is the fiscal year we’re in, the City 

of Los Angeles received approximately $89 million in CDBG funding, and by the same token the County of Los Angeles received 

about $37 million in CDBG funding. We are all aware that one of 

the most important reasons for the success of the HUD-sponsored 

Community Development Block Grant program is its great flexibility and its reliance on local elected officials and community leaders to identify key revitalization projects and activities. 

CDBG activities are initiated at the local level, based on a communities identified local needs, priorities and benefits to the communities. As identified in that community’s Consolidated Plan, 

which is a document that is submitted to HUD in conjunction with 

the CDBG, the home and other formula grant programs. 

Entitlement communities such as the City of Los Angeles may 

use CDBG funds for a variety of community, housing and economic 

development activities which focus on neighborhood revitalization, 

5

economic development and the provision of improved community facilities and services to lower moderate income residents. Those 

communities receiving a grant are free to determine what activities 

to fund as long as certain requirements are met, including that the 

activity is eligible and, in addition, meets one of the three following 

national objectives: The first one is benefit to low and moderate income persons. The second national objective would be: Aid in the 

prevention or elimination of slums or blight; and the third is an activity that meets urgent community needs for which that community cannot find the financial resources to fund itself. 

In addition to this requirement, 70 percent of an entitlement 

grantees CDBG funds—and this includes the Section 108 loan 

guarantee, it includes the economic development initiative grants, 

as well as the Brownfield economic development initiative grants, 

must primarily benefit low and moderate income residents. 70 percent of all these monies must primarily benefit low and moderate 

income residents. And this is calculated by HUD on either a oneor two- or three-year basis, depending on the period of time that 

the consolidated plan that is submitted by that grantee covers. 

In most instances, we see that most communities have a threeyear consolidated plan. Now, the responsibility for ensuring that 

local Community Development Block Grant funds meet Federal requirements rests initially and primarily with the executive authority and the mayor or the County Commissioner of each CDBG 

grantee, subject to schedule monitoring by representative of HUD 

in the case of Los Angeles, the county and the city, it is our Los 

Angeles field office representative that had the responsibility to 

monitor on a scheduled basis our grantees. 

And by the same token, it’s also conditioned on audits by HUD 

office of Inspector General. As we all know, working with local governments and nonprofit, mostly 501(c)(3) organizations, are an important conduit for neighborhood-based program delivery. Nonprofit organizations such as community development corporations 

or local development corporations are often asked to undertake 

projects that are inherently risky because of factors such as locations, which many have high crime, high vacancy rate, high poverty and a lot of this investment. 

CDBG grantees utilize nonprofit organizations because they have 

specialized skills and neighborhood acceptance. It is important to 

note, however, that the primary responsibility for insuring that 

Community Development Block Grant funds are used to revitalize 

low and moderate income neighborhoods and that the projects and 

activities undertaken meet all programs, statutory and regulatory 

requirements, belongs to the CDBG grantee. 

In this particular case, we’re talking about the City of Los Angeles and the county of Los Angeles. The Community Development 

Block Grant program statute and regulations requires that grantees identify eligible activities that will provide benefits to communities, especially low and moderate income distress communities. 

The flexibility of the CDBG program allows grantees to implement community development activities based on local decisions. 

Communities may choose to provide assistance to nonprofit organizations for neighborhood development initiatives as they deem necessary. The success of any community development initiative must 

6

include accountability for use of program funds to create tangible 

results for the neighborhoods for which it serves. 

Working together with local leaders, special officials and members of Congress, we at HUD have forged a partnership which has 

made CDBG a shining example of how government can work. 

CDBG provides funding for grantees to develop strategies revitalize 

neighborhoods, promote economic development and provide much 

needed social services. 

Grantees have great latitude in the type of projects and activities 

that they may fund. As you mentioned, Mrs. Waters, and I agree, 

a grantee can undertake myriad of activities whether acquisition, 

disposition, housing rehabilitation, public facilities, social services, 

economic development, all within the realm of the CDBG program. 

For instance, we have some statistics here that shows that in fiscal year 2002, entitlement grantees expended approximately $275 

million for economic development activities, about $955 million for 

public facilities, about $518 million for social services and about $1 

billion, the preponderance of the use of these funds for housing-related activities, either housing rehabilitation or down payment assistance or any type of housing assistance. For the program year, Los Angeles expended about $15 million for economic development activities, about $44 million for public facilities and improvements, about 45 million for social services and 

approximately about $28 million for housing-related activities. 

By the same token, the County of Los Angeles expended approxi- mately $6 million for economic development, $12 million for public 

facilities and improvements, $9 million for social services and about 

$15 million for housing-related activities. As part of the CDBG program, each formula’s grantee’s responsible for developing its own 

consolidated plan that encompassed funding for the CDBG program, the home program, the housing opportunities for persons 

with AIDS and the emergency shelter grant program. 

So each community prepares a consolidated plan for these four 

formula grants. They must hold a public hearing, and they must 

receive the input from the community as to which activities they 

would like to see funded in their particular neighborhood. HUD’s 

CDBG program currently provides funds directly to entitle units of 

general local government, cities, town and urban counties, based on 

the statutory formula that Chairman Ney pretty much gave us 

what those parameters are, poverty, pre-1940 housing, growth lag 

and a number of statutory requirements that dictates how we distribute the money to our grantee clients. 

The current method of funding appears to be satisfactory. A 

grant may not be disbursed. A grantee may not disburse CDBG 

funds until there is a legal obligation to pay. Generally when contracted goods and services have been delivered or provided. A 

grantee has full responsibility to assure that his contractors have 

conformed to all applicable program requirements and that invoices 

or other type of documentation are proper and represent goods and 

services provided consistent with the contract. 

So the rule is that grantees can draw down the money, when 

they’re ready to use. We have a three-day rule, as you all know, 

that once they draw down the money from Treasury, they have to 

disburse that money within three days. So hopefully, they have all 

7

the documentation that is required for them to make that payment 

to a contractor or subrecipient, as the case may be. 

I know that this subcommittee has some questions on Los Angeles Community Development Bank, and let me just mention some 

facts: In December, 1994, the City and County of Los Angeles received designation from HUD for a Supplemental Empowerment 

Zone in the area covered by the unsuccessful joint City, County and 

empowerment zone application. 

So in 1994, there was an empowerment zone designation competition and, the City and the county applied. They were not successful in obtaining the Empowerment Zone designation, but the 

previous administration felt that it was a good thing to give a supplemental empowerment zone designation; and that’s what this 

did. The purpose of the Supplemental Empowerment Zone designation was to provide a special name for the award to the City’s hundred million dollars in economic development initiative which was 

a grant and $25 million to the County. 

Now, once this grant money was received, one of the conditions 

was that this money must be matched with Section 108 loan guarantee funds, and both the City and the county did that. The EDI 

awards to Los Angeles City and County took place pursuant to a 

notice of funding availability published in the Federal register on 

December 7th, 1994. And the supplemental empowerment zone 

designation and the economic development initiative grant were 

awarded on December 21st, 1994. 

Now, there are a number of different levels of accountability. The 

Los Angeles Community Development Bank, as an operating entity, is accountable to its Board of Directors, and as a subrecipient 

of the City and the county, it’s also accountable to the City and the 

county. Concurrently, the City and the county, as CDBG grantees, 

are accountable to HUD for the expenditure of the Section 108 and 

the EDI funds by the Los Angeles Community Development Bank 

in compliance with applicable Federal statutes and regulations. 

HUD does not have a direct contractual relationship with the 

bank. The contractual relationship is between the City, the County 

and the bank. And the City and the county are accountable to HUD 

for the uses of the EDI grant and the Section 108 loan guarantee 

funds. The original intent of the Los Angeles Community Development Bank was to fund economic development activities in some of 

the most economically disadvantaged areas of the City and the 

county, primarily the area of the supplemental empowerment zone. 

The Los Angeles Community Development Bank has, in fact, utilized approximately $190 million from the combined City and 

County Section 108 and EDI awards to undertake economic development activities in the designated area. 

Thank you very much, and this statement concludes my opening 

remarks. At this point, I will be more than happy to answer any 

questions that you may have. 

I have next to me Mr. Stanley Gimont who is the Deputy Director for the Financial Management Division, and he’s really the expert when it comes to the nuances of the 108 and the EDI grant 

program. By the same token, we have some of our Los Angeles field 

office staff members, Mr. Robert Ilymin who is our CBD director 

and he has a lot information as to the activities that are underVerDate 0ct 09 2002 13:01 Feb 25, 2004 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\DOCS\91774.TXT FIN1 PsN: MICAH
8

taken by the county and the city utilizing CDBG funds, 108 funds, 

EDI funds, BEDI funds or any other HUD funds. 

So at this point, I’d like to turn it over to you if you have any 

questions. Thank you. 

[The prepared statement of Nelson Brego ́n can be found on page 

80 in the appendix.] 

Chairman NEY. Thank you for your testimony. The question I 

have is: When was the last time that the formula was reviewed, 

and do you think it’s balanced between the east and the west? 

Mr. BREGON. That’s a very good question. In 1980 was when we 

came up with the dual formula that gave a community a grant, 

based on two formulas. We give that community the benefit of the 

doubt; and we give them the amount of the greatest formula. 

Now, what has happened lately, Chairman Ney, is that with the 

2000 data on population, on poverty, on growth lag, we’ve seen 

some major dislocations, if you will, from one community to another. We’ve seen that some communities are loosing maybe up to 

20 percent of the CDBG formula grant, and other communities 

gaining 15 percent of CDBG funds. 

So right now, the Department, the Community Planning and Development office in conjunction with the Office of Policy Development and Research at HUD, are looking at the formula, and we’re 

looking at different ways that the formula perhaps could be either 

tweaked or changed altogether. And we will be making recommendations to Assistant Secretary Bernardi and to Secretary 

Martinez who will, in turn, make a proposal to you as to whether, 

in fact, the formula should need some sort of changes or not. 

Chairman NEY. That was 22 years ago that formula was established, and that’s why you, know, the question should be changed 

by you’re saying that you’re looking into it. 

Mr. BREGON. That is correct. 

Chairman NEY. Do you have an idea of a time frame when you 

will complete preliminary look at it, it will be given to Secretary 

Martinez, when he will come to us? 

Mr. BREGON. Our Office of Policy Development and Research is 

telling us that by the end of the fall, they should have concluded 

their studies. As you know, we work very closely with the Office 

of Management and Budget. They make sure that they’re always 

looking over our shoulder. Maybe there’s someone here from OMB. 

So we’ll be working closely with them. I would say early next year 

we will have—we’ll be meeting with Secretary Martinez and start 

discussing what the effects and the impacts of the formula is. 

Chairman NEY. In the fall? 

Mr. BREGON. I would say late fall, that the report will come out, 

early next year. I would say February we’ll be meeting with Secretary Martinez and giving him different options, if you will. 

Chairman NEY. And if you could post us on the progress of that, 

we’d appreciate it. 

Mr. BREGON. We will. 

Chairman NEY. Los Angeles has a special exemption to allow 25 

percent of the CDBG funds for public services use is the category. 

So what—what uses can be utilized under that category of public 

service? 

9

Mr. BREGON. Public service. You are correct. The regulations 

stipulate that a community may not use more than 15 percent of 

their grant for public services. The City of Los Angeles was given 

an exemption, and they can use up to 25 percent as Congresswoman Waters indicated before. The monies can be used for mostly 

soft cost. It could be for meal for the elderly, it could be operating 

expenses for day care centers, it could be Meals on Wheels for 

handicap people. So it is pretty wide how this money can be utilized by—by a grantee. 

Chairman NEY. How about—how about oversight between HUD, 

City, County? How would that work? 

Mr. BREGON. Oversight? 

Chairman NEY. Uh-huh. 

Mr. BREGON. Well, as I indicated before, we do regular monitoring visits of our grantees. Because of our limited resources, we’re 

doing about 40 percent of all grantees in monitoring on a yearly 

basis. So when we monitor the City, we also try to do the County 

because a lot of the activities are interrelated. A lot of funding is 

interrelated. So we do monitor the City and the county on a regular 

basis. 

Chairman NEY. One other thing. My final question: Dealing as 

you would with urban and rural, do you—do you see any differences? For example, CDBG in towns of, you know, 4,000, 2,000 

also went from what we call 5,000 a city—that would be a large 

City—we have a lot of places 2-, 300 people, and everybody knows 

about these funds, trust me. I mean, they’re in the paper. They’re 

in meetings. They’re small towns. 

Now, in—that’s why I’m here to learn—and larger urban settings, I know there are people who care about these, but I would 

assume there would be—or let me ask this: Would there be a difference in communication on where these monies are going or could 

they go between the urbans and rurals, and is there a difference 

of how you look oversight between urban and rural? 

Mr. BREGON. Yes, sir. As you mentioned on the entitlement 

grantees, we have central cities. We have cities with the population 

of 50,000 or more. We have urban counties with population of 

200,000 or more. On the other hand, then we have the States. 

About 30 percent of the funding goes to—I’m sorry, 25 percent—

25 percent of funding goes to states. 

Chairman NEY. So the $4.5 billion gets divided. 75 percent goes 

to entitlement communities; 25 percent goes to the States. Now, 

how the States divvy up that money among the smaller designations is up to the States. Some States might say, ‘‘We’re just going 

to divvy up the money by per capita,’’ looking at how many low income residents a community has, and we’re going to give them $80 

per each low income resident. 

Some other State says, ‘‘No, we don’t want to do it that way. We 

going to do priorities,’’ and perhaps our first priority is infrastructure. Our second priority is housing rehabilitation. Our third priority is public facilities. And then they would have all the smaller 

communities come in and compete for the money at the state level. 

The State must do a consolidated plan just like an entitlement 

community. They must go around the entire state and receive input 

10

from the smaller communities to be part of that consolidated plan 

that is submitted to HUD on a regular basis. 

So the entity that is accountable to HUD for the small cities program is the state. It’s not each individual community that receives 

its monies, but it’s the state that entity that is responsible for the 

management and oversight of the State CDBG program. 

Chairman NEY. Gentlelady? Counsel? 

Ms. WATERS. Thank you very much. 

I certainly appreciate your very well-organized presentation to 

explain the mission, the national mission for CDBG. I think I’m 

going to ask some questions that are directly related to this area. 

I want to know about the Community Development Bank first. I 

want to understand what happened. 

We’re going to have some more people here testifying today. The 

reason I’m so concerned about it at this point is because there are 

dollars that are now—that could be made available from that Community Development Bank to be used for other purposes or like 

purposes or purposes that are inconsistent with the intent of Section 108. 

As I understand it, the Community Development Bank is no 

longer the Community Development Bank that, based on a decision 

by the city of Los Angeles with some maybe encouragement from 

the Inspector General based on a report, that there is no longer the 

Community Development Bank as we knew it. And that there’s 

several things going on: Requests for some of that money again to 

be used for other purposes or for like purposes in different ways. 

And there’s another part of this discussion that I’m recently just 

getting information about that talks about or discusses the venture 

capital firm that had a management contract of some sort with the 

Community Development Bank that placed or invested funds in 

some businesses. 

Some of them went belly up, I suppose—but it’s still in that portfolio—we still have some businesses who owe us money who are operating or they may be out of business, and there’s further talk 

about selling off that portfolio in some way that may help us to recapture some of the debt—can I get some discussion on that? 

Mr. BREGON. Sure. As I indicated originally, when the supplemental empowerment zone designation was given to the City and 

the county of Los Angeles, there was an EDI grant of $100 million 

to the City and $25 million to the County. 

As a minimum requirement, Miss Chairman——

Ms. Waters, the City had to match the hundred million dollars 

of EDI grant with a hundred million dollars of Section 108 loan 

guarantees. The City opted to request a higher authority on the 

108. So even though the minimum amount of 108 that the City had 

to apply for was a hundred million dollars, they indicated to HUD 

that they really wanted to do $300 million. 

So the minimum requirement was a hundred million; so there 

was an additional $200 million in one-way authority for the City. 

So you are correct. The City has expended the original hundred 

million dollars to match the EDI, and in addition, they had spent 

about $4 million of the additional $200 million, so there’s about 

$196 million in Section 108 authority which the City could use in 

11

other areas outside the targeted area as long as they meet all the 

other requirements of the 108 program. 

Ms. WATERS. Outside the target area? 

Mr. BREGON. Yes. 

Mr. GIMONT. And just as a final point, the original application 

that we considered in 1995 defined something called the Section 

108 area outside—which included not only the zone, but other enterprise community areas designated within the City of Los Angeles as well as other census tracts and areas of the City which 

would meet certain low moderate income thresholds as well as poverty thresholds. 

So that was the 108 area as defined in the original application, 

and our—our understanding at this point with respect to the City 

proposal is that of the initial $15 million, they would like to carve 

off the remaining 196, those funds will be expended within the area 

defined in the original application back in 1995. 

Chairman NEY. Generally—can we have that broken down one 

more time? The whole——

Mr. BREGON. Sure. The—with the original empowerment supplemental empowerment zone designation, the City received $100 million of EDI grant, the economic development initiative grant—this 

is free money—the County received $25 million. The city and the 

county were to meet dollar for dollar the grant with 108 monies. 

The County did $25 million in 108, and the City, instead of doing 

the minimum, a hundred million, did 300 million. So now we’re 

looking at a total amount of about $430 million. 

Chairman NEY. 430 million? 

Mr. BREGON. That is correct. 

Ms. WATERS. Okay. Go ahead. 

Mr. BREGON. Now, Miss Waters, you indicated that it has come 

to your attention that the City and the county will be closing down 

the bank. It is our understanding, that there is an agreement that 

the bank will cease to operate by the end of this calendar year. 

There is a portfolio there that is owned by the bank with a number 

of loans, many of them performing loans. Many of them nonperforming loans as well, and there is a venture capital fund that perhaps Mr. Gimont can give you more details as to how that works 

and how that came about and what are the nuances there with the 

venture capital. 

Ms. WATERS. Okay. Before you go into that, I want to go back 

so that we can have a better understanding. The 50 million that’s 

been requested by the city has been requested to be used in the 

same manner that it would have been used under the Community 

Development Bank and meeting the requirements of Section 108 

expenditures? 

Mr. GIMONT. Yes. 

Ms. WATERS. Is that what you’re saying? 

Mr. GIMONT. The before profit businesses. That’s what we approved in the original application in 1995, and that is how the city 

would propose to use this 50 million——

Ms. WATERS. No. I want to be on the same track. 

Are they going to use the $50 million in the same area that they 

would have had to use it under the agreement that you had when 

you created the supplemental zone, or are they going to use it in 

12

the way that you would use the original Section 108 money that 

could be used in—throughout the City in other ways that’s identified for economic development? 

Mr. GIMONT. Well, then let me back up a step. With respect to 

the $200 million that was over and above the $100 million required 

as to match the EDI funds, those 200 million could be spending 

what the City defined as the 108 area which included not only the 

zone, but the other enterprise community areas within the City as 

well as other census tracts and areas meeting certain poverty and 

low to moderate income thresholds. 

Ms. WATERS. Well, tell me how that is matching money in order 

to get the money for the supplemental zone. 

Mr. GIMONT. That——

Ms. WATERS.——the Section 108, 200 million or 300 million. 

Mr. BREGON. There was a $100 million requirement, minimum. 

Ms. WATERS. Okay. 

Mr. BREGON. And in addition, to the hundred million, the city requested $200 million that has, let’s say is less restrictive, the use 

of that monies is less restrictive than the original hundred million 

that was to match the EDI grant. 

Ms. WATERS. Okay. So the EDI grant was 100 million. All they 

had to do was put up $100 million match. 

Mr. BREGON. That is correct on 108. 

Ms. WATERS. Okay. If they had only put up $100 million match, 

all of that money would have been confined to the supplemental 

zone; is that correct? 

Mr. GIMONT. Right. 

Mr. BREGON. That is correct. 

Ms. WATERS. However, since they decided to use more for that 

match, you’re saying that could be used anywhere——

Mr. BREGON. The original——

Ms. WATERS.——in the other zone. 

Mr. BREGON. The original $200 million——

Ms. WATERS. Yeah. 

Mr. BREGON.——they identified the service area larger than the 

supplemental empowerment zone. As Mr. Gimont indicated, it was 

the supplemental empowerment zone area other areas that showed 

high incident of poverty and low income. 

Ms. WATERS. Well, let me——

Mr. BREGON. For instance——

Ms. WATERS. Let me just interrupt you. It seems to me that if 

it was—you already had Section 108 identified areas. There was no 

need for you to put that additional money into the match because 

you could use it any way that you wanted to. 

Mr. BREGON. That is correct. 

Ms. WATERS. So why did you—why did you put it into the match? 

Why did they put it into the match? 

Mr. BREGON. The city requested at that time, they said not only 

did we have—they felt that the need of the community was so 

great that there was a market, there was a need in the community 

for more than the $200 million or the—and they decided that they 

wanted a larger authority under the 108 in the amount of $200 

million more, and that is the grantees’ prerogative. I mean, if the 

13

grantee requests that and it’s within the limits under the 108 program which is five times——

Ms. WATERS. Yeah, they would have done that or could have 

done that if you had no such thing as a supplemental zone——

Mr. BREGON. That is correct. 

Ms. WATERS.——in the way that you normally use it. 

Mr. BREGON. Yes, ma’am. 

Ms. WATERS. What I’m trying to find out is, why was it connected to the supplemental zone? 

Mr. GIMONT. That was a decision on the part of the city. 

Ms. WATERS. Well, evidently the city felt there was more money 

needed in the supplemental zone; is that correct? 

Mr. BREGON. That is correct. 

Ms. WATERS. Okay. Now, if that is true—if that is true, then we 

have monies that are now from the Section 108 supplemental zone 

money, that you’re telling me has more flexibility and can be used 

outside the supplemental zone. Who made that decision, and how 

do you make it? 

Mr. BREGON. The grantee made that decision. The grantee told 

us which were the areas that they want to service with the additional $200 million. 

Ms. WATERS. So now that the bank is closing down and we’ve got 

this 196 million, the City is talking about taking a portion of that 

and doing whatever it is they want to do with it. It doesn’t have 

to be identified or confined to this supplemental zone area, and 

when HUD looks at that, what does HUD say as the oversight? Is 

that in compliance with the original purpose of the use of the Section 108? 

Mr. BREGON. Yes, it is. The $200 million in addition to the already used $100 million that had to be used within the supplemental empowerment zone. In addition, they have used $4 million 

more into the zone, which they didn’t have to do. Now, they have 

$196 million. Now, they’re saying the bank is going to close. We 

want to use this 196 authority to do other Section 108 funded 

projects——

Ms. WATERS. So then——

Mr. BREGON.——in the larger area that we had identified to you 

HUD before——

Ms. WATERS. So when HUD worked the agreement with the city 

of L.A. For the supplemental zone and the application that included the 100 million plus, the 200 million——

Mr. BREGON. Yes, Ma’am. 

