oversight

Development of Minority Businesses and Employment in the Hough Area of Cleveland, Ohio, Under the Special Impact Program

Published by the Government Accountability Office on 1971-08-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Office of Economic Opportunity




BY THE COMPTROLLER GENERAL
OF THE UNITED STATES
                    COMPTROLLER     GENERAL     OF      THE    UNITED   STATES
                                  WASHINGTON.    D.C.     20548




        B-130515




    i   To the President  of the Senate and the
/
        Speaker of the House of Representatives

                This is our report  on development    of minority  busi-             p, ?95/?
        nes ses and employment     in the Hough area of Cleveland,     Ghio,
        under the Special Impact program       of the Office of Economic              4~.1
    1   Opportunity.

                 Our review  was made pursuant   to the Budget and Ac-
        counting    Act, 1921 (31 U.S.C. 53), and the Accounting and
        Auditing    Act of 1950 (31 U.S.C. 67).

               Copies of this report  are being sent to the Director,
        Office  of Management    and Budget; the Director,  Office of
        Economic    Opportunity;  and the Administrator,   Small Busi-
3       ness Administration,




                                                  Comptroller              General
                                                  of the United            States




                          50TH ANNIVERSARY                    1921- 1971
    1
    I
    I
    I
    I
    I              COMP?'ROLLERGEivERAL'S                      DEVELOPPIENTOF PllINORITYBUSINESSESAND
    I
    I
                   REPORT TO THE CONGRESS                      EMPLOYl";ENTIN THE HOlrGH AREA OF CLEVELAND,
    I                                                          OHIO, WDER THE SPECIAL IliPACT PROGRAM
    I                                                          Office of Economic Opportunity   B-130515
    I
    I
    I
    I
     I
     I             DIGEST
                   ------
     I
     I
      I

     I
                   WHY THE REVIEW WAS MDE
     I
     I                  Special     Impact programs are designed to have a major impact on unem-ploy-
     I
     I
                        ment, dependency,       and community tensions         in urban areas having large con-
     I                  centrations      of low-income    residents     or in rural      areas having substantial
     I                  migration      to such urban areas.       TheI!.rpose       of these experimental        pro:
     I
     I                  grams?ombining         business,    community, and manpower development--is               to of-
     I                  fer the poor an opportunity          to become independent          anti self-supporting
     I
     I                  through the use of the free enterprise              system.
     I                                                                                                                 -j‘i$!qq
     I
     I
                      I The Special Impact program carried            ou t  by   the  Hough   Area    Development     Cor-
      I                 poration     in Cleveland,    Ohio, was the first          of its kind in the Nation to
      I
                     - be funded directly         by grants from the Office of Economic Opportunity
      I
      I                 (OEO).
      I
      I
      I
                        Hough is a 2.3-square-m  le area located about 2 miles                    east of doctlntown
       I                Cleveland.   In 1965, 88 percent of Hough's population                    was black.and
       I
          I
                        15.7 percent of its labor force was unemployed.
          I
          I             OEO fundinq of the Housh nroqram             besan in' June 1968.         Total   OEO funding
          I
          I             through Ociober 1972 will'amount             to-$5.13  million.
.         I
          I
                        Hough Development is required  to provide non-Federal       contr i butions ei ther
          I
          I             in cash or in kind of at least 10 percent of total       program costs . As of
                        June 30, 1970, non-Federal contributions      amounted to about $202,000 or
          I
                        nearly 13 percent of the $1,575,200     of total  program costs incurred as of
          I             that date.
          I
          I
          I             The General      Accounting Office       (GAO) sought      to determine
          I
          I
          I                 --the    impact the program has had in Hough,
          I                 --its    prospects   for meeting its goals,
          I
          I
                            --the    actions   necessary to attain the goals,           and
           I                --how    k/e11 the program is being managed.
              I
              I
              I         GAO issued an earlier  report    to the Congress             on the Special       Impact    program
              I         in Los Angeles (B-168560,    October 7, 1970).
              I
              I
              I
              I
              I
              I
              I
              I
              I
              I
              I
              I
              I
              I         Tear Sheet                                    1
               I
               I
               I
FINDINGS AUD CONCLiJSIOflS

    As of February 1971, after    more than 2-l/2     years of Federal funding,    the
    Special Impact program had brought few visible         benefits to Hough.   Con-
    sidering  Hough's deey-seated   and long-standing      problems of unemployment,
    poor housing,   and high crime rate,   however, it would be unrealistic      to
    expect a major social and economic impact in that short a time.

    Hough Development  leaders    have shown a willingness      to recognize   their er-
    rors and have attempted     to correct  them.    GAO believes    that they have
    learned that complex programs require       planning   not only of what to do but
    also of how to do it.      (See ch. 2.)

    If tRe Special    Impact program in Hough is to succeed, it must maintain
    the support of the Hough community.       To this end Hough Development must
    soon demonstrate    that it can produce successful   projects which will  pro-
    vide tangible    benefits  to the community.

    The following     sections         discuss   various   projects   carried   out by Hough De-
    velopment.

    Martin   Luther   King,      Jr.    Plaza

   One of Hough Development's     major efforts    is a combination   shopping center
   and housing development.      The cost of the Martin Luther King, Jr. Plaza
   is estimated     to be about $3 million   and is to be financed     by funds from
   the Special     Impact grant and a loan from a local bank.       In addition,   the
 1 Small Business Administration       (SBA) has agreed to consider     financing  con-
   struction    costs for most of the businesses      to be located  in the shopping
   center,   if they meet SBA's eligibility     requirements.

    Although   construction       orig inally     was scheduled to begin in August 1968,
    only site-grading       work had begun as of May 1971.            The original   starting
    date was overly      optimistic     , reflecting    a lack of understanding      of the
    complex problems--securing           tenants?    acquiring  land, and obtaining       financ-
    ing--that    had to be solved before construction             could begin.     (See ch. 3.)

    MeDonu Zd’s restaurants

    Hough Development    purchased a McDonald's restaurant      fran‘chise   in the
    Hough area to help lessen community tensions--resulting           from a boycott
    of white-owned   McDonald's   restaurants    in the black community--and      to
    enter into a profitable     bysiness.     It also purchased another    franchise
    for a restaurant   that was under construction      on the east side of Hough.

    As of February 1971 these             restaurants    had 78 employees,    26 of whom were
    Hough residents.  Through             December 1970 one franchise       was making a profit
    but the other was showing             a slight    cumulative loss.     (See ch. 7.)
’           *
I
I
                      Loan assistance

                      Hough Development also assisted      black contractors    and businessmen in ob-
                      taining  needed funds through the Contractor       Loan Gurantee program, which
                      has been unsuccessful   in achieving     certain  key objectives,      and the Small
                      Business Loan program, which has not had the intended           impact.

                      Six black contractors   who had obtained    loans from a bank under the loan
                      guarantee program defaulted    on their  loans and, as a result,    were no
                      closer to being able to obtain bank loans without       guarantees.   In addi-
                      tion,  Hough Development had to pay the bank the unpaid balance of
I
                      $153,700 on the loans totaling    $207,500.     (See ch. 4.)
I
I                     The intent of the Small Business Loan program was to provide small loans
I                     as seed money to enable firms to obtain larger  loans.  A Hough official
                      advised GAO, however, that most of the 25 loans to 18 firms were not made
                      for this purpose but were made to meet the borrowers'  needs.  (See ch. 8.)

