During most of the nation's history, there was little fiscal interaction between the federal government and local units of government. The federal government had a limited set of responsibilities, and most governmental functions were left to the states. Local governments were subsidized and regulated by state governments, but generally not by the federal government.

That structure changed dramatically during the mid-20th century as the federal government launched an array of housing, urban renewal, and community development efforts. It was a grand experiment to use the seemingly vast resources of the federal government to try to micromanage the life of cities and neighborhoods. The experiment was a grand failure, as illustrated by the many public housing projects that became plagued with crime and disorder.

In recent years, some housing and welfare programs have been reformed, but the federal government still funds an array of "community development" activities for local governments. Community development funds were originally targeted to large cities in decline, but today funding is spread widely to communities rich and poor, large and small.

In 2009, the Department of Housing and Urban Development spent $13.2 billion through its Office of Community Planning and Development.¹ Here are the main programs:

• Community Development Block Grants. This $8 billion program provides formula-based grants to localities for a range of development projects such as parking lots, museums, and street repairs.
• HOME Housing Program. This $2.3 billion program provides formula-based grants for "affordable" housing.
• Homeless Assistance Grants. This $1.6 billion program funds local governments and nonprofit groups that offer assistance to the homeless.
• Housing for Persons with AIDs. This $289 million program provides housing assistance for low-income persons with HIV/AIDs.
• Self-Help Homeownership Grants. This $50 million program provides grants to nonprofit groups that build low-income housing. The beneficiaries provide "sweat equity" by contributing labor toward the construction of their homes.
• Rural Subsidies. This $24 million program funds a wide range of projects in rural areas.

According to HUD, community development programs:

Seek to develop viable communities by promoting integrated approaches that provide decent housing, a suitable living environment, and expanded economic opportunities for low- and moderate-income persons. The primary means towards this end is the development of partnerships among all levels of government and the private sector, including for-profit and nonprofit organizations.²

That description sounds warm and fuzzy, but the reality is that community development programs have a history of wasteful and ineffective spending.

Following a background discussion, six HUD community development programs are examined. Some common themes in the workings of these programs are complexity, bureaucracy, and susceptibility to financial abuses. Policymakers should end these failed efforts at micromanaging local affairs, and leave community development to local governments and the private sector.
 

Background

The Constitution provided the federal government with a modest array of enumerated powers and left most government responsibilities to the states. During most of the nation's history, local units of government were not financially tied to the federal government. The New Deal of the 1930s started to change that with major federal encroachment into formerly state and local policy areas. The federal government's micromanagement of local affairs accelerated in the 1960s with President Lyndon Johnson's "Great Society" and the creation of the Department of Housing and Urban Development in 1965.

Proponents of federal intervention claimed that state and local governments did not have the capacity to address urban blight, affordable housing, and economic development. That led to the launching of a huge range of urban grant programs, which President Johnson believed would create "cities of spacious beauty and living promise."³ New aid programs were created for housing, urban renewal, education, and many other activities.

There were more grant programs enacted during the Johnson administration in just over six years than in all of the preceding years in U.S. history combined.⁴ There were 109 separate aid programs for state and local governments enacted in 1965 alone.⁵ President Johnson called his policies "creative federalism," but his activism dealt a severe blow to the federalism of the nation's Founders. By the end of the 1960s, many policymakers believed that the federal government should spend money on just about any local activity that it wanted, and questions regarding constitutional propriety were seldom considered.

With all the new federal subsidy programs came a blanket of regulations on the activities of state and local governments. By the 1970s, state and local politicians were chafing at Washington's heavy-handed approach. The Nixon administration pursued changes that would allow for funding to be delivered with fewer strings attached under broader "block" grants. In 1974, Congress enacted Community Development Block Grants. Under block grants, local policymakers are afforded wider discretion regarding how to spend federal money, but the federal government is still supposed to maintain oversight to prevent waste and abuse.

The idealistic plans of the 1960s for federal aid to solve local problems have not panned out. Federal meddling has been high in taxpayer cost and low on accomplishment. Indeed, federal subsidies and regulations have often contributed to the very urban decay that federal involvement was supposed to fix. The following six HUD programs should be high on the list of programs for federal policymakers to put on the chopping block.
 

