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CDBG Formula Targeting to Community Development Need

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CDBG Formula Targeting to Community Development Need CDBG Formula Targeting to Community Development Need U.S. Department of Housing and Urban Development Offi ce of Policy Development and Research CDBG Formula Targeting to Community Development Need Prepared by: Todd Richardson Office of Policy Development and Research U.S. Department of Housing and Urban Development Washington, DC February 2005 Foreword Last year marked the 30th Anniversary of the Community Development Block Grant (CDBG) program. The primary objective of the CDBG program is the development of viable urban communities, by providing decent housing, suitable living environments, and expanded economic opportunities, principally for low- and moderate-income persons. To divide the annual appropriation of CDBG funds among jurisdictions, the Congress designed a formula that is intended to provide larger grants to communities with relatively high community development need and smaller grants to communities with relatively low community development need. The CDBG statute identifies poverty, neighborhood blight, deteriorated housing, physical and economic distress, decline, suitability of one’s living environment, and isolation of income groups, among others, as important components of community development need. The CDBG formula uses variables identified in the 1970s that proxy these dimensions of community development need. The core variables in the formula that allocates the CDBG funds to local jurisdictions have not been changed since 1978. This report provides the latest assessment of how well the variables being used in the CDBG formula continue to target funds toward community development need. It shows that the formula does generally continue to target to need. Among the entitlement communities, on a per capita basis, the 10 percent of communities with the greatest community development need receive four times as much as the 10 percent of jurisdictions with the lowest level of community development need. However, targeting toward community development need has declined substantially over the past 26 years. Over time, an increasing number of jurisdictions with similar need have come to receive substantially different grants. Furthermore, the amount of funds going to the most needy grantees on a per capita basis has decreased, while the amount of funds going to the least needy grantees on a per capita basis has increased. This report offers four alternative formulas that would substantially improve targeting to community development need. Each alternative provides trade-offs in terms of the following: • formula simplicity; • amount of funds reallocated; and • the type of community development need provided highest priority. It is important to recognize that any change to the existing formula that improves targeting to need will result in a significant redistribution of funds. Nonetheless, the Department hopes that serious attention be given to the alternatives presented in this report. We look forward to working with Congress, CDBG grantees, and other stakeholders to discuss alternatives to the current formula. Dennis C. Shea Assistant Secretary for Policy Development and Research Acknowledgements The author thanks Nelson Bregón, Richard Kennedy, Robert Duncan, Sue Miller, and Steve Johnson of the U.S. Department of Housing and Urban Development’s Office of Community Planning and Development (CPD) and Darlene Williams, Jennifer Stoloff, and Mark Shroder of the Office of Policy Development and Research (PD&R) for their comments and suggestions on earlier draft versions of this report. I am most indebted to both Robert Meehan of CPD, who provided invaluable institutional memory, data sets, and the core elements of Chapter 7 of this report, and Kevin Neary of PD&R, who taught me all that I know about formula allocations and provided the core elements of Chapter 8. F. Stevens Redburn and Dustin Brown of the U.S. Office of Management and Budget also provided helpful comments that greatly improved this report. I am extremely grateful to Giles Roblyer, Patricia Dumrose, and Linda Wolfe Keister of HR Communications, Ltd. for their careful editing. Despite the generous contributions from these individuals, any errors and omissions that remain in the report are, of course, my own. Table of Contents Executive Summary.................................................................................................... vii Chapter 1. Introduction. .................................................................................................1 Chapter 2. Current Formula Mechanics. .......................................................................5 Chapter 3. Developing a Community Development Needs Index. .............................11 Chapter 4. CDBG Targeting to Need: Entitlement Communities. .............................37 Chapter 5. CDBG Targeting to Need: States (Nonentitlements). ...............................53 Chapter 6. CDBG Alternative Formulas. ....................................................................61 Chapter 7. Impact of New Metropolitan Area Definitions. ........................................85 Chapter 8. The 70/30 Split. .........................................................................................91 Chapter 9. Conclusion. ................................................................................................95 Appendix A. Targeting to Individual Measures of Need Appendix B. Impact of Alternatives on Individual Grantees References v vi CDBG Formula Targeting to Community Development Need Executive Summary Purpose of the Report This report assesses how well the Community Development Block Grant (CDBG) formula, after introduction of 2000 Census data into the formula, allocates funds toward the community development needs identified in the Housing and Community Development Act of 1974. The U.S. Department of Housing and Urban Development (HUD) indicated in its Fiscal Year (FY) 2004 budget that it would undertake this study. The National Research Council’s Panel on Statistical Issues in Allocating Funds by Formula (Louis, Jabine, and Gerstein 2003) recommends that policymakers periodically review formula allocation programs to assess whether they perform as intended. The CDBG formula has undergone the following five major assessments since 1974: 1. The first of the reports, prepared at the request of Congress in 1976, pioneered the thinking on how to target funds to community development need (Bunce 1976). The major conclusions of that report led to the current CDBG allocation formula, which first allocated funds in 1978. 2. A follow-up report in 1979 discussed the targeting of the newly created formula (Bunce and Goldberg 1979). 3. & 4. With the introduction of new census data into the formula in 1980 and 1990, HUD performed follow-up studies to determine whether the CDBG formula continued to target well to community development need (Bunce, Neal, and Gardner 1983; Neary and Richardson 1995). Those studies showed that targeting to need has declined as new census data have been introduced into the formula, and significant funding anomalies still exist, but in general, the formula still provides considerably more dollars per capita to needier communities than it does to less needy communities. 5. This report continues in the tradition of those reports, assessing how well the formula allocates toward community development need following the full introduction of 2000 census data into the formula. This report also provides several alternative formulas for improving targeting to community development need. How the CDBG Formula Works After setting aside funds for special purposes such as technical assistance, projects specified by Congress, and the Indian CDBG program, the annual appropriation for CDBG formula funding is split so that 70 percent is allocated among eligible metropolitan cities and counties (referred to as entitlement communities), and 30 percent among the states to serve nonentitled communities. HUD uses two basic formulas, known as Formula A and Formula B, to allocate CDBG funds to entitlement communities. A similar “dual formula” system allocates funds to states. For entitlements, Formula A allocates funds to a community based on its metropolitan shares of: (1) population, weighted at 25 percent; (2) poverty, weighted at 50 percent; and (3) overcrowding, weighted at 25 percent, times appropriations. Formula B allocates funds to a community based vii CDBG Formula Targeting to Community Development Need on: (1) its share of growth lag1, weighted at 20 percent; and its metropolitan shares of (2) poverty, weighted at 30 percent and (3) pre-1940 housing weighted at 50 percent times appropriation. HUD calculates the amounts for each entitlement jurisdiction under each formula. Jurisdictions are then assigned the larger of the two grants. That is, if a jurisdiction gets more funds under Formula A than Formula B, its grant is based on Formula A. With this dual formula system, the total amount assigned to CDBG grantees has always exceeded the total amount available through appropriation. To bring the total grant amount allocated to entitlement communities within the appropriated amount, HUD uses a pro rata reduction. In FY 2002, for example, the pro rata reduction was 11.43 percent. Current Formula, 2004 Entitlement Communities States (Nonentitlements) Formula A Formula B Formula A Formula B 25% * population 20% * growth lag 25% * population 20% * population 50% * poverty 30% * poverty 50% * poverty 30% * poverty 25% * overcrowding 50% * pre-1940 housing 25% * overcrowding
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