                      Other projects

                      As of February 1971 Community Products,     Incorporated,     a rubber parts manu-
                      facturing   company, had 27 employees, 16 of whom were Hough residents.
                      Handyman's Maintenance Service,     Inc., a custodial     and maintenance     service,
                      had 31 employees,    20 of whom-wereTHough residents.       The latter    project    had
                      not received   OEO approval.   Both companies have operated at a loss since
                      they began, but, as a result    of recent changes, their      financial    conditions
                      have improved.     (See chs. 5 and 6.)
    I
                      Hough Development plans to turn over ownership of the businesses               started
                      under the Special Impact program to Hough residents           once the businesses
                      become profitable.     If the various     projects   reach their  full    potential,
                      it is conceivable   that,   until ownership of the businesses          is turned over
                      to Hough residents,    Hough Development could become a holding company for
                      businesses worth millions     of dollars.       (See pp. 14, 15, and 17.)

                      Program management

                       On three projects,     Hough Development used impact funds of about $114,000
                       in excess of the amounts authorized         by OEO. Although   OEO subsequently      ap-
                       proved the funds'    use for two of the projects,       the unauthorized    use lim-
                       ited OEO's ability     to ensure that Special Impact program funds were being
                       used to accomplish     program objectives.      OEO advised GAO that the entire
                 v     system of releasing      funds for the program had been revised        to minimize un-
                       approved expenditures.        (See ch. 10.)


        I       RECOkIMENDATIONSOR SUGGESTIONS

                     The Director      of OEO, through   the Office   of Program Development,     should:

                        --Require    Hough Development to submit to OEO, within   a specific     time
                           period,   a detailed  plan showing how ownership of existing     businesses


                Tear Sheet                                   3
        assisted  by the    Special  Impact program will be distributed       to Kough
        residents  and/or    the planned use for funds derived       from ownership
        retained  kdithin   Hough Development and, for future       projects,   require
        Hough Development      to submi" L such plans as a condition     for project
        approval.    (See   p. 18.)

      --Work with l-lough Development,and   the Federal and local agencies in-
         volved to ensure the successful    completion  of the Martin Luther
         King, Jr. Plaza, because of the tremendous impact the project       can
         have both on the Hough community and in renewing the confidence       in
         Hough Development.    (See p. 23.)

      --Carefully  monitor,    with Hough Development,    future  operations of Com-
         munity Products,   Incorporated,    to ascertain   the impact of changes
         that have been initiated      by company management as well as the pos-
         sible need for further     changes.   (See p. 32.)

      --Evaluate    the Handyman project      and decide   whether   to approve   it   for
         funding.     (See p. 37.)


AGENCYACTIONSAND UNRESOLVED
                          ISSUES
    OEO advised GAO that it agreed generally with the recommendations   and in-
    forme$GAO of the measures to be taken in accordance   with the recommenda-
    tions.   (See pp. 18, 23, 32, and 37.)

    SBA has emphasized,  with respect  to the Martin Luther King, Jr-. Plaza,
    that loans cannot be made for speculative   purposes and that therefore,     be-
    fore a ioan can be committed,   a specific, identifiable,  eligible    small
    business must agree to use the facilities   to be financed  by the loan and
    must assure SBA that it can pay the rent and earn a reasonable      profit.
    (See pp. 23 and 24.)


MTTERS FOR CONSIDERATIONBY THE CONGRESS
    This report should be of special       interest     to those congressional      commit-
    tees having oversight responsibilities          for federally     assisted antipoverty
    programs, as well as programs concerning           minority   business enterprises.
                         Contents
                                                              Page

DIGEST                                                          1

CmPTER

   1     INTRODUCTION
             Special  Impact programs
             Hough Area Development   Corporation
             Hough projects

   2     IMPACT ON HOUGH                                       11
             Economic impact                                   11
             Social    impact                                  14
             Contractor's     evaluation  of Hough proj-
               ect                                             15
             Conclusions                                       17
             Recommendations      to the Director, OEO         18

   3     THE MAR‘I'IN LUTHER KING, JR. PLAZA                   19
             Obtaining    financing                            20
             Securing   tenants                                21
             Acquiring    land                                 22
             Town houses                                       22
             Impact on training        and employment   for
               Hough residents                                 22
             Ownership                                         23
             Recommendation       to the Director,    OEO      23

   4     CONTRACTOR LOAN GUARANTEE PROGRAM                     25

   5     COMMUNITY PRODUCTS, INCORPORATED                      29
            Initiation   of project                            29
            Analysis   of performance                          30
            Ownership                                          31
            Recommendation     to the Director,       OEO      32

   6     HANDYMAN'S MAINTENANCE SERVICE, INC.                  33
             Project   history                                 34
             Handyman's     operations                         34
             Ownership         *                               36
             Recommendation       to the Director, OEO         37
CHAPTER                                                                 Page

        7   MCDONALD'SRESTAUPSiNTS                                       38
                    Purchase     prices    and profit   potential        38
                    Ownership                                            39

        8   SMALL BUSINESS LOAN PROGRAM                                  41

        9   HOMES FOR HOUGH                                              43

   10       FINANCIAL      MANAGEMENT                                    44

   11       SCOPE OF RJWIEW                                              46

APPENDIXES

        I   Letter    dated February    4, 1971, from the
               Deputy Director     of the Office   of Economic
               Opportunity    to the General Accounting     Of-
               fice                                                      49

   II       Letter     dated December 4, 1970, from the Ad-
               ministrator     of the Small Business  Admini-
               stration     to the General Accounting  Office            56

 III        Principal       officials      of the Office    of Econo-
               mic Opportunity          responsible    for the ad-
               ministration          of the Special    Impact program    57

                                  ABBREVIATIONS

GAO         General      Accounting       Office

OEO         Office      of Economic       Opportunity

SBA         Small     Business     Administration
* COMPTROLLERGEUERAL'S                      DEVELOPMENTOF MINORITY WSINESSES AND
  REPORT TO THE CONGRESS                    EMPLOYl'4ENTIN THE HOUGH AREA OF CLEVELAND,
                                            OHIO, UNDER THE SPECIAL I?IPACT PROGRAM
                                            Office of Economic Opportunity  B-130515



 DIGEST
 ------

 WHY THE REVIEW WAS &lDE

      Special Impact programs are designed to have a major impact on unemploy-
      ment, dependency,     and community tensions      in urban areas having large con-
      centrations    of low-income   residents   or in rural    areas having substantial
      migration   to such urban areas.       The purpose of these experimental          pro-
      grams --combining    business,  community, and manpower development--is            to of-
      fer the poor an opportunity       to become independent      anti self-supporting
      through the use of the free enterprise         system.

      The Special Impact program carried     ou t by the Hough Area Development            Cor-
      poration  in Cleveland,   Ohio, was the first    of its kind in the Nation           to
      be funded directly    by grants from the Office of Economic Opportunity
      (OEO).

      Hough is a 2.3-square-mile   area located-about       2 miles      east of downtown
      Cleveland.   In 1965, 88 percent of Hough's population             was black and
      15.7 percent of its labor force \n;as unemployed.
                           n
      OEO funding of the Hough program began in June 1968.               Tota 1 OEO funding
      through October 1972 will  amount to.$5.13      million.

      Hough Development  is required     to provide non-Federal       contr ibutions either
      in cash or in kind of at least 10 percent of total           program costs.    As of
      June 30, 1970, non-Federal     contributions      amounted to about $202,000 or
      nearly 13 percent of the $1,575,200         of total  program costs incurred    as of
      that date.

      The General     Accounting   Office    (GAO) sough> to determine

          --the   impact the program has had in Hough:
          --its   prospects   for meeting its goals,
          --the   actions   necessary to attain the goals,      and
          --how   well the program is being managed.

