Welcome to the first edition of NAHRO's CD Edge, our new free e-newsletter focused on federal community development programs.

NAHRO will distribute the CD Edge approximately twice a month in an effort to keep community development professionals up to date with the latest news on federal community and economic development programs and policies including CDBG, HOME, brownfields redevelopment, and eminent domain legislation.

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In This Issue:

Making a Difference: The Importance of Restoring Federal Community Development Funding
GAO Briefs NAHRO on Results of New CDBG Formula Study
FY 2008 Appropriations Update
Eminent Domain Update

Making a Difference is the second in an ongoing series of NAHRO publications examining the consequences of reduced funding for core federal housing and community development programs. NAHRO released Paying the Price: The Costs of Cutting Public Housing Funding earlier this year.

Please consider sharing this new resource with members of your Congressional delegation and their staff during the August recess. It is our hope that it will be helpful to you as you advocate for full funding for all of HUD's affordable housing and community development programs.

The GAO effort assessed the current CDBG formula's ability to target resources to need while also exploring alternatives to the current formula structure. The GAO's study is separate from a HUD review of the formula released in February 2005. (NAHRO members can access NAHRO's detailed review of the 2005 HUD study here.) During the August 13 briefing, GAO officials emphasized that their examination focused almost exclusively on the CDBG entitlement program as opposed to the states and small cities program.

Much like the 2005 HUD study, the GAO examination involved the creation of a community development needs index for entitlements. GAO staff identified a number of potential variables to constitute the index, including population size; poverty population; employment status; age of housing; metropolitan Statistical Area per capita income; entropy index (an index that measures the segregation of minority groups); and mean murder rate (from the FBI's Uniform Crime Reports).

Using a statistical technique known as "factor analysis," the individual data elements were translated into a single community development needs score for each entitlement community. (The final GAO report is expected to include an appendix listing each entitlement's score on the needs index.) GAO then worked to develop alternative formula factors that correlate closely with the scores produced by the needs index.

When released, the final GAO report will feature three alternative formula structures for the distribution of CDBG funding to entitlement communities. The first of these formulas, known as the "Needs" formula, would allocate CDBG funding according to each entitlement's community development need, much as the current formula structure is intended to do. Instead of the dual Formula A/Formula B structure currently employed by the program, the first GAO formula alternative would feature a single formula with three variables: 1) Poverty, adjusted for cost of living (weighted at 50 percent); 2) Pre-1970 housing units rented by poverty households (20 percent); and 3) Working age population lacking high school diploma (30 percent).

Of particular note within the first GAO alternative formula is the poverty variable. Because that particular variable involves recalculating the poverty line for every county in the United States based on local cost of living, entitlements located within high-cost counties would be considered to have higher poverty populations under the GAO alternative than under the current CDBG formula structure. Lower-cost areas would experience the opposite effect. It should also be noted that in an effort to exclude dependent college students from the poverty population, the poverty variable within the first GAO alternative formula omits students aged 15-24 living in poverty.

The second GAO formula alternative consists of the "Needs" formula adjusted for variations among grantees in the cost of providing services. The current CDBG formula structure does not account for cost variations across jurisdictions. According to GAO officials, over half of current CDBG spending goes toward construction and much of the cost differences among CDBG jurisdictions are due to differences in the cost of labor. The cost of services adjustment factor included in the second GAO formula alternative takes into account land values (with HUD-issued Fair Market Rents serving as a proxy), construction wages, public administration wages, and a handful of other variables related to the cost of materials. Under this alternative, the formula grant amount for higher-cost jurisdictions would be adjusted upward to account for the higher cost of providing CDBG-funded services, while grant amounts for lower-cost jurisdictions would be adjusted downward.

The third and final GAO formula alternative is simply the second alternative plus an additional weighted variable designed to account for a jurisdiction's fiscal capacity to fund community development activities using local resources. This variable is essentially the jurisdiction's per capita income adjusted for the extent to which its local employment base allows for revenue through incremental taxation. The variable is calculated in part by examining the ratio of employees to residents within a jurisdiction. Under this final formula alternative, communities with relatively high fiscal capacity would see their CDBG formula grants adjusted downward, while communities with low fiscal capacity would be see their grants adjusted upward. GAO officials suggested that the fiscal capacity variable could be weighted at 20 percent under the third formula alternative.

