Program funds can be used for  housing, economic development, neighborhood revitalization, and other  community development activities. States distribute their allocated CDBG funds to  nonentitlement communities. After the set-asides, 70 percent of CDBG  funds are allocated to entitlement communities, and the remaining 30  percent are allocated to states to distribute to nonentitlement  communities. In fiscal year 2015, Congress appropriated about $3.1  billion for the Community Development Fund, $66 million of which was set  aside for Native American tribes. HUD’s Low- and Moderate-Income Summary Data

For projects designed to serve either the entire community or a smaller  area within a community, HUD produces the LMI summary data to help  states and communities determine whether at least 51 percent of a  proposed project’s service area is comprised of LMI persons. Communities Have the Option to Conduct a Local Income Survey When They Disagree with Census Data

For nonentitlement communities that disagree with their CDBG eligibility  determination based on HUD’s use of ACS data, HUD’s and states’  primary policy is to allow these communities to conduct local income  surveys. HUD and States Allow Local Income Surveys When Service Areas Do Not Align with Census Geographic Boundaries

HUD’s CDBG regulations and local income survey guidance also discuss  the use of local income surveys in place of the LMI summary data when  the service area benefitting from an activity is larger or smaller than the  census boundaries. Based on our review of CDBG guidance from 49 states and  Puerto Rico, 1 state does not allow nonentitlement communities to use  the LMI summary data to show they meet the LMI threshold; instead, this  state requires all communities applying for funding using the area-benefit  criteria to conduct local income surveys. For example, officials from four states said it is  challenging for communities to obtain a sufficient number of survey  responses to be considered representative of the nonentitlement  community’s income. State and local stakeholders cited cost as a challenge associated with  conducting a local income survey. HUD and most states provide guidance that nonentitlement communities  can use to develop and conduct their local income surveys. Stakeholders Noted That Potential Alternative Data Sources Have Limitations and That Collecting Accurate Income Information Is Generally Challenging

Stakeholders we interviewed noted that alternative data sources that  might be used to demonstrate that communities meet the LMI  requirements of the CDBG program have limitations, and they cited  challenges associated with measuring income generally. Stakeholders we interviewed cited several types of alternative sources of  income information that have not been used by communities that  disagree with census data to determine CDBG eligibility:
Other large-scale Census Bureau surveys that include  information on income. These could include federal and state tax data or data on enrollment  in income-based programs, such as the National School Lunch  Program for free and reduced-price meals, Medicaid, or the  Supplemental Nutrition Assistance Program (SNAP). For example, the Census Bureau’s Small Area  Income and Poverty Estimates (SAIPE) supplements ACS income  data with administrative data such as federal income tax return data. However, while these potential sources could provide information on  income at the individual or community level, stakeholders also noted that  they would likely have one or more of the following limitations:
Does not fully allow communities to determine if they are LMI. Is not easily accessible by communities. Is not available at small geographic levels. Because  nonentitlement communities are small communities, an alternative  data source would need to be available at a sufficiently small  geographic level. Is not more precise than ACS. In  addition, in July 2015, the Census Bureau announced a plan to evaluate  the availability and sustainability of using external data sources, such as  Social Security Administration and Internal Revenue Service data, to  supplement income information collected by ACS, which they said could  improve the data. According to the research plan, the Census Bureau  expects to make specific recommendations before March 2017. They provided technical  comments, which we incorporated as appropriate. Appendix I: Objectives, Scope, and Methodology

You asked us to review options for nonentitlement communities that  disagree with their Community Development Block Grant (CDBG)  eligibility determination based on the Department of Housing and Urban  Development’s (HUD) use of American Community Survey (ACS) data. This report examines (1) HUD’s and states’ policies for communities that  disagree with their eligibility determination based on HUD’s use of ACS  data or are not able to use HUD’s Low- and Moderate-Income (LMI)  summary data and the challenges, if any, communities face in using  available options, and (2) stakeholders’ views on whether there are  possible alternative data sources for determining eligibility under CDBG’s  LMI objective. Appendix III: Changes in the LMI Status of Nonentitlement Communities between 2000 and 2006–2010 Low- and Moderate-Income Summary Data

