The Indianapolis Star recently ran an article on a relatively wealthy county in Indiana that has received $3 million in HUD Community Development Block Grant funding since 2005. I lived in Hamilton County for three years and it has a well-deserved reputation in Indiana as being the home of the state’s hoity-toity. I don’t believe the federal government should be subsidizing community development for any locality, but subsidizing wealthier areas of the country is extra ridiculous.

From the article:

Hamilton County, which automatically qualifies for the Community Development Block Grant program funding despite having one of the lowest poverty rates in the nation, has followed federal guidelines in spending its allocation…

The poverty rate in Hamilton County was 5.6 percent in 2009, compared with a 14 percent rate in Indiana and nationally. The county’s per-capita income was $38,298, 60 percent higher than the state’s.

A Cato essay on community development subsidies notes that the CDBG program has gone from targeting poorer areas to subsidizing wealthier areas as well:

CDBG spending has gradually shifted from poorer to wealthier communities over time. For that reason, the Bush administration rated the CDBG program “ineffective” due to its “weak targeting of funds.” It noted, for example, that wealthy Greenwich, Connecticut, received five times more funding per low-income resident than poorer Camden, New Jersey. It should not be the role of the federal government to redistribute income between regions, but even if it was, the CDBG program is not very good at it.

The reason why this has happened is simple: more congressional districts receiving subsidies means more congressional support for the program.

The Star article notes that “Of the approximately $3 million the county has received from 2005 through 2009, the largest chunks were spent on program administration ($677,589) and sidewalks ($598,751). The Cato essay points out that much of the money gets lost to the multiple bureaucracies:

One result of involving all three levels of government in funding local projects is rampant bureaucracy. Local governments that receive CDBG funds spend 17 percent on administration, on average, according to the Government Accountability Office. For the portion of CDBG funds that flow to state governments, state-level bureaucracies are an additional cost. The GAO found that state government administration consumed 8 percent of CDBG funds. On top of those costs are federal administration costs, which are about 5 percent of the value of grants.

After the government bureaucracies take their share, CDBG monies get distributed to the private businesses and organizations that carry out funded projects. Federal rules usually specify the share of funding that may be used by recipients for administrative costs, and 10 percent seems to be common. Thus, considering all the administrative costs at all layers of government and private organizations, a large share of the CDBG budget disappears before any actual work is done.

The official in charge of Hamilton County’s CDBG program blames the high administrative cost on federal red tape:

McConaghy said the program allows for high administration costs because “when you’re dealing with federal funds, there are a lot of additional steps that you have to go through,” including creating an annual action plan.

The official’s excuse isn’t completely without merit. As the Cato essay notes, “One cause of high administration costs in grant programs is that governments and private groups must comply with complex federal regulations.”

The reporter is to be commended for critically examining a prominent federal subsidy for state and local government. Too often local reporters treat the receipt of federal funds as a free lunch to be celebrated. However, like all federal subsidies, the CDBG program does not create economic activity – it merely redirects it according to political and bureaucratic whims. Contrary to what the folks in Washington say, there’s no such thing as a free lunch.