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America’s Worst Urban Program
The Bush administration is right to put the community-development block grant out of its misery.
Spring 2005

In its new budget, the Bush administration is proposing to eliminate one of the last and least effective vestiges of the War on Poverty: aid to cities doled out in the form of community-development block grants. The president has proposed slashing funding for this $5 billion-a-year boondoggle, which allows local officials virtually a free hand in spending federal money in their cities. Bush would fold what remains of the block-grant program into other, more tightly focused and controlled grant schemes.

The end cannot come soon enough. Over the last 30 years, the block-grant program has expended some $100 billion in thousands of communities, with little to show for the effort. Local officials squandered the billions by financing unworkable projects that often went bust, investing in new businesses that couldn’t survive in depressed neighborhoods, and funding social programs with little idea of how they might actually strengthen their communities. A paradigmatic example of government ineffectiveness, this tempting pot of money gradually evolved into nothing more than a funder of local patronage and congressional pork spending. By killing the program, the Bush administration will do more than just save billions of taxpayer dollars. It will send a message that cities must cast off the 1960s dependency mentality that viewed federally subsidized programs as the only road to inner-city community revival and economic development—a notion that years of failed efforts should now put to rest.

Created in response to the riots of the mid-1960s, urban-aid programs sprang from a belief of those radicalized years that the economic decline of inner cities resulted from external forces unconnected to the cities’ own high-tax, antibusiness policies or the growing culture of inner-city dependency, nurtured by a vast expansion of welfare. Instead, such model-cities gurus as Edward M. Kaitz and Herbert Harvey Hyman, in their Urban Planning for Social Welfare, blamed urban decline on, among other things, federally subsidized home mortgages, which they argued encouraged the middle class to abandon the cities, and also on the nation’s Protestant ethic, which directed private charitable institutions to target their aid only at the “worthy poor” who embraced our culture’s values, but skimped on aid to those who didn’t. To counteract the sins of the federal government and of our bourgeois culture, federal officials proposed spending immense sums to rebuild neighborhoods, stimulate local economies, and finance social services that could restore the sense of community evaporating from inner- city neighborhoods as poverty demoralized their residents. President Johnson grandly asserted that with this investment, the federal government would help create “cities of spacious beauty and living promise,” while the director of his Office of Economic Opportunity, Sargent Shriver, confidently predicted that the government could all but eliminate poverty in a decade. Buoyed by such optimistic self-assurance, Washington crafted a panoply of urban-aid programs and eventually rolled them into one gigantic block grant, funneling billions of dollars of urban aid to local public officials, many of whom understood little about the true causes of urban decline or about how the economies of cities and neighborhoods worked.

A graphic illustration of how little this money accomplished is the failure of the program’s key initiative: a loan scheme designed to stimulate business in poor neighborhoods. War on Poverty planners had argued that poverty persisted in distressed areas partly because banks and other businesses redlined them, starving them of the investment they needed to revive by refusing to do business there. To counteract that lack of capital, the block-grant program poured hundreds of millions of dollars into businesses in poor communities, often financing companies that had difficulty repaying their debts, backing projects that went bust, and rarely creating jobs in the distressed areas at which they were targeted. Nationwide, nearly 25 percent of block-grant-backed loans wind up in default, according to a recent analysis of dozens of community-lending portfolios. Even worse, a second HUD program—known as Section 108—which allows block-grant communities to raise money for loans by floating HUD-backed notes, has a staggering 59 percent default rate. Although government programs are expected to make riskier bets than private banks (whose loan-default rates are typically in the low single digits), the stratospheric failure rate of HUD loans amounts to a squandering of millions of taxpayer dollars, since taxpayers are on the hook for these loan guarantees.