Officials from the Department of Housing and Urban Development (HUD)  and some states we interviewed noted that each time HUD updates its  Low- and Moderate-Income (LMI) summary data, whether from one  decennial census to another as in the past, or the more recent 2014  transition from the 2000 decennial census to the 2006–2010 American  Community Survey (ACS) data, some nonentitlement communities see  changes in their LMI status.
Why GAO Did This Study

Administered by HUD, the CDBG program provides funding for housing, community, and economic development programs. After set asides, HUD must allocate 70 percent of funds to cities and urban counties, known as entitlement communities, and 30 percent to states for distribution to eligible nonentitlement communities. In fiscal year 2015, Congress appropriated $3 billion for the CDBG program, of which HUD allocated $900 million to states. Seventy percent of CDBG funds must principally benefit low- and moderate-income persons, and Census Bureau data are used for this determination. In 2014, HUD transitioned from using decennial census long form income data (which are no longer collected) to ACS income data, which HUD uses to update its income data every 5 years.
GAO was asked to review HUD's policies related to communities that disagree with their CDBG eligibility determination based on HUD's use of ACS data. This report examines (1) HUD's and states' eligibility policies and (2) potential alternative data sources. GAO interviewed CDBG administrators from 8 states and from nonentitlement communities in each of these states, all of which were selected based on available data and CDBG stakeholders' recommendations; spoke with other CDBG stakeholders; and reviewed CDBG guidance from 49 states and Puerto Rico. GAO also analyzed how use of ACS data can affect community eligibility.
GAO makes no recommendations in this report. HUD and the Department of Commerce provided technical comments.

What GAO Found

The Department of Housing and Urban Development's (HUD) and states' primary method for communities to demonstrate eligibility when they disagree with HUD's eligibility determination is to allow communities to conduct their own local income surveys to show that they meet the Community Development Block Grant (CDBG) income threshold. HUD instructs small communities, known as nonentitlement communities, to use data based on the Census Bureau's American Community Survey (ACS) to determine whether at least 51 percent of residents in their proposed project service areas are low- and moderate-income persons and are therefore eligible for CDBG funds. However, communities may disagree with their eligibility determination based on ACS data, or they may be unable to use this method because the project's service area is larger or smaller than the census boundaries. In these cases, HUD and states allow communities to conduct their own local income surveys to demonstrate eligibility. State officials GAO interviewed said it is common for nonentitlement communities to use local income surveys as an alternative to HUD's ACS-based data, and HUD and states provide guidance on conducting these surveys. However, stakeholders cited costs and other challenges nonentitlement communities face in conducting local income surveys, including resource constraints, administrative burdens, and difficulty in obtaining a sufficient number of survey responses. Other than local income surveys, alternative methods for showing eligibility for CDBG funds are limited. For example, communities may qualify by funding activities that serve populations HUD presumes to be low- and-moderate income, such as the elderly or homeless.
Stakeholders GAO interviewed cited challenges associated with measuring income and limitations associated with alternative data sources that might be used to demonstrate that communities meet the low- and moderate-income requirements. For example, stakeholders cited general challenges associated with measuring income and poverty, such as fluctuations in an individual's or community's income over a year. Some stakeholders cited alternative sources of income information that have not been used by communities that disagree with census data to determine CDBG eligibility. However, they noted that these sources would likely have one or more of the following limitations:
does not fully measure a community's income;
is not easily accessible by communities;
is not available at small geographic levels; or
is not more precise than ACS.
For example, some sources of income data, such as income tax data, may have limited public availability—limiting their accessibility by communities—and income tax data would not include low-income earners who are not required to file tax returns. Other sources, such as the Supplemental Nutrition Assistance Program and other income-based programs, would not provide data at a small enough geographic level to be useful for this purpose. The Census Bureau is in the process of exploring ways to use external data sources, such as Social Security Administration and Internal Revenue Service data, to supplement ACS to improve the data and expects to make recommendations by March 2017.