      GAO issued an earlier  report    to the Congress       on the Special     Impact   program
      in Los Angeles (B-168560,    October 7, 1970).




                                                 1
.1,..:       .   ,   I   ,   .




                             FINDINGS AND CONCLUSIONS

                                      As of February 1971, after    more than Z-l/Z years of Federal funding,    the
                                      Special  Impact program had brought few visible    benefits to Hough.   Con-
                                      sidering  Hough's deep-seated   and long-standing  problems of unemployment,
                                      poor housing,   and high crime rate,   however, it would be unrealistic  to
                                      expect a major social   and economic impact in that short a time.

                                      Hough Development leaders   have shown a willingness      to recognize   their er-
                                      rors and have attempted   to correct  them.    GAO believes    that they have
                                      learned that complex programs require     planning   not only of what to do but
                                      also of how to do it.    (See ch. 2.)

                                      If the Special Impact program in Hough is to succeed, it must maintain
                                      the support of the Hough community.       To this end Hough Development must
                                      soon demonstrate    that it can produce successful   projects which will pro-
                                      vide tangible    benefits  to the community.

                                      The following       sections        discuss   various   projects   carried   out   by Hough De-
                                      velopment.
                                                                                                          1
                                      Martin   Luther     King,     Jr.    P2az.a

                                      One of Hough Development's     major efforts    is a combination    shopping center
                                      and housing development.      The cost of the Martin Luther King, Jr. Plaza
                                      is estimated     to be about $3 million   and is to be financed     by funds from
         .
                                      the Special     Impact grant and a loan from a local bank.       In addition,   the
                                      Small Business Administration      (SBA) has agreed to consider      financing  con-
                                      struction    costs for most of the businesses      to be located  in the shopping
                                      center,   if they meet SBA's eligibility     requirements.           :.
                             R
                                    Although construction       oris inally     was scheduled to begin in August 1968,
                                    only site-grading     work had begun as of May 1971.            The original   starting
                                    date was overly    optimistic     3 reflecting    a lack of understanding'of        the
                                    complex problems--securing         tenants,    acquiring  land, .and obtaining      financ-
                                 -2 ing--that    had to be solved before construction           could begin.     (See ch. 3.)

                                      MeDonaZd's      restaurants

                                      Hough Development purchased a McDonald's       restaurant  franchise   in the c
                                      Hough area to help lessen community tensions--resulting         from a boycott
                                      of white-owned   McDonald's restaurants    in the black community--and      to
                                      enter into a profitable    business.    It also purchased another    franchise
                                      for a restaurant   that was under construction      on the east side of Hough.

                                      As of February 1971 these restaurants   had 78 employees 9 26 of whom were
                                      Hough residents.  Through December 1970 one franchise   was making a profit
                                      but the other was showing a slight   cumulative loss.  (Seesch. 7.)
                                 :.



                                        h


                                                                                      2
    Loan assistance

    Hough Development also assisted      black contractors    and businessmen in ob-
    taining  needed funds through the Contractor        Loan Gurantee program, which
    has been unsuccessful   in achieving     certain  key objectives,     and the Small
    Business Loan program, which has not had the intended           impact.

    Six black contractors    who  had obtained    loans from a bank under the loan
    guarantee   program defaulted   on their   loans and, as a result,    were no
    closer   to being able to obtain bank loans without       guarantees.   In addi-
    tion,   Hough Development had to pay the bank the unpaid balance of
    $153,700 on the loans totaling     '$207,500.     (See ch. 4.)

    The intent of the Small Business Loan program was to provide small loans
    as seed money to enable firms to obtain larger  loans.  A Hough official
    advised GAO, however, that most of the 25 loans to 18 firms were not made
    for this purpose but were made to meet the borrowers'  needs.  (See ch. 8.)

    Other   projects

    As of February 1971 Community Products,     Incorporated,     a rubber par& manu-
    facturing   company, had 27 employees, 16 of whom were Hough residents.
    Handyman's Maintenance Service,     Inc., a custodial     and maintenance     services
    had 31 employees,    20 of whom were Hough residents.       The latter    project    had
    not received   OEO approval.   Both companies have operated       at a loss since
    they began, but, as a result    of recent changes, their      financial    conditions
    have improved.     (See chs. 5 and 6.)

     Hough Development plans to turn over ownership of the businesses           started
   ' utider the Special Impact program to Hough residents      once the businesses
     become profitable.     If the various projects   reach their  full    potential,
     it is conceivable   that,   until ownership of the businesses      is turned over
     to Hough residents,    Hough Development could become a holding company for
     businesses worth millions     of dollars.   (See pp. 14, 15, and 17.)

    Program management

    On three projects,     Hough Development used impact funds of about $114,000
    in excess of the amounts authorized         by OEO. Although OEO subsequently        ap-
    proved the funds'    use for two of the projects,       the unauthorized    use lim-
    ited OEO's ability     to ensure that Special Impact program funds were being
    used to accomplish     program objectives.      OEO advised GAO that the entire
    system of releasing      funds for the program had been revised        to minimize   un-
    approved expenditures.        (See ch. 10.)


RECOMMENDATIONSOR SUGGESTIONS

   The Director        of OEO, through   the Office   of Program   Development,   should:

     --Require     Hough Development to submit to OEO, within   a specific     time
        period,    a detailed  plan showing how ownership of existing     businesses



                                             3
          assisted  by the    Special  Impact program will be distributed      to Hough
          residents  and/or    the planned use for funds derived      from ownership
          retained  Mithin    Hough Development and, for future      projects,   require
          Hough Development      to submit suck  plans as a condition     for project
          approval.    (See   p. 18.)

        --Work with Hough Development and the Federal and local agencies in-
           volved to ensure the successful   completion of the Martin Luther
           King, Jr. Plaza, because of the tremendous impact the project     can
           have both on the Hough community and in renewing the confidence     in
           Hough Development.   (See p. 23.)

        --Carefully  monitor,    with Hough Development,    future  operations of Com-
           munity Products,   Incorporated,    to ascertain   the impact of changes
           that have been initiated      by company management as well as the pos-
           sible need for further     changes.   (See p. 32.)

        --Evaluate    the Handyman project     and decide   whether   to approve    it   for
           funding.     (See p. 37.)


AGENCY ACTIONS AflD UNRESOLVED ISSUES

      OEO advised GAO that it agreed generally with the recommendations  and in-
      formed GAO of the measures to be taken in accordance with the recommenda-
      tions.   (See pp. 18, 23, 32, and 37.)

     SBA has emphasized,  with respect  to the Martin Luther King, Jr. Plaza,
     that loans cannot be made for, speculative  purposes and that therefore,     be-
     fore a loan can be committed,   a specific, identifiable,  eligible    small
     business must agree to use the facilities   to be financed  by the loan and
     must assure SBA that it can pay the rent and earn a reasonable      profit.
     (See pp. 23 and 24.)


 iMTTERS FOR CONSIDERATION BY THE CONGRESS
Y
     This report should be of special       interest     to those congressional      commit-
     tees having oversight responsibilities          for federally     assisted antipoverty
     programs, as well as programs concerning           minority   business enterprises.
                                      CHAPTER1

                                   INTRODUCTION
           The Congress authorized            the Office     of Economic Oppor-
   tunity,      under title      I, part D of the Economic Opportunity
   Act of 1964, as amended (42 U.S.C.                  27631, to initiate        Spe-
   cial    Inpact    programs      directed     to the solution      of the cri-
   tical     problems    existing       in specific     poverty   areas.      These
   programs are to be of sufficient                 size and scope to have an
   appreciable       impact in the poverty'areas              in arresting     ten-
   dencies      toward dependency,          chronic    unemployment,       and rising
   community tensions,

          The Special  Impact program carried      out by the Hough
   Area Development    Corporation   in Cleveland,    Ohio, was the
   first   such program to be funded directly       by grants from OEO.
   In reviewing    the Hough program,   we sought answers to these
   questions.