Community Development Block Grants

Community Development Block Grants are the largest community development activity in HUD. They were created by the Housing and Community Development Act of 1974, which combined several narrower grants into one formula-based block grant for local governments. The change stemmed from local frustrations with the complex web of federal aid that developed in the 1960s.⁶

In 2009, CDBG spending totaled $8 billion.⁷ The bulk (70 percent) of the funding goes to selected local governments that are called "entitlement communities." The top five recipients of these funds since 2000 are the cities of New York ($1.6 billion), Chicago ($780 million), Los Angeles ($758 million), Philadelphia ($557 million), and Detroit ($412 million).⁸ The other 30 percent of CDBG funding goes to state governments as "nonentitlement community" funding. State governments dole out those funds to local governments and nonprofit groups.

CDBG activities are supposed to meet one of three objectives: (1) benefit low- and moderate-income persons, (2) prevent or eliminate slums or blight, or (3) address a serious need or threat that has particular urgency.⁹ A huge range of activities meet these criteria, including:

• acquisition of property
• construction or repair of streets, recreation facilities, and other public works
• demolition and rehabilitation of public and private buildings
• public services and planning activities
• assistance to nonprofit and for-profit groups for community development purposes

While CDBG funds are initially handed out to state and local governments, the ultimate beneficiaries are usually private businesses and organizations working on particular projects, such as shopping malls, parking lots, museums, colleges, theaters, swimming pools, and auditoriums. Here is a small sampling of projects funded in 2008:¹⁰

• $588,000 for a marina in Alexandria, Lousiana
• $245,000 for the expansion of an art museum in Allentown, Pennsylvania
• $147,000 for a canopy walk at the Atlanta Botanical Gardens in Georgia
• $196,000 for expanding the Calvin Coolidge State historic site in Vermont
• $294,000 for a community recreational facility in New Haven, Connecticut
• $196,000 for the construction of an auditorium in Casper, Wyoming
• $441,000 to replace a county exposition center in Umatilla, Oregon
• $98,000 for the Pearl Fincher Museum of Fine Arts in Spring, Texas
• $245,000 for renovations to awnings at a historical market in Roanoke, Virginia
• $294,000 for the development of an educational program at the Houston Zoo in Texas

All these activities are purely local in nature, and there is no national interest in funding them. CDBG funding runs completely counter to the federalist model of American government.

Federal policymakers are supposed to make decisions on national issues such as defense and security; it makes no sense for them to be city planners, but that's what the CDBG program effectively lets them do.

Battling over Formulas

Moving funding for local projects up to the federal level injects federal politics into local activities. The particular cities and counties that receive CDBG funding have long been fought over in Congress. While the program was created to help high-poverty areas improve basic services such as fire and police, the program currently spreads taxpayer largesse very widely, including to some of the wealthiest areas of the country.¹¹

CDBG money is doled out based on complex formulas that do not target need very well. For example, the wealthy community of Madison, Wisconsin, receives a CDBG allotment of a similar size as low-income San Marcos, Texas, partly because a large group of temporarily low-income college kids in Madison are included in the formula.¹² The 2009 federal budget noted that the CDBG "formula has not been updated in over 30 years and as a result, many lower-income communities receive less assistance than wealthier communities."¹³ Experts occasionally try to fix such problems, but those reforms are usually blocked by politicians benefiting from the status quo.

One allocation item in the CDBG formula is "housing built before 1940." How did that obscure item get into the CDBG formula? The Northeast-Midwest Institute, which is a lobby group for a regional group of states, got a member of Congress to insert it into legislation in 1977 in order to tilt aid toward older cities.¹⁴ The Bush administration wanted to change this formula item in 2006 because "many poor communities have torn down old, blighted housing while affluent communities have rehabbed theirs, giving them a leg up in the distribution of funds."¹⁵ But the Bush proposal met stiff resistance from wealthier communities such as Oak Park, Illinois, which would have lost some of its CDBG subsidies.¹⁶

CDBG spending has gradually shifted from poorer to wealthier communities over time.¹⁷ For that reason, the Bush administration rated the CDBG program "ineffective" due to its "weak targeting of funds."¹⁸ It noted, for example, that wealthy Greenwich, Connecticut, received five times more funding per low-income resident than poorer Camden, New Jersey.¹⁹ 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.

Excessive Bureaucracy

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.²⁰ 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.²¹

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.

One cause of high administration costs in grant programs is that governments and private groups must comply with complex federal regulations. Consider, for example, that the State of Virginia's CDBG manual explaining the regulations is 170 pages long, and the state's application package for grant applicants is 132 pages long.²²

Waste and Abuse

Moving funding for local projects up to the federal level eliminates responsible city planning. When local funds are used for local projects, local officials have an interest in ensuring that the benefits of public projects outweigh the costs. But when the federal government is the source of funds, local governments tend to invest in a range of inefficient and wasteful activities.