Ms. WATERS.——there was something in that agreement that 

said you only have to use $100 million of this in the supplemental 

zone. 

Mr. BREGON. That is correct. As a minimum. 

Ms. WATERS. As a minimum. 

Mr. BREGON. Yes. 

Ms. WATERS. And you could have the flexibility to take the other 

200 million and use it in what you have identified as areas——

Mr. BREGON. Areas of distress. 

Ms. WATERS.——areas of need that would fit into whatever we 

call our Section 108 loan guarantee? 

Mr. BREGON. That is correct. 

14

Ms. WATERS. Okay. And you will, of course, show to the—the 

Congresswoman that agreement? 

Mr. BREGON. Absolutely, ma’am. 

Ms. WATERS. Okay. Thank you. 

Mr. BREGON. Now, by the same token, all public documents, 

ma’am——

Ms. WATERS. Congresswoman wants to see the agreement. 

Mr. BREGON. Okay. 

Ms. WATERS. All right. 

Mr. BREGON. Now, by the same token, let’s say that the city says 

to us, now we have $196 million but we really want to use it citywide in any neighborhood, for any activity that is eligible under 

108. If they decide to do that, then they would have to amend that 

agreement, and they would have to go perhaps even amend or consolidate that plan, perhaps even hold public hearings with the citizens of the City of Los Angeles and the county of Los Angeles and 

then go through that process of amending that agreement. 

Ms. WATERS. Okay. Thank you. Now back——

Mr. GIMONT. Is it okay if I just put one additional point on that? 

Ms. WATERS. Yeah. 

Mr. GIMONT. It’s—the real essence here is going to change——

Chairman NEY. Move your mike just a little bit closer. Thank 

you. 

Mr. GIMONT.——is that no longer will the bank be responsible for 

deciding, making the lending decision would reside with the city’s 

community development department as opposed to the bank. We’re 

still carrying out the same activities. They’re going to carry them 

out in the same areas that they identified in the original 1995 application when there will no longer be LACDB, making decisions as 

to what community development department as to which activities 

to fund. 

Ms. WATERS. Okay. Now, a little bit about—well, if you can explain to me the contract between the venture capital company and 

what they did for the Community Development Bank, and I’ll ask 

a little bit more when I get the Community Development Bank 

here a little bit more detailed question, but just your understanding—did you have to sign off on this also? 

Mr. GIMONT. I did not sign off on the agreement between LACDB 

And Joint Ventures? No. 

Ms. WATERS. This was between the City and the county? 

Mr. GIMONT. No, this was between the LACDB And an entity 

known as Zone Ventures. 

Ms. WATERS. And Zone Ventures. 

Mr. GIMONT. Yes. 

Ms. WATERS. So Zone Ventures was given an amount of money 

to go around and invest in venture capital. Let’s find some businesses put some money into them that was going to make some 

money nor the bank; is that right? 

Mr. GIMONT. Up to $35 million is my understanding. 

Ms. WATERS. So they were given 35 million? 

Mr. GIMONT. The agreement called for an investment in the bank 

of the partnership up to a maximum of $35 million. 

Ms. WATERS. Now, what did they do with that $35 million? 

15

Mr. GIMONT. They operated the fund to analyze the proposals for 

investment and when the—based on the applications they did receive, they elected to invest in a number of different businesses. I 

believe it was 15 or 16 business in total. 

Ms. WATERS. I see. So some of that was management. They had 

management fees. 

Mr. GIMONT. Yeah. 

Ms. WATERS. How much, do you know what percentage of the $35 was management fee? 

Mr. GIMONT. No, I do not right now. 

Ms. WATERS. Okay. We’ll talk to the Community Development 

Bank people about that. 

And so what happened with that portfolio? 

Mr. GIMONT. Some of the businesses are still up and active; some 

are in a condition that is called ‘‘hibernation,’’ where they—they 

still exist on paper. There’s some possibility that they may resurrect themselves and—and get back on their feet and a number of 

other businesses are totally closed and out of business—business 

consistent with the types of—types of investment that venture capitalists make which were primarily high-tech investments in the 

late 90’s. 

Ms. WATERS. I see. 

And so now, you have—this portfolio some performing, some not 

performing, we want to sell it off. Who are we selling it to? 

Mr. GIMONT. I would not use the term ‘‘sell’’ at this point. I 

would say——

Ms. WATERS. Give? 

Mr. GIMONT.——divest. Divest their interest in the Zone Ventures’ portfolio. 

My understanding of the deal that is currently on the table is 

that there is a—an investment group interested in taking the 

LACDB interest in Zone Ventures. They really would not pay anything on the front end with respect to the past investments, the 

capital investments that have been made on the part of the bank. 

However, they would be reimbursement for certain management 

fees that the bank has paid out to Zone Ventures over the past 

year or so. So the immediate return to the bank would solely be 

the management fees that they’ve paid out in the last 6, 12 months 

I believe. 

And then, ultimately if some of the businesses went—went public, where you had initial public offering, and there was a significant upside to—to the investment made in the business, ultimately, 

the bank might see some return on that; but the primary return 

would go to the group that takes on the investment from here on 

out because they will continue to pay the management fees that 

are required as well as make any capital calls that are necessary 

in order to maintain the—the bank’s percentage interest in these 

businesses. 

Ms. WATERS. Okay. Let me see if I understand this: The—the 

joint venture firm that was doing the management for the Community Development Bank would substitute—who pays them management fees we would no longer pay management fees, and under 

this agreement, the group who is the recipient of the divested portfolio would be paying the management fees. 

16

We would not receive any money from those performing or nonperforming businesses unless, of course, they went public, and then 

there’s something in an agreement for in perpetuity that would 

say, ‘‘If this happens a hundred years from now, we want our 

money’’? 

Mr. GIMONT. I don’t know what the outside time limit is as far 

as the return would be concerned. 

Ms. WATERS. All right. Fine. We’ll——

Mr. GIMONT. I also don’t believe the agreement’s been fully negotiated at this point. 

Ms. WATERS. I see. Well, that’s good. We’ll see what we can find 

out some more detail about that. 

Now, we’re going to be talking with—with other panelists about 

this, but I also understand that if the $50 million is transferred, 

the balance that’s left could be used in any way that the city would 

like to use it; is that right? 

Mr. BREGON. Of the 196, if 50 is used for this revolving loan fund 

or business fund that is called under the community development 

requirement of the city, then, yes, you would have then the balance, the 146 available. 

Ms. WATERS. And let me see if I understand this correctly: The 

146, would the city have to go back out and amend the plan and 

hold hearings, or they could just spend it? 

Mr. BREGON. If they’re talking about using the same—funding 

the same activities in the same areas, then they would not have 

to come back to us. If they’re talking about changing either the 

scope or the location of the activities, then, yes. They must come 

to HUD for a—with a formal amendment request, and before they 

do that, they must go back to the citizens and hold public hearings 

and go through the formal amendment process that is required in 

a regulation. 

Ms. WATERS. If they were going to use it in any way different? 

Mr. BREGON. Yes, ma’am. 

Ms. WATERS. If they were going to use it in the same way, could 

they still contract with the joint venture firm to do the kind of 

work that was done for the Community Development Bank—that 

was under your original agreement—could they still do that again? 

Mr. GIMONT. I would say that the city—I would think it highly 

unlikely that the city would go forward with a proposal of that nature, and they would certainly question it at this point in time. 

Ms. WATERS. There’s nothing in the agreement that would stop 

them from doing it. You’re saying that HUD may not look kindly 

on it, but they certainly could if they were going to use it consistent 

with the way they had used the money in the bank; is that right? 

Mr. GIMONT. There’s nothing in the agreement right now to prohibit. 

Ms. WATERS. Okay. I think that’s all. 

Chairman NEY. I just have a couple. It’s a little bit more complicated than the fire truck we had in the CDBG back home, I’m 

sure. 

I just kind of—I wanted to ask a question: What happened to the 

initial 100 million, where’s that? 

17

Mr. BREGON. That has been invested. That has been invested by 

the bank on a—for a number of loans to—for profit entities within 

the zone. 

Chairman NEY. So we know where that—where that is? 

Mr. BREGON. Yeah. Some of them that are businesses that are 

no longer in business that went belly up, and there’s other businesses that are still performing and doing very well and hiring employees from within the zone, low income residents. 

Chairman NEY. Do we know the percentage of the businesses 

that are—are hibernating or the percentage of the working, do we 

have those percentages, or can we get that? 

Mr. BREGON. Yes. The City gives us a performance report on a 

yearly basis, and we would have that information available for you, 

sir. 

Chairman NEY. And then would you rate this overall a successful 

venture as it went about? 

Mr. BREGON. The—the bank venture? 

Chairman NEY. I can give you a one to ten scale, if you want. 

Mr. BREGON. I—well, I think one thing that we should take into 

consideration, Mr. Chairman, is that this is a very difficult area for 

difficult projects. I mean, HUD recognized the difficulty to the 

point where we were willing to match dollar for dollar giving them 

a dollar of grant money for every dollar that they invested. I think 

that that indicates the degree of—of risk that we all knew we were 

getting into. Measure performance—success can be measured in a 

number of ways: Has this bank had a positive impact on this particular neighborhood because they have created jobs, they have 

brought in private investment? I would say yes. Is there nonperformance portfolio out of whack with, let’s say, Bank of America? I don’t know. 

Chairman NEY. Well, I understand what you’re saying about 

the—some difficult investment. I mean, we—our projects, for example, in some areas are more simple. Some people may look at the 

projects and say, ‘‘What are those worth?’’ The impact of a community to actually have a fire truck to save somebody’s life. If you 

don’t have that, you lose your insurance in a small community, and 

it all starts to domino. 

Some things are hard probably quantitatively to say what helped 

the community or didn’t? You know, who got a job and month were 

able to further help their families. But there’s got to be other—are 

you telling me this is such a unique project, or were there other 

projects in the history of CDBG that we can look and say, ‘‘How 

did we measure their success versus this project?’’. 

Mr. BREGON. Well, we have—there’s a couple of things: There is 

another bank which is the Cleveland Bank that is similar to this 

one. We have two other Community Development Banks: We 

haven’t done a comparison as to performance, but perhaps we can 

do that and take a look at how well the other banks have performed in relationship to the Los Angeles Community Development 

Bank. 

Chairman NEY. I would like to see that if you can get the information to myself or Congresswoman Waters. 

Mr. BREGON. Absolutely. 

18

Chairman NEY. One final question that I have, and I don’t know 

if we answer this today or not: But if an area embarks on a project 

of major significance, which at the end of the day is, you know, a 

lot of money that is, you know, to go towards helping people, but 

if it has certain flaws and it doesn’t then, you know, what happens 

to that money and how’s the public ever served again to be able 

to utilize that money for the greater good of their communities? 

Having said that, are you comfortable that the mechanism that 

we have—I’m talking about the Fed—is in place and is tight 

enough so that if a city or a county goes in one direction, they state 

they’re going to do ‘‘A,’’ ‘‘B,’’ ‘‘C,’’ and then all of a sudden for whatever reason, some of the businesses don’t come through or whatever, they—they again change direction, but maybe they tell us, in 

fact, that they’re not changing direction. How do we step in as 

the—as the Federal government to say, ‘‘Wait a minute. You’ve got 

to lay out your plan. Is it similar?’’ I mean, I’m relating some of 

the things you’ve said today. 

Mr. BREGON. Yeah, right. 

Chairman NEY. Are they going to come back with the same 

thing, and is it just take your word for it; or is there some type 

of set criteria that we have—they have to show? 

Mr. BREGON. Absolutely, sir. And that’s a very good question. As 

I indicated to you, the first thing we get from our community, our 

grantees is a consolidated plan. They tell us how they’re going to 

spend the money. What are the activities they’re going to undertake. As you heard throughout this testimony, activities has to be 

eligible, and they have to be one of the three national objectives 

that we talked about. As I have indicated, we do monitoring. And 

by the same token, our office of the Inspector General perform audits of our grantees. 

So let’s take the example of a community that says that they 

were going to do something, and when we go out, we find that they 

do—they did something totally different, perhaps to the point 

where that activity’s not eligible or it doesn’t meet one of the three 

national objectives. 

At that point, we will have an audit finding, we will have a monitoring finding, if you will. If it’s a matter of us going out and monitoring the grantee, if that finding is sustained, if the grantee cannot explain to us with satisfactory evidence, then we will tell the 

grantee we have $500,000 in ineligible uses of CDBG monies. You 

owe us $500,000 of general funds. Now you must repay this to your 

line of credit with general funds. 

So what happens now is this particular community will go into 

their general fund, they will take $500,000, and they will put it 

back into the line of credit for CDBG and then reuse that money 

for an eligible activity. 

Chairman NEY. One final question I have: Is the public hearing 

process different across the U.S., meaning, you have to notify a certain number of people, does it have to be advertised? Does it vary? 

I don’t know what the questions is. Does it vary state to state community? 

Mr. BREGON. It varies, sir. For instance, you can have a community like New York City. Our experience in New York City is that 

they might have five public hearings in the different one in each 

19

of their burroughs. They might advertise it in a Spanish-speaking 

newspaper. A Chinese speaking newspaper. 

They might have interpreters in all these public hearings, and 

that’s the way they satisfy the citizens’ participation requirement. 

You could have another community that says, ‘‘We’re just going to 

hold one public hearing in City hall, and we’re going to put it in 

a paper of general circulation and let everyone know that we’re 

going to have one public hearing′′; and everybody comes to one public hearing. So it all depends on the community. 

Chairman NEY. It’s open; correct? I mean, we really don’t have—

HUD doesn’t say, ‘‘Here, here’s the hearing process.’’ This is loose 

or open compared to——

Mr. BREGON. Right. Each community give us a citizens’ participation plan. As part of the consolidated plan, they give us something 

called a citizens’ participation plan so the City of Los Angeles 

would say, ‘‘HUD, this is how we are going to reach out to our community.’’ And we will monitor that as well. We will go out and say, 

‘‘The City of Los Angeles said that they were going to have five 

public hearings, and they only had one.’’ And we will confront them 

with that. And if we find——

Chairman NEY. But it may vary, though; correct——

Mr. BREGON. Yes, sir. 

Chairman NEY.——community to community? 

Mr. BREGON. Local decisions, local—a lot of flexibility in this program. 

Chairman NEY. Do they have to contact the office holders in all 

cases, members of congress? 

Mr. BREGON. No, sir. It would be nice if they did, but they—they 

don’t have to. 

Chairman NEY. Okay. That’s something we should—in my case, 

frankly again, we will see the notice. We get a phone call, and I’ll 

get a call from any Commissioners; and that’s basically how it 

works down home. Then we get a call from the people who, in fact, 

submitted a request or the Coalition of Appalachian Development 

or Housing Coalition or whatever. But I’ve always kind of assumed, 

I guess, that that was mandated by somebody else, and I guess it’s 

not. It’s just the way they’re doing it where I’m from. 

Mr. BREGON. We give them a minimum threshold. We say, ‘‘You 

must hold a public hearing. It must be accessible to people who 

speak other languages other than English.’’. 

Chairman NEY. Does it state the time, the day of the week? 

Mr. BREGON. It does not, sir. 

Ms. WATERS. It doesn’t say anything about public notice? 

Mr. BREGON. It does say about public notice. We do tell them 

that it must be published in a—in a newspaper of general circulation, and some communities, for instance, say, ‘‘Look, our low income residents don’t read the—the ‘Los Angeles Times.’ So what we 

going to do is we going to have fliers, and we going to distribute 

fliers door to door,’’ some community might say. Some other ones 

say, ‘‘We will have ads on the radio, some of the Latino radio and 

the Chinese radio station, the African-American station, and we 

will put ads in,’’ so it all depends. 

Chairman NEY. So there’s really no particular set standard? 

Mr. BREGON. That’s correct. 

20

Ms. WATERS. Mr. Chairman, I know that you said that was the 

last question. I do have just one last question. 

Chairman NEY. Go ahead. 

Ms. WATERS. I’m looking at the Community Development Bank’s $100 million expenditures, the companies that were loaned money. 

Am I to understand that these companies are all in the supplemental zone? 

Mr. BREGON. If it’s for the hundred million——

Ms. WATERS. First 100 million. 

Mr. BREGON. Yes, ma’am. They should be. Whether they are or 

not—for instance, the—our office of the Inspector General has performed an audit. They are some questions as to whether, in fact, 

all these companies are within the zone. 

Ms. WATERS. The Inspector General’s report does discuss this? 

Mr. BREGON. It does, ma’am. 

Mr. GIMONT. It included a sample is my recollection. Not all—not 

100 percent of the portfolio, but it included a sample is my recollection. 

Ms. WATERS. I see. So it was a sample. So we don’t know, based 

on the Inspector General’s report, whether or not they were able 

to capture, you know, all of them—where all of these companies 

might have been operating from. 

Mr. BREGON. But since there is a question, we have our field office working with the city to identify the location of each business, 

not only the ones that the IG select selected randomly, but we’re 

looking at a hundred percent of the universe, if you will. 

Ms. WATERS. So while you are looking at it, what if you discovered that they were not, what would you do? 

Mr. BREGON. Then it would be an ineligible activity, and perhaps 

they would have to pay that money back to the line of credit. 

Ms. WATERS. Okay. We will get that information from you also? 

Mr. BREGON. Absolutely. 

Ms. WATERS. Okay. 

Chairman NEY. We have had some cases down home where we 

have a—the use of CDBG money created this pot of money, a policy 

that would pay in and pay out, somebody came in town, herds of 

people and then vanished, and by the time you found out what they 

had bought and purchased, it was too late. We try to, you know, 

recapture—recapture that money. 

Ms. WATERS. Well, my curiosity was raised by the fact that I just 

happened to see something here that says the Summit Industries 

of Nevada. They may be, you know, California—Los Angeles company. 

Mr. BREGON. I would hope they’re not in Nevada, ma’am. That 

would definitely be a red flag. 

Ms. WATERS. Thank you very much. 

Chairman NEY. Thank you for your time. I appreciate your traveling. 

[recess.] 

Ms. WATERS. Thank you very much. 

Mr. Chairman, we have a panel here that includes, first, Supervisor and President of the Board Supervisors, Yvonne BraithwaiteBurke who represents the Second district of the County of Los Angeles. She brings to the board of Supervisors more than 30 years 

21

of experience in public service, and at the national and State as 

well as local levels. 

She has focused a great deal of her energy on the needs and education of children, especially those cared for in the county foster 

child program. Supervisor Burke’s Department of Science, Department of Affirmative Action Compliance. Community Development 

Commission, Department of Human Resources, Museum of Natural 

History, Department of Parks and Recreation and the county of 

Public Library and the Public Social Services. 

Welcome, Supervisor Yvonne Burke. 

We also have Mr. Clifford Graves, who is a General Manager for 

the Community Development—Development Department, City of 

Los Angeles. Mr. Graves is the new General Manager in the Community Development Department for the City of Los Angeles. He 

will oversee the department which creates economic, social and employment opportunities for individuals, families and neighborhoods 

in need. Prior to Mr. Graves’ position as Vice Chancellor for fiscal—physical planning at the University of California, Merced and 

served as Executive Director of the City and County of San Francisco Redevelopment Agency. 

Welcome, Mr. Graves. 

Mr. Carlos Jackson, Executive Director Community Development 

Commission of Los Angeles County. Mr. Jackson joined the community development commission in June of 1983. On February 19, 

1991, he was appointed as Executive Director of the Los Angeles 

County Board of Supervisors. As Supervisor director, Mr. Jackson 

directs the County’s public housing approximately 3,640 units, 

housing rehabilitation Section 108 assistance, Redevelopment Community Block Rent and the Housing Revenue Bond programs. 

Welcome, Mr. Jackson. 

Also, we have here, is this—I think that we’ll wait for the introduction of Mr. Sausedo. 

Mr. Sausedo, How are you doing? I didn’t recognize you, and it’s 

been just a few months back that I’m trying to pick your brain 

about everything that was going on. 

Mr. SAUSEDO. Okay. 

Ms. WATERS. So I get to do a little bit more today. 

Mr. SAUSEDO. Clean myself up. 

Ms. WATERS. He’s Chairman of the Board of the Los Angeles 

Community Development Bank. Thank you so much for coming 

today. 

Chairman NEY. The Honorable Ms. Burke. 

STATEMENT OF HON. YVONNE BRAITHWAITE-BURKE, CHAIR 

COUNTY BOARD OF SUPERVISORS, LOS ANGELES COUNTY, 

CALIFORNIA 

Ms. BURKE. Thank you very much. Good morning. 

And we want to welcome you, Chairman Ney, and Congresswoman Waters. Very pleased that you’re here in Los Angeles at 

this Exposition Park Center which is growing and has really 

brought many dimensions to this area. I also welcome you because 

this is part of you’re Supervisorial district that I chair and that I 

represent. 

22

In fact, and Federal programs play a great—important part, of 

course, in this district. It’s—in the county of Los Angeles, and I’m 

really here speaking for the entire County of Los Angeles, not just 

for the Second District. And there are two programs that are certainly very important, is the CDBG as well as the Section 8 housing voucher system that you maintain. 

I do want to thank Congress, and particularly you Congresswoman Waters, for your support of CDBG and your support of 

many of the programs that are very important to Los Angeles. And 

we depend upon the support of Congress obviously for the growth 

and the extent to which we receive CDBG funds. Many of those 

funds that we have are not just CAPA projects. And we have some 

very successful CAPA projects, and I have to kind of distinguish 

the County of Los Angeles. Our funds are used only in unincorporated areas. In other words, our funds that we receive—is about 

a million people who live in the unincorporated area of Los Angeles 

County. There are 88 cities in that County so those 88 cities, their 

funds, the City of Los Angeles being the largest, of course, their 

funds go directly to them, and the 88 cities are funded separately; 

but we administer those million people and those areas that are in 

unincorporated areas where they do not have a City, and we’re all 

the City they have, we’re the mayor, the council and everything in 

those cases. 

And so the impact of CDBG funds in those areas are so important, and first of all, we have been fortunate to have that waiver; 

and that 25 percent waiver has made it possible for us to do a 

number of things in terms of public interest projects. I hope that 

will continue. 

I know it’s supposed to terminate in 2004, but it’s—we use those 

funds and we use them in a very positive way and in a diverse 

County, we have to realize that this is probably one of the most diverse counties in the world, 136 languages spoken. 