          --What impact has the program had in the                  Hough area
             since it began in July 1968?

          --What are the prospects       for the program's    fulfilling
             its purpose,and     what actions   are necessary     to help
             bring  this  about?      .

          --How well     is the,program        being   managed?

         Our review generally         covered Hough Development's           acti-
  vities    from June 1968 to June 1970.           Although      we basically
  completed     our fieldwork     in July 1970, for certain            subse-
P quent actions      concerning     those projects       which Hough Develop-
  ment had undertaken         as of December 1969, we updated our
  data through      February,    March, or May 1971.           Our fieldwork
  after   the completion       of our detailed      review     in July 1970
  was limited     to that necessary        to ascertain      the status     of
  those projects      or problem areas that we had concerned                our-
  selves with during        our earlier      work.

          On October 29, 1970, we requested               comments on our        draft
   report   from OEO and the Small Business               Administration.
  OEO's comments, which considered Hough Development's com-
  ments, were furnished    on February 4, 1971, and are included
  as appendix I.     SBA's comments were furnished   on December 4,
  1970, and are included as appendix II.       We have included in
  pertinent  sections of the report those OEO and SBA comments
  that we considered    appropriate  to a clear understanding   of
  the matters discussed.

  SPECIAL IMPACT PROGRAMS

         Title I, part D, of the Economic Opportunity        Act of
  1964, as amended, authorized       OEO to initiate   Special Impact
  programs to fight poverty in urban areas having large con-
  centrations    of low-income residents    or in rural areas hav-
  ing substantial     migration   to such urban areas.    These
  programs --combining     business,  community, and manpower
  development-- are designed to have a major impact on unem-
  ployment, dependency, and community tensions.          The Special
  Impact programs are experimental       and offer the poor an op-
  portunity    to use the free enterprise     system to become in-
  dependent and self-supporting.

        Through June 30, 1970, OEO had awarded grants totaling
 about $53 million    for these purposes to community develop-
 ment corporations    representing     the residents     of eligible
 poverty areas.     In addition,     OEO had provided funds of
 about $52 million    designated.for      Special Impact programs
 and had delegated administrative         responsibility     for those
 programs to the Departments of Labor, Agriculture,              and Com-
 merce during fiscal     years 1967 through 1969. Beginning in
 fiscal   year 1970, OEO assumed responsibility          for administer-
 ing selected Special Impact pro"grams that had been funded
 and for all future programs.

         This is our second report to the? Congress on the Spe-
   cial Impact programs.      The first  report was entitled      "The
   Special Impact Program in Los Angeles -is Not Meeting Goal
   of Providing    Jobs for the Disadvantaged"    (B-168560, Octo-
   ber 7, 1970).
:".:T
         Hough is a 2.3-square-mile     area, predominantly     black
   populated,   located about 2 miles east of downtown Cleveland.
    (See map on p. 7.)     In 1965 Hough had a population      of
   59,000--88 percent of whom were black--compared        with

                                    6
Cleveland's    total   population    of 811,000--34     percent   of whom
were black.      Unemployment     in Hough in 1965 averaged
15.7 percent     compared with 7.4 percent        in Cleveland.

       During the past decade many people left           Hough to seek
a better    environment.    Vacancies    in housing     caused rents  to
decrease,    and the poor moved in.       The decline      in buying
power of the residents,      rising   crime rate,     high insurance
rates,    and other factors    caused many businesses        to move out
of Hough.




           CLEVELAND       CITY   LIMITS


                                           Q
            HOUGH   AREA
       Hough Development was conceived in April 1957 when a
group of-about    20 Hough residents,   led by Rev. DeForest
Brown, met to discuss ways of interrupting       the economic de-
cline of Hough. Deciding that a Hough-based organization
was needed to unify and improve efforts      toward economic de-
velopment, the group formed the Hough Area Development Cor-
poration,   which was incorporated    as a nonprofit  organiza-
tion in the State of Ohio in June 1967.

      In an attempt to reverse the economic decline,     Hough
Development submitted a proposal to OEO in June 1968 for a
Special Impact grant to enable Hough Development, through
the use of grant funds, to offer leadership,    expertise,   and
risk capital   to residents of Hough so that they might

     --plan   the development   of their   own community,
     --attract  and create industries      that   would train   and
        employ Hough residents,

     --attract  and own businesses to meet consumer and ser-
        vice needs of area residents, and

     --gain   entrepreneurial   and management skills.

       OEO awarded a grant of $1.64 million     to Hough Develop-
ment in June 1968. Additional      funding of $1.5 million   was
approved in June 1969 and made available      for program pur-
poses.   The grant period ran through June 1970 but was ex-
tended through October 1970. In October 1970 OEO approved
another grant totaling    $1.99 million   for the 2-year period
ending October 1972.

       Hough Development was required to provide non-Federal
contributions,    either in cash or in kind, of at least
10 percent of total program costs.         As of June 30, 1970,
non-Federal    contributions   amounted to about $202,000, or
nearly 13 percent of total program costs of $1,575,200 in-
curred as of that date.       At that time the balance of the
grant funds remained available        for use on Hough Develop-
ment's projects      and on administration   of the program.
HOUGHAREA DEVELOPMENT
                    CORPORATION

        Hough Development is headed by a 60-member board of
trustees,    about two thirds of whom are Hough residents.      The
board is a coalition     of many community spokesmen--mostly
blacks, a few whites, some poor, and some middle class--in-
cluding leaders of Hough Community Action Programs involving
housing, recreation,     education, and welfare.   Trustees must
reside, have a place of business,      or possess a genuine in-
terest,    in Hough. The board appointed the Reverend Brown
as executive director,     with the responsibility  for day-
to-day operations.     As of February 1971 Hough Development
had 39 employees, of whom 18 were Hough residents.

      Hough Development, in its original        proposal for funding
in 1968, stated its intent to use the existing          neighborhood
advisory groups, set up under a local Community Action Pro-
gram, and a financial      advisory council to assist in meeting
its objectives.    The neighborhood advisory groups allowed
residents   an opportunity     to state their needs and to comment
on proposed projects,       The financial   advisory council,      to be
made up of a volunteer      group of excutives     and professionals
from the Greater Cleveland area, was to evaluate the eco-
nomic feasibility    of proposed projects.       This council,    how-
ever, was not formed.
HOUGHPROJECTS

       Project ideas originate      both from the community and
from within Hough Development.          The excutive director and a
15-member executive committee, appointed by the board of
trustees,     j udge the merit of an idea and make recommenda-
tions to the board of trustees.          The board decides whether
a feasibility       study should be made by the Hough Development
staff or whether the project        idea should be dropped.   The
results    of the feasibility    study, along with the executive
director's      recommendation,  are submitted to the board which
decides whether to request OEO approval for the project,
OEOmust approve a project        before Federal impact funds can
be used for it,

       As of March 1971 Hough Development had considered 61
ideas for projects,   36 of which came from community resi-
dents.    Some ideas were not considered to be feasible  or in

                                   9
line with program objectives,    Our review covered the seven
projects  which were in the program as of December 1969.
These projects  are discussed in detail in chapters 3
through 9. The seven projects    are:

     --Martin    Luther King,    Jr.  Plaza--a   combined shopping
        center   and housing    complex.
     --Contractor     Loan Guarantee program--a      project to pro-
        vide local    building contractors  with     needed operating
        capital.