When it comes to such lending programs, the bigger the effort, the worse the failure. In Los Angeles after the 1992 riots, for instance, the federal government plowed a staggering $430 million into a loan program designed to finance a cornucopia of jobs in East, South, and Central Los Angeles but that went bust after creating pitifully few jobs. The federally sponsored Los Angeles Community Development Bank (LACDB) searched out worthy businesses in depressed areas, but since its crime-ridden target area remained an economically inhospitable place, the bank had trouble finding companies to lend to. Criticized for not making loans quickly enough, it then started pouring money unwisely into local businesses. It made one of its biggest loans to a former welfare recipient who had become a successful soft-drink salesman and wanted to open the country’s first minority-owned dairy. Turned down by every commercial lender he approached because the venture was so risky, the salesman, Kevin Copeland, won a $6 million loan from LACDB. Then the troubles began. The company racked up big losses, and, as the red ink spread, LACDB replaced Copeland and poured more money into the operation to keep it alive, until the bank had invested $24 million—violating its own lending limit. Even that wasn’t enough to salvage the dairy, which closed only 18 months after then–vice president Al Gore touted it in a speech as a major success story of government-backed lending.

Copeland’s dairy was far from LACDB’s only failure. Just two years after the bank started making loans, nearly one-third of the companies in its portfolio had gone out of business or were delinquent in their payments—more than triple the default rate that the program had planned for. A HUD audit found that more than two-thirds of the 150 companies that received assistance did not create the required number of jobs in the enterprise zone where the bank operated, and that only 11 percent of the jobs generated went to the zone’s residents, for whom they were intended. Last year, in response to the audit, the Los Angeles City Council shut down the program, supposedly a national model for lending in troubled areas.

A structural flaw in such programs is that they are not designed to make a profit, and that those who run them are investing the federal government’s money, not their own. As a result, these institutions are often carelessly and ineptly administered. A HUD audit found that in 30 percent of loans, local lending administrators didn’t collect enough information to verify the job-growth objectives that were the very point of the program. And when the city auditor of Syracuse, a former private-sector banker, recently scrutinized the city’s community-development loan program, he found not only that 60 percent of the loans were overdue, but was also stunned to learn that the program had no written lending criteria or standards for evaluating the viability of projects and companies, even though it had been pouring out money for years. The auditor, Philip LaTessa, said of his findings, “If this were the private sector, very possibly we would be in bankruptcy.”

Urban aid can do little in cities whose own policies are hostile to real economic development, a key reason that the block-grant program has wasted so much money. Like Los Angeles, Buffalo has received huge infusions of federal urban aid—more than half a billion dollars in community-development block-grant money alone in 30 years. If this kind of urban aid truly worked, Buffalo would be a shining star in the economic-development constellation because it has gotten more block-grant money per capita than any other U.S. city. But as a recent series in the Buffalo News revealed, the city has almost nothing to show for its massive federal aid, having squandered it on a succession of failed projects. It poured nearly $60 million into trying to revive its theater district, with numerous loans and grants to private businesses that then defaulted, including hotels, restaurants, and arcades. Elsewhere in the city, government lent money to a developer to create a trade center near a Canadian border crossing, but it went bust. Various office-tower and hotel projects have also failed. More than $23 million of the nearly $38 million lent by the city through the Section 108 loan program alone has gone bad.

These projects failed because Buffalo offers little foundation for success, despite the boost from federal aid. The city, once a great manufacturing center, began to decline in the 1960s, when, just as it was facing intense competition from other regions and from foreign goods, New York State officials began sharply raising taxes to pay for an expanding social agenda. The state also introduced new mandates, like requiring municipalities to pay a portion of the state Medicaid bill, which forced up property taxes, too. First businesses, then residents, began fleeing, and today Buffalo ranks as one of the nation’s most depressed cities. The state and city have continued on this ruinous course. New York has, according to the Tax Foundation, the second-worst tax climate for businesses among the states; its workers’ compensation system is the third most expensive for employers, nullifying Buffalo’s continuing efforts to reinvigorate its industrial base. And despite 50 years of population loss, Buffalo has the highest state and local tax burden of any metropolitan area in the country.

