During the 1970s and 1980s, we issued a number of reports on the funding  formulas used to direct Revenue Sharing funds to local communities based  on both their capacity and willingness to utilize local resources to address  local needs. This wide range of experience provides us  with an in-depth understanding of the issues associated with the equitable  and efficient targeting of federal grant dollars. The first principle is based on the idea that  communities with similar needs should receive roughly similar per capita  funding amounts. However, determining the extent to which program  funding is disproportionately allocated to communities with the highest  needs involves value judgments that are the responsibility of policymakers  rather than technicians and administrators. One of the  criticisms directed at the CDBG program in the administration’s fiscal year  2006 budget proposal is that there is a “lack of clarity in the program’s  purpose,” a statement which is supported by the long list of specific  program objectives cited in HUD’s report. These  variables represent 80 percent of HUD’s overall index of need. Many Features of CDBG Funding Formulas Limit Their Ability to Consistently Target High-Need Communities

The HUD study reaches a number of valid conclusions regarding the  targeting performance of the program’s funding formulas. I will just  mention their conclusions to echo the more detailed analysis presented in  the HUD report:    The primary reasons entitlement communities with similar community  development needs receive wide differences in funding are 1) using  two formulas rather than a single formula and 2) the factor that reflects  older housing in formula B results in especially large disparities in  funding among communities with similar needs because units occupied  by higher income residents typically are not in need of rehabilitation at  public expense. Formula A is most responsible for reducing the extent to which funding  is targeted to high-need communities, because its reliance on general  population precludes greater targeting based on community  development needs. Changing the poverty measure to one based on the poverty status of  households rather than individuals would avoid awarding large grants  to low-need college towns. While HUD Formula Options Improve Needs Targeting, Additional Options Should Also Be Explored before Deciding on a Particular Reform Strategy

In our view, the HUD study has clearly identified the major elements that  limit the current formula’s ability to efficiently and effectively target  funding to high-need communities, and it puts forward a number of  formula alternatives that would strengthen the program in this regard. The  first option, formula alternative one, introduces revised indicators of  poverty, older housing units and slow population growth and decline, and  places greater emphasis on the poverty indicators. In contrast, a third option, formula alternative three,  introduces two additional factors—community per capita income and the  per capita income of the wider metropolitan area in which the grantee is  located. The metropolitan PCI factor partly offsets the effect of  community PCI by increasing funding for communities in high-income  metropolitan areas. The net effect of both factors is that the two factors, to  some extent, work at cross purposes. The HUD report suggests using the two per capita income factors because  they provide a means of directing more funding to high-need communities. Clearly, the introduction of per capita income can be justified on the  grounds that it provides a means of taking into account the underlying  economic strength of communities and their ability to fund local needs  from local resources. Central to such a reexamination is assessing how to  better target federal assistance to those with the greatest need and the  least capacity to meet those needs.
Why GAO Did This Study

Congress asked GAO to comment on the Department of Housing and Urban Development's (HUD) 2005 report on the Community Development Block Grant (CDBG), "CDBG Formula Targeting to Community Development Need." The CDBG program distributes funding to communities using two separate formulas that take into account poverty, older housing, community size, and other factors. That study evaluates the program's funding formula from two perspectives: (1) to what extent do communities with similar needs receive similar CDBG funding, and (2) to what extent are program funds directed to communities with greater community development needs. The HUD report is particularly salient in light of the administration's 2006 budget request which criticizes the program for not effectively targeting high-need communities. Congress asked us to provide our views on the HUD study based on our experience and past assistance to various congressional committees on a wide variety of federal formula funding issues.

What GAO Found

HUD's report on the CDBG formula provides a thoughtful and sophisticated analysis of those elements of the formula that impede effective and equitable targeting of limited federal resources. Central to HUD's analysis is an index of need that encompasses a wide variety of indicators related to poverty, housing infrastructure, and population growth and decline. While we would question some of the factors in their index, overall we believe it serves as a reasonable basis for evaluating CDBG targeting. The study identifies a number of causes that explain the poor performance of the current formula. The use of two formulas rather than one is an important reason communities with similar needs do not receive similar funding. The use of population size as a need indicator significantly reduces the extent to which funding is directed to high-need communities. Changing the poverty measure to one based on the poverty status of households rather than individuals would avoid large grants to communities with large student populations. An increasing number of communities have attained the minimum population size necessary to be eligible for formula funding and this has also reduced funding to communities with the highest needs. In addition to presenting formula options that address a number of these problems, HUD's study also presents an option that would include per capita income in the formula. The inclusion of per capita income could be justified on the grounds that it directs more funding to communities with weaker economic capacity to meet needs from local resources. However, some of the effect of this factor is offset by introducing an additional factor--metropolitan per capita income. The metropolitan per capita income factor directs more rather than less funding to communities located in high-income metropolitan areas. This works at cross purposes with the local per capita income factor. GAO suggests that Congress consider a needs-based criterion to determine eligibility and eliminate the grandfathering of eligibility into the formula before this approach is adopted as a means of improving the targeting performance of the program.