     --Community Products,   Incorporated--a        manufacturer of
        small rubber products used primarily         by the automo-
        tive industry.

     --Handyman's Maintenance Service, Inc.--a      company offer-
        ing custodial  and maintenance services to commercial
        and industrial  companies, civic organizations,    and
        homeowners.

     --McDonald's   restaurants --a project    to purchase and op-
        erate the franchises    of two carryout restaurants.

     -ISmall     Business Loan program--a project  to provide seed
        money    for obtaining  additional funding for new busi-
        nesses    and for improvements and/or expansion of ex-
        isting    businesses.

     --Homes for Hough--a housing project    on scattered        sites
        in Hough for large, low-income families.

      We did not make a detailed review of projects, such as
a credit union and a junior achievement program, which were
approved or begun after December 1969.




                                       10
                            CHAPTER2

                        IMPACT ON HOUGH

        As of February 1971, after more than 2-l/2 years of
Federal funding,     the Special Impact program had brought few
visible    benefits  to Hough. Because Hough's problems, such
as unemployment, poor housing, and a high crime rate, are
deep seated and long standing,     it would be unrealistic  to
expect a major economic and social impact in that short a
time.

       The Special Impact program in Hough got off to a slow
start.    When Hough Development began to implement its proj-
ects, it became apparent that its grant proposal contained
muc'h optimism,     Some projects-- Contractor  Loan Guarantee,
Community Products, and Handyman--which had been expected to
provide many benefits,     provided few. The Martin Luther
King, Jr. Plaza had been slow in starting,       and the McDonaldls
restaurants,    with good potential   for success, did not start
until March 1970.                                         .

     Mistakes were made but Hough Developmentss leaders
showed a willingness    to recognize their errors and attempted
to correct them.     It appears to us that they have learned
that complex programs require planning not only of what to
do but also of how to do it.
      We believe also that the success or failure    of the Spe-
cial Impact program in Hough cannot be measured on a short-
term basis.     There is much to be done, and only time will
tell whether Hough Development, with the assistance     of OEO
and others, can provide the leadership    and know-how necessary
to have a major impact on the problems of the Hough commu-
nity.

ECONOMICIMPACT

      One of Hough Development's major efforts    has been to
develop the Martin Luther King, Jr, Plaza, which is to in-
clude a modern shopping center with 20 stores to meet the
shopping needs of residents,    provide jobs, and stimulate   the
Hough economy.   Hough Development's    original August  1968
date for starting   construction  was overly optimistic   and in-
dicated a lack of understanding     by Hough Development of the
many complex problems involved.      The shopping center, how-
ever, has moved closer to reality.       As of February 1971, 17
businesses had agreed to lease space and 10 of these had
signed leases.    In May 1971, site-grading    work had begun.

      The impact that the shopping center, once constructed,
will have on the Hough economy will depend on the success of
the tenant businesses.       Hough Development, through the use
of shopping-center   consultants,     has attempted to recruit
businesses with strong potentials       for success,    If the busi-
nesses within the shopping center are successful,         others may
move into Hough to compete for the trade,          These other busi-
nesses would provide more jobs, resulting        in more buying
power and possible   further    business growth.

       Besides the shopping center, the two McDonald's restau-
rant franchises     have the most promise of providing          a lasting
economic impact on Hough.         As of February 1971 these two
restaurants    had 78 employees, 26 of whom were Hough residents.
Also Hough Development plans to offer shares of stock in
these franchises     to community residents.        At the time the
franchises    were acquired,     total annual sales of $1.4 million
were anticipated     and profits     before taxes were expected to
be $175,000.     Through December 1970 one franchise          was making
a profit,    but the other was incurring       a slight   loss.

       Hough Development started two other projects,        Community
Products and Handyman, to provide jobs and ownership oppor-
tunities   for residents.     Although 58 jobs had been provided
as of February 1971, generally       neither project had shown a
profit   and Hough Development did not plan to offer ownership
of the projects    to residents    until   profits  were made. Al-
though some improvements in the management of these projects
have been made, further     improvements may be needed if the
projects   are to be successful,        As of February 1971:

      --Community Products had 27 employees, 16 of whom were
         Hough residents.    The company continually   operated
         at a loss after it began operations     in June 1969.
         The company recognized the need for change and took a
         number of actions in 1970 to improve its operations.


                                    12
     --Handyman had 31 employees,       20 of whom were Hough res-
        idents.    The company generally    operated at a loss
        after it began operations     in December 1968. Hough
        Development and the company took a number of actions
        to improve its operations,      however, and its financial
        records indicated     that some of the actions taken had
        had positive   results.    The degree to which Handyman
        will be able to motivate its employees to do a good
        day's work should have a direct bearing on the abil-
        ity of Handyman to survive.

       Hough Development assisted black contractors     and busi-
nessmen in obtaining    needed funds through two other projects.
However, one of these projects-- Contractor     Loan Guarantee
program-- has been unsuccessful    in achieving  certain key ob-
jectives   and the other project-- Small Business Loan program--
has not had the intended impact.

       As of December 31, 1970, nearly $207,500 had been used
to guarantee working-capital    loans for six' black constwc-
tion contractors   to help them establish    credit at a local
bank. Although a number of homes had been renovated and
jobs may have been salvaged by the project,        as of December 31,
1970, all six contractors    had defaulted   on their loans and
therefore   were no closer to being able to borrow money on
their own which was one of the project's      objectives.    Hough
Development paid off the defaulted      loans and in July 1970
decided to phase out this project     and-to not guarantee any
more loans.

       As of January 31, 1971, Hough Development, under its
Small Business Loan program, had made 25 loans to 18 firms.
Two of the firms had gone out of business after receiving
the loans and had not repaid the loans.      Hough Development
had also helped a number of small businessmen in the Hough
area by providing    advice, guidance, and legal and other tech-
nical assistance    and by directing  them to other organiza-
tions,   such as SBA, Greater Cleveland Growth Association,
Black Economic Union, National Business League, and local
banks, for assistance.




                                 13
SOCIAL IMPACT

       When a person gets a job, a house is built,        or a busi-
ness opens, the community benefits        not only economically
but also socially.      In evaluating    the total impact of Hough
Development's    program, therefore,    consideration    should be
given to such social benefits       as easing tensions,    instilling
community pride, and recognizing       individual    accomplishments.
The degree to which Hough Development has met these social
and psychological     needs of residents     cannot be measured
readily,    We do know that some of Hough Development's           ef-
forts,   as discussed in the following       paragraphs,  have been
directed   to meeting these needs.

       Community tensions were eased when Hough Development
purchased a McDonald‘s restaurant      franchise    in Hough. Ten-
sions had reached a high pitch when four white-owned
McDonald's restaurants    in Cleveland's     black community were
shut down for several weeks by a boycott sparked by pickets
demanding that the restaurant     franchises     be sold to blacks.
Responding to these demands, an attorney for McDonald's
urged Hough Development to purchase one of the restaurant
franchises.    Hough Development purchased the franchise        to
help lessen tension and, at the same time, to enter into a
profitable  business.

      Although only scratching   the surface of the housing
problem, Hough Development has helped nonprofit     housing
corporations,    under its Homes for Hough project,   to acquire
land on which to build houses.      As of February 1971 three
housing units were completed and 28 were under construction.
Also plans had been made for the shopping center and hous-
ing complex to include 26 three-bedroom     town houses for low-
income families.

      Recognizing   that there are few places in Hough for
residents  to shop for their daily needs, Hough Development
put a high priority     on a shopping center which residents
could reach easily.      The delay in its construction,  however,
has caused considerable     skepticism  among residents as to
whether the project     ever will be a reality.