So it’s very important to try to address these separate communities, each of which have their demands, their needs. I can say to 

you, you know, we provide assistance in one community where 

there’s really a lack of ability to relate to other communities adjacent to them. So we have to address each one of these individual 

communities and try to meet their specific needs and their resources. 

I’d like to address—I know you’re going to talk a lot about the 

Community Development Bank. We were part of that bank, and 

our portion that we are withdrawing is 15 million. It is our intention to use that 15 million for what is called the Los Angeles Eye 

Institute. It’s a—an institute that is being established at one of the 

major complexes that exists in the unincorporated area that is covered by this empowerment zone and the Martin Luther King Drew 

Medical complex. 

Much of our money, the CDBG money, has gone into that complex—housing, everybody open two large developments recently in 

terms of housing, whether it’s rental housing or condo or home 

ownership, but a—surrounding that area. Major commercial development, but what we’re really planning to so is to establish an eye 

institute which will provide care and also outreach to provide specialty eye care, in an institute in that area. 

23

We will also probably include—some of those funds will go to 

what’s called the Drew Child Care Center. So a lot of the—they’re 

working together, so it will be child care as well as the eye institute that will probably be the beneficiaries of that 15 million we 

withdraw. So I think that we can be very proud of the funds that 

we have utilized in that Community Development Bank. 

And all of it in those areas that are very in need—and I mean, 

very much in need—but what you see it, you can see it, you can 

look at it, you can walk, you know that those things have been very 

effective. Now, I’m not—I know that I won’t be here tomorrow 

when you’re talking about Section 8. 

I just want to say a couple of things about that. The administration of Section 8, moving to the State, we feel would have a detrimental impact upon our Section 8 program. We have long waited 

for Section 8 as it is now. There are many people who were served 

after the earthquake with Section 8. 

I have calls every day, people are homeless who are looking for 

Section 8, and to move it, this administration, we think would be 

an unnecessary labor as far as the administration and the bureaucracy. I know that these are very difficult times. They’re difficult for 

us, they’re difficult for the State, and I know they’re difficult for 

the Federal Government; and we recognize that we have taken 

some cuts in CDBG, but to the extent that this program can continue in the very vital way that it has and continue to make impact 

is going to be very important for us. 

And I know through these hearings, you’ll be able to see how it’s 

being used here, the dimensions of the problem as well as some of 

the solutions that have been provided by these very important 

funds. So I thank you very much for being here. 

Chairman NEY. Thank you. 

[The prepared statement of Yvonne Braithwaite-Burke can be 

found on page 85 in the appendix.] 

Ms. BURKE. I won’t be here during the rest of the panel. I see 

that Councilman Garcetti is here. If there are questions that you 

want to address to me, I’d be very happy to answer them. 

And if not, Carlos Jackson will be able to address detailed questions about it in the bank. 

Chairman NEY. Thank you for your attendance. 

Ms. BURKE. Thank you. 

Ms. WATERS. I’d like to thank you also for coming, and Carlos is 

here; and we can get into a bit more detail——

Ms. BURKE. Sure. 

Ms. WATERS.——with him about the bank and some other things. 

But we do appreciate your coming making the statement about the 

important of these funds, too. 

Ms. BURKE. And we appreciate the strong support we’ve received 

from Congress, and particularly, I know Congresswoman Waters 

has a deep interest in and has been a strong supporter. 

Chairman NEY. I also appreciate having a former colleague here. 

Ms. BURKE. Thank you very much. 

Chairman NEY. Thank you. 

Ms. WATERS. Thank you. Mr. Chairman, I’d like to introduce 

Councilman Garcetti representing the 13th Commercial District as 

Chair of the economic development and employment committee and 

24

vice Chair of the housing and development committee. Councilman 

Garcetti has promoted affordable housing and strengthened unit 

intervention programs, community and senior centers and overseeing the expansion of after school programs. 

Welcome, Councilman Garcetti. 

STATEMENT OF HON. ERIC GARCETTI, MEMBER, DISTRICT 13, 

LOS ANGELES CITY COUNCIL, LOS ANGELES, CALIFORNIA 

Mr. GARCETTI. Thank you very much, Congresswoman. It’s great 

to be here, and I want to thank the Chair, Mr. Ney, for coming all 

the way out to Los Angeles. It’s really wonderful to have you here. 

We’re trying to beat the June gloom. So hopefully, we won’t have 

it too much longer, and I hope you enjoy your stay. And I want to 

praise the leadership of Maxine Waters, too, and thank you for 

making this happen as well. 

The testimony I’m going to give, I couldn’t give two years ago: 

One, because I wasn’t a councilman, so that makes it uneasy. But 

also, because I think the City of Los Angeles was in a very different place in terms of block rent, in terms of how we spent it, in 

terms of how we looked at it, and I have hopefully much better 

news, good news to share with you and not because I’ve been captured by the bureaucracy, not because I’m simply now on this side 

of things; but because I’ve seen this change, I’ve lived that change, 

and I’ve been a part of the change. 

Cliff Graves will speak next who is one of the original authors 

of the block rent legislation from his work in D.C. Now as head of 

our community development department. An entire leadership 

team I think has really changed the way we do block rent from the 

city level. 

My testimony will really focus on that. When I came here two 

years ago, we were almost, I think, two-and-a-half over our yearly 

balance, and we were being threatened by HUD of losing some of 

the block rent monies because we simply weren’t spending it out. 

We really—the mayor and the council took a hard look at how they 

did it, the department, and we were able to in a year period really 

spend that down to the proper ratio that it should be at. 

What we did in that process, too, is we changed the way that the 

grant is being spend, making sure that it was really going back to 

the root of the seed money that it’s intended to be and not to just 

sustain programs, not to just be another place to fill in services, 

but something that would be encouraging entrepreneurialism, 

something that would encourage creativity and something that 

would plant those seeds in communities that would hopefully blossom into true community development. 

I know that Los Angeles is a poor city and that it needs more 

resources. The census count has us at 22 percent. The official poverty line, obviously, if we go to 200 percent of the poverty line, we 

have the majority of our children being born into that essentially 

working poverty. And we have an estimated undercount of about 

80,000, mostly people of color, which equals a loss of about $180 

million in funding over the ten-year shelf life of that census. 

And we have an extreme housing and homelessness crisis. We 

need to be building in this city about 8,000 units of affordable 

housing just to keep up with population growth. Most of that is not 

25

migration. About two thirds of that is just the baby boom echo. So 

the baby boomers’ kids are having kids, and we are building about 

2,000 units of affordable units. 

So each year we’re falling behind by about 3,000 units. As a way 

of answering that, we have now—so that you don’t think we’re not 

putting our money where our mouths are, we build the largest affordable housing trust fund per capita in the country, which would 

be $100 million every year hereafter for the building of affordable 

housing. If you want to leverage that to about half a billion dollars 

a year, combined with the State funds, we’ve really prioritized that 

in a new and dynamic way. 

Phil Mangano who is the President and Director of the Interagency Council on Homelessness recently came to our skid row and 

called it Calcutta to give you an idea of what his view and his extensive work throughout the country was. He really was struck by 

what he saw on our own skid row in Hollywood, where I represent 

is the second biggest population that we have some similar areas. 

I think we do need an extension on 25 percent CAPA services 

where we do face a dramatic cut in-services. Now, I know it’s not 

going to be easy to say, ‘‘Why are we funding services,’’ and I think 

that block rent is intended again as seed money. But the way that 

we do services is not just to sustain programs and groups. 

We really are focusing on those programs which do build capacity, intellectual capacity, work force capacity, things that—where 

it’s read as services essentially as doing much more. As much 

CAPA infrastructure as a building because it’s a human physical 

infrastructure. 

If we do have the services reduced to the 15 percent level, about $11 million in direct services will be cut in the City. So please consider extending that waiver at the very least phasing it out over 

time for us to be able to see how we can use work force investment 

monies or other human infrastructure dollars to get there. 

With the Community Development Bank—this has been one of 

the more fun areas to work on in the last two years, and we certainly, even though we are aren’t directly overseeing the bank, our 

work in the City was—I think they’re as experienced as anybody 

else to see what direction the bark had gone. 

And when we look not at the bank itself, but at the problems, 

the civil unrest of 1992, you have essentially increase in unemployment in South Los Angeles; you have the problems which have 

manifested themselves have gotten even worse, and I think it 

would be one of the worst things we could do not to keep that Section 108 authority. 

Now, what we do with it is the question: I think we can use the 

same target areas, the easy, the 20 percent poverty areas. And I 

would make the formal request the $1$96 million be kept available. 

But I think that the leadership team that we have, as opposed to 

what the bank was doing before, really has the experience, right 

here on my left, the knowledge and the know-how and the innovation to spend this in very creative ways, in capital deprived areas 

that will spur the economy, spur employment and deal with blight. 

We should have the flexibility to use the section 108 funding to 

adjust these problems holistically. To be able to combine—and this 

is what we’re trying to do in the council, too—our housing proVerDate 0ct 09 2002 13:01 Feb 25, 2004 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 G:\DOCS\91774.TXT FIN1 PsN: MICAH
26

grams together with our economic development programs, and job 

training programs and our community development programs. Instead of taking these all in silos, we’re trying to mix these grains 

together to really see in a community, you know, I don’t think a 

child care is where the school district ends and the City begins, 

where one department ends and another one begins. 

They want to see that mix of housing and economic development 

and education and work force development go hand in hand. I 

think the Section 108 authority is a critical piece of this. As I said, 

I couldn’t have given this testimony two years ago, but I have a 

lot of confidence in this leadership team that we have right now. 

We have a committee chair for the development committee which 

oversees the block rent and helped distributes it. We are now actually focusing on having yearly priorities. So it isn’t just this big 

grab bag of different things, whatever we inherited. I’m really saying that nothing is safe anymore, that’s on this table. 

One of the four or five areas that we want this committee to really impact on, not just who do we know from one organization, 

depoliticize that process as much as possible, and I should say to 

both Congresswoman Waters and to Chairman Ney, that we really 

have a pretty apolitical process. 

I know in a lot of places block rent is all about who knows who, 

and I see here that there’s very—a small percentage of that really 

has to do with personal pet projects of any council members. It is 

spent, I think, in a very neutral and fair way. But increasing that 

and really focusing on certain policy areas, again, affordable housing, work force development, literacy is one of the areas that we’re 

focusing on, too. 

And quite literally, this is our lifeline to other programs. Surprisingly and not political and dealing with infrastructure issues, I 

think the way that I would categorize how we’re dealing with the 

block rent money, and the last thing that I’ll conclude with is I 

know that to talk about whether we should administer this differently. 

To me, you know, I think the council level, the local level is one 

that is most in touch with what’s happening out there, you know. 

Every Saturday I meet with constituents, I have office hours where 

people come up and talk to me where we get that kind of on-theground intelligence, but it’s difficult to get through any departmental agency. 

And certainly as you go higher up the—the food chain, I think 

it’s more and more removed from the people on the ground. We 

have citizens’ units for participation that have done some incredible 

things here. They are all representatives from the community, but 

they did polling for this entire city. 

They took a political polster, one of the best in the country, and 

they actually came in and asked me about block rent money, where 

they would want to see it spent. I don’t know if that’s been done 

by a CPA in the country, but we then broke that down by district, 

and every council member has seen that. 

That gives us a real jumping off point, not just to say, ‘‘One of 

my priorities as an elected official, I’m the gatekeeper, but what 

does my community want?’’ And lastly, with the Section 8 stuff, 

just goes—I know Supervisor Burke mentioned that, too. 

27

I did want to say with our $100 million housing trust fund that 

I mentioned, a lot of what we’re spending it on is the preservation 

of project based Section 8, which we really have a lot that is risking being lost, and so for us being able to keep that in place is critical, too, as we address the housing crisis and not falling further 

behind, but I will be here for the rest of the testimony and thank 

you very much for coming out here. 

[The prepared statement of Hon. Eric Garcetti can be found on 

page 88 in the appendix.] 

STATEMENT OF CLIFFORD GRAVES, DIRECTOR, COMMUNITY 

DEVELOPMENT DEPARTMENT, CITY OF LOS ANGELES, CALIFORNIA 

Mr. GRAVES. That was great. Let me add my welcome to those 

that you’ve already had. 

As was pointed out, I’m relatively new to Los Angeles and to this 

position, and I thought I’d open my testimony by reciting some 

numbers that amazed me when I got here. The City of Los Angeles 

is home to nearly 3.6 million people. 816,000 of them are below the 

poverty line. When you use a percentage like 6 percent or 20 percent, it hides the real number, but if you think of 816,000 people 

and compare those to the populations of other major cities, it gives 

you an idea of the magnitude of what we’re trying to address 

here—147,000 families below the poverty line. 

Supervisor Burke mentioned the number of languages that are 

spoken around the City. 226,000 persons are disabled. Focus on 

that absolute number to understand what we’re dealing with. 

Beyond the census figures, think about what’s happening to the 

housing stock here. We grew by about 6 percent from census to 

census. That translates into new households. During that same period, only 5,400 dwelling units were added to the housing stock. 

That’s a very simple explanation of why housing costs are increasing beyond the means of more and more of Los Angeles residents 

Mr. Garcetti did mention the census undercount which concerns 

us deeply. The undercount (which we estimate at about 79,000) 

represents a large shortfall in Federal funding to which we would 

otherwise be entitled. 

So this is the setting for our Block grant activities. One of the 

virtues of the Block grant program is the flexibility it provides to 

local officials to establish priorities and allocate resources. Los Angeles, with an allotment of approximately $90 million a year, takes 

advantage of that flexibility. 

I’d like to go through the main categories of what we fund and 

give you a few examples: We spend about $41 million a year on 

public services. This includes the Community-Based Development 

Organizations. These fund a variety of services. We have a human 

services delivery system which integrates CDBG funds with other 

Community Services, Block Grant and others. We fund a number 

of youth and family centers, supplemental youth recreation and 

youth nutrition, just to name a few. 

The impact of reverting to the 15 percent public services cap 

would be greatly felt. That amounts to an $11 million reduction, a 

40 percent cut in the services we have been providing. 

28

We also fund neighborhood improvement activities to the tune of about $9 million. These include such things as alley closure programs, code enforcement, nuisance property abatement, sidewalks 

and tree planting, the kind of things that increase the quality of 

life in our most difficult neighborhoods. For public facilities, we have allocated approximately $6 million 

this year for such things as neighborhood parks, multi-purpose centers for seniors, and the Temple Beverly Recreation Center. As the 

Deputy Assistant Secretary pointed out, the framework for all of 

what we do is the multi-year consolidated plan. Our job is to make 

sure that the program is well publicized, that there’s ample public 

participation and that we get creative ideas. 

We then test the submitted applications for eligibility and compile them as a list which is made public. Then it’s subjected to our 

community review process. Councilman Garcetti mentioned the 

Citizens’ Unit for Participation cup, which is our public participation arm. 

Members of that organization are selected to represent the various facets of the community. Most of the members are appointed 

by the city Councilmembers from each district. We also have a couple of at-large members. Mr. Garcetti mentioned the polling that 

they do. They hold several public meetings and hearings. They 

meet once a month. We go before CUP to explain to them what we 

are doing, any issues that we have. CUP will be deeply involved 

in our reprogramming effort, which we do to keep our spend rate 

within HUD requirements. 

In addition to the CUP, we also post the consolidated plan on our 

Website. We work with 72 neighborhood councils. The City Council 

Committees hold hearings, and finally, the City Council reviews 

and adopts the consolidated plan. Once the plan is done, we submit 

an annual CAPERS report. This Consolidated Annual Performance 

and Evaluation Report to HUD discusses our accomplishments and 

issues. Every one of our CDBG-funded project is required to file a 

quarterly report with us. We review the reports which rolls up into 

HUD’s own information system. 

So we have a fairly good handle on where the money is going and 

its effectiveness. Is it perfect? Nothing is, but I think we’re improving it every year. The monitoring that is done on the ground, is the 

one area that I’d like to see us improve. 

Like most City departments, we could always use more funds, 

but we’re trying to make our monitoring less of an audit and more 

of a technical assistance review. We work with a number of very 

fine agencies here in Los Angeles, but staying on the right side of 

the regulations isn’t always the easiest thing to do. We’re trying to 

shape our monitoring program to be more assistive to these agencies. 

Moving to the Community Development Bank, you’ll be hearing 

directly from Mr. Sausedo, but I’ll give you the City’s perspective 

on the Community Development Bank. 

Chairman NEY. I don’t mean to interrupt you, but just based on 

the councilman’s statement, now will you be taking over the development bank? I didn’t know if that was your reference? 

Mr. GRAVES. The activities of the bank will be undertaken by the 

Community Development Department. 

29

Chairman NEY. I didn’t mean to interrupt you. I just wanted to 

make sure I could follow you. 

Mr. GRAVES. The Community Development Bank was an experiment, and I think it was recognized as such when it was formed. 

And I think there have been a lot of lessons learned as a result of 

it. But as was pointed out by Mr. Bregon, when it comes down to 

do the loans go to the right places, and do they make a difference? 

Yes, they probably did. Was it the most efficient way of doing it? 

Probably not. And were there some things we will do better based 

on lessons learned? Yes, and I’ll go through those. 

The contract between the City and the Community Development 

Bank is in the form of a comprehensive agreement which lays out 

the roles and responsibilities of the bank and the other parties and 

obligates the Department to perform annual reviews to review annual business plans. 

It is not the role of the City to get involved with individual transactions. The LACDB was set up as an independent body, and we 

have respected that. The question was raised about the Zone Ventures’ aspect of the bank. That was a part of the original business 

plan that the bank submitted to the city and to HUD. 

The agreement between Zone Ventures and the Bank is between 

those two entities. The city is not involved in that aspect of it. 

There is an issue of accountability here. I think this is one of the 

weaknesses of the original business plan. The Board of Directors of 

the Bank and the Bank itself are independent and accountable only 

to themselves with regard to the loans that they make, subject to 

the general criteria set forth in the funding. 

However, the way I look at it, the LACDB is using CDBG money, 

for which the City is ultimately responsible to HUD. So any issues 

that arise with regard to the Bank, we end up holding the bag, and 

that has caused some concerns. I think we’re addressing that 

through the transition. 

I’d like to go to the lessons learned. And I think these are lessons 

which we will apply to the loan authority when we receive it. One 

is to make sure that the requirements of the program are really 

practical. For example, one of the more difficult charges that the 

Bank had was that it could not loan money to anyone except persons who had been turned down by other banks. 

It was in effect, a lender of last resort. So that the loans that 

were funded for by the Bank generally were of a poorer credit than 

most banks would have. In retrospect, that probably wasn’t necessary. It was more important where the money went and how to 

get the best community impact. 

There is a need for more adequate financial and compliance controls. The bank had a very difficult set of requirements to follow, 

and we believe that under the Department, we will be able to apply 

the same type of controls that we apply to our own programs. 

The bank was originally chartered to attract private investment 

as well as the HUD funds. This did not happen which left the Federal funds further exposed than I think they should have been. 

And finally, with regard to strategic utilization of resources, the 

bank, lent money to individual applicants who met their criteria 

without regard to overall impact on an area, without regard to 

broader priorities that the City might have. We would like to be 

30

able to utilize them in a targeted way in concert with other programs by our department and by the city. 

To emphasize a point I think that’s been made previously, of the $196 million in loan authority which still exists from the bank, we 

have asked HUD for an immediate allocation of $50 million to be 

used exactly as provided in the Bank’s plan in terms of the activities to be funded and the geographic area to be supported. 

We believe we can do this, Mr. Bregon said, without amending 

the current plan. We would like to amend the plan for the other 

$146 billion. The intent would be to continue to invest in the geographic area that the bank was chartered to invest in, but we 

would like the flexibility to use the funds for a broader range of 

purposes within the domain of Section 108. 

We believe that that will allow us to use the funds more effectively and still carry out the spirit of the supplemental empowerment zone plan. 

Mr. Chairman, I’ll stop my remarks at this point. 

Chairman NEY. Thank you. 

[The prepared statement of Clifford Graves can be found on page 

91 in the appendix.] 

Chairman NEY. Mr. Jackson. 

STATEMENT OF CARLOS JACKSON, EXECUTIVE DIRECTOR, 

COMMUNITY DEVELOPMENT COMMISSION, LOS ANGELES 

COUNTY, CALIFORNIA 

Mr. JACKSON. Thank you. 

First of all, I’d like to also welcome you to Los Angeles. And also, 

this is the first major opportunity that we have had a chance to 

express our support that the community block program here on the 

West Coast. Typically, we have to travel back east to express our 

needs, and to express, you know, what kind of things we need here 

on the West Coast. So this is a grand opportunity. 

The Los Angeles County Community Development Commission is 

responsible for the Urban County Block Rent Program. We have 88 

cities in the county of Los Angeles, 40—53 cities have a population 

of 50,000 or less. Of that 48 cities participate in our program including the City of south El Monte. But we represent approximately 2 million people, a million from the 48 cities, and a million 

in the unincorporated areas. In Los Angeles County, historically, 

the only corporate areas have been rated from all its commercial 

viable communities. Most of the cities either incorporate those 

areas and take you know the industry part, the manufacturing 

part, so we’re spaced with communities and major infrastructure 

needs, major housing needs, some old housing style. So our focus 

is not only the unincorporated areas, but the 48 cities. And many 

times when I’m asked to describe what we do as an urban County, 

which happens to the largest one in the nation, we receive about 

$38 million annually. The allocation between the cities and the 

county is almost split down the middle. The cities get about 14 million; the unincorporated areas gets awarded about 16 million. We 

use the allocation formula that HUD uses for awarding the times, 

their allocations, we use the same with the county and 48 cities. 

That has been in place since 1975, that policy that was adopted 

by the board. And we have found it to be very effective in terms 

31

of working with the cities. Over the years, the cities have been responsible for developing the programs with the city council requiring approval of such a program. I work closely with each of the Supervisors for developing the unincorporated area programs, and 

that has been intact again since 1975. 

I’d like to say that recently 93 percent—I’m sorry, 94 percent of 

the recipients have been low income residents of the County, both 

the cities and the unincorporated areas. Our focus is predominantly 

to—to look at how we can best improve the communities. Unfortunately, like the City of Los Angeles, you know, it’s—it’s dealing 

with a variety of resources. The County is not, and I have to focus 

really on the unincorporated areas. Our tax base is lower than—

in other areas. The challenge that we have is how to leverage our 

resources. Because again, when you look at $60 million published 

or a million—of a million of unincorporated area, it’s not a whole 

lot of money. If you look at the allocations made for by the 

Supervisorial district, the highest one which is in the first 

Supervisorial district is about $6 million, and has tremendous 

needs of money, development housing, infrastructure to the loan, 

communities that have not been intended to. 