The CDBG program also has a history of financial abuse and dubious project spending. In 2006, HUD's inspector general found that fraud by CDBG grant recipients was common—and increasing.²³ After recently auditing a sample of just 35 CDBG grantees, investigators found more than $100 million in improper or questionable spending, including:

• An audit of redevelopment projects in San Diego found that $12.9 million was spent on activities there were ineligible or lacked proper records. For example, CDBG funds were used improperly for a festival to celebrate a shopping center.²⁴
• The City of Chicopee, Massachusetts, spent $4.3 million on projects that were ineligible or lacked proper records. Some of the funds went to the affluent neighborhood where the mayor lived. In 2005, the mayor was arrested on extortion charges related to illegal campaign contributions received in return for helping a developer obtain development funds.²⁵
• The City of Utica, New York, spent funds on a variety of improper uses, such as $902,799 on a marina and $255,158 on ski chalet renovations.²⁶ That is not the targeting of funds to poor neighborhoods that CDBG supporters envisioned.

 In 2006, HUD's inspector general reported that in just two and a half years of CDBG investigations it had "indicted 159 individuals, caused administrative actions against 143 individuals, had 5 civil actions, 39 personnel actions, and over $120 million in recoveries."²⁷ The inspector general found that there were "repeated" problems with the program, including the improper use of funds, grantee inability to account for funds, and a lack of monitoring and oversight.

Here is a sampling of some of the local-level scandals to hit the CDBG program over the years:

• The economic development agency of Essex County, New Jersey, spent $1.6 million on county administration in assisting just seven businesses.²⁸
• A government employee in East St. Louis pled guilty to income tax evasion after directing $158,000 in CDBG funds to her bank account.²⁹ East St. Louis has long had corruption problems with federal grant monies.
• Former South Dakota governor Bill Janklow directed $825,000 of CDBG funds to a shooting range, which HUD ruled was an improper use of funds.³⁰ HUD found that 9 of 12 CDGB awards it examined in the state failed to meet low-income targeting requirements.
• Miami officials used CDBG funds to back a $5.4 million low-interest loan for an investment company controlled by a wealthy Saudi Arabian sheik.³¹
• Selected audits of CDBG grantees in 1995 produced 31 indictments and 21 convictions for misuse of funds.³² Auditors found that the owner of a Louisiana sawmill used funds to pay off personal debts, the city of Troy, New York used $1.6 million to lure a hockey team to the city, and a California Indian tribe used $404,000 to construct an off-track betting facility.
• The head of the Multicultural Center in Modesto, California, who was a Democratic Party activist, used $47,500 of CDBG money for personal and political purposes.³³
• The government of Washington, DC, gave $1 million to a funeral home for a business expansion, which ended up never occurring. That prompted the Washington Times to note: "It's an example of a repeated problem the city has administering its community development block grants."³⁴
• Niagara Falls and Lockport, New York, used $12 million to build an amusement center, which shut down after just six months of operation. The company behind the project pled guilty to defrauding HUD.³⁵

The CDBG program has been a poster child for waste and abuse for decades. Unfortunately, few members of Congress have shown any interest in cutting the program or even conducting oversight. A 1989 news article explains why:

GAO investigators have been trying to interest congressmen in scrutinizing the $3 billion Community Development Block Grant program. … Describing the program as the "next bombshell" waiting to hit HUD, investigators said it is rife with waste and mismanagement, but they got no takers. Lawmakers explained that since they had been struggling to save the grants from Reagan's budget ax, they would be embarrassed by a scandal. In addition, many districts get money from the program, and legislators do not want to launch a probe that could turn off the spigot.³⁶

Despite all the abuses, perhaps policymakers believe that CDBGs are nonetheless effective at stimulating growth. After 30 years and more than $100 billion it should be easy to demonstrate the program's success, but it's hard to find any examples of city rejuvenation created by the program.³⁷ Instead, numerous cities, such as Detroit, which have been major CDBG recipients, have fallen further into decline. The reality is that no amount of federal money can overcome the local hurdles to growth in cities such as Detroit—including political corruption and destructive tax and regulatory policies. Indeed, just like international development aid, federal aid to the cities likely increases corruption and stalls much-needed local reforms.

With the federal government running huge deficits, it cannot afford to fund ineffective and often wasteful local development projects. Community development is a local concern, and only local leaders and businesses using their own funds can make sound cost-benefit decisions on projects. By providing local leaders with handouts from Washington, we simply encourage them to make irresponsible decisions. At the same time, experience has shown that federal politicians use local projects as political tools that are disconnected from sound economics.
 