      Hough Development proposed to decrease tensions and to
develop pride in the Hough community by encouraging resident

                                 14
ownership of businesses assisted by the Special Impact pro-
gram. Hough Development has started several businesses but
has not provided ownership opportunities  to residents because
it prefers to retain ownership in the businesses until they
become profitable.
        To ensure that ownership opportunities       would be made
available    to residents,     OEO included a condition     in Hough
Development's grant contract         requiring that Hough Develop-
ment submit for OEO approval a plan for disposition            of as-
sets Hough Development owned and controlled.            Rather than
designate a specific       date by which the plan was to be sub-
mitted,    however, OEO stated that the plan was to be submit-
ted at the end of the grant period, which could be extended
by additional    or supplemental grants.       Therefdre a plan had
not been submitted at the time we completed our fieldwork.

CONTRACTOR'SEVALUATION OF HOUGHPROJECT

      Westinghouse Learning Corporation,   under a contract
with OEO to evaluate a number of Special Impact programs,
presented in a report dated July 31, 1970, several conclu-
sions regarding   the program administered  by Hough Develop-
ment. Westinghouse concluded,    in part, that:       _
     "The Hough Special Impact project meets legisla-
     tive and OEO requirements,     structurally.      The gap
     between legislative   expectation     and project   conse-
     quences is chiefly   a matter of unreal expectations,
     given program design and the level of funding.

     "HADC [Hough Area Development Corporation]      has
     been slow in getting needed expert assistance        on
     staff and from outside sources.      The organization
     continues  to improve its performance in this area
     as it gains the experience and self-confidence
     needed to direct    the deployment and use of experts
     without feeling   threatened by them. Though a
     handicap to early productivity,    it is not abnormal
     or without long-term benefits."
          *           *          *                       *
                                     I




                                     1s
  "Private    industry   has only limited    involvement;
  and the chances of inducing private          industry    to
  locate in Hough are remote given the lack of HADC
  power, will,     and resources to provide incentives.
  HADC is not-anxious      to have industries      which will
  be controlled      from outside the community.        It pre-
  fers joint     ventures with the community in control."
      *            *           *           *           *


  "The value of the process so far is mainly real-
  ized-in  increased self-development      capabilities
  which are essential   to self-sustaining     community
' development.

  "The HADC approach to economic development--
  changing the infrastructure       of power, control,
  and ownership from outside to inside the community--
  is inherently    constrained    at the outset, with ac-
  celerated   benefits    over time."




                                   16
CONCLUSIONS
      The Special Impact-program has not been in existence
long enough to have had a major impact on the Hough commu-
nity.    It is too early to judge,with        any confidence,     whether
the program as a whole will achieve its objectives             and goals.
If the program is to succeed, however, it must maintain the
support of the Hough community.           Therefore,   within the very
near future,    Hough Development must demonstrate that it has
the ability    to produce successful projects        which will pro-
vide tangible benefits        to the community.
      Hough Development should place a moratorium on initiat-
ing additional      projects   and should direct all of its efforts
to those ongoing projects which have the greatest             potentials
for success.      If the various businesses owned by Hough De-
velopment realize       their growth potentials,     it is quite con-
ceivable that, until ownership is turned over to the commu-
nity, Hough Development could become a holding company for
businesses worth millions        of dollars.
      To ensure that the residents   are given an opportunity
to participate  in program decisions   and benefits and to
share program responsibility   through ownership, OEO should
designate a date when Hough Development would be required
to submit a plan showing how and when it intends to distrib-
ute ownership of its businesses.
      We believe that, in developing      such a plan, however,
consideration     should be given to the retention    by Hough De-
velopment of a portion of the ownership.        This would
strengthen    its financial  base through a continuous    source of         a.
revenues for investment in future projects,        and it might
provide more assurance that, should OEO decide to not con-
tinue funding the Special Impact program in Hough, Hough De-
velopment would have sufficient      funds to seek successful   de-
velopment of its projects.
      For each future project   Hough Development should be re-
quired to submit a plan of the degree of, and reasons for,
community ownership and/or retention    of ownership by Hough
Development.    This plan should be a part of the proposal
sent to OEO for approval of a project,     so that OEOwill be
in a position   to determine whether the proposed project
meets the legislative    intent of the program--arresting       \


                                   17
tendencies   toward dependency, chronic        unemployment, and
rising   community tensions in specific        proverty areas.

      In our draft report to OEO, we proposed that OEO re-
quire Enough Development to place a moratorium on the initi-
ation of additional    projects so that Hough would direct all
of its efforts   toward making its ongoing projects  successful.

      The Deputy Director, OEO, in his letter    to us dated
February 4, 1971, stated that from June 1970 a moratorium
had been imposed on the initiation  of additional     projects
for the reason mentioned by GAO and that efforts      of Hough
Development were being focused on existing    projects.

RECOMMENDATIONS
             TO THE DIRECTOR, OEO

        We recommend that the Director,   OEO, through the Of-
,fice of Program Development, require that Hough Development
 submit for OEO approval,     within a specific    period, a de-
 tailed plan of how ownership of existing       businesses assisted
 by the Special Impact program will be distributed          to Hough
 residents    and/or the planned use for funds derived from
 ownership retained within Hough Development.          We recommend
 also that,    for future projects,  the Director,     OEO, require
 Hough Development to submit such plans as'a condition          for
 project approval.
                              -   -    -   -


     The Deputy Director,     OEO, in his letter     of February   4,
1971, stated that:

     "The Board of Directors       of Bough Development has
     a Committee on Community Benefits which is ad-
     dressing the issue of showing how ownership of ex-
     isting businesses will be distributed            to Hough
     residents.       For each project    *** there has been a
     tentative     plan and/or discussion       on the divesti-
     ture scheme. These plans are being submitted to
     OEO for approval.       In addition,     the use of funds
     derived from such divestitures          will be used to
     further    the economic objectives       of the program.
     For future projects      Hough Development will be re-
     quired to submit divestiture         plans as a condition
     of approval."
                                      18
                              CHAPTER3

                THE MARTIN LUTHER KING, JR. PLAZA

      The most ambitious project undertaken by Hough Develop-
ment and, in our opinion,   the most crucial for the success
of the program, is a combination shopping center and housing
complex to be called the Martin Luther King, Jr. Plaza.       The
plaza is designed to provide space for 20 retail    businesses
in a covered mall and 26 three-bedroom town houses built on
the roof of the mall.
       The original    August 1968 date for starting       construction
was overly optimistic       and indicated    a lack of understanding
of the many complex problems involved in such a massive ef-
fort,   such as obtaining     financing,    secliring tenants,    and ac-
quiring   land.     The delay caused considerable      skepticism
among residents      who had seen many past failures       of various
programs in Hough and caused at least two prospective              ten-
ants who had signed letters        of intent to lease store spaces
to withdraw from the project.

      A major obstacle in getting construction    under way has
been the time needed by Hough Development to convince black
merchants of the opportunities    available  in the plaza.
Another obstacle has been the considerable     time needed to
comply with the requirements    of the Federal and local agen-
cies involved in the project.

       SBA, under its local development company program, has
applications   pending for substantial    construction     loans to
Hough Development for the small businesses to be located in
the shopping center.     Under this program, which is autho-
rized by section 502 of *the Small Business Investment Act
of 1958 (15 U.S.C. 6961, SBA can approve the loans only
after the qualified   applicants    have stated their intent to
lease store space.     In addition,   SBA requires    that, before
it releases funds to Hough Development, formal leases mustbe
signed by the applicants.

