Congress' Municipal Slush Fund and How to Fix It
The Community Development Block Grant is a failed experiment. But conservatives should still reform the program so it works better, since we’re stuck with it for the time being
The Community Development Block Grant (CDBG) Program is a multi-billion dollar money spigot for state and local governments creating all the wrong incentives. It entices grantees to spend their money quickly, not carefully. It disincentivizes expansion of housing supply or upgrading existing housing. The Department of Housing and Urban Development (HUD) has failed to define key programmatic terms, failed to enforce adherence to program requirements, and failed to ensure funding recipients follow through on what they attest to be doing with the money, and more. Conservatives have long rightly called to shutter the program entirely. Realistically, given broad congressional opposition to funneling porkbarrel spending to districts and states, axing the CDBG Program is, for now, a pipe dream. However, conservatives can and should continue to work to shutter the CDBG Program. In the meantime, we can improve it to limit perverse incentives and maintain programmatic integrity.
The program’s foundational flaws have led to terrible outcomes. In HUD’s words, CDBGs provide “grants on a formula basis to states, cities, and counties to develop viable urban communities by providing decent housing and a suitable living environment.” No two localities are the same, so Congress thought they needed flexibility to define for themselves how best to meet the needs of low- and middle-income (LMI) people. But in practice, the CDBG Program incentivizes irrational local funding decisions or just plain wasteful spending. The CDBG Program has long been riddled with a laughably large amount of waste, fraud, and abuse. In fact, it once paid Louis Farrakhan’s speaking fee and one newspaper in Buffalo wrote an article in 2004 about how the city blew through half a billion dollars in CDBGs with nothing to show for it. It is hardly news to observers to say the CDBG Program is a failed experiment. But that shouldn’t stop conservatives from making the program work better, since it seems we’re stuck with it for the time being.
Fix the Funding Formulas to Incentivize Good Spending Decisions, Like Building New and Refurbished Housing
The CDBG Formula Grants distribute about $4.2 billion annually. The program permits grantees to receive an amount of money either Formula 1 or Formula 2 spits out, whichever is higher. The way they are designed disincentivizes localities to expand their housing supply.
Formula 1 focuses on poverty alleviation, using the number of persons in poverty, total population, and over-crowded housing as metrics to determine a funding level. But Formula 1 shortchanged certain regions and so to keep money flowing, the program’s focus expanded to include old infrastructure and Congress developed Formula 2. These new metrics — percent of pre-war housing, poverty rate, and below-average population growth — just so happened to send money to the regions that were supposed to get less money under Formula 1.
Both Formula 1 and Formula 2 disincentivize cities from building more housing or updating their existing stock of housing by weighting heavily the amount of pre-war housing. The more cities add housing supply, the less overcrowded housing there will be. The more cities rebuild their housing stocks, the smaller the percent of pre-war housing will be. In both circumstances, a locality improving the state of its housing supply will mean it stands to receive less CDBG money. Housing shortages across the country are pervasive, driving up rents and housing markets to unsustainably high levels. Federal incentives against building more housing merely empowers NIMBYists. In light of the extreme increases over time in rental rates across the country, any incentive against expanding supply to meet demand should be ended.
Stop Incentivizing the Policies that Helped Crash the Housing Market in 2008
CDBGs are putting people into homes they can’t afford. Federal and non-federally driven incentives to issue mortgages for homes which were ultimately foreclosed upon drove the 2008 housing crisis. Today, HUD allows grantees to use CDBGs to subsidize payments on private residential real estate purchases, including paying mortgage principals, interest, closing costs, up to 50 percent of a down payment, and more.
It is difficult to ignore the striking parallels between a regulatory scheme incentivizing risky loans and HUD’s policy of underwriting real estate purchases. Namely, HUD seems not to care whether homeowners can pay their mortgages when putting them in houses. HUD doesn’t require grantees to forecast the ability of LMI beneficiaries to pay off mortgages absent a steady stream of public money. It’s hard to see how this won’t lead to more foreclosures for some once taxpayer funds run out.
HUD is also egregiously hands-off about how municipalities can select who receives federal homeowner assistance. HUD lets grantees set their own criteria for selecting recipients and HUD merely requires recipients be LMI. In other words, HUD is totally fine with a corrupt local official giving federally-backed housing assistance to a personal friend over somebody else as long as the recipient of the assistance is LMI.
Incentivize Grantees to Spend Responsibly, not Quickly
HUD uses the Timely Performance Test to ensure its grantees spend enough of its allocation within the fiscal year. If a grantee fails the Timely Performance Test in two consecutive years, HUD may reduce its allocation by that amount the next year. This drives localities to spend money for the sake of spending money. Use-it-or-lose-it funding schemes across various levels of government have led to innumerable examples of wasteful government spending by those seeking to burn through their money by a certain deadline. Instead of punishing grantees for not spending money quickly enough, HUD should reward those who spend their money best.
Define Basic Programmatic Terms
HUD relies on basic terms to help guide grantees determine what spending is eligible under the CDBG Program. In part, some terms are purposefully undefined so localities can be flexible in addressing local needs. But even for conservatives, there reaches a point of an absurd level of flexibility. Among the terms Congress and HUD have left undefined is “community development.” Other undefined terms intrinsic to the program’s operation are “community development need,” and “serious and immediate threat to the health or welfare of the community.” When a grantee can classify any spending as a community development need, everything will magically become a community development need. That’s how CDBG funds ended up going to some mural in Massachusetts honoring a local community activist. Congress must define terms in statute so CDBG spending matches congressional intent in appropriating the funds.
Require Businesses Receiving CDBGs to hire LMI Applicants to Actually Hire LMI Applicants
In certain circumstances, private companies can receive CDBG funds. This includes but is not limited to if they plan to hire LMI employees. The jobs companies are hiring to fill must have no special skills, training, or education requirements. LMI persons must receive first consideration. But companies’ receipt of funds is not conditioned on them hiring an LMI applicant. Nor does HUD require grantees claw-back funding if a company ultimately does not hire an LMI employee for the advertised job. If a locality wants to subsidize hiring of LMI applicants, that’s its prerogative. But the federal government should require those businesses to follow through or lose their public funding.
Require Entrepreneurs Receiving “Microenterprise Assistance” to use Funds to Support their Businesses
HUD lets grantees provide financial assistance “of virtually any kind that may be needed by the owner of or person developing a microenterprise.” Conspicuously absent from the requirements is that recipients use CDBG money in furtherance of the business. “Entrepreneurs” can use money on counseling, peer support program, transportation, and childcare. We’re one step away from the federal government funding housekeepers on the premise cleaning entrepreneurs’ homes diverts their attention from their businesses.
Again, conservatives’ goal can and should be eliminating the CDBG Program. But living in reality, we must recognize CDBGs enjoy bipartisan support, so aren’t going away tomorrow. There are steps we can take in the interim to shut off the fire hose indiscriminately spraying money at every municipality and create some better outcomes for American taxpayers and for program beneficiaries.