Affordable Housing Grants

The HOME Investment Partnerships Program is a $2.3 billion block grant program established by the National Affordable Housing Act of 1990. It provides funding to state and local governments to develop "affordable" housing for lower-income families. HOME funds can be used for housing rehabilitation, assistance to homebuyers, rental construction, rental assistance, and counseling services.³⁸

Funding recipients must match every dollar of HOME funds with 25 cents from nonfederal sources. Recipients must also set aside 15 percent of their funding for housing development activities in which nonprofit organizations are the owners, developers, or sponsors of the housing.³⁹ A generous 10 percent of funds can be used for administrative costs.

In 2003, Congress added an American Dream Downpayment Initiative to HOME. It provides down payment, closing costs, and rehabilitation aid to first-time homebuyers with modest incomes.⁴⁰ A 2006 GAO report concluded that "limitations of HUD's data did not allow us to draw any conclusions about the program's accomplishments."⁴¹ The Obama administration labeled the program "duplicative" and called for its elimination."⁴²

Here are some typical audit findings by the HUD inspector general on the HOME program:

• Of $10.5 million received by Fulton County, Georgia, $6.4 million involved questionable usage.⁴³ For example, one group was loaned $244,850 for a home-building project and was then given another $220,000 to cover cost overruns. The group went into default and the taxpayer money was never recouped.⁴⁴
• Bridgeport, Connecticut's HOME program ran afoul of auditors, who found almost $1 million in "unsupported" spending and excessive costs of various sorts.⁴⁵
• Some grants received by the Puerto Rico Department of Housing were unauditable due to poor accounting, while others were for work not performed or for excessive costs. More than $2 million of spending was "ineligible" or "unsupported."⁴⁶
• The city of Pontiac, Michigan, loaned a developer $1.4 million in HOME funds to construct houses. The developer built shoddy homes and reneged on $367,000 owed to the government.⁴⁷
   

Homeless Assistance Grants

In 2009, HUD spent $1.6 billion on homeless assistance grants, which were delivered through a remarkably complex web of programs. The origin of these programs was the 1987 Stewart B. McKinney Homeless Assistance Act.⁴⁸ There are four separate homeless grant programs, each with its own set of complicated rules: ⁴⁹

• Emergency Shelter Grants. These are distributed to state and local governments, who parcel the money out to local government agencies and nonprofit groups that provide homeless services. Funding can be used for such items as emergency shelters, health care, and rental and utility assistance. Up to 15 percent can be used for administrative costs.
• Supportive Housing Program. These are competitively awarded grants to states, local governments, public housing authorities, and nonprofit groups. Funds are to be used for rehabilitation or construction of housing for the homeless, and for services such as health care, counseling, and employment assistance.
• Shelter Plus Care Program. Grants are competitively awarded to states, local governments, and public housing authorities. Funds are intended to be used for supportive services and rent subsidies for disabled and homeless individuals.
• Single Room Occupancy. These grants are competitively awarded to public housing authorities and nonprofits. Funds are used to rehabilitate properties to create multiple single-unit rooms to permanently house the homeless.

These grants have created a labyrinth of bureaucratic red tape. HUD has taken some steps to streamline the administrative burden, but Congress has not moved on GAO reform recommendations. Regarding these grants, the GAO noted, "overlapping regulations and reporting requirements, as well as the unpredictability of the competitive grants, appropriation levels, and varying lengths of the grant awards made it difficult to administer these programs."⁵⁰

HUD is not the only federal agency that has programs for the homeless. According to a 2002 GAO report, there are 50 federal programs administered by eight agencies that provide services to the homeless.⁵¹ But even if federal homeless programs could be streamlined, this sort of spending is not a proper federal responsibility. It makes more sense for charitable groups and churches to deal with the problem on a local basis. Funds emanating from Washington pass through multiple layers of bureaucracy, which results in waste and ineffectiveness. The following are a sampling of audit findings on these homeless grants by HUD's inspector general:

• The city of Dallas homeless grants are so poorly administered that auditors proposed that all federal funding be cut off.⁵² Thousands of dollars were spent on ineligible activities, including rental payments for vacant apartments and for drug traffickers. The city's reports included math errors, inconsistencies, and other problems.⁵³
• A California grantee providing housing services for the homeless could not document $108,853 in expenses. Auditors criticized the poor oversight by local officials.⁵⁴
• A New York City housing grantee had $1.7 million in unsupported expenses, meaning that the organization had no records to account for charges to the government.⁵⁵
• A Chicago housing grantee was found to have $671,252 in unsupported expenses, and had used grant money to purchase ineligible items such video games, audio systems, digital cameras, party supplies, and maintenance on the director's personal vehicle.⁵⁶
   

Housing for Persons with AIDs

The $289 million Housing Opportunities for Persons with AIDS program was established as part of the National Affordable Housing Act of 1990. HOPWA makes grants to state and local governments for housing assistance and support services that benefit low-income persons with HIV/AIDS. About 90 percent of the funds are distributed by formula and 10 percent by grant competition.