One of the matters that have—you have to asked me to address, 

which is more in detail than my testimony, was how our monies—

how do we involve the communities? You know, it was mentioned 

that by law we’re required to have one public hearing which is before the board of Supervisors when our action plan or consolidated 

plan is adopted, but we have—we have 60 communities throughout 

the unincorporated areas of Los Angeles. 

We ask the cities, the 48 cities, to have their own community 

meetings. When you tally that, that’s quite a few community meetings. We go to the community stakeholders invite them to participate, we will go to the churches. We go to other community organizations that will provide any input, not only as to what is needed. 

We return back to the community and say, ‘‘This is how the monies 

were allocated this past year’’ and ask feedback, not only up front 

but at the back end. 

As an agency, we—I have the opportunity to look at public housing, Section 8, administration of the home dollars, the homeless 

dollars, as well as the monies for affordable housing, the community development of block rent. The challenge that we have is how 

best to leverage those dollars, because the needs are tremendous. 

It’s mentioned that the homeless crisis is surfacing again. It was 

interested in seeing that the—there was a plan of ten-year plan to 

eliminate the homelessness. Well, since I’ve been around, it’s the 

second one. And that is really a confronting problem that I’m not 

sure no one—as one agency can resolve that problem. 

It requires really a multijurisdictional agency. But there’s one 

funding source that we have fortunately that we administer, and 

this is where I’d like to use the leveraging factor. 

And it’s the housing money that we get from the City of Industry 

which is for the redevelopment set aside, special legislation was 

passed in early 1990 at the State level. When we first started allocating dollars for this housing program in 1998, we have allocated 

$102 million from that fund, had to leverage $600 million and produced 2,400 affordable housing units, home ownership, special 

32

needs housing, housing for domestic violence victims, emancipated 

youth, the whole gambit. Some of them have been used in the City 

of Los Angeles. How we can encourage similarly leveraging from 

other jurisdictions, not just from the County of Los Angeles. 

We do a five-year consolidated plan. We just completed ours recently. Again, we go out and solicit information from the various 

communities that we’re involved with, and then, finally, a formal 

public hearing before the board of Supervisors. But you know, our 

meetings have taken place prior to them. 

Most of our funds, I would say—and I don’t have the numbers 

handy—but it’s been owned housing, economic development, public 

services and public facilities. And most of our public facilities are—

are easily fund expended by the cities our 48 participating cities. 

The County unincorporated area needs really are prioritized 

around housing, economic development and public services. 

Different from the City of Los Angeles, the counties have mandated prudent health, welfare, protective children’s services, a variety of things that local jurisdictions are not faced with. The discretionary funds that the county has are very limited. So really the 

future of the Walkman program because it’s a very viable program 

to look at these areas of needs that typically the County are not 

able to fund. And it really is a—it’s a major challenge if you look 

at reducing our 25 percent from 50 percent. Overall, it’s a $4 million loss for us. 

I think poverty probably describes our world with the city as the 

mini HUD. We’re responsible for assuring that their funds are 

spent properly and according to all the regulations. We’re the 

grantee of the funds so that we’re the ones who are responsible. 

For anything that doesn’t occur, we have agreements with the cities for expenditures for eligibility in case there are disallowances, 

you know, we have a mechanism to recover those funds. 

Even though it may have been political before, we have that 

mechanism and then we are also responsible for compliance in the 

unincorporated areas. We do—we have spent a lot of time over the 

years in improving our compliance systems. We have learned 

through experiences that in working with participating cities, we 

have to work with them a certain way with our CBOs, we have to 

do a lot up-front technical assistance because many are not 

equipped to deal with all the Federal regulations that area is confronted with. 

Not only eligible projects, but as well how can they account for 

the expenditures which are—sometimes gets them in trouble. But 

we have done an extensive rebuilding of actually building up a system. We do desk top reviews, performances, we check their accounting systems before they are contracted to make sure that it 

can handle the funds coming in, and then we do our field reviews 

at the different sites. Not only the CBOs, but as well as the cities, 

as well as the county departments. And we go through a lot of data 

collection to make sure that the funds are accounted for. 

The 108 loan program is a viable one for the county. Cities have 

been using the 108s to help them develop economic development 

packaging. For example, in the City of Santa Fe Springs, we had 

a $23 million project that was to clean up old oil tank field, and 

it has now become a very viable industrial warehousing facility 

33

that creates over 600 jobs; but without the assistance of the 108 

and their EDI and their bedding, they wouldn’t have undertaken 

a particular project, and now it’s become a major cornerstone in the 

southeast Los Angeles area. 

We had just resumed work with West Hollywood again to do an 

economic development project. We have undertaken some in our 

area, in East Rancho Dominguez, West Altadena, which is in the 

5th Supervisorial District. Because of the lack of resources that the 

county has, 108 is a field to us again to leverage and to get investments locally for viable projects. 

And lastly in the Community Development Bank, I don’t know 

if I have the pleasure or really, but I was beginning—I was there 

at the beginning of the bank; and if I have to reflect back as to 

what took place: One of the key—one of the key factors that the 

board of Supervisors took was that any project dollars belonging to 

the County required authorization by the County prior to any expenditure or commitment. 

And the reason we did that was that the bank, when it first 

started, didn’t have the administrative infrastructure to undertake 

all the requirements, Federal requirements and local requirements, 

that really would put them on the right track. We were conservative on how we approached that, and of course, the County took 

a lot of criticism being conservative; but the Inspector General report pointed out that administrative policies and procedures were 

not there. 

For some reasons why some of the loans were made out of the 

zone or were questionable, there was environmental issues of clearances. So my staff spent a lot of time with the bank early on developing manuals and administrative policies and procedures to ensure the accountability took place, but I think that when we have 

two legal entities, the county and the city and our—we have five 

census tracks in the environment zone, supplemental environment 

zone, which equated about 13 percent of the area. 

We were dominated, in essence, but in our agreement, we require 

that they—that it get approval from us for any expenditure or 

agreement. So we’re protected on that. Now, we were confronted 

with trying to come up with viable projects in the five census 

tracks, and Supervisor Burke has identified one of them which I 

think will really assist the undeserved communities, the medical 

undeserved, and we’re working with a group of doctors from Drew 

Medical University to look at this in terms of an eye institute. 

But again, we’re in a transition. We are requesting, you know, 

that once the bank is closed that the money reverts back to the 

County of Los Angeles and we already have anticipated how to 

spend those dollars. I’d be available for any questions. 

Chairman NEY. Thank you. 

[The prepared statement of Carlos Jackson can be found on page 

114 in the appendix.] 

Chairman NEY. Mr. Sausedo. 

STATEMENT OF ROBERT SAUSEDO, CHAIRMAN OF THE 

BOARD, LOS ANGELES COMMUNITY DEVELOPMENT BANK, 

LOS ANGELES, CALIFORNIA 

Mr. SAUSEDO. Good afternoon. 

34

Now, Chairman Ney, and ranking Member Waters, and once 

again, my name is Robert Sausedo. I’m the Chairman of the Board 

of the Los Angeles Community Development Bank, and I was appointed to the Board of Directors by former Los Angeles City Councilman Marjorie Thomas in July of 1999 and subsequently elected 

by the entire Board of Directors to serve as Chairman of the Board 

in 2001. 

My role as the Chairman of the Board is a nonpaid position and 

is strictly that of a volunteer. In short, I’m a community guy. That 

means what I say here, I have nothing to lose with respect to politics or what have you. I represent the community. 

I—before I move on, though, I do want to compliment your staff, 

Congresswoman Waters, for always being there when a cause is to 

be made and being responsive. As you well know, there are times 

when you call certain political figures and don’t get return calls, 

and staff is less than sufficient; so I do appreciate a good staff and 

always take the opportunity to compliment you. 

I’m here today to offer testimony on behalf of the Board of Directors, and again, as a concerned citizen and volunteer. Additionally, 

I am joined by our President and CEO Mr. Steve Valenzuela for 

any of the more specific questions with respect to day-to-day operations of the bank. 

Let me begin by talking about access to capital. As you heard earlier, HUD provided the bank with $100 million in Section 108 

funds and $100 million in matching EDI funds. This is the City 

side of those funds. This extraordinary allocation of EDI was made 

in recognition of the additional risk and lending that the bank 

would undertake. 

Credit risk was an enigma to most commercial banks resulting 

in capital star businesses in the intercity community of Los Angeles. The bank adopted credit guidelines and underwriting criteria 

similar to those employed by the largest commercial banks in the 

City. This was done, in part, to help facilitate co-lending with these 

banks in both these significant pledges made early on by three 

large banks in the Los Angeles area in 1995. 

The pledges of co-lending with major banks were worth a lot less, 

of course, than imagine they just didn’t show up. The Los Angeles 

Community Development Bank was forced to assume even greater 

risk than originally forecasted in order to meet unmet capital need 

for businesses in the empowerment zone. 

So what have we accomplished? Let’s talk about that. What have 

we accomplished? To date, the Los Angeles Community Development Bank has closed over 250 loans and investments totalling 

over $130 million in funding. We are especially proud of having received an award from HUD for implementing an innovative 

microloan program that funded over $1 million in loans to very 

small businesses in L.A. With an average loan size of $15,000 of 

LACBD funding, all of it in the form of EDI, reached approximately 

70 businesses, while many of these very small junior experienced 

spent time expanding their businesses to create new jobs, I will say 

that the vast majority have either repaid their loans in full or are 

making good on their commitments. 

The bulk of the loans made by LACDB have been to small- and 

medium-sized businesses in the empowerment zone and the oneVerDate 0ct 09 2002 13:01 Feb 25, 2004 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 G:\DOCS\91774.TXT FIN1 PsN: MICAH
35

mile buffer which, by the way, is across the street from the empowerment zone. Okay. We have a number of success stories of 

businesses that remain open and viable that met the national objective of creating jobs for the benefit of low and moderate-income 

persons and that repaired their financial obligations to LACDB. 

We also have experienced, as you all well know, some set backs—

borrowers who have failed to execute their business plans and, of 

course, media stories about the bank’s missteps. Rarely has the 

local press published a story prominently about the bank accomplishments in light of its challenges. 

Recognizing that some companies require capital and not debt to 

further their business plans and create jobs, LACDB also partnered 

with Draper, Fisher, Jergenson and formed its own ventures. The 

partnership focused on funding early-stage investments and portfolio companies in the empowerment zone. 

We formed a similar partnership with Fame Renaissance and 

Hancock Partners that focused on operating companies in the empowerment zone. The strategic exits from Zone Ventures partnerships relied heavily on continued vitality of the IPO and MNA markets. And as we’ve seen of late, with the .com busts, those markets 

somewhat have within dried up to some degree which affected our 

long-term strategy in short—that’s the short of that. 

We do, however, remain hopeful and optimistic that the economic 

benefits resulting from these efforts doing the new high-tech companies populating the empowerment zone in the central City of 

L.A. And possible zoning impact will continue far into the future. 

We’ve laid the ground work for the baseline infrastructure. 

Let me talk about reduction of liabilities. In 2000, the bank, by 

direction of the Board of Directors, moved aggressively to defease 

its outstanding HUD debt, which as of July 2000, totaled $105 million. During 2001, the bank reduced the City and County’s liabilities to HUD by $10 million and $4 million respectively, approximately 16 years ahead of schedule. 

The reduction liabilities occurred through a defeasance of county 

long-term debt. The bank has successfully resolved all outstanding 

significant legal issues and prevailed on appeal and in the Supreme 

Court in overturning a 12 million-dollar judgment. Our Board of 

Directors continues to remain pleased with the hard work our senior staff put into this successful conclusion because we have, in 

short, one hell of a staff. 

With respect to job creation, providing eligible companies with 

capital was always intended to be a means and not the end of economic development. The measure of success we strive for is job creation. Primarily benefiting residents hopefully of the empowerment 

zone and/or other low to mod persons. That’s the standard set forth 

by the comprehensive agreement with the city and County of Los 

Angeles and that’s the national objective set forth in the HUD regulations. 

Each company assisted by LACDB is required to demonstrate 

they have the capacity to create one job for every $35,000 in financial assistance which is quite difficult to do, but it is what it is. 

Taken together the portfolio of companies are required to create approximately $3,800—excuse me, 3,800 jobs. So essentially, based on 

the money loaned, 3,800 jobs should have been created. Through 

36

December 31, 2002, LACDB-funded small businesses have created 

3,400 jobs. So what that means is that 90 percent of the goal—90 

percent of the goal has been achieved, from a numbers standpoint. 

And while the number of empowerment zone residents benefiting 

from these jobs totals only one out of every five jobs created, low 

and moderate income persons hold 80 percent of the jobs created 

by those companies who receive funding. While we are proud of 

these accomplishments, we expected to achieve greater results, but 

to be quite frank, it was a difficult, difficult task to carry—pull that 

off and make sure that we reach the 51 percent number; but we 

continue to try and do that. 

LACDB also understood that the federally funded job training 

and referral program operating in Los Angeles would provide our 

clients with the type of resources and workers they needed in a 

timely manner. Things like work source development and other entities in the community would be a resource that individuals could 

go to for training and job placement which and would augment the 

bank’s activities which unfortunately, we’re not up to par in meeting that opportunity. 

When the founders of the Los Angeles Community Development 

Bank performing their strategies around what was anticipated to 

be our targeted customers, the economy shifted as a result of rapid 

growth in the technology sector. During this time, commercial 

banks lowered their lending standards and began to offer business 

loan products, and they were far more competitive and had significantly less red tape than the requirements that accompany Section 

108 funding. 

This resulted in LACDB taking on higher risk loans to businesses that would need to stabilize their infrastructure before they 

could follow through on their jobs creation commitments. In short, 

we got even riskier leans. I continue to remain significantly challenged as a board member when I hear statements made like, ‘‘The 

bank has failed at meeting its national objectives,’’ or, ‘‘The bank 

is out of compliance,’’ or, ‘‘The bank doesn’t know what they’re 

doing.’’. 

It is important to note that the businesses that receive funding 

and remain in business are not required to create jobs within a 

specified period of time, but it appears that requirement for jobs 

creation is open ended with respect to the time line of—of the Section 108 commitment. 

That said, current LACDB statistics once again show us the 90 

percent achievement level. While it is true that the founders of 

LACDB intended for the bank to operate autonomously from the 

City, it is a significant departure from the truth to say the City of 

Los Angeles staff has remained hands off and unaware of the level 

of risk that is involved with LACDB lending, a significant departure from the truth. 

Additionally, it is important to note that the reason the bank is 

moving towards closure, the reason the bank is moving toward closure is primarily due to the lack of political will to support the 

bank. In short, the bank was not set up to withstand changes in 

administration at the local and Federal level. 

So where do we go from here? So where do we go from here? I 

will tell you as a third-generation citizen of this great City that I 

37

am very proud to—to have been born, live in and will die in, I’m 

encouraged by the fact that this committee is asking the question: 

What are you going to do with remaining Section 108 funds when 

the bank closes? 

As a suggestion, I offer the following: While the City of Los Angeles wants to expand on the uses of these funds to include housing 

development, I am of the mind that we cannot walk away from the 

job without defined specificity on how the funds will be utilized in 

the future. Additionally, it is my belief that we must maintain 

funding for our mid-size and small and/or microbusinesses. 

Therefore, a significant portion of the remaining funds should be 

relegated to this activity and should include the areas of the City 

that meet the low income census track criteria while utilizing the 

2000 census data, and not the 1990 census data. Additionally, as 

the LACDB moves toward closure, I believe local organizations that 

provide this kind of lending should be considered for tactical deployment of this resource. I offer the following highlights from 

South L.A. Rioting, opportunities for economic self-sufficiency ten 

years after the 1992 civil unrest written by two UCLA students, 

Mark Drisey and Danny Flemming, economic round table briefing 

paper: ‘‘When business is created and developed, you obviously 

have jobs, short of that statement. South L.A., in particular, was 

the hardest hit after the 1992 civil unrest with 547 buildings damaged in Los Angeles. 78 percent of—or 428 of those damaged were 

in South L.A. 

For the purposes of this study, South Los Angeles included the 

planning districts of South East L.A., South Central Los Angeles 

and West Adams/Baldwin Hills. Of the 428 buildings damaged in 

South Los Angeles, only 19 percent had payroll paying estimates 

in 1999—excuse me, established. The 81 recovered buildings house 

147 businesses employing 985 workers, an average of 7 workers per 

establishment. 

Of the 195 workers comparatively, they were paid 15 percent 

lower wages than their counterparts in other parts of the City. The 

South L.A. Workers are paid an average monthly salary of $1,707, 

which annually is about $20,884, below poverty wages for a family 

of four in the county. 

One of the fundamental problems faced by South Los Angeles 

residents in 1992 was the shortage of jobs. At the time, there was 

only one job to be found in South L.A. For every 4.5 residents, 

making it the most out—making it the most job scarce area in the 

City. According to the economic round table study presented in 

April of 2002, by 1999, there was a slight decline in City-wide job 

availability, but a precipitous decline in South Los Angeles. 

In 1999, there would 2.8 residents per job Citywide and 7.2 residents per job in South Los Angeles. This means that there were 

only one third as many jobs per residents in South L.A. as in the 

City as a whole. By the end of the decade, South L.A. had a joblessness rate higher than that—the City average, but three times higher than the national average, three times higher. 

What does this mean to distressed communities in Los Angeles, 

particularly in South L.A.? It means that the initial designation of 

the $400 million to boost the local economic engine has a long way 

to go to create jobs and businesses. Rather than place the $198 milVerDate 0ct 09 2002 13:01 Feb 25, 2004 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 G:\DOCS\91774.TXT FIN1 PsN: MICAH
38

lion in other areas, why not designate at least half of those dollars 

to be placed at the local level and local community-based business 

expansion and job creation retention organizations. 

If you’ll allow me a couple more minutes, I will come to a close. 

Let me give you an example of that statement: The community financial resource center in L.A.’s first private partnership in 1993, 

in its tenure of community economic development service of the 

community, it is based right here in South L.A.—by the way, I’m 

not advocating for one group. What I’m advocating for is that we 

take the remaining dollars, identify the people that do what 

LACDB was formed to do, but they do it well, and have a coalition 

of lenders throughout the City that help these underserved communities. 

I will leave that example open for your reading that since I happen to note in the interest of time, but I want to drive this message 

home: There are many reasons why we should continue to employ 

capital to small businesses and inside business in Los Angeles. 

Some additional reasons are: Of the 6 million people estimated 

to move into California between 1999 and 2010, approximately 

900,000 will call Los Angeles home creating a 24 percent increase 

in Los Angeles’s growth rate. Over the next five to ten years, approximately 20,000 to 30,000 people in California will be released 

from prison. On an annual basis, landing in communities being underserved, poor and low income, where will they work? As communities expand, the need for small businesses required meet the 

needs of local communities. This is driven by the need for inability 

for big bucks developers to keep up with the growth rate. Increased 

businesses mean increased taxes which mean you get a chance to 

increase the services. As a citizen of this great City, I implore this 

committee to keep the focus on standing on the side of what’s right 

in supporting our local economy. Thank you. 

Chairman NEY. Thank you for your testimony. I have a couple 

of questions just for my complete clarification. 

[The prepared statement of Robert Sausedo can be found on page 

124 in the appendix.] 

Mr. Graves, you will, under your auspices of the city, will take 

over the bank in December; is that right? 

Mr. GRAVES. We will. 

Chairman NEY. Functions of the bank. 

Mr. GRAVES. The bank functions basically, yes. 

Chairman NEY. And then, you feel that you’re ready, not you, 

yourself, you know, the organization is ready to do that, the transition would be occurring in——

Mr. GRAVES. Yes, I do. Keep in mind, Mr. Chairman, that the department already administers the rest of the 108 program. So we 

would essentially be merging that into our capacity, the same is 

true with the EDI grants. 

Chairman NEY. Now, originally the bank, I think it was your 

statement that it was an independent body from the City. It was 

completely independent. 

Mr. GRAVES. It was set up——

Chairman NEY. In ’94. 

Mr. GRAVES.——in ’94, ’95 as an independent body, but the idea 

was—is that a body that was not bogged down by the red tape of 

39

the City or the County could become more aggressive in its economic development activities. 

Chairman NEY. Was it independent of the County at that time 

in ’94? 

Mr. GRAVES. It was the same thing. As Mr. Jackson pointed out, 

their monitoring process was a little different than ours. 

Chairman NEY. Looking back on it, if you have Government 

money that comes in, it’s independent of the City and independent 

of the County, is that wise—I mean, you want to keep it, quote, 

‘‘from the bureaucrats,’’ or want to keep it, quote, ‘‘out of the hands 

of politics?’’ But sometimes political activities involvement, not on 

a partisan basis but how politicians actually vote on these items 

help these programs along. The use of an independent body took 

it completely out of the realm of the elected Representatives who 

have the responsibility for the funds. Unfortunately, if the independent body goes a little haywire, which I think it has in this 

case, then the elected officials say, ‘‘Well, it wasn’t us.’’

The question I have is: If you reconstitute this will you have the 

same type of situation or how will it differ? If anybody wants to 

answer. 

Mr. GARCETTI. Mr. Chairman, I think maybe the best metaphor 

for this was, if it was an arranged marriage and either of the 

spouses live together. So yeah, we have one in which they 

would——

Chairman NEY. Are either one of them alive? Has one left the 

country? 

Mr. GARCETTI. Well, I think we have two alive today. When we 

look at, you know, whether we have the capacity to, I think we 

have to ask ourselves a question: In some ways the bank was put 

in a difficult position because there was never a clear policy direction. 

Do we want this to have great jobs, or do we want this to have 

a portfolio that works? Do you want this to be a purely functioning 

financial institution, or do we want this to be something that creates jobs? In high risk areas, those are not going to always dovetail. In fact, it’s almost possible to have them dovetail. 

So I think that if the city takes over some of the affects in the 

way of authority, we’re not in the business necessarily of trying to 

get the highest return in pure fiscal terms for a portfolio. What we 

are in the business of is getting the best return on a human portfolio, and I think that is something the bank in some areas did 

something really well. 

Participating in a microloan program, that was one, I think, in 

which we see the best of entrepreneurialism, and see money going 

out there, and it was a model for the entire region, and arguably 

for the country. Those are the stories of successes on the bank side 

we want to build on new loans. But our own section of the loan program is definitely in place and ready to go and ready to spend that 

out in coordination with housing and job development programs. 

Mr. JACKSON. Mr. Chairman, it wasn’t totally independent. 