A similar waste of federal money has occurred in cities around the country that were equally inhospitable to business and so squandered funds on doomed projects. For 20 years, starting in the mid-1970s, two blighted Baltimore neighborhoods—Park Heights and Upton—received some $100 million in federal aid, but by the mid-1990s they were “much worse off today than they were” at the start of the federal programs, according to an economic-development consultant who studied them. Over that time, in fact, Baltimore’s economy shrank by 55,000 jobs, while the city poured much of its block-grant money into recreational centers and street improvements that had little impact on the economy but were designed, according to a study by a local foundation, to placate community activists’ demands for programs.

Conceived at a time when federal officials argued that communities should have wide latitude in deciding how to spend federal aid, the block-grant program has given local politicians a free hand in choosing what to invest in. Naturally, they have pumped big sums into their favorite projects, many having nothing to do with revitalizing depressed neighborhoods. Too often, these projects reflect what politicians believe the market should want, rather than what it really wants.

Governments, for instance, have used block grants to finance a building boom in convention centers and subsidized hotels that the private sector won’t fund—a building boom that has yielded a nationwide glut of space, as cities have vied with one another for a largely flat business. Starting in the 1980s, cities of all sizes, from Washington, D.C., and Jacksonville, Florida, to St. Louis, Tulsa, and Orem, Utah, have used block-grant money to fuel this boom, despite mounting evidence that the business was becoming saturated. “While the supply of exhibit space in the United States has expanded steadily, the demand . . . has actually plummeted,” according to a recent study by urban-planning expert Heywood Sanders of the University of Texas at San Antonio.

The building boom has sparked little, if any, economic development. The Washington, D.C., convention center, built with $834 million of public money, is attracting no more business than the city’s previous, smaller center. Similarly, St. Louis’s new Renaissance convention hotel, built with block-grant and other public money and touted as the final piece of a downtown renewal project, has been running at an occupancy rate below 50 percent, and rating agencies have put its government-backed bonds on credit watch.

Whatever economic development that block-grant money actually produces in a given locality almost always comes at the expense of somebody else, since communities now use federal urban aid to give businesses relocation incentives—in effect employing U.S. tax dollars to wage war against one another for existing jobs rather than creating new ones. Maryland, for instance, used block-grant money to buy land for a distribution center for Wal-Mart, the world’s largest company and one of its most profitable. Rhode Island and Delaware were also wooing the company to open the center on their turf. Similarly, Florida gave Sears, which Wal-Mart replaced as America’s largest retailer, a $5 million loan backed by community development block-grant money, in order to keep the retailer from moving a distribution center to Georgia.

The early designers of urban-aid programs saw inner-city decay as more than just an economic matter. Poor neighborhoods were losing not only jobs but also their sense of community, advocates for the poor argued, and therefore, as the original block-grant legislation said, the government should help create “viable urban communities” by setting aside money for social services, from senior-citizen centers and youth sports leagues to mortgage-counseling services and AIDS-prevention efforts. But the notion of “community development” was so vague—if not downright specious—that it has been hard to measure the effectiveness of programs that fall under that rubric, and in most cases government stopped trying long ago. Billions of community-development block-grant dollars have cascaded into social programs with little sense of how the money has been spent and whether it has helped achieve the program’s original goal.

Occasional audits of these groups suggest that much of it has gone to ineffective and inefficient programs, often run by politically connected operators. An analysis of Buffalo, for instance, which has spent about $75 million of community-development block-grant money over the last three decades on social services, found that, over one three-year period, 13 neighborhood housing groups helped initiate an average of only about two mortgages or home-repair loans per month each, nearly half of which were for $5,000 or less. Yet the groups collectively received about $1 million in annual funding and continued receiving it despite their poor performance.

If there are social services that demonstrably do good, municipalities have certainly not figured out how to target their block-grant spending to them in a way that achieves community-wide goals. After the 1992 riots in Los Angeles, for instance, Congress told the city and county that they could spend $14 million a year more on social programs aimed at “the underlying causes of the unrest”—as if everyone knew what they were. But the city and county largely just funneled the additional grant money into the existing array of senior centers, graffiti-removal programs, AIDS-prevention education, and so on. Little wonder that, according to a subsequent General Accounting Office (GAO) study, authorities could never “quantify how much public service funding was spent on the specific results or causes” of the riots, much less on whether that spending did anything to cure those problems. And little wonder that the federal Office of Management and Budget (OMB) has criticized the entire block-grant program for lacking the means to measure the output or effectiveness of many of its grantees.