As usual, the formula grants have prompted political battles over the geographic distribution of funding. The current formula uses the cumulative number of AIDS cases in an area, which illogically includes individuals who have died.⁵⁷ The Bush administration tried to change the formula, but Congress has resisted fixing it, presumably because some cities would lose out in any change in the formula.

As with other HUD grants, the HOPWA program has been plagued by waste, fraud, and abuse:

• The city of New Orleans gave a politically connected nonprofit group $1.3 million for a housing project on which it had already spent $1.7 million of federal funds—with nothing to show for it. The New Orleans Times-Picayune noted, "It's hard to believe that such a sum was poured into the complex's two squat, beige brick buildings. … Nearly every window is broken, leaving the units completely open to the elements."⁵⁸ Much of the grant money went toward six-figure salaries at the nonprofit group.
• The New York Post reported that New York City was using federal funds to place some of its homeless AIDs patients in "glitzy" four-star hotels.⁵⁹
• A Washington, DC, nonprofit group "could not substantiate how it spent $1,160,873 in federal funds" (92 percent of the HOPWA funds that it received), according to HUD's inspector general.⁶⁰ The inspector general found that the group spent thousands of grant dollars on cigarettes, movie tickets, and bingo games.
• The HUD inspector general found that a Virginia organization "could not substantiate how it used $339,661 of $353,562 of grant funds it received from HUD under a Supportive Housing Program renewal grant and a Housing Opportunities for Persons with AIDS grant."⁶¹
   

Self-Help Homeownership Grants

The Self-Help and Assisted Homeownership Opportunity Program provides grants to facilitate "self-help" homeownership. It was established by the Housing Opportunity Program Extension Act of 1996 and cost $50 million in 2009. Low-income homebuyers provide "sweat equity" by contributing labor toward the construction of their homes. Up to 20 percent of SHOP funds can be used for administration.

Only a small number of nonprofit groups receive SHOP funds, including Habitat for Humanity and the ACORN Housing Corporation.⁶² The latter group is part of the Association of Community Organizations for Reform Now, which is a left-wing political outfit known for perpetrating voter fraud.⁶³ As one columnist noted, ACORN "promotes a 1960s-bred agenda of anti-capitalism, central planning, victimology, and government handouts to the poor."⁶⁴ In recent years, ACORN has received more than $2.7 million in SHOP funds.⁶⁵

It is disconcerting that taxpayer money is entrusted to an organization with a political agenda diametrically opposed to taxpayer interests. But it is also disturbing that reputable organizations, such as Habitat for Humanity, jeopardize their independence by subjecting themselves to the political controls that come with government money. Habitat used to eschew government handouts, as its founder believed that "the conventional welfare-state approach to housing robs the poor of their dignity."⁶⁶ Habitat has recently received over $118 million in SHOP funds.⁶⁷
 

Rural Subsidies

The Rural Housing and Economic Development program was created by Congress in 1998. The program, which cost $24 million in 2009, provides grants to nonprofit groups, Indian tribes, and state and local governments. The eligible activities for federal funding are broad—everything from developing strategic plans to the acquisition of land and buildings.⁶⁸

The HUD inspector general noted that RHED was at high risk of awarding funds to groups that are incapable of achieving their stated objectives.⁶⁹ While no inspector general audits of RHED grantees are currently available, it is probable that similar waste and abuse plagues it as plagues other community development programs.

The Bush administration tried to terminate RHED, arguing that it "is duplicative, particularly of programs provided through the U.S. Department of Agriculture, which manages a portfolio of rural housing and economic development grants programs that vastly exceed HUD's RHED program."⁷⁰ Indeed, there are hundreds of federal programs that provide subsidies to rural America.⁷¹

The RHED program was created to subsidize rural America within a department created to subsidize urban America. It illustrates the propensity of lawmakers to spread the benefits of spending as broadly as possible to garner maximum congressional support. But community development, whether urban or rural, is not something that the federal government ought to be involved in.