There was, through the comprehensive agreement, a relationship 

between accounting and the bank. We had——

Chairman NEY. Excuse me, but not the City. 

40

Mr. JACKSON. The City had the same arrangement because there 

was a joint body and honor committee between the two entities 

that looked at program performance, looked at different types 

of——

Chairman NEY. Not to interrupt. I just want to follow. But I 

think Mr. Graves said it was autonomous. 

Mr. GRAVES. Well, it was autonomous in the sense that we did 

not participate directly in their loan program, except for 108 passing through 108 applications to HUD. We did have an annual business plan which was reviewed by the county and the city up 

through the City council and the board of Supervisors. 

Chairman NEY. Sure. Well, was there a vote on that plan, or was 

it just there; or did somebody say good or bad? 

Mr. GARCETTI. Well, this information, we still have this coming 

before us, we decided last week, and since I’ve only been here the 

two years, that we get briefed on it and ask questions, and move 

on. There’s no formal vote. 

Mr. SAUSEDO. And that plan is co-authored by the bank, the 

county and the city. 

Chairman NEY. What was the role then? If there was autonomy, 

what was or is the role of the City or the County then? What would 

you deem your role was? If there was an autonomy of this board, 

but what was the role, to monitor——

Mr. JACKSON. It’s similar to like a nonprofit organization. We 

have an agreement that specifies program requirements, program 

activities, the target areas, and then like I mentioned, we were not 

satisfied initially with the establishment of the bank in this operation. So we—withheld any approval of any expenditures until we 

felt comfortable, and at that point, it was at that point that we 

allow expenditures, loans to be approved. But we were not involved 

in the daily operation of the bank. That was not our responsibility. 

So we had guidelines——

Chairman NEY. Whose responsibility was that, do you know? 

Mr. JACKSON. That was the daily operation staff. 

Chairman NEY. But you had an oversight on the daily—reporting 

mechanism to the City and the county that sees funds coming 

through for local control or——

Mr. SAUSEDO. The answer to your question is yes. I could probably have Mr. Valenzuela speak to that more specifically. 

Chairman NEY. We need your name into the record. 

Mr. VALENZUELA. I’m Steve Valenzuela, President, CEO of the 

bank. I think in Mr.——

Chairman NEY. How long have you been CEO of the bank? 

Mr. VALENZUELA. I’m the President and CEO. 

Chairman NEY. I’m sorry. How long have you been CEO? 

Mr. VALENZUELA. Since March of this year. Prior to that, prior 

to six years, I was chief operating officer. 

Chairman NEY. Who was the previous? 

Mr. VALENZUELA. There have been two prior CEOs. The original 

CEO was Robert Kemp. He was the initial CEO from approximately June of ’96 until about late 1999, and then the—we had an 

interim CEO for about six months in the form of a board member, 

Linda Griego, and then in February of 2000, the board appointed 

41

William Chu as a CEO who served as CEO until March of this 

year. He’s gone to private industry. 

Chairman NEY. Thank you. 

Mr. VALENZUELA. And your question was? 

Chairman NEY. The question I had is: Who—well, I’d gotten to 

the issue of monitoring, and what I wanted to know: Is there’s a 

certain amount of autonomy between the City and the county, say, 

that they do have a plan that they review. On a daily basis, as you 

all were operating the bank, how or do you or when do you report 

to the City and County and in what manner? Is it just reporting, 

or are they involved anyway in the decision making process? 

Mr. VALENZUELA. Neither the County nor the City were involved 

in the decision making by the bank in terms of which loans or investments they were to make or approve. That authority rested 

with the Board of Directors and credit committee of the Board of 

Directors. 

Chairman NEY. Okay. Which comes to the point that these are 

government minds that come down: Any decisions made at the end 

of the day, who was the bank accountable to? Just the autonomy 

agency of the board? I mean, was there any accountability to the 

City and County? 

Mr. VALENZUELA. Well, each year I think as—I think as Mr. 

Graves indicated, each year the bank submitted under the term of 

the comprehensive agreement in October, an annual business plan 

to both the City and the county with copies to HUD, they would 

outline what the expected loan activity and investment activity was 

for that particular year. 

And that—those business plans were—were reviewed and approved by the city and County, and while they didn’t identify specific loans, companies or that we would be making specific loans to, 

it did identify the range of dollars that would be made to small 

businesses to microloans to the venture capital program. 

We also work closely with the county, the City, and HUD used 

to participate as a stakeholder as well in oversight committees that 

would meet on at least a quarterly basis wherein we would report 

and the county, City and HUD would sit in on these meetings to 

listen in on the performance of the portfolio, the performance of the 

achievement of our business plan day and other activities. 

We also reported on a quarterly basis to the City, County and 

HUD on our progress toward job creation with a detailed report 

showing how our borrowers, investees are doing with their job creation goals, jobs to date and some of the remedial actions that we 

would undertake in order to improve performance. 

Chairman NEY. Congresswoman Waters has some questions, so 

I want to ask one final question. 

When you talked about the—Mr. Sausedo talked about the analysis or about the jobs and the money spent, of the successful loans, 

is there a breakdown or an analysis of how much money was spent 

to create what job—was it 35,000 per job, 10,000 per job—is there 

some kind of average, number one, did that take into account, of 

course, the loans that didn’t make it that were still funded that a 

person didn’t get a job out of, but of the successful ones, was there 

a dollar figure per job that can be available out there? 

42

Mr. VALENZUELA. That number is available. We’re—we’re—the 

county and the city required that we have quarterly compliance reviews that are conducted by an outside audit firm as well as quarterly financial reviews which are conducted by the same audit firm, 

and one of the evaluations that they conduct—and I can make that 

available, I don’t have that information with me—is they look at 

that standard which, I believe, under the Federal regulations is one 

to 50,000 and—one to 35 for the bank. I think it’s one to 50,000 

in general. We have that information and can make it available to 

you. 

Chairman NEY. I just want to—make one statement. We’ll move 

on to the gentlewoman from California. It seems to me and this is 

something of importance to us because, you know, when you’re in 

Washington, you’re voting I’m all for local control. I’m a preacher 

of the legislature and you serve on the legislature also. I’m all for 

local control, but then if there’s not a check and balance or an assessment or something, we can’t just say, ‘‘Well, we’re trying to 

help poor people.’’ It doesn’t actually overall do that, not because 

it was intentional, just because of a series of problems we represented. But then as we tried to support problems that become 

more difficult here or in Idaho or Ohio or larger or smaller places 

because it’s more difficult to support them. People say, ‘‘Well, how 

effective was it?’’. 

Also, one thing that’s unclear to me—and I’ll ask you right now—

one thing that’s unclear to me as you take your next step, was this, 

the whole request of money and the bank all geared towards helping distressed area and now as you recross this—I shouldn’t say 

you, as this is reconstituted, is it really going to help the distressed 

areas, or is it going to go somewhere else where it really wasn’t 

meant to be? I have a County at home right now, we’re at 13 percent unemployment. It’s horrific. We were at 17, but now we went 

to 13. I had a County that was 26 percent official unemployment, 

which was depression era on unemployment. As we went to help 

those counties who needed a wide variety of support, I think we 

had to get away from this generic, ‘‘Well, we’re helping this area,’’ 

and all of a sudden, the money comes in; and we create a small 

factory, but nobody in that County works in the factory. That’s a 

problem. 

You know, ‘‘Well, gee, this County adjoining it, if we help that 

County, those individuals that need that job are going to work 

there,’’ but then in actuality, they didn’t. And we had a, you know, 

major corporation of Honda. I just want to give a estimate of the 

$43 million to, they specifically would not interview anybody from 

my zip code. I mean, this is a fact. Of course, we didn’t testify. I 

voted on that Honda loan, too, when I was in legislature. I just 

threw out there as this is all reconstituted, I just think that, first, 

you have to be careful of how you do it. 

Mr. SAUSEDO. Absolutely, Chairman Ney. I’m three years into 

the bank. When I was brought here, I was looking, trying to find 

innovative ways to make our borrowers successful. For example, 

the stakeholders are the City, County and the feds. If there’s something we can do with the procurement to give these people contracts to pay us back, that was one of the things we needed to discuss that was left out. This was an experiment, I think, that we 

43

all have the benefit of hindsight and looking at and saying, ‘‘Well, 

we probably shouldn’t have looked at it this way, or we could have 

done it that way’’ or given certain resources; and you’re right, I 

mean, we have to target the areas, but some of the areas—for example, when we start looking at employment law, can we legitimately prevent someone from getting a job from someone who got 

a loan from us and not be in violation of labor law because they 

have to meet a specific criteria. 

There are a lot of unanswered questions. But what I don’t want 

to miss here is that there is a significant lesson learned here, and 

that is that with an entity like LACDB, what we can do is take 

the bureaucracy out of deploying money to businesses that need it 

immediately. And there are other institutions out there—I named 

one—but if there was the right coalition because what I don’t want 

to see as a citizen is, to be very frank, which is take a hundred million, 50 million or whatever, put it in the hands of CDB and say, 

‘‘Do the right thing.’’. 

Chairman NEY. That’s my—and it’s going to take the will of 

what we call political or elected, and I have to be in preparation, 

and for the record not in the soft light of day, or we are going to 

shut the lamp off, if you know what I mean. 

Mr. SAUSEDO. Right. 

Chairman NEY. I’ll just mention that I think there’s got to be a 

lot of communication out there. 

Mr. SAUSEDO. Absolutely. What we will tell you in short, is that 

this board—you can probably hear a little bit ever anger in my 

voice. And where that comes from is the Board of Directors on this 

bank are some very savvy folks, some of you know Professor Gene 

Grigby, who has now transitioned off the board. Rob Amens, Far 

East National Bank, and—just to name a couple notables. Denise 

Fairchild, these are people that are critical thinkers that analyze 

policy that understand business and that came here to do good. 

We spent the last three years putting out fires, and it’s a shame 

because the last three years, we weren’t able to serve the community in the way that it needed to be served. What we were able to 

do is serve as a buffer to protect the City. And we don’t get acknowledged for that, and I take issue with it. 

I take issue when I hear statements like, ‘‘The bank did this 

wrong,’’ but then when you call the City council members to sit 

down when they’re newly elected to say, ‘‘Let me share with you 

where we’ve been and where we’re going’’ and you don’t get a return phone call, and you walk the halls on your own time twice to 

do it, there’s a disconnect; and the disconnect with any organization is when there’s lack of communication, that is ultimately going 

to lead to failure. And we cannot not, not let that happen again. 

Chairman NEY. Congresswoman? 

Ms. WATERS. Okay. This has been—this is—I’m going to try and 

have questions for each of you. 

Mr. Garcetti is an elected official. I’ve got to ask some questions 

that may be a little bit uncomfortable. 

Mr. GARCETTI. Please do. 

Ms. WATERS. But I was drawn into making this work kind of a 

priority despite all the issues that we’re confronted with. There’s 

44

Medi-Care reform and all of that. I said I got to pay attention to 

CDBG Section 108 and the development bank and how it all works. 

And the reason that I was made to focus on this is several things 

happened: One was I was sitting with angry young people at one 

time who said, ‘‘The Federal Government doesn’t give us any 

money.’’ ‘‘If it wasn’t for my City councilman, I wouldn’t get any 

funding.’’ He was talking about Federal money. He was talking 

about CDBG, and I thought about it; and I said, ‘‘Well, you know, 

there is a lack of understanding about where this money comes 

from.’’. 

Now, for people like me who are tagged as old taxing spare liberals who push for money to be sent to my community, I don’t like 

it when somebody says you don’t spend any money. Then, I began 

to pay attention to campaign brochures where some local elected officials were politicking with the money, I’m leaving some blood on 

the floor here in Congress. 

This is what I did as a City councilman. I developed a shopping 

center. I did this. I did that, whole long list of it. No mention that 

that money was Federal money. That it was CDBG or Section 108, 

any of that. And then at one point in time, when Los Angeles had 

not spent its money in a timely fashion, $25,000 checks kind of 

showed up. Okay. 

They were pulled out the back of somebodies pocket and they 

just started passing them out, and that was CDBG money. So I 

guess I’m saying this because you kind of mention, you know, it 

used to be politicize and it’s really not so political, and these decisions are made because we have this one reform outreach and response to requests for proposal and on and on and on. 

I’m concerned about all of that, and I’m trying to work with this 

committee and my delegation to figure out how we straighten all 

that out. I have a great respect for what was described earlier 

today about the flexibility that you have in City government to be 

able to target and identify, set some priorities about what needs to 

be funded, and I’d like to see that. 

But you know, because I know the community so well and know 

who’s connected, I know who gets funded. I know how it works. 

This is what I spend my life doing. I know this stuff. Then I figure 

I got to help straighten this out. So having said that, and I’d asked 

Mr. Graves this question before, and Mr. Graves, when we talked, 

kind of gave me a little bit of idea about how you—I asked where 

is the discretion? 

After all is said and done and you got the CUP and you got the 

neighborhood councils and all of is that, where is the discretion, 

and how do we get to write $25,000 checks and pass them out? 

Where does that come from? 

Mr. GARCETTI. Well, I think—you ready for me to respond? 

Ms. WATERS. Yeah. 

Mr. GARCETTI. Okay. I think you hit the nail on the head, and 

I 100 percent agree. I think that passing out on the last round 

$25,000 checks was the gasping cough of a dying system. Because 

that was that one time in which there was that surplus, and as 

Chair, I mean, you can appreciate this when a colleague comes to 

you and says, ‘‘Help me out, I got this project. I have this, I have 

that.’’ There really is not much to go around anymore. 

45

So we are looking at community base in terms of discretionary 

money. There really, we have a list probably five times as long as 

the money that our members request and that wasn’t the case in 

the past. When Mike Menendez, my predecessor, was there, he was 

sharing stories with me that he had absolute responsibility and 

somebody come to me, ‘‘Oh, okay. This isn’t spending out. Let’s 

move that. We funded that for five years, and we should have funded it for one,’’ and we don’t have that. I mean, my position’s a lot 

less powerful, but I’m glad because that means that some of that 

is being devolved. And I didn’t mean to paint too rosy a picture 

that we’re there yet. I guess it’s about the intent that it’s really 

permeating the system right now. For me, that’s different. It was 

because we had the crisis of spending down from that 20.5 to the 

legal limit there was a bunch of checks that just went out the door. 

And I for one, want to praise the Federal government—I always 

publicly thank the Federal government and let my constituents 

know this is Federal money. When I say that we have a hundred 

million dollar housing trust fund, most of that is our money going 

out where our money is about $5 million of that is from CDBG 

money, so we’re always trying to leverage that, and I think it is 

critical for that to be closed. Now——

Ms. WATERS. Well, go ahead. 

Mr. GARCETTI. The flip side, though, and I respect very much 

what Mr. Sausedo was saying and I was one of those council members who sat down immediately and did get briefed on the bank, 

but I understand the lack of interest. It’s something that I’ve tried 

to get my colleagues to show some interest in, too, and it’s been a 

mixture of, ‘‘Oh, I don’t want to be touched by that.’’. 

Because of that perception, sometimes it’s unfair to talk about 

the bank, but nobody wanted to engage in the political will on this 

when they saw that it’s already out the door. But that said, if we 

just did a system where it only went to the community which I, too, 

philosophically favor, we get that oversight problem. 

We have to figure out a thing where if the CDD has failed in the 

past and certainly I think there’s blame with the department as 

well as with the bank, we have to shoulder that as well. So just 

to say that I’d be worried CDD take this money and run with it, 

we have to have a CDD that can take that money and run with 

it. 

We have no choice in our system but to have a system that 

works, so the internal reforms that Mr. Sausedo was talking about 

is something that we’re working on just as much from the inside 

to make sure that happens, but I was not mincing words when I 

said the leadership term and that attitude is permeating places immeasurably different. 

And I think it’s got community members that would begin to 

wash out toward the community tried to do but we only have gone 

through one round since those changes have been made. 

Ms. WATERS. Okay. And I’d just like to mention, too, while my 

mind was on the description of this money or lack of description 

of where this money comes from. We are pleased about the teams 

that are put together to do some of this development, whether it 

is a big private developer and a community group or organization, 

et cetera, et cetera. 

46

I’ve seen some of the private developers who wouldn’t walk foot 

into the community without all this gap financing, who go around 

touting what they have done for the community, and they don’t 

seem to know where the money comes from. When in fact, those 

developments would never take place without Section 108 and certain gap financing. So I’m looking at that also in terms of developers because in the final analysis, if we know these are business 

deals, but we don’t mind people making money, but I don’t want 

to see some of the well-healed developers who make these—put together these teams walk away beating their chest about what they 

did for the community without recognizing that this was a team effort with the Federal and the local government playing an important role. So we’re going to be looking at how we can bring some 

reality to some of this. We’re not out to change the mission of—of 

CDBG, but I think we do have to have some new definitions and 

I just——

Mr. GARCETTI. Absolutely. In fact, if I could make one suggestion. 

It’s not about the name Maxine Waters’ name out there or 

whoever’s name not on there. But I think whenever we have those 

projects and we have those signs that are out there so people know 

where their tax dollars are going, whether it’s Federal or whatever. 

I will make an instruction of the community redevelopment, that 

they make sure that Federal moniker’s on there, too, because this 

is made possible by Federal Section 108, that this is the rep for the 

area, that these are people who are fighting on the floor because 

I think that is critical for that credit to be out there, too. 

Ms. WATERS. Yes, I think that, too. I’ve never seen that on a site. 

That’s interesting. 

Mr. GARCETTI. You had my word that I will make that direction 

to the department and try to see if my colleagues will come on 

board with that, too. 

Ms. WATERS. We’ll have some directions for you also. 

Mr. GARCETTI. Good. Thank you. 

Ms. WATERS. Thank you. I thank you for volunteering that. 

Mr. Graves, why should we support the idea that CDD should 

have this $196 million, be it in a $50 million allocation or further 

and whatever, and why shouldn’t we insist that the money go into 

the areas that were intended in the supplemental zone; and could 

this not be better done by one of these CDFI organizations or take, 

for example, some of our local banks that are really Community 

Development Banks? I see small banks, we have them all over. 

That’s what they do. They’re in the business to lend money. Now, 

I know that you said that this Community Development Bank 

ended up being the bank of last resort. And they had to take businesses to lend money to that the banks and turned down. Now in 

my mind, that’s not so bad. Let me tell you why. 

The banks haven’t had a clue for what to do with minority businesses, start-up businesses and never supplied any real substantial 

capital. This has been a struggle that I’ve been in for years. So 

they’ve turned out a whole lot of people who, in fact, should be 

given loans and who can pay those loans back. So I’m not disturbed 

by being the bank of last resort. 

When I was in the State of California and we had our small business development operation that the banks did guarantee those 

47

loans, that was the same kind of idea, too, that we were kind off 

of the bank of last resort. And that bank discovered ways by which 

to evaluate the applicants in ways that traditional banks don’t always do. 

First of all, looking for the ability to repay. But also, doing some 

of the kinds of things that have never been done particularly for 

poor communities and minority communities before. We have people who have—could go out and get signed contracts for goods or 

services that they could negotiate at any traditional bank, but it’s 

done in nonpoor or nonminority communities where, you know, 

you’ve got a whole list of people who say, ‘‘You make this product. 

I will buy. This is what I need. I’ll sign the contract.’’ Business does 

not have money to get the inventory. Can’t get it from a traditional 

bank, but I would expect a Community Development Bank to be 

able to look at that just a little bit differently, look at the history 

of the person, look at the entrepreneurial spirit of the person, look 

to see, ‘‘Well, maybe they have a little something in collateral 

someplace where they could help out with this,’’ put together a 

package where maybe they could get the family or somebody else 

involved in what would be some kind of good faith money to show 

that, you know, you’re really struggling for this startup capital and 

then make it work. 

Now—so I—I’m not again shocked that traditional banks turn 

people down, and you become the bank of last resort. But what 

makes a civil servant or a political appointee a better judge than 

some of the Community Development Banks? We’re funding 

through the community development financial institutions, some 

banks that are identified as community to do this very work. 

Why can’t we go over there and look at what is it, One United 

or whatever that bank is, that consolidated with family and founders and all of that, these aggressive, young community-minded 

spirited people. Why can’t we put that money into those banks and 

let them do this work and just wipe your hands of that? Get rid—

you don’t need that. Why do you want that? 

Mr. GRAVES. Well, now you made me stop and think about it. Actually, at one level, there is no reason not to consider that. When 

I was in San Francisco, the redevelopment agency, we worked with 

a couple of banks to use tax increment funds as loan loss reserve 

in exchange for their commitment to make loans in our targeted 

areas. 

There are a lot of ways you can use a bank and not spend a lot 

of money, by assuming some of the risk that they otherwise 

wouldn’t take. It’s not that what CDD would be doing is that much 

different than what we’re doing already. 

As I pointed out, CDD operates the 108 loan program outside the 

bank now, and I think that our folks have a pretty good track 

record in terms of the creativity of using our funds to fill in those 

gaps that you’re referring to. At this point, I’m not ruling out any 

alternative for the use of those funds. I do know that the initial 50 

million is a relatively small amount compared to what we’re already doing with the same 108 funds. 

With regard to the larger amount, then we probably would need 

to bring in some different kinds of partners, but I would very definitely prefer to go with an existing lending institution and give 

48

them some incentive to take a second look at some of the applicants that——

Ms. WATERS. Would you take a very close look at that. 

Mr. GRAVES. Sure. 

Ms. WATERS. Because I think that that’s something that ought 

to be considered. While I have both of you. 

Mr. Garcetti and Mr. Graves, there’s a pile of money in CDBG 

that’s being used for certain kind of City infrastructure services 

that I wonder about—code enforcement, why are we using CDBG 

to do code enforced? 

Mr. GARCETTI. This is for housing, substandard housing for people—kids who have lead paint poisoning. We’re using it to make 

sure that people aren’t living—I think it’s 15 percent of all of our 

housing stock qualifies as slum housing, and it’s to make sure that 

we can supplement and everything is in a three-year cycle so that 

every piece of housing in this city was getting inspected just once 

every three years. 

Ms. WATERS. Don’t we have some special funding for—Somewhere? 

Mr. GARCETTI. We have some from the State that we’ve gotten. 

It wasn’t—we found that it is insufficient. 

Ms. WATERS. Okay. 

Mr. GARCETTI. So we wanted to make sure—we had kids, you 

know, even as a candidate, I remember going to a couple buildings. 

You could see the kids with gray faces, stunted growth and with 

that, it wasn’t nearly enough when you look at 15 percent of the 

City of Los Angeles. 

Ms. WATERS. I see. 