GAO officials readily conceded that including a fiscal capacity adjustment factor would be controversial. NAHRO has previously cautioned against adjusting CDBG grants for per capita income. In his April 2005 testimony before the House Government Reform Subcommittee on Federalism and the Census, NAHRO Executive Director Saul Ramirez said the following:

"Many higher per-capita income communities may have pockets of need, and the costs associated with meeting these needs through activities benefiting low- and moderate-incomer persons could be quite high. It is assumed that many of these higher per-capita income communities have sufficient tax bases to find, if they so choose, additional funds to cover the loss of CDBG funds. However, many communities face state-imposed prohibitions against raising property taxes or levying local income taxes. Furthermore, many communities are already overly reliant on their residential tax base and face a shortage of taxable commercial property. And let us not forget that many communities with higher per-capita incomes already spend a significant amount of their own revenues on community and economic development."

According to GAO officials, the final report will most likely not include projected grant amounts for entitlements under each alternative formula. The final report will include each entitlement community's score on the GAO-developed community development needs index, as well as rankings of relative need related to each of the three formula alternatives. GAO officials declined to provide a date for the final report's release.

As approved by the House, H.R. 3074 includes some positive news for supporters of HUD's community development programs. For the second year in a row, the House has rejected the president's proposal to slash funding for CDBG formula grants. The bill funds CDBG formula grants at $3.936 billion (including insular areas), a 5.9 percent increase over the FY 2006 and 2007 appropriated levels of $3.711 billion. The president's FY 2007 budget requested just $2.775 billion for CDBG formula grants.

The version of the FY 2008 THUD spending bill (S. 1789) approved by the Senate Appropriations Committee on July 16 provides $3.708 billion for CDBG formula grants. Recall that CDBG formula grants were funded at $4.110 billion for FY 2005 and $4.331 billion for FY 2004. NAHRO has consistently advocated for $4.5 billion in formula grant funding.

Funding for Economic Development Programs Preserved: Under H.R. 3074, the House provides $3.7 million for the Section 108 program, an amount that would subsidize up to $137.5 million in guaranteed community development loans. The bill also provides $9.9 million for BEDI and $16.8 million for the Rural Housing and Economic Development (RHED) Program. The Senate bill provides $6 million for the Section 108 loan guarantee program and roughly the same amounts as H.R. 3074 for BEDI and RHED. The administration's FY 2008 budget argued that these programs are duplicative of CDBG and proposed eliminating all three. NAHRO continues to advocate for increased funding for these important economic development programs.

NAHRO members: For more information on H.R. 3074 and S. 1789 (including provisions on the CDBG formula, HOPWA, Section 202 and 811, and the American Dream Downpayment Initiative) access the full version of this article on Direct News. Direct News is NAHRO's members-only email service providing breaking news and information on federal housing and community development programs.

Eminent Domain and FY 2008 Appropriations: The Senate version (S. 1789) of the FY 2008 THUD Appropriations Act includes language prohibiting the use of FY 2008 THUD funds for federal, state or local projects that use eminent domain for any purpose other than a public use. For the purposes of the legislation, economic development that primarily benefits private entities is not considered a public use. The use of funds for mass transit, railroad, airport, seaport and highway projects; certain utility projects; structures designated for use by the general public; projects for the removal of an immediate threat to public health and safety; and projects involving brownfields would remain eligible for federal funds. H.R. 3074 does not include this prohibition.

This particular prohibition on the use of funds originated with the so-called "Bond Amendment" to the FY 2006 Transportation, Treasury, and HUD spending bill. The Bond Amendment was a reaction to the U.S. Supreme Court's decision in Kelo v. New London in which the Court held that, under certain circumstances, the use of eminent domain in support of economic development could be considered a permissible public use. NAHRO has been on the record in opposition to the Bond Amendment since September 2005.