However wrong the War on Poverty planners turned out to be, they at least operated under the notion, misguided but sincere, that their programs might do some genuine good. But as time passed, local officials and Congress have twisted the block-grant program for their own self-interested ends. They have allowed billions to go to politically connected groups, to congressional pork spending, and to wealthy communities—a far cry from the original intention of using the money to revive depressed neighborhoods.

Buffalo Common Council member Joseph Golombek Jr., a critic of his city’s block-grant efforts, calls local politicians “pigs feeding at the trough” of the program, and recent headlines from around the country make clear how widespread the problem is. In New London, Connecticut, for example, block-grant money funded an adult-education program run by the mayor’s brother. In Yonkers, New York, the local chamber of commerce used a community-development block grant to run a program that employed a political ally of the mayor; when the mayor began feuding with the head of the chamber and withdrew the block grant, the chamber ended the program and fired the mayor’s ally. In Buffalo, a council member successfully sought block grants for a literacy program run by her son-in-law and for an AIDS-prevention organization that she founded and that employed her daughter. That is par for the course in Buffalo, where numerous developers and community groups receive block-grant funding, though their performance is never evaluated, says Golombek. “The people who run them and staff them write out checks for politicians and staff their campaigns,” he says, “and they expect a payback.”

In treating the program as a patronage tool, local officials are, of course, following the example of Congress. The less effective the program has turned out to be at reversing inner-city decline, the more congressmen have hijacked it for their own pork-barrel spending. Each year the HUD appropriations bill contains hundreds of member “earmarks,” spending that is not part of the regular HUD grant-making process but instead is inserted by individual congressmen directly into federal legislation. These earmarks, totaling between $250 million and $300 million annually, have nothing to do with curing urban decay. An investigation by HUD’s general counsel in the late 1980s disclosed that members of Congress were using the program for such pet projects as sugarcane mills in Hawaii and a recreation center on Mackinac Island, a tony Michigan resort boasting a Grand Hotel and restored Victorian homes—about as far from urban decay as one can get in America.

A few years later, President Clinton’s transition team issued a blistering report that warned of the “systematic plunder of many millions of taxpayer dollars” in block grants and other HUD programs. It hasn’t stopped: in the last several years, congressmen have lavished over $2 million in grants on zoos, $340,000 for opera houses in Connecticut, Michigan, and Washington State, money for the Southern New Mexico Fair and Rodeo, the Alabama Quail Trail, and the Iao Theater in Wailuku, Hawaii. In election years, the block-grant program becomes a particularly valuable political piñata. In the 2002 elections, for instance, U.S. Senate Democrats, trying to protect their slim majority, inserted $31 million in block-grant earmarks into HUD legislation for states with close races—a 50 percent increase over the previous year in those states.

Little wonder, then, that politicians like Senator Charles Schumer, now head of the Democratic Senatorial Campaign Committee, ignore the manifold failings of the program, amply detailed in studies by everyone from the GAO to the HUD Office of Inspector General, and insist that block grants are the “seed corn for urban development and job growth” and “the single most important tool that cities like New York have to grow,” statements so at odds with the facts that they are simply ludicrous.