Mr. GARCETTI. They had not begun to even look at that, so that 

was the code enforcement. Also, City infrastructure we supplement 

other areas, sidewalk repair and other things and census tracks, 

poverty census tracks, districts like yours and mine. 

Ms. WATERS. Why don’t we pay for that with regular City 

money—sidewalk repair? 

Mr. GARCETTI. We do as well. Say that’s split up by 15 districts 

equally, more or less, then those districts that have greater need 

are supplemented even more with CDBG so that those districts 

that are represented are getting more than, say an area where 

there’s not poverty, although we do that as a City anyway, too, that 

supplements that further. 

Ms. WATERS. I have some questions about that. I’ll continue to 

think about that. 

Mr. GARCETTI. That was cut by half the——

Ms. WATERS. You did reduce there. 

Mr. GARCETTI. Yeah. 

Ms. WATERS. Because while you’re asking for social service 

money, it is identified that this is high priority, don’t tell me you 

spend it on sidewalks. 

Mr. GARCETTI. Right. Well——

Ms. WATERS. Because I expect the City, I expect the City, one of 

the basic responsibilities of the City is to trim trees and clean 

alleys and to fix sidewalks. 

49

Mr. GARCETTI. Sidewalks are not a legal responsibility of the 

city, so the City wasn’t doing them at all up to about 15 years—

10 years, at all. 

Ms. WATERS. Is that right? 

Mr. GARCETTI. At all. 

Ms. WATERS. And for the homeowner? 

Mr. GARCETTI. And for the homeowner. We’re looking at systems 

where maybe we share that cost again. We’ll go back, I know we’re 

not testifying about sidewalks today. But it’s interesting that we 

never had done that at all. And it was precisely because some of 

those areas that we’re trying to deal with blight, so how can we 

bring economic development if we have the older blocks, the older 

sidewalks, older part of it? 

Ms. WATERS. Where’d you get the hundred million dollars done 

from the housing trust funds? 

Mr. GARCETTI. Mostly a combination of sources. Community redevelopment agency tax increment money, from our general fund 

which was pretty dramatic considering the last two years has been 

our worst budget years in a decade. We have monies to be gotten 

from tax reform, there are tax slough laws that weren’t paying any 

City business tax and so additional monies from that, were dedicated for housing trust funds, and some monies from surplus property sales that the City owned. 

Ms. WATERS. But none of the CDBG——

Mr. GARCETTI. On top of the balance of $5 million——

Ms. WATERS. Five? 

Mr. GARCETTI. Yeah, about 5 million. 

Ms. WATERS. 5 million in CDBG——

Mr. GARCETTI. With the exception of the housing trust fund. 

Ms. WATERS. A hundred million is a nice amount to package. If 

you can package 95 million, you can package $100 million and 

leave that 5 million in CDBG alone. 

Mr. GARCETTI. Well, here’s where it came from. Under our previous mayor, about—I don’t know, a lot of the money consolidated 

families for monies used to go to housing was moved away in housing. And so this was found as a commitment because housing had 

basically been not a priority under the previous administration. So 

this was a way, whether or not it was through the housing trust 

fund or whether it was just direct dollars into housing subsidies, 

we thought it was to rewrite that wrong. 

Ms. WATERS. Oh, don’t worry about that. 

We need that 5 million in CDBG for these nonprofit organizations that you want us to continue to support the waiver on, and 

I can understand what you’re saying. 

Mr. GARCETTI. That wasn’t coming from that waiver piece, 

though. Yeah, that was coming from——

Ms. WATERS. I know, from the regular CDBG. 

Mr. GARCETTI. Okay. 

Ms. WATERS. Yeah, I’d like to encourage you to not to use that 

as a symptom. Give the people the money because—like I said, if 

you can package, 95—if you can package, you know, a hundred, we 

need that so, so, very badly. 

Mr. GARCETTI. I’m sorry. I would be corrected. Of the original 

plan by the mayor was 5 million, but it’s only 500,000. 

50

Ms. WATERS. We can take that back, too. Okay. 

Now, before I get to Mr. Sausedo, Mr. Graves, this proposed arrangement for the joint venture company, to divest the City this 

portfolio and move its management fee over to the new entity that 

may buy, it sounds to me as if the management company would 

continue to be able to manage the portfolio, they would just change 

hats and who’s paying for it. 

But that’s not a high priority of ours to make sure that the management company stays in business. Your priority is to see what 

you have in this portfolio and how you can get back the most 

money that you can get back from this portfolio. 

Now, some of the businesses are performing; some are not performing. I don’t know what the total assessment is, but could you 

look at that very carefully and decide whether or not the way that 

it’s been described to us is the way you really want to go with that, 

and whether or not—you don’t have anymore—you don’t have any 

management by anymore organizations as FAME or any other of 

the organizations still managing those loans that they made? 

Mr. SAUSEDO. No, FAME actually—there was a breakdown—

there was a $5 million allocation for FAME to do similar type work 

in venture capital. There were no deals brought to the table, and 

so we subsequently——

Ms. WATERS. Took that 5 million back? 

Mr. SAUSEDO. Right. 

Ms. WATERS. And you had one other entity——

Mr. SAUSEDO. Which what associated with FAME which was 

Hancock Partners. 

Ms. WATERS. Hancock Partners. 

Mr. SAUSEDO. Right. 

Ms. WATERS. So all that 5 million is back into the bank. 

Mr. SAUSEDO. Right. 

Ms. WATERS. So all that you have now is this portfolio that’s 

managed by, what is it, Zone——

Mr. SAUSEDO. Zone Ventures. 

Ms. WATERS.——Zone Ventures that you have to be concerned 

about. 

Mr. SAUSEDO. Yes, and the short of it is—let me give you a little 

background. 

Ms. WATERS. Yes. 

Mr. SAUSEDO. Because it’s important to note history. 

Ms. WATERS. Yes. 

Mr. SAUSEDO. In the fall of 2000, the wonderful ‘‘L.A. Times’’ reporter—and I do say that sarcastically—wrote an article about the 

Zone Ventures portfolio—why is the City involved in venture capital? It’s sent a flurry in City hall of some council people, not all, 

but some influential council folks, I should say at the time, to include staff and the net result of that was, ‘‘You guys need to get 

out of this, and you need to do it now.’’. 

Well, the Board of Directors took the position that, ‘‘We were 

brought here to make prudent financial decisions. If we walk away 

from the portfolio, we have a contractual obligation to pay all venture fee, et cetera, et cetera, you will lose any potential up side. We 

will not make a poor financial decision.’’. 

51

So after some creative thinking, we said, ‘‘How can we make a 

good financial decision and political decision which sometimes, 

more often than not, is an oxymoron and do that in a way that the 

City can win and get them most or best paid back, if you would, 

from that.’’. 

So we came up with a strategy as a board to identify a thirdparty entity that would take on our responsibilities, and part of 

that $35 million commitment is about $5 million in fees over the 

next several years due to the general partner, Zone Ventures. 

So one of the things we need to do is relieve ourselves from that 

responsibility. During that time we had about 1.5 million in followon investment, meaning if there’s a capital call, we have to participate in order not to be what’s called ‘‘deluded’’ or lose some of our 

investors. One of the things that we did, we engaged a technology 

firm to come in and not do a financial audit of the company, but 

to come in say, ‘‘Look, of what we have, are these companies that 

are worth continuing to invest in, are we getting our money’s worth 

in Zone Ventures.’’

Okay. So that if we’re not, let me take a different tack. At the 

end of that study, we found that we some funds in the group. We 

also discovered that for them to—one of the main companies, for 

them to go public, they’re probably going to need about $15 to $20 

million in a capital call in the future, and as whether some of the 

other companies. The next question is: Will we be in a position to 

do that and as——

Chairman NEY. Can you—I’m sorry, hold your thought for a second because we’re running out of paper, I’m told. So just hold that 

thought about the next question. 

Mr. SAUSEDO. Fair enough. 

[recess.] 

Mr. SAUSEDO. The next question was: Will we have the financial 

resources to participate in this long term? The answer’s no. And 

you know, it’s the will of the City in a position to do so? How will 

they do so? They’re going to pull money from the general fund, et 

cetera. With the caveat over our head, get out of this deal. 

We then ask ourselves to go out and identify on a performancebased agreement some investors that would be willing to take over 

the investment from us and then take over our capital commitment, and as part of that, they would be taking on future rounds, 

taking on future rounds of investment and the remaining fee arrangement. 

We did talk to a number of other people that potentially, and no 

one wanted to touch it at the time. And now that we’ve been in negotiations with—actually, there were two investors at this time: 

One was MR Bill which was one of the largest bond companies in 

the City at the time and a local developer Bedford Group who was 

interested in taking on and stayed in the process. 

MR Bill unfortunately lost their taste to stay in the bill because 

it was being too bureaucratic so what I thought would be a very 

simple process. So—so we think that the board had voted on moving forward on this, because we don’t feel that we have the venue 

capital to stay in the game, if you would, if the City makes a decision to stay in the game and they have some other financial resource to do so, then that’s a good call, because I do believe that 

52

some of the companies in the portfolio are good, but when you’re 

looking at issues like police and fire being challenged by the shortfalls in the budget kind of a difficult call to make. 

So that’s why—that’s the history behind us looking at selling off 

or—or divesting, if you would, the portfolio while having some upside in the future should a future event occur mark the conditions 

allowed more. 

Ms. WATERS. Well, I think that—that certainly should be revisited. For a number of reasons. It seems to me—and I don’t know 

if you’ve done an assessment of that portfolio—there is some document that talks about each of those companies, the assets, everything, the management, everything, because it seems to me that 

venture capitalists are not magicians anymore than anybody else 

who manage monies or companies. 

You make sound decisions based on the information and the 

facts, and you can determine which companies are going to hold 

and which ones are going to fold. And it seems to me that rather 

than a management company, you know, managing that portfolio, 

that if it’s all going to be drawn back in to someplace, that all be 

vested in that someplace to make some decisions about rather than 

keeping the management company involved at this point. 

Mr. SAUSEDO. Unfortunately, we don’t have—I concur with you 

100 percent. We don’t have the luxury of making that decision because there’s a contractual obligation. 

Ms. WATERS. I see. How long does the contract run? 

Mr. VALENZUELA. July of ’08. 

Ms. WATERS. July of what? 

Mr. VALENZUELA. July of 2008. 

Ms. WATERS. Who made that deal? 

Mr. VALENZUELA. It’s fairly standard. I mean, limited partners——

Ms. WATERS. Really? 

Mr. VALENZUELA. I mean, limited partners generally have a tenyear life span, and in many cases additional options to extend at 

the option of the general partner with the consent limited partners. 

In this particular case, I just want to add to the complexity of the 

matter: Los Angeles Community Bank is the sole limited partner. 

So we’re the 99 percent financial interest of the limited partner 

with Zone Ventures having the 1 percent stake which is fairly common. But we are not in many cases the investments that we have 

through Zone Ventures and the portfolio companies, there are numerous other investors and so our ability to—well, first of all, we 

have limited, if any, ability to control the investments were limited, 

and—and so we take recommendations from the general partner, 

we review them, we—we try to evaluate, make determinations as 

to whether the investments will meet national objectives and other 

criteria that we’re subject to, and the portfolio has grown and matured and it’s gone through its ‘‘I’’ curve and ‘‘S’’ curve and beyond. 

We’ve seen material deterioration and the value of the portfolio 

very similar to what’s occurred in other portfolios with similar or 

like kind investments. And so the decision process and the bank 

and the one that we’ve been communicating and sitting on, how do 

we preserve, maximize the recovery from this as opposed to walking away and taking a deep loss and worse yet, we think that the 

53

proposal that has been approved by the board and approved by the 

city and is now being discussed with HUD to get their thoughts on 

it, is the best available to us at the present time. 

We’re not sure—and I think, I’m not sure if they’re prepared to 

comment, but I know the City hired a consultant to do kind of an 

evaluation or short valuation of the portfolio to evaluate the terms 

and come up with some additional comfort, but we believe that is 

on behalf of the bank and for the businesses, this is the best possible proposal of this portfolio that’s been put forth that we’ve seen 

that preserves the opportunity to participate in the upside, and we 

do believe that there will be an upside for at least one or two of 

the other——

Ms. WATERS. Well, I forgot about the complication of other investors. I was not taking that into consideration when this was described. That complicates the matter somewhat. Let me move on to 

Mr. Carlos Jackson. 

Mr. Jackson, we know about the RFP process and the City of 

L.A. And we know about the hearings, and we’ve heard the CUP 

described and the neighborhood council is placed on role and all of 

that. And whether or not that is fully operational or realized, it is 

a kind of an oversight and involvement that certainly everybody 

supports it should be done. It should be worked at so that—in fact, 

it is real. Now, at the County, you don’t have an RFP process? 

Mr. JACKSON. For public services? We talking about public services? 

Ms. WATERS. Well, you tell me. 

Mr. JACKSON. In the area of housing, we do have RFPs. In the 

area of economic development and limited to what we have in the 

two Supervisorial districts is working in targeted communities, and 

basically it’s a commercial business revitalization or business loans 

and solid improvements so really owner driven in that sense. In 

terms of our housing rehab program and income driven which is 

equitable driven, we can come forward. 

Ms. WATERS. Let’s back up so you and I can talk about the same 

thing. You get $38 million in CDBG money. How do you disburse 

it? How did you dispense it? 

Mr. JACKSON. Being in L.A. County for 48 cities involved, and 

since 1975, the board has adopted a policy for distribution which 

is using the same formula that HUD uses for the entire jurisdiction, population of current housing and people in poverty. We run 

the numbers for the 48 cities, so it’s very objective in terms——

Ms. WATERS. Okay. 

Mr. JACKSON. The cities are responsible for developing their program according to the guidelines and requirements of CDBG. And 

they will do a variety of things. For the unincorporated areas, I 

work with each of the Supervisors, there’s five of them, and predominantly, that money goes into housing. 

Ms. WATERS. Wait just a minute. I’m talking about a process 

right now. 

Mr. JACKSON. That’s——

Ms. WATERS. You have a pot of money. Do you just divide it up 

between the five Supervisors? 

Mr. JACKSON. No, it’s done again by formula. Same formula we 

use with the cities, we use for the Supervisorial districts. So——

54

Ms. WATERS. How do you do that? 

Mr. JACKSON. Using the three factors again: Housing, population 

and poverty. We have the census information for the unincorporated areas, and that yields a certain number for each Supervisor. One Supervisor whose district’s predominantly in the City of 

Los Angeles may get 150,000. To Supervisor Burke and to Supervisor Molina, we get the bulk, they have the highest level of poverty or low income housing. And then, we—for the cities, they do 

it, you know, according to their particular needs. 

Ms. WATERS. Okay. So you’ve got this formula that’s synonymous 

with the formula that you use to disburse the money to the cities 

which is the same formula we kind of use in the Fed that divert 

to the States. We know that. So now you use your formula and we 

each have this pile of money. How do we spend it? 

Mr. JACKSON. Each of the—I′′m going to focus on the unincorporated areas because, again, for the 48 cities, if I can, as an example mention South El Monte, that City of South El Monte would 

get a——

Ms. WATERS. Just because his relatives are in South El Monte. 

Mr. JACKSON. I doubt it. But they’ve been in a program the entire time. South El Monte would get an allocation stating $200,000. 

Ms. WATERS. Okay. 

Mr. JACKSON. They will work with their council and the staff and 

the community there as to what is pertinent and important to 

them. We do not interfere with their programs select in the sense. 

We allow them to develop their programs, provided it meets all the 

requirements. 

For the unincorporated areas, it’s different. Each of the districts, 

we work with the Supervisor and the staff and our—and we also 

conduct community meetings. Like I mentioned earlier, we have 16 

communities that we go around and listen to the communities. Unfortunately, when you look at the numbers allocated, we get $30 

million, it sounds like a lot. But for the unincorporated areas, it’s 

only $16 million. 

Ms. WATERS. That’s not a lot of money. That’s very little money. 

Mr. JACKSON. That’s the reason for——

Ms. WATERS. But they do just kind of give it to whoever they 

want to. 

Mr. JACKSON. Not—on the public service side. But not on the—

not on the other targeted for a particular program. And it’s really 

like, say, for instance, in one district we’d have certain streets that 

are earmarked for community—commercial business revitalization. 

It’s really the participant’s willingness to participate in that program, a business. If they wanted to do it for sign improvement. For 

housing rehab, it’s the same story. We will publicize and market 

the program, but it’s a voluntary program. We can’t force anybody 

to take out a loan or to accept it. In some cases, unfortunately, we 

have gone and walked the neighborhood and offered a grant. People still fear Government, fear the paperwork. 

Ms. WATERS. So let’s get back to process. For your unincorporated areas, you have 48 cities. In that, you have the City of 

Hawthorne? You have Hawthorne? 

Mr. JACKSON. It’s an entirely different jurisdiction. 

Ms. WATERS. Give me—Lawndale? 

55

Mr. JACKSON. Lawndale is a participating City in our program. 

Ms. WATERS. They get a set amount of money based on this formula, and they do what they want to do with it, but they have 

some process, some process, but they spend that money. 

Mr. JACKSON. Right. 

Ms. WATERS. You have the unincorporated areas, and in your unincorporated areas, you have should have some targets that you’d 

like to see the money spent on. The money is basically divided up 

between the Supervisors. 

Mr. JACKSON. By formula. 

Ms. WATERS. By something, formula. For the unincorporated——

Mr. JACKSON. Same formula we use for the cities, everything’s 

above board on that. 

Ms. WATERS. And people apply for the money. People ask for the 

money. You have community booster organizations who would like 

to see—see some funding and maybe small amounts of money because you don’t have that much. And so you look at it and say, 

even eeni-meeni-mini-mo, or I know this person. This is a good program, something. You do something like that. 

Mr. JACKSON. In one program home, which you know we can buy 

with our block grant. 

Ms. WATERS. Right. 

Mr. JACKSON. Home is an open RFP. 

Ms. WATERS. Oh, okay. But that’s not the money that was included in 38 million. 

Mr. JACKSON. No, just——

Ms. WATERS. I want to talk about 38 million. 

Mr. JACKSON. Under the public services category. 

Ms. WATERS. Uh-huh. 

Mr. JACKSON. Under the RFP program, it might be money targeted for the redevelopment area, small redevelopment area, 

Willowbrook, say, for instance, and we have certain things we’re 

going to do there. But the area that we’re—I think we’re talking 

about the public service category, this is the—the dollars that Supervisors as well as the County we look at in terms for social services. 

Ms. WATERS. Look, I’m not——

Mr. JACKSON. No. 

Ms. WATERS.——saying you shouldn’t do it. But I don’t want you 

to labor at this too hard. There is no RFP process for those dollars. 

Mr. JACKSON. I didn’t say there was an RFP. 

Ms. WATERS. I know. I know. You have a hard time getting me. 

I’m not beating you up about it. I just—I have to understand it before I have to start talking about making law to try and deal with 

this. They have the flexibility to fund programs that they’d like. 

Mr. JACKSON. That’s right. 

Ms. WATERS. That’s right. That’s okay. Now, you mentioned 

something that I did not know about—the monies that you get 

from something to do with the city of Industry. What is that? 

Mr. JACKSON. Back in early 1990, ’91, the City of Industry had 

specialization set aside at the state level. For City of Industry, 

they’re set aside money for a tax increment for the redevelopment 

areas, 20 percent set aside. They claimed and the legislature apVerDate 0ct 09 2002 13:01 Feb 25, 2004 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 G:\DOCS\91774.TXT FIN1 PsN: MICAH
56

proved it that there was no need for housing within the City of Industry, and it reverted to the L.A. County Housing Authority. 

Ms. WATERS. Great. 

Mr. JACKSON. Our agreement with the city of Industry was that 

we would do it by housing program, without any input from the—

in terms of decision making, and so since then, since 1997 because 

there was a lot of litigation on that particular matter, we’ve been 

using the money to elaborate for homeownership, senior housing, 

special needs housing, and a few other ones, you know. 

Ms. WATERS. That’s good. Now I know there was something 

about the City of Industry, and I remember some years ago when 

we found that there were elected officials who lived every place but 

the City of Industry who didn’t have to worry about it because it 

was all commercial and industrial. That’s okay. I’m glad that the 

county is the beneficiary of that. That’s fine. But now let me ask 

you the same question I asked the City when I kind of talked to 

them about not using—maybe they should be using money for a 

certain kind of infrastructure, that maybe the money should be 

used for social service programs, et cetera. What—how much of 

that 38 million are you using for something like that, some kind 

of infrastructure, are you repairing rec and parks—park and rec, 

facilities with CDBG money? 

Mr. JACKSON. We do limited park improvements. 

Ms. WATERS. Why are you using CDBG money to do that? 

Mr. JACKSON. Well, the County itself has the park improvements. 

Ms. WATERS. Why don’t you use some of that City of Industry 

money? 

Mr. JACKSON. It’s strictly for housing. 

Ms. WATERS. It was strictly for housing based on the legislature? 

Mr. JACKSON. Yeah. 

Ms. WATERS. The legis—Sacramento? 

Mr. JACKSON. No. In the redevelopment area, 20 percent of the 

tax increment monies that are collected is set aside for housing by 

law in any development area. That 20 percent is transferred over 

to and—us, and we have to use that more housing and no other 

purpose. 

Ms. WATERS. The tax increment cannot be used for any other 

purpose, even though when you’re developing housing and considering the neighborhood or the environment which should include 

recreation, parks, all of that, you can’t use any of that money for 

that? 

Mr. JACKSON. We do not receive the balance of the dollars that 

they—you know, the 80 percent—we’re not using that. They keep 

that money. We’re only receiving the 20 percent of the housing set 

aside. We’re not receiving any other portion. That money’s restricted to housing only. 

Ms. WATERS. And so tell me again, how much was your last—

I mean, give me some idea of how much money that is, that the 

City of Industry tax increment? 

Mr. JACKSON. On an annual basis in July, we get maybe $11, $12 

million. 

Ms. WATERS. You say housing——

Mr. JACKSON. Strictly housing. 

57

Ms. WATERS. So what do you do with it? I mean, how do you 

spend it on housing? 

Mr. JACKSON. The board of Supervisors adopted an allocation 

plans, and 50 percent went for affordable housing which is home 

ownership, multi-family housing and senior housing, three categories. 

Ms. WATERS. That’s to the developer. 

Mr. JACKSON. It could be to nonprofit. 

Ms. WATERS. Computer down payments. 

Mr. JACKSON. Not that money. There’s another half—the other 

half is special needs housing. It’s housing, and it cannot be emergency housing. It has to be transitional. 

Ms. WATERS. So how do you use 50 percent of that 11 million. 