     As of February 1971 SBA had agreed to consider financ-
ing construction  costs through Hough Development for 17 of
the 20 businesses to be located in the shopping center if
they met SBA's requirements   for eligibility.  Hough
                                                                            \
                                   19
Development planned to finance the construction          costs of the
remaining three businesses with impact funds--one          (a bank)
because it did not qualify      for SBA assistance     and the other
two because Hough Development was having difficulty           in secur-
ing letters   of intent from prospective       tenants and did not
want to further    delay starting   construction.

        As of June 1970 the 17 businesses had signed letters
of intent to lease space but three withdrew their letters              of
intent,    two indicating    that they were withdrawing      from the
project    because of the delay in getting      construction     under
way. As of February 1971, however, Hough Development had
letters    of intent from prospective     tenants for 16 of the 17
businesses and from the bank which had agreed to lease space
in the shopping center.         The major obstacle in obtaining
SBA funds as of February 1971 centered on the selection             of a
tenant acceptable       to both Hough Development and SBA for a
supermarket which would occupy 4Q percent of the floor space
in the shopping center.

       In March 1971 Hough Development obtained an agreement
from a local bank to provide financing    for the plaza.   Our
follow-up   of the status of this project   in May 1971 showed
that site-grading   work had been started that month.

OBTAINING FINANCING
      Hough Development planned to obtain financing            for the
plaza from two sources:        impact funds and the SBA loan,
There was over $1.7 million        available     from impact funds for
thegshopping    center and the town houses.          Hough Development
planned to obtain the remaining funds needed for the shop-
ping center through the construction           loans from SBA for the
17 businesses.      In March 1971 a local bank agreed to loan up
to $1.5 million     for construction      of the plaza.

      The estimated cost as of August 1970 to construct           the
plaza was about $2.8 million,  consisting of:




                                   20
                                               Estimated   cost

    Construction:
        Shopping center                          $1,725,000
        Town houses                                  675,000
             Total   construction                 2,400,OOO

    Land                                            174,000
    Architects  and consultant        fees          135,000
    Other development costs                          58,000

             Total   estimated      cost         $2,767,000

      A project   official  informed us that by February 1971
the estimated costs had increased to about $3 million.        The
contractors    for the construction  of the plaza informed SBA
and Hough Development that construction      costs would escalate
about $40,000 for each month construction      was delayed,

SECURINGTENANTS

       Prospective  tenants were selected from among 200 to 300
black-owned businesses in the Cleveland area.       Selection and
screening of tenants was performed by a team consisting       of
the Hough Development staff and consultants     from a shopping-
center development firm.     As of February 1971, 17 businesses,
including    the bank, had agreed to lease space in the plaza
and 10 of the 17 had signed leases.

      The team has had difficulty       finding    businesses willing
to make commitments to lease space.           Besides the difficulty
of leasing a shopping center prior to its construction,
other problems have resulted       from the uniqueness of the plaza
because it is in a ghetto,      involves solely black-owned busi-
nesses, and provides housing on the roof of the shopping-
center mall.

      Another obstacle was SBA's requirement  that each tenant
financed through an SBA loan sign a 20- to 25-year lease, de-
pending on the financing  desired.   SBA, however, has agreed
to consider alternatives,   such as a lo-year lease with a
lo-year option available  to the tenant.


                                    21
ACQUIRING LAND

       In trying to get title     to the land from the city, Hough
Development experienced      several   delays.   The city had to
agree to sell the land; the city council had to rezone the
land, originally    designated as residential      under an urban
renewal plan, to permit its use for retail         establishments;
and the Department of Housing and Urban Development had to
approve the sale price.       In January 1971 land was purchased
from the city for $123,750.         Additional land, to be used for
parking,    was to be purchased at a later date.

TOWNHOUSES

      The 26 three-bedroom    town houses will be located around
a large courtyard    on the roof of the shopping-center    mall.
Part of the courtyard     will be set aside as a play area.
The tenants will have private parking and an entrance lobby
separate from the shopping center.       In addition,  each tenant
will have a private    area of about 200 square feet at the
rear of his town house.

        The town houses will be leased to the Cleveland Metro-
politan    Housing Authority which will sublease them to low-
income families    under a rent supplement program sponsored
by the Department of Housing and Urban Development.
IMPACT ON TRAINING AND EMPLOYMENT
FOR HOUGHRESIDENTS

       Each business which leases space in the shopping center
will be required    to hire as many Hough residents          as possible.
Hough Development estimates that the businesses in the shop-
ping center will provide 200 new jobs, including             130 for
Hough residents.      In addition,       150 temporary jobs will be
created during construction,          50 of which will go to Hough
residents,    As of February 1971 Hough Development planned
to apply for a grant from the Economic Development Administra-
tion of the Department of Commerce to train shopping-center
employees in retailing,        inventory    control,  merchandising,
marketing,   and  advertising.




                                  22
OWNERSHIP

      The plaza will be owned by the Martin Luther Kings Jr.
Plaza Corporation,    which was incorporated     in August 1969 as
an Ohio nonprofit    corporation.   During the development and
construction   of the plaza, the corporationls      board of trust-
ees will consist of Hough Development employees.          This will
enable Hough Development to transfer       impact funds to the
corporation   and to maintain the necessary monitoring        func-
tion over the funds.

      After the plaza opens, the corporation     plans to invite
residents   of Hough to become members of the corporation      by
buying stock.    The corporate code of regulations    provides
that these members, three fourths of whom must live or work
in Hough, elect the board of trustees   annually.

RIXOMNENDATIONTO THE DIRECTOR. OEO

      We recommend that the Director,    OEO, through the Office
of Program Development,work  with Hough Development and the
Federal and local agencies involved to ensure the successful
completion of the Martin Luther King, Jr. Plaza, because of
the tremendous impact the project     can have both on the Hough
community and in renewing confidence     in Hough Development.



      The Deputy Director,  OEO, stated that he was in total
agreement with the need for such an effort.      He added that
local agencies had been responsive    and that the program of-
fice had notified   SEA of the importance of expediting   deci-
sions related to this project.

     The Administrator     of SBA emphasized     that:

     "*V the nature and purpose of the Local Develop-
     ment Company Program is to aid in the economic
     development of an area by providing          loans to as-
     sist identifiable     small businesses.        Section 502
     development company loans cannot be made for
     speculative    purposes,   Therefore,    before loans
     can be committed, a specific,       identifiable,      eli-
     gible,   small business must agree to utilize          the

                                  23
facilities  being financed by the loan. However,
the small business must provide SBA with a rea-
sonable assurance that it can pay the rent and
earn a reasonable profit."




                        24
                             CHAPTER4

               CONTRACTOR
                        LOAN GUARANTEEPROCaAM

       Because of the prospects for large-scale      housing pro-
grams in the Hough area and because of the reluctance          of
white contractors    to work in the area, Hough Development
established    the Contractor   Loan Guarantee program in 1968
to help black contractors      get the working capital     necessary
for performing construction       work.   By June 1970 Hough De-
velopment had guaranteed bank loans totaling        nearly
$207,500 for six contractors.        The loans were made to con-
tractors    who were in financial    trouble and were used to
keep them operating     rather than to help them grow.

       The loan guarantee program contributed    some benefits
to the Hough area in that the loans enabled the contractors
to continue their home construction     and renovation    activi-
ties--decent   housing is a pressing problem in Hough--and
continue to employ a number of Hough residents.        Of the six
contractors,   however, five had defaulted    on their loans as
of June 30, 1970, and one had defaulted      on a number of its
loans.    As a result prospects were dim that one of the ma-
jor objectives    of the program, bank financing    on their own,
would be accomplished by these contractors.,       In July 1970,
because the program was not succeeding, Hough Development
decided to phase it out.