One of the most corrosive consequences of the War on Poverty is that it created an entitlement culture among the poor that soon spread to politicians representing them and then, over the years, to pols representing the wealthy and the middle class, too. This entitlement mentality has thoroughly infected the block-grant program. Soon after it began, mayors of thriving cities and congressional representatives from posh districts began complaining about their exclusion from the program. To win their support, the Carter administration expanded urban aid to include “non-distressed” communities. As a result, thousands of municipalities free of urban blight have used federal money to build tennis courts in tennis-playing neighborhoods, to finance arts centers, or to pretty up their downtown shopping districts. The town of Parkland, Florida, where family income is more than twice the national average, has used block-grant money to spiff up its local community center. Bergen County, New Jersey, where annual household income is 55 percent above the national average, spent nearly $280,000 in block-grant money over a three-year period to keep alive a privately owned local theater and arts center less than half an hour from Broadway. The town of Lower Merion, Pennsylvania, where household income is more than double the national average, has spent some of its block-grant money to compile a history of a local train station.

Some wealthy cities, like Greenwich, Connecticut, and Newton, Massachusetts, defend the program by pointing out that they, too, have some lower-income residents and that their programs focus on these few. But the original legislation intended to provide federal aid not to poor people everywhere but to the poor in cash-strapped cities whose budgets were under strain. By contrast, these wealthy communities have enormous tax bases and robust city budgets that could pay for services to the poor without help from the feds. Greenwich’s tax base is so healthy, for instance, that the town’s school system spends about $18,000 per pupil annually—about twice the national average—yet Washington is contributing hundreds of thousands of dollars a year to finance social programs there. Similarly, when state aid to cities declined in Massachusetts during the last recession, residents of Newton simply voted to raise their taxes by $11 million rather than cut any services. But taxpayers across the country are paying for the wealthy town’s block-grant programs. “Block grants have helped spur a redistribution of income from moderate communities to some privileged rich ones,” says National Taxpayers Union vice president Pete Sepp.

Given the awful track record of this program, the Bush administration now aims to cut and reform it. The Office of Management and Budget recommends excising billions that now go to well-off neighborhoods, and vastly reducing spending on social-services programs. The administration wants to give what will be left of the block-grant program to the Commerce Department and focus it on one purpose only—helping to boost distressed neighborhoods. And considering how poorly even these efforts have often turned out, OMB is demanding that projects receiving funds demonstrate their effectiveness using such traditional measures as increases in jobs, gains in property values, or declines in neighborhood crime. Cities will have to compete with one another to win such aid, rather than receiving funds each year based on a preordained formula.

The administration is sure to face a tough fight, for the program is now so large and diffuse that everyone from congressmen in wealthy districts to urban politicians defends it. Over the years, this coalition has saved the program and resisted even modest changes, because its supporters view it as an entitlement—free money to plug their budget deficits and finance city-employee salaries. New York, for instance, uses a portion of its block grant to pay the salaries of city building inspectors and lawyers in its housing department. Buffalo has spent some $100 million of its block-grant money over 30 years on government salaries, at one point paying some 230 city-hall workers through the program. Milwaukee this year will spend about $1 million of its block-grant money on salaries in its comptroller’s office and city-council staff.

Losing that windfall has prompted hyperventilation from local pols, perhaps none sillier than the response of Baltimore mayor Martin O’Malley, who compared the president’s block-grant cuts to terrorist attacks on our nation’s “core cities.” O’Malley, recall, is mayor of a city that spent some $100 million of block-grant money on two neighborhoods that ended up worse off than ever.

If the president is serious about expanding the opportunity society, he must kill this program beyond resuscitation. America’s great cities were once hothouses of the opportunity society that Bush hopes to nourish. They provided economic mobility that allowed tens of millions to move into the middle class and beyond, before government policies encouraged a culture of urban dependency. During the 1990s, America saw an urban revival, especially in New York—a renewal that made cities once more theaters of opportunity. Those revivals had nothing to do with federal aid and everything to do with cities’ taking control of their own fortunes. In New York, for example, Mayor Rudolph Giuliani’s effective war against crime, combined with tax cuts and welfare reform, lifted former welfare recipients out of poverty and sparked startling reinvigorations of places like Harlem and central Brooklyn, where previously urban planners had wasted hundreds of millions in government aid to no avail. Such revivals remind us that cities and their residents are in control of their own futures and that what stimulates renewal is not federal aid, but local governments that deliver basic services well and allow citizens to pursue their economic dreams freely.

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