Give me some idea of how you use that for multi-family, for example. 

Mr. JACKSON. We have—we allocate money for helping them on 

acquisition, of property——

Ms. WATERS. Developers. 

Mr. JACKSON. Right. 

Ms. WATERS. You give it to developers to do acquisition and land 

packaging in order to build multi-family housing. 

Mr. JACKSON. It’s not just—well, again——

Ms. WATERS. Profit on nonprofit. 

Mr. JACKSON. And that is strictly on an RFF process. 

Ms. WATERS. Okay. On an RFP process. Right, okay. And the 

other 50 percent, you do on special needs? 

Mr. JACKSON. Special needs housing. 

Ms. WATERS. Okay. You use any of this for homeless? 

Mr. JACKSON. If it’s transitional housing. By law, we cannot do 

emergency housing under the redevelopment law. 

Ms. WATERS. Okay. All right. 

Mr. JACKSON. So we do—again, we do domestic violence. A lot of 

our focus is emancipated youth that come out of foster care at 18. 

Ms. WATERS. You have a lot of focus on emancipated youth? 

What are you doing for them? 

Mr. JACKSON. This. We will develop transitional housing. 

Ms. WATERS. Where is it? 

Mr. JACKSON. Disbursed throughout the County. 

Ms. WATERS. We can’t find any homes for people coming out of 

foster care. 

Mr. JACKSON. You have to be 21, and the need is tremendous. 

Ms. WATERS. Okay. Thank you. 

Mr. Chairman, you were very generous. 

Mr. GARCETTI. Just because of your line of questioning, I want 

wanted to give one—and I’ll try to make a succinct argument for 

some of the more infrastructure-based things. 

Ms. WATERS. Okay. 

Mr. GARCETTI. I think all of us want to grant money to provide 

people with self-sufficiency——

Ms. WATERS. Yes. 

Mr. GARCETTI.——and communities with self-sufficiency. 

Ms. WATERS. Yes. 

58

Mr. GARCETTI. It’s really a lather. So when I think about where 

we spend the money as the City, first you have to have a safe community. 

Ms. WATERS. That’s right. 

Mr. GARCETTI. I represent an area, which in a 2-month period, 

13 young people, 5 were taking drugs, in a similar district. 

Ms. WATERS. Sure. 

Mr. GARCETTI. We were able to take some block rent money and 

bring gang intervention folks, chased away at gunpoint. Within two 

months, they had 70 percent of the gang members positively enrolled in becoming forest fighters, just one example. The second 

step on the ladder is the infrastructure buildings so the community 

has some capacity. 

In Echo Park where I live, where there was gunshots just this 

weekend, we had an improvement project which had to do with 

sidewalks and trash cans and actually the facade of our businesses, 

things which gave the community pride, things like the City should 

be doing, but the City cannot similar afford to use those Federal 

dollars to get to the third step which is the delivering of services, 

the economic development projects, the community pool project. 

Ms. WATERS. Can you use Section 108 for infrastructure repair? 

Mr. GARCETTI. I don’t know. 

Ms. WATERS. Who mentioned that? Who mentioned the City of 

Santa Fe to you? 

Mr. JACKSON. I did. 

Ms. WATERS. Did you tell any——

Mr. JACKSON. No. That was economic development project 

where——

Ms. WATERS. Where you had to do some cleanup where——

Mr. JACKSON. Major cleanup. 

Mr. GARCETTI. And if you get all those pieces in place, then you 

have Federal money with which you will be able to provide self-sufficiency to some parts of communities and actually get the rest 

going and get the community going. 

Ms. WATERS. Okay. 

Mr. GARCETTI. But I think that’s the last round of actually being 

able to deliver services. 

Ms. WATERS. It may be, and it’s not a lot of money, and I——

Mr. GARCETTI. I hear you. 

Ms. WATERS. The City of responsibility. 

Mr. GARCETTI. Absolutely. 

Ms. WATERS. Now, having said all of that and—I’m finished Mr. 

Chairman. 

As we look at the possibility of the management of the bank by 

a financial institution, CDFI institution on bank or something, we 

would really like to keep in contact with you as you think this 

through. 

Mr. GARCETTI. Absolutely. 

Ms. WATERS. We think that’s very important. The other thing I’d 

like to impress upon you is this: You talk about infrastructure, the 

sidewalks, the trees, the alleys, the poverty, the unemployment, 

buildings that are still boarded up, since the insurrection, I am 

going to have to really, really, really work—look very closely at 

what you talk about doing with that money, that 50 million and 

59

the 146 million because we know politically it’s very hard oftentimes to direct the money where it should go because everybody 

wants a piece. 

You know, it’s just a political reality, but we have to resist that. 

We can’t continue to look at the epicenter of the problem and divert 

the resources that were intended for that epicenter away from 

there. I think that most of us have been very, very generous in our 

lack of criticism about this Condit thing, but we’re in a deficit situation in the Federal government, the state’s in a deficit situation. 

So this is precious money. I mean, this is precious money. And 

I would like very much to see it go where it was intended, and so 

I’ll stay on top of that; and. 

Mr. Sausedo, where I don’t agree with everything, I think you’ve 

made some very valid points about the bank, and if you’re not to 

do it, what you think ought to be done in some of the statistics that 

you have cited have been riveting and forces us to have to focus 

on what happened with this very precious money that’s before us. 

Thank you very much. 

Chairman NEY. Thank you. I would also note to the witness’s 

first and second and also in vase of the third panel, some members 

of the subcommittee may have some questions that they would like 

to ask, keep the hearing open for 30 days so their questions may 

be asked in writing potentially. 

Thank you for a very interesting panel. 

We’ll take a five-minute recess. 

[recess.] 

Chairman NEY. We’ll begin your testimony. 

STATEMENT OF LORI GAY, LOS ANGELES NEIGHBORHOOD 

HOUSING SERVICE 

Ms. GAY. Thank you. Good afternoon, subcommittee, ranking 

Member Ney and ranking Member Waters. It’s a pleasure to be 

here. Welcome to Los Angeles. 

Just a quick word about NHS, and since this is a field hearing, 

we’ll focus our comments on what CDBG’s been helping us do here 

in Los Angeles. LANHS is 18 years old. We’ve served over 1.8 million people. We are a CDFI as well, and last year generated $72 

million of business assisting families to improve their homes and 

obtain their homes. 

We provide financial literacy, education, affordable loans, construction management services and neighborhood revitalization 

programs. We are members of the national NeighborWorks Network, and we spoke to this committee in April on the down payment assistance fund, so I won’t reiterate all the information that 

I have. 

Chairman NEY. Just a note, I was so impressed I stopped you, 

and I said I wanted to visit——

Ms. GAY. You did. 

Chairman NEY.——you. 

Ms. GAY. You did, and we welcome you to do that at any point. 

We are interested in leveraging. That’s the business we’re in, so 

the other panels that spoke before us, one of the things I thought 

was interesting was the capacity for leverage. We’re at a 35 to 1 

60

leverage now in the housing business we’re in, and I think that the 

small business sector has a very difficult challenge. 

It will be interesting to see if they can leverage the funds that 

you so adequately place with them, and I thought it particular intriguing, the idea that we’re suggesting for the Community Development Bank resource is what I would certainly offer is the notion, 

that’s not our business. 

We don’t do small business development detail or investment 

peaks. But a group like LALDC, Little Tokyo Service Center here 

was earlier this morning. These are entities that are CDF investments. They along with banks put money on the street aggressively, and so just the notion of being able to perhaps share some 

of that 196 million, spread it around, I think, would particularly 

behoove a lot of the communities that were formerly served by the 

bank. 

The other thing I’d note just on CDBG, some of the communities 

we’ve referred to throughout L.A. County and low income census 

tracts lack economic resources, lack neighborhood facilities, lack 

basic affordable housing so we’ve spent the bulk of our time working with the municipalities and now, seeing ourselves as one of the 

largest home ownership providers in the region putting 42 families 

a day onto home ownership paths, we see now the importance of 

being able to utilize flexible CDBG dollars, not only to assist families to get ownership, that’s just one piece in your district. Congresswoman, just as a sample, HUD ran studies several years ago 

which I was certainly happy to provide to your staff involving a 

third-party predatory lending detail going on in your district and 

Congresswoman Diane Watson’s district as well, and one of the interesting statistics I recall was that moderate income blacks borrowed at nine times the rate of low-income whites from subprime 

lenders. 

Hispanics were borrowing from FHA at 20 times the rate of 

whites. 14 times the rate of whites for blacks from FHA, and just 

the notion of affordable money being available in our communities, 

it’s a huge lack, it looks black, brown, Asian, rural, poor whites in 

many instances—and I raised this because I didn’t quite hear it 

today yet on the other panels—that the families who are underserved look like some of all us. You mention the fire truck. 

I’m interested in the very simple stories. You mentioned 

$500,000. Some might ask: Why are we talking at these levels, but 

for practitioners like us, I’m interested in every single dime getting 

to every single family that needs help. In certain instances, it 

eliminates the opportunity for families to participate so that’s why 

I mentioned the bank’s resource allocation for the future would be 

very intriguing to privatize it, let CDD have some oversight, but 

whatever’s appropriate, but see how the people on the street can 

get the money out. 

That would be a real notion that we’ve seen work in housing. The 

other thing I’d mention with CDBG, in particular, we were given—

I’m from the old school—a lump sum draw down grant to get or 

revolving loan fund started 18 years ago, and when I came to the 

NHS it hadn’t leveraged very well; and so as we got a little more 

sophisticated, what we found was that, our revolving loan fund 

that’s now made up of mostly private dollars, could be utilized to 

61

leverage Freddie Mac and Fannie Mae-type programs, leverage individual down payments and/or closing cost assistance. 

And what we see is in using a system to get that money on the 

street, we’ve been able to maximize as the City of L.A.’s primary 

contractor on their home maintenance program, neighborhood preservation program, we end up helping, you know, maybe it’s only a 

hundred families a year, but those are people who are in danger 

of losing their home and are at risk of falling subject to predatory 

lenders and are living in homes that really are in disrepair. 

So it’s how do you utilize CDBG as maybe an initial source which 

the housing department, I believe, has tried to do well in this city 

over the years and then leverage that well past the original intent 

so that the government’s money is not wasted? And that, in fact, 

more consumers are assisted because your money got it started 

perhaps. 

Your initial investment of a thousand dollar grant into a fund like ours 18 years ago is now generating $72 million a year. I 

mean, that’s the kind of story you want to be able to have with 

every single dollar that’s spent on CDBG, I would think. Similarly, 

programs like Section 8 to home ownership, particularly interesting 

I think in Congress right now, we’re watching it, we see those 

kinds of programs. 

In L.A. There are probably only four or five homeowners among 

9,200 right now who are able to receive that assistance and use 

their Section 8 voucher to make their mortgage payment, but the 

notion is: How do you make that 40 people? You know, how do you 

take many people off the voucher program and, in fact, assist them 

to grow their lives to a place where their capacity is beyond utilizing Section 8, and they’re working contributing citizens who then 

give back by becoming homeowners on their own? 

The final points I’ll make, everything from code enforcement to 

nuisance abatement to graffiti removal to the city’s handiworker 

program are all things we’ve seen in what we call full-cycle-type revitalization effort that are needed to make neighborhoods work. 

And what we keep finding is that if we limit our vision to thinking 

that our little home ownership stuff and our little home maintenance stuff is all that matters, we screw up, quite frankly, the capacity of families to make their lives better because as soon as you 

get them in the house, then you have to deal with an alley closure 

because there may be gang members driving behind the alley of the 

house they just bought, okay? Okay, to traffic their drugs. 

There may be some nuisance abatement problem. There may be 

some sidewalk that is a hazard to their children in front of their 

homes. So it’s how do you strike the balance? That’s always the 

question. Groups like ours have been asked to help strike it clearly 

on the housing, affordable housing and the rental side, but I think 

we have a lot more work to do. 

What we certainly want to encourage the subcommittee to consider, is that whether it’s small business, economic development or 

affordable housing, commercial resources, we need all those pieces 

of the pie to be able to make the whole pie work. 

And the real job of the nonprofit community in our meager opinion is to take one small percentage of a pie that makes up a community and then stretch that as far as possible so that everyone 

62

gets to eat from the pie, and that’s our job as your partner so we’re 

committed to that. 

If you end up having more specific questions on the types of programs that we’ve managed for the City of L.A. Because they do privatize through the housing department much more aggressive than 

they did even a decade ago, I’m happy to answer them. Just wanted to offer some of the solutions that we see. 

Thank you for your time. 

[The prepared statement of Lori Gay can be found on page 91 in 

the appendix.] 

Chairman NEY. Mr. Mistrano. 

STATEMENT OF SAM MISTRANO, ACTING EXECUTIVE DIRECTOR, SOUTHERN CALIFORNIA ASSOCIATION OF NONPROFIT 

HOUSING 

Mr. MISTRANO. Ranking member Waters, Council. Thank you 

very much for having me. 

My name is Sam Mistrano, the Executive Director of SCANH, 

which is the worst acronym, which stands for Southern California 

Association of Nonprofit Housing, and I get introduced all the time 

as working for SCAM or SANK or something like that. There are 

two syllables in our time. 

We have over 500 organizational members who help produce and 

develop affordable housing throughout Southern California. Our 

members have built 76,000 affordable housing units since 1986, 

and last year, started, completed or were in construction on $1.7 

billion worth of projects. 

Our members are great supporters of CDBG, and I’m going to 

touch on two reasons why in my testimony briefly: First of all, Los 

Angeles City is in a housing crisis. There’s not enough housing 

units being built. For example, between 1990 and 2000, the L.A. 

City population grew by 200,000 people. 80 percent of that, by the 

way, from births. 

However, L.A. County only produced 37,000 new units despite 

the 200,000 population growth. So there’s a very large mismatch 

between the need and the production. In fact, the Southern California Association of Governments SCAG, perhaps another horrible 

acronym estimates the City needs to produce 47,000 new units to 

meet the current demand. 

What happens when demand is not, assuming production, doesn’t 

meet demand prices rise. Of course, it’s basic economics, and last 

year the medium price for a house in this city was $328,000. That’s 

the medium price of a house. That’s a 30 percent increase since the 

year before. So it makes sense that the statistics show that home 

ownership rates in Los Angeles have actually dropped in the last 

ten years. 

They—home ownership has risen in California, it’s risen across 

the country, but not in Los Angeles. It’s dropped. And so again, it’s 

understandable that most of the City rents—62 percent of the City 

residents rent. The medium rent for a two bedroom/one bath apartment in the county is $1,100. $1,100 for a low-end basic two bedroom/one bathroom apartment. That means people cannot afford 

this. 

63

A person earning a minimum wage has to work a 124 hours a 

weak to be able to afford that which means a family—a family of 

two people working minimum wage still have to work over 60 

hours. So there’s a massive housing crisis in L.A. City that’s still 

current. That’s my first point. 

My second point is easing the housing crisis our members believe 

happens to be production of new units. Production of affordable 

housing to meet the demand. CDBG helps ease the housing crisis. 

Basically, local officials and the people who live in the region understand that we need to build our layout of this crisis. 

Earlier this year L.A. City Council and Mayor Jim Hahn ap- proved $100 million affordable housing trust fund to help produce 

new units. And last year 63 percent of L.A. County voters voted yes 

on the statewide initiative of Prop 46 which is all about housing, 

a $2.1 billion housing bond. So people who voted for this knew 

what they were voting for. 63 percent of County voters voted yes. 

Despite this new money, L.A. Still desperately needs CDBG. It’s 

a critically important financial tool. As Miss Gay pointed out, it’s 

a tool that our people—our members leverage. So we’re a portion 

of the City funding helps fund L.A.’s high leverage program which 

is a key source of local support. 

So for example, Esperanza Community Housing Corporation, one of our members, was awarded almost $600,000 from the housing 

department. Some of that money is from CDBG. Well, Esperanza 

used that first grant of $600,000 to raise an additional $2.8 million 

and was able to build its Alley Grave Court project. So the money 

was used to leverage other money. 

And CDBG also helps to fund the City trust fund. An example 

of the trust fund which is new to L.A City, it committed its first 

rent of 13 projects earlier in the year, and these 13 projects will 

produce 700 new affordable units, and CDBG’s a factor within this 

fund. So in conclusion, I’d like to say this our members or semifive area developers all have CDBG money in their projects. They 

all need it. 

One of the most important strengths of the program is its flexibility. It allows the counties to use the money to best fit their own 

needs. The rest of the state does not understand Los Angeles’s 

unique needs, its overcrowding, its high prices, its unique City 

needs. So we support the program as is. I appreciate the time. 

Thank you. 

[The prepared statement of Sam Mistrano can be found on page 

121 in the appendix.] 

Chairman NEY. Ms. Gay. 

Ms. GAY. I’m here wearing two hats, Chairman Ney and Congresswoman Waters and other members. I just want to thank you 

for having me. I’m here as the associate director for the Los Angeles Metropolitan Churches, and we are an organization of 45 small 

and mid-size churches. 

Most of our work focuses on employment linking residents to job 

opportunities as well as education opportunities for exoffenders. I 

also happen to be the chairperson for the Los Angeles Empowerment Zone Oversight Committee, which is the community group 

that was convened as a result of the Community Development 

Bank we had formed in 1994 and 1995. 

64

So I’m here today to make testimony in terms of the Community 

Development Bank’s contribution to CDBG, but more importantly 

I want to lift up for you that the task of the Community Development Bank’s lending was to raise the economic status of empowerment zone residents, and in our opinion, that was not done. 

The other point that I want to lift up for you is that the result 

of the lending was to link residents to job opportunities. There was 

no mechanism to do that which means that that component of the 

bank’s goal went unfulfilled. As a requirement by the Federal regulations, the empowerment zone and oversight committee was established and firmly fostered those partnerships between the public 

sector and the private sector. 

In January, 1997, the L.A. City Council had to instruct the Community Development Department to identify a source of funds. 

These funds were CDBG funds of approximately 144,000, and those 

funds would be used by the empowerment zone oversight committee to carry out its oversight work of the job linkage and job creation. 

So as you can see, from ’95 to ’97, there was no funding, no apparatus, no infrastructure that was put in place behind that mandate 

in the cooperative agreement. It took the community two years to 

get funding to make a phone call, to send out a fax, to be at the 

table. In order for residents to participate, we have to be at the 

table. Since that time, the empowerment zone oversight committee 

has approved over $100 million in a request for Federal funds by 

both public and private entities that operate in the zone or that 

serve zone families. 

About 60 million of those funds have actually come into the zone 

from other sources than the loans that were made by the Community Development Bank. Also, our committee has provided technical assistance and capacity only for microbusinesses, small businesses and community-based organizations in the empowerment 

zone since 1995. 

We’ve also provided ongoing staff support using CDD staff which 

is our administrator in this project to support the youth programs 

in the empowerment zone, Yo Watts, the Cooley Program, all of 

these were initial employment demonstration programs in the empowerment zone. In 2000 when the zone actually received the wage 

tax credits, remember prior to 199—to 2000, we didn’t have that. 

In 1998, HUD gave us our full designation as the empowerment 

zone which the tax credit would take effect in January 1, 2000. 

So from 1994 until January, 2000, there was actually no mechanism and no incentive under this particular lending apparatus to 

attract or retain businesses. Neither was there a wage incentive for 

them to employ residents from the zone. One of the questions I 

want you to ask is: If they’re not going to tell us what happened 

to all the money, where are the jobs? 

Where are the individuals that were hired by the jobs, the 90 

percent jobs that were created, which are those empowerment zone 

residents? That’s one question we want to know. Of the 51 percent 

that were supposed to be retained, are any of those employees actually living in the empowerment zone or these high-census poverty 

tracks? We have been unable to get that information. 

65

Additionally, a couple of months ago, HUD came out with a report that tells us that there’s five states in the union that have a 

disproportionate number of homeless, undocumented immigrants 

and individuals who are below the Federal poverty line. California 

is one of those states. 

HUD has lowered the average medium income which is going to 

place an additional burden on our community development corporations, economic development corporations who offer affordable 

housing and other services that these residents need that’s going 

to place an additional burden on them, and they may no longer be 

able to provide those services. 

So I wanted to lift that up for you. The employment needs that 

are emerging in the empowerment zone are particularly in the 35th 

Congressional District are comprehensive and adverse. We’ve been 

told by another division within the corporation of the city, our public safety arm, and the State Department of Corrections that approximately 30,000 parolees and probationers will be returning to 

these very communities that are currently designated at empowerment zone census tracts. How do we want to address this problem? 

We’re also being told that there’s a tremendous housing shortage. 

How are we going to meet those needs? The County also has a 

health crisis. How are we going to meet those needs? The very census tracts and zip codes that the economic development activities 

that were treated by the empowerment zone with all of these other 

myriad domino effects happening, we still would like to know, the 

bank didn’t do this; the loans didn’t do that, how are we going to 

address the job linkage, job creation, job placement requirement? 

This was not an option. 

This was an express outcome in the cooperative agreement as 

well as the empowerment zone initiative, so we have these recommendations. For the committee: We believe that about $50 million of the Section 108 fund which is equivalent to 1,400 jobs at the 

market rate of 35,000 for one job, we’re not sure if that is the 

equivalent market rate today, but we’re going to go with that number, that that should be used for broader CDBG-eligible purposes 

to create an empowerment zone job creation and training center 

that could address the needs of this population in the empowerment zone. 

We already have a study that’s been commissioned to June, 2003 

with refunds investment at the empowerment zone oversight committee worked to put in place. That study will be complete in May, 

2004. So our request is for implementation funding of which these 

funds that are on the table for discussion right now could be used 

for implementation of the recommendations that the City will 

produce in May, 2004. 

Finally, the empowerment zone oversight committee recommends 

that the following criteria be applied for all remaining activities for 

Section 108 funds including any portion of the funds that are reprogrammed for CDBG objectives or for outside the zone. 

Number one, the empowerment zone residents must have access 

to at least 51 percent of all jobs resulting from loans made on any 

economic development activity with remaining Section 108 funds. 

$50 million to create an empowerment zone job creation and training center with four satellite subsites in the other remaining comVerDate 0ct 09 2002 13:01 Feb 25, 2004 Jkt 000000 PO 00000 Frm 00071 Fmt 6633 Sfmt 6633 G:\DOCS\91774.TXT FIN1 PsN: MICAH
66

munities. Empowerment zone residents must be trained in the 

areas where they are deficient. Empowerment zone consideration 

in review of the cumulative effect of ecological and environmental 

impact, as they are improving our areas, and whenever possible, 

headquarters of businesses should be located in the community, 

and they should be—utilize local services and its suppliers. 

So what we want to leave you with is that even though the bank 

has struggled, and I will admit that it’s—I personally, I think it’s 

important to know that I personally have been a part of this process since 1992, when the application was actually prepared, we 

didn’t get anything, so everyone whose come to speak to you outside of myself and one other individual are new. 

So I think it’s important to understand the historical process that 

has gone on and that the community participation experiment is 

only real if the community is actually participating in decisions, 

sharing power and having a real voice, and so I’m here to represent 

those 200,000 nameless, faceless men and women in the empowerment zone who need these jobs, who did not participate in the economic benefits from the lending that has occurred; and we would 

like to know: If we don’t have the money, where are the jobs? 

Thank you for your time. 

Chairman NEY. Thank you. 

For the record, we have two additional witnesses who have 

joined us. One is Felipe Merino and—with the Molina Gardens Improvement. The other is Arturo Ybarra with Watts Century Latino 

Organization. 

STATEMENT OF FELIPE MERINO, MOLINA GARDENS 

IMPROVEMENT 

Mr. MERINO. Good afternoon, Mr. Chairman and Congresswoman 

Waters. 

Thank you very much for allowing me to testify before the subcommittee today. My name is Felipe Merino. I’m the Executive Director of the Molina Gardens Improvement. I’m the 501C3 community-based nonprofit in the City of Hawthorne, serving Hawthorne, 

Lawndale, Lennox Gardena and other surrounding areas. 

Our community-based organization provides very vital services to 

the community, services that I would say are at the front line of 

survival for a lot of families. We help folks with housing issues, 

Government benefits, health care access to State-sponsored programs and other social services that are very necessary for a lot of 

our families. 

We work in direct partnership with over 150 partner agencies including educational institutions, electrical government agencies 

and other nonprofit organizations. Most namely, we work with the 

Hawthorne School District directly so we can make sure that the 

children of our community have access to resources so that students can get a good quality education. We’ve found in working 

with the Hawthorne School District that a good quality education 

doesn’t just mean the textbooks. It doesn’t just mean what happens 

in the classroom. It means everything after the home, after school 

and before school. It means making sure that the child is safe, 

making sure that the child has a roof over his head, that they have 

food on the table. That their parents are able to get medical insurVerDate 0ct 09 2002 13:01 Feb 25, 2004 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6633 G:\DOCS\91774.TXT FIN1 PsN: MICAH
67

ance. That their parents are able to teach them that the cycle of 

poverty can be broken, and that they can excel at everything that 

they set their hearts to. 

As a small nonprofit organization, what we’ve been able to find 

is that CDBG resources are tremendously necessary in the community. They really are an access to other resources is not readily 

available to everyone, which is a sad state of affairs particularly in 

our community where so many things are needed. 

But let me share with you a little bit, and I’ll be brief. I’ll share 

you with a little bit about what happens in our community in the 

City of Hawthorne. In our community, we started off this nonprofit 

organization. When I came on board, we had an annual budget of 

6,700 and something dollars which is amazing that an association 

of nearly 150 different partner agencies was getting all those different types of things done in the community. However, there was 

nobody on board to make it a concerted effort or to channel the 

agency of those other nonprofit agencies or other individuals from 

the community. 

After our first year, through the budgetary cycle, we were at $87,000, I believe, for an annual budget. The reason largely—the 

reason why we were able to expand our budget, and now we’re at 

a point where we’re going to be closing out our books at about 

$250,000 a day after two years is because of CDBG funds because 

that money was accessible to us by way the City of the Hawthorne, 

and we had the support of people here are CDBG funds. 

Why don’t you apply for them? Now before that point, we had a 

terrible time as a small nonprofit organization trying to raise 

money and develop the kind of credibility that we needed in the 

community and in—with foundations and with other government 

agencies to do the kind of things that we’re doing now. 

But once that money was available to us, it was to—would have 

a multiplier effect. We were able to leverage those funds because 

all of a sudden we had the backing of not only the City but the 

Federal Government, and we were table to say, ‘‘We have Federal 

dollars by way of the CDBG program—and mind you it was only 

$10,000 because it’s—a percentage of the budget goes to direct program services by way of nonprofit organizations, but that amount 

of money has now multiplied to what, next year our budget will be 

closing out at about $600,000 is our projection at this point—and 

that’s not even starting the fiscal year yet. 

So I want to thank the Federal Government for the CDBG program; however, I caution you that in the written testimony that 

I’ve provided there are three different concerns that I have as far 

as access to the community block rent funds: The first one being 

that many nonprofits don’t even know that the funds exist. 

Whether it’s because they’re grass roots nonprofit organizations 

where the education level attained by a lot of the individuals that 

are part of the nonprofit board doesn’t permit them to know about 

such resources and because they start off with such humble beginnings like ours. 

The second is that a lot of times elected officials are disconnected 

from what’s going on at the grass roots level, and they really don’t 

understand that the survival of these organizations depends on 

funding like CDBG funds, and unless you have somebody who’s 

68

completely savvy on your Board of Directors or involved in your organization, it never trickles down to those organizations. 

It only trickles down to the organizations that people know about 

which is very unfortunate, as Miss Waters mentioned earlier, that 

that’s been what’s been happening. 

And the third point that I have is—is the notice requirements. 

The notice that’s given about CDBG funds is done by newspaper—

by way of newspaper which is a very minimum requirement for 

people to satisfy. However, not all of the individuals involved in 

community agencies in the business of survival of community members have time to read through every one of those little notice provisions that comes in those throwaway papers that go through the 

communities or even some of the larger papers where they’re compacted and put in some obscure section of the newspaper. 

And at the end of the written testimony that I provided, I make 

a few suggestions that you may want to consider or reject, whichever you prefer: The first in order to deal with nonprofit organizations, the smaller nonprofits becoming aware of those resources 

and also being able to apply for CDBG funds. 

I’ve suggested that some kind of technical assistance be provided 

to nonprofit agencies so they’re able to develop the kind of accounting mechanism that they need to have a place in order to track 

funding and be able to receive funds from cities and from counties 

in the area. The second is addressing the concern about elected officials not being aware of what’s going on at the grass roots level and 

needing somebody politically to be involved. 

I don’t think that funding for CDBG programs should be contingent upon whether or not you know a political or elected official. 

I really believe that it should be a broad enough process where everyone has an equal chance and equal access to those kinds of resources because I think there are many good causes that are being 

looked over for whatever the reason, and I think in order to employ 

that, you would have to require some kind of mechanism in which 

you were able to get information about other nonprofits. 

I know that there are several Web sites in place right now 

where, if you wanted to investigate a nonprofit organization, you 

wouldn’t have to call the IRS. You could get on Web sites and find 

out financial information about nonprofits. I don’t know how difficult it would be to link that up with some kind of database that 

local governments would have to access in order to identify nonprofits within their zip code or within their community that could 

provide equally as good services as the ones that are being contracted for elsewhere. 

And the third is the notice provision of CDBG services. A lot of 

nonprofit organizations have absolutely no idea that the CDBG 

funding exists. And I’ve suggested here as a—as a way of notifying 

nonprofits that that funding is accessible, that there probably be 

some kind of collaboration with the Internal Revenue Service that 

when nonprofit organizations are notified of their nonprofit status, 

that there be an instrument of some sort notifying them that 

there’s Federal funding available and a possible suggestion of some 

Web sites that they could combine possible resources from some 

other resources. 

69

[The prepared statement of Felipe Merino can be found on page 

131 in the appendix.] 

Chairman NEY. Mr. Ybarra. 

STATEMENT OF ARTURO YBARRA, EXECUTIVE DIRECTOR, 

WATT CENTURY LATINO ORGANIZATION 

Mr. YBARRA. Good afternoon, Chairman Ney and Congresswoman 

Waters and Mr. Jones. My name is Arturo Ybarra, and I’m the Executive Director of the Watt Century Latino Organization. Watt 

Century Latino is the only Latino Multicultural oriented in existence in the whole south central area of Los Angeles. We have been 

in existence for the last 12 years. We are currently involved in programs to—that go from violence prevention to emergency education, homeless prevention and counseling, job training and placement. 

And we also have other projects distributing safety car seats for 

needy families in the community. And we are concentrated in serving a community that is growing all over California, especially in 

South Central Los Angeles. Latinos are now 60 to 65 percent of the 

total population in South Central Los Angeles. 

Watts Latinos are close to 70 percent of the population. And unfortunately, there is a total lack of infrastructure to channel services and resources to these communities. A public official mentioned earlier that many people in our communities are reluctant 

to deal with government programs because—because of the stress 

of government, and it’s very much true within the Latino community or the immigrant community. 

But whenever there is—there are programs that are culturally 

and—and very sensitive to these sectors, special sectors, the—the 

programs are property market are very successful. In 1994, the 

Watts Century Latino Organization insisted they become an action 

of the Los Angeles Housing Department to successfully market a 

residential loan program in Watts. 

Unfortunately, it was only a drop in the bucket because despite 

the success of this type of program, it has never been implemented. 

Watts has a very large old housing stock with many senior citizens 

and many houses that are in urgent need for rehab. But never, as 

I have told you, never again, these are residential low interest loan 

program, has revisited our community. 

My organization will be more than happy to help any senior or 

County officials or department in conducting these kinds of committee outreach comprehensive and sensitive marketing activities 

to market these rehab loans or even those grants that are available 

to improve facade, if those housing—houses are in need of. 

Finally, I would like to suggest to local officials to—that are in 

charge of distributing the CDBG funds, to get in touch with my organization. We will be more than happy to coordinate the development of a kind of strategy to facilitate access for available funds 

for rehandle grants improvements and other community development programs especially for monolingual Spanish-speaking and 

immigrants. 

Chairman NEY. Thank you. Just—I really don’t have a question. 

I want to thank you for your testimony, and you know, it helps to 

acknowledge whether you’re supporting CDBG or not. 

70

Just a couple of, I guess, points: One, for Ms. Branch, any questions, and we have for the record your testimony now; but other 

questions you want—you would want asked, and it seems you have 

probably a few people that have been there from two years to today 

through the home situation. 

I think it’s good to pose the questions of what happened, because 

if there’s going to be oversight and HUD is going to be involved in 

an oversight sense, whether it’s here or where I live or whatever 

state, we’ve got to ask questions of—of what went wrong in order 

to find the ability to make sure things go right. Not just here, anywhere in the country. 

So any other questions you’d have, I think it—it kind of interesting to me that something just hasn’t been answered. They always elicit testimony, and then I kind of clear and then confused. 

That happens to me quite a lot wherever it is. But anyway, I 

thought I deserved that. 

STATEMENT OF CHERYL BRANCH, ASSOCIATE DIRECTOR, LOS 

ANGELES METROPOLITAN CHURCHES 

Ms. BRANCH. I think you understand how we feel. It’s just the 

most frustrating for me to be in a process where they say the goal 

is to have community participation, and then we’re not there. But 

I think in addition to asking for a breakdown, ask Mr. Sausedo and 

the community development department, Mr. Graves, to provide for 

you a breakdown of the so-called 9 percent jobs that were created. 

We want the census track breakdown or the Zip code. The mandate when the bank was created, was there were 2000 criteria in 

order for an individual to get a loan from the bank. Number one 

was that they had to be turned down by a conventional banker. 

Number 51—they had to have a business plan. That included 

that 51 percent of the jobs would be given to zone residents. They 

also had to have a business plan that indicated how for every 

$35,000 borrowed, they create a job. No one ever—they say that 

there’s no time frame on when this should occur. That—that 

shouldn’t—that’s a question: Why are we doing it that way? Why 

is there an open ended because the community doesn’t have an 

open ended option on balance, you know in terms of meeting our 

needs. So we would like to see—there should be a time frame, and 

actually, our committee has made a question for that in 1998, 1999 

and 2000 that borrowers be given two years. 

Some of those things we haven’t been able to get any feedback. 

You can ask them: When did they inform the borrowers that they 

had a job creation requirement? I have heard from some borrowers 

and some individuals who’ve tried to access funds or who got funds 

and their business failed and they weren’t aware of the job creation 

requirement when I inquired to them from any question. Where is 

the job? 

They didn’t know so we want to know: At loan closing? At quarterly report? Disbursement of the first payment? When are you telling individuals that they have had job requirement? How is the 

City assisting them in meeting that job requirement? We heard Mr. 

Sausedo did support the community’s position in that the bank 

turned to the city’s work force development system, the ones that 

used to be JTPA. 

71

Now, it’s one stop, and that that system was not able to help 

them. That’s not a response because you’re—your mandate, the requirement, this is not an option. It’s expressly stated was to link 

residents to job creation. So you want—you want some real question—you want some real answers as to why did none of these 

things occur, and if they didn’t occur in the empowerment zone, the 

committee group has gone to our council reps and CDD and asked 

for that to be addressed in the transition plan. 

So the community is attempting to behavior like the other key 

stakeholders. If we were unable to fulfill what is written, then 

we’re going to request a reprogram and try to make lemonade out 

of lemons, and the community is making the same question, if we 

were unable to get the jobs that were promised. 

We’re asking if you’re going to reprogram the 108 monies, you 

must include our response to the job linkage and creation piece. I 

think those would be some key—ask them how are they teaching 

microbusinesses and small businesses to utilize the wage tax credits? Is there any technical assistance or capacity building apparatus in the City to assist a microlender or a small bid owner if 

they even wanted to take advantage of these so-called incentive. 

Chairman NEY. Another real quick observation. It’s a matter of, 

I think, communication to you, Mr. Merino. You know of this. I 

don’t know that they would do that or they could technically, but 

still an idea of trying to get communication out there somehow. I 

understand that maybe we do look at ways to do that, and Mr. 

Ybarra, one other thing, too, is you might be able to find out who 

you were saying about the crews contacting the Latino community, 

through HUD, I would assume, I’ll be checking it, of who, in fact, 

has the hearings, and you would then contact them to let them 

know that you’re out there. 

Mr. YBARRA. All right. Well, we have found from City agencies 

and even foundations very hard to invest in emerging conditions 

and organizations. Like Watt Century Organizations. I mentioned 

to you before, we are the only Latino organization in an area that 

has experiment that bring dramatic changes in the composition of 

its population, that brings lots of challenges, and some of those 

challenges and various for Latinos are the language barrier. Not 

knowing how the system works, we—we don’t know how to process 

the government processes work, you know, and foundations and 

City agencies rarely want to invest or to risk any investment of 

funds in this emerging organizations. 

So if there are no resources for us to learn how to work with the 

system, how we are going to be able to work with the system? 

Something we have to learn, but in order for us to learn, we need—

we need people with—with the know-how to show us where is the 

way. You know, how can we get access to those funds? We have a—

a community resource center. You know, we got it in 1998 out of 

a class action suit against a Public Housing Authority of the City 

of Los Angeles due to the institution of neglect because of the living 

conditions for residents in the public housing in Watts. 

Out of those $50,000, we bought a liquor store, a former liquor 

store, to convert to a community resource center. The government—and we got a $50,000 from this class action suit, and we invested it in this community resource center. 

72

Out of that, we haven’t received any—any kind of assistance 

from the government, and this is a very particular situation for a 

recent immigrants and mono English-speaking people in Los Angeles and in Watts. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Let me just say thank you to Chairman Ney for coming to Los 

Angeles during his break when he could be in his own district or 

taking vacation as many of our fellows are doing. But I made this 

request to him, and he listened and we have formed a bipartisan 

effort to try and deal with some of the problems of housing and 

rural—and in urban communities and, of course, this CDBG Section 108 which turns out to be large and important sources of—of 

funding for our communities. 

So I’d like you to know that I would not be able to do this without him, and it’s very important that he’s here. Mr. Chairman, the 

people that you see before you are extremely important for a number of reasons. I’d first like to say to Mr. Merino and Mr. Ybarra, 

thank you for responding on such short notice. 

I want you to know that as our Washington, D.C., staffs attempt 

to work to put this together, it is difficult—and what normally happens is the—the traditional well-connected organizations get here, 

but the new ones don’t often get here. And when we discovered 

what had happened, we were anxious for Mr. Ney to hear some 

new voices about what is and what is not happening. 

And you represent that for us, and I’m very appreciative for the 

work that you do. Mr. Merino is an attorney who went off to school 

and came back to work in his community and struggle, like he said, 

starting with $6,000 nonprofit donations and fighting the establishment on all of those things in order to bring some services to his 

community. I was recently at Mr. Ybarra’s to celebrate ‘‘Cinco de 

Mayo’’ and was reminded one more time about the struggle of that 

corner of the district and lack of—of resources. 

Now, Ms. Branch is extremely special because not only does she 

understand this game, she is a professional grantsmanship person 

who understands the rules, written and unwritten, of this response 

to request proposal magnes that all these nonprofits are caught up 

trying to access a few dollars. And her work is such that she’s committed to the community, not only in trying to help them access 

funds, but trying to make the establishment do what it’s supposed 

to do and given of her time to get the kind of oversight that she 

was so articulate in describing. 

I take her recommendations seriously, and I need to ask you just 

briefly, whether or not the $50 million that you point to that need 

to be erected toward the supplemental zone or the zone that was 

intended under the following insurrection, that’s the same 50 million that you’re talking about that Mr. Graves is talking about, you 

know, they have a plan, they want $50 million. They said they are 

going to use that $50 million to do the same thing that they would 

have been doing with—with the money from the Section 108, from 

the Community Development Bank. That’s what they say. Then the 

other 4,800 or 46 or so, they say that they want some flexibility, 

I think, with that to be able to not only service the zone, but also 

to service the old Section 108 identified areas in the City. I’m a litVerDate 0ct 09 2002 13:01 Feb 25, 2004 Jkt 000000 PO 00000 Frm 00078 Fmt 6633 Sfmt 6633 G:\DOCS\91774.TXT FIN1 PsN: MICAH
73

tle bit skeptical of that. Are you all on the same track? Are you 

talking about the same thing? 

Ms. BRANCH. We’re talking about the same funding, the same 50 

million, yes. The same total 46, yes. We’re talking about the same 

money, yes. But we’re not talking about the same uses. We would 

support the city’s desire to spend some of the 108 funding in low 

to mod census tracks outside of the zone. We support some of that 

because we understand why. 

Ms. WATERS. Okay. 

Ms. BRANCH. We understand why; however, we will need that of 

that—not with that proposal there should be at least 50 million 

earmarked to continue the job linkage and creation for lending activity that occurs with whatever’s remaining. 

Ms. WATERS. Now, that’s what he claims they want to do with 

that 50 million, that first 50 million request. That’s what he’s——

Ms. BRANCH. That’s not true. I didn’t read that, and I do have 

a copy of the city’s transition plans because it comes to my committee for approval. As of last Thursday, it wasn’t in my board 

meeting, and I raised in the board meeting there. 

Today what I heard, the City wants to use 50 million to continue 

lending activities with a broader CDBG use. That’s what I heard 

today. 

Ms. WATERS. Ah. 

Ms. BRANCH. I did not hear that they want to use that money 

to focus on linking residents to job opportunities as a result of lending from the full portfolio. 

Ms. WATERS. Okay. 

Ms. BRANCH. I think that’s worked in part. 

Ms. WATERS. All right. Well, that’s very good. And let me suggest 

to you Miss Branch. You know, they very timely and, you know, 

as our maker would have it, we’re just at the right point in time 

to catch the transition plan before it is given to HUD by September. 

And we may be at the right point in time to pull the community 

together to have our own hearings and bring everybody out and lay 

this plan out so that we can influence what happens with it. I am 

committed to the prop signatures that that money was intended to 

be spent in a certain way, and we can’t see it distributed away 

with some other wishes by the city, so I’m so glad that you’re here. 

Thank you. 

Miss Gay, I want to thank you, and I’d like you to know that we 

are focused on predatory lending. As a matter of fact, as you know, 

we’ve had a number of pieces of legislation, and there’s more legislation that is coming forth; and we’ve got to try and find a way to 

make this a bipartisan effort so that we can get something real. I 

don’t want to be in a fight with my colleagues about whether or not 

we have a bill that simply puts some window dressing on this very, 

very terrible problem. 

Let me just say this to you: And a lot of people don’t understand 

it, I am so outraged with the predatory lending practices of our 

banks and our financial institutions that I do not allow them to be 

sanitized for donations to the community. 

As a matter of fact, I resent what I call the fifty cents to the Boy 

Scouts, in an effort to get CRA credits, and at the same time, they 

74

are taking somebody’s grandmother’s house. So what I—and one of 

the things I want to work with the housing organizations and—and 

talk about is getting tougher. 

Because what they do, they come to you all, and so many different ways, and they come to support something or they’ll be at 

the annual dinner or they will come with us to help paint a house 

once a year and the bank get their name all over the house; and 

I don’t do that stuff. 

But what I want to do with the housing groups is, I want to get 

tougher on the banks and not let them buy off with this shell game 

so that we can force them to do better from, you know, whatever 

we’re attempting to do with predatory lending. 

So I thank you for being here. I know that—I will tell you the 

nonprofits that you talk about are doing an extraordinary job in 

building capacity. From my own view of things in the past ten 

years or so, all of that housing that we have, it’s because of these 

nonprofits who learn the game and build capacity and went out 

there and did it. 

Now, you got to stop building so much single homes and build 

some more multi-family, for just poor people. I respect that. They’re 

not here today. You’re here. I’m speaking for them. But we know 

them all. We know who all the players are. And they—we—we respect the work that’s done, and when I ride through my district 

and I see some of that housing, I’m very thankful for it. So we’re 

glad that you’re here. 

Again, thank all of you for coming today, and that concludes my 

comments. 

Chairman NEY. I want to thank the ranking member, my boss 

from Ohio, the ranking member of Massachusets, and my name’s 

Bob Ney. I chair the subcommittee. Our ranking member’s Maxine 

Waters. I want to thank Congresswoman Waters for having us 

here. This is the first hearing of the 108th—first field hearing. 

That’s right. I’ve got to say we’ve had 11—we’ve had more activity, 

both of us, in—and I think in recent history, we’ve had 11 hearings 

within the Capital. This is the first outside, and so—so happy to 

be here. 

Ms. WATERS. He hasn’t even been in his own district to a hearing. Give him a clap. 

Chairman NEY. I want to thank Congresswoman Waters, not 

how you voted to 2:30 in the morning last week and a long flight 

here, and obviously she could be doing also with her time take a 

little bit of breather. We’re doing a hearing tomorrow. It’s wonderful being here in sunny good weather California. Thank you. 

Ms. WATERS. Thank you all so very much. 

[Whereupon, at 3:15 p.m., the subcommittee was adjourned.] 

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A P P E N D I X

June 30, 2003

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