        When the program was established,     Hough Development
planned to guarantee high-risk      loans which banks would
otherwise be unwilling      to make. Hough Development be-
lieved that, once the contractors       had demonstrated their
ability    to repay their loans, the banks would be willing      to
accept the contractors      as good credit risks.    This finan-
cial stability     would allow the contractors    to grow and at
the same time provide needed jobs to Hough residents.

       In June 1968 OEQ approved the use of $225,000 of the
grant funds to establish      a revolving   fund to be used for
guaranteeing    loans.   Hough Development budgeted and made
available    $212,000 of that amount for the project.      Hough
Development was not required       to obtain approval from OEO
for individual     loan guarantees but was required    to obtain


                                 25
assurance that the contractor       had an adequate accounting
system and adequate internal       controls to safeguard assets.

      The one bank which made all the loans was unwilling    to
assume any risk, and Hough ‘Development had to guarantee the
entire amount of each loan.   The following   table shows the
status of the loans to each contractor    as of December 31,
1970.

                      Total amount        Amount
     Contractor         of loans          repaid    Defaulted

           A             $ 20,000        $ 6,000    $ 14,000
           B               65,000                     65,000
           C               18,735          3,735      15,000
           D               60,184         35,184      25,000
           E               37,168          7,168      30,000
           F                6,400          1,700       4,700

                         $207,487a       $53,787    $153,700

a$32,000 additional   from the     revolving  fund was used as se-
 curity for the financing     of   a duplex house under the Homes
 for Hough project,     Although    these funds were not used to
 meet working-capital    needs,    they were used to encourage .
 construction   in Hough. This      loan was repaid in December
 1970.

All the loans, except the one to contractor      B and the one
for financing   for the Homes for Hough project,    were made
to meet working-capital   needs.  The loan to contractor    B
was to pay past-due debts as well as to meet working-
capital  needs.

     When the contractors    defaulted,    $153,700 of impact
funds were paid to the bank. A Hough Development official
told us that efforts   to collect    on the defaulted  loans had
not met with much success.

       Hough Development, in its original  proposal for fund-
ing in June 1968, stated that, before a loan guarantee was
approved, a project   team would analyze each contractor's
financial   position,   This team was to consist of a consul-
tant or staff member of Hough Development and of

                                26
consultants     from three other organizations     working in
Hough. Also each contractor         was to be evaluated by the
Cleveland Contractor      Assistance Corporation,     a nonprofit
corporation     that was to provide technical     assistance    to
minority    contractors.

       Hough Development did not follow its proposed proce-
dures in guaranteeing     loans.for  contractors   A and B because
neither the project    team nor the Cleveland Contractor       As-
sistance Corporation    was in operation     at the time the loans
were made. Hough Development also did not comply with Om
requirements   in that it made no attempt to determine
whether the contractors      had adequate accounting    systems,

      The guarantees for these two contractors    were approved
by Hough Development's executive committee on the basis of
information  provided by the contractors.     The proposed pro-
cedures were followed,  however, for the four other contrac-
tors, and Hough Development did get assurance from a certi-
fied public accountant that all four had adequate account-
ing systems.

       With regard to another of the program's objectives--
providing      two thirds of the jobs and training            to Hough res-
idents   --we   were  unable   to   determine     how  many residents  were
employed by the contractors           as of June 30, 1970. The only
data available       showed that as of January 1970 four of the
contractors      were employing 70 men, 17 of whom were Hough
residents.       According to Hough Development most of these
17 men had been working for the contractors                prior to the
loan guarantees.         Therefore,     although Hough Development
could not be credited with creating               these jobs, its actions
under the loan guarantee program may have enabled the con-
tractors     to continue operations         and employ these persons in
construction      and renovation      activities.

        In December 1969 the project  team reported to the ex-
ecutive committee that none of the contractors      were close
to being able to get bank credit on their own, one of the
program's objectives.     The project   team stated that Hough
Development had not sought contractors      which were entering
periods of growth but had guaranteed loans on a first-come-
first-served    basis to contractors  which were in financial


                                    27
             trouble.   In July 1970 Hough Development decided to phase
             out the project   and to not guarantee any loans after that
             date.




  :‘:,
         ’
 ‘I,
;




                                          28
.


                                CHAPTER5

                  COMMUNITYPRODUCTS,INCORPORATED

          As of June 1970 Community Products, Incorporated,         a
    rubber parts manufacturing      company, employed 32 people, 25
    of whom were from Hough. The company's heavy operating
    losses and our analysis of its costs of production        indicated
    a need for significant      changes in its operations.    The com-
    pany recognized the need for change and took some actions
    in 1970 to improve its operations.        For example, it negoti-
    ated increased prices with some of its customers after we
    advised management that prices on some products did not
    cover all of their related costs.        The company also recog-
    nized that there were problems associated        with depending
    solely on cyclical     customers, such as the automobile indus-
    try 9 and it obtained contracts     for producing rubber parts
    for companies which manufacture business machines.

           We were unable to evaluate the impact of most of the
    changes because they had not been fully     implemented before
    the completion of our fieldwork.     The company's unaudited
    financial   statements for its first  18 months of operation
    through December 31, 1970, indicated    that its financial   sit-
    uation had improved somewhat during the latter     months of
    the period, although the company was showing an operating
    loss as of December 31, 1970.

           As of June 1970, $198,000 of impact and non-Federal
    funds had been invested in the company. Because of problems
    in the way the company's financial    statements had been pre-
    pared9 we were unable to determine with any certainty      the
    actual operating   loss sustained as of the time of our
    follow-up   work, although it appeared to be in excess of
    $300,000.

    INITIATION   OF PROJECT

           One of Hough Development's  first   priorities    was to
    establish   a black-owned and black-operated       manufacturing
    company in Hough. Hough Development believed that the com-
    pany should enter a field where it could obtain a competi-
    tive advantage and decided that the company should manufac-
    ture rubber parts, using the injection-molding         process.

                                     29
This   process was comparatively new and was supposed to be
more   efficient than the more conventional process used by
most   American rubber parts manufacturers.

       Hough Development performed an analysis     of the rubber-
parts-manufacturing     field which showed that companies in
that field were not reinvesting      in capital improvements and
that the demand for rubber parts in the automotive       industry
alone was expected to double by 1972, As a result Community
Products was formed late in 1968, with the hope of creating
jobs--49   in the first    year, 150 within 3 years, and 500
within 5 years --and of giving eventual ownership opportuni-
ties to Hough residents.

      In its February 1969 proposal to OEC for funding the
company, Hough Development estimated that by August 1969
monthly sales would be $70,000.       A profit  was projected   af-
ter the first    year of operation.    The proposal included
sales projections      of $2 million annually within 3 years and
$10 million    annually within 5 years,,     Community Products
began operations     in June 1969 with $80,000 of impact funds
and a $350,000 guaranteed loan from SBA.

ANALYSIS OF PERFORMANCE

       Because of the heavy operating     losses, we reviewed the
costs of production.      Adequate cost records were not main-
tained, and we could not identify      the actual cost of pro-
duction for each part manufactured for comparison with unit
sale prices.     We did, however-$ analyze the data available,
including   cost estimates provided by Community Products, and
projected   a theoretical   break-even point for each of seven
parts being produced,      We found that even at full production
the costs to produce each part would exceed the selling
price.    In fact for three parts the material     and labor costs
only-- without including    overhead and general administrative
expenses-- would exceed the selling     price.
      Cur estimates were based on the best information    avail-
able and were conservative.    For example, we based our es-
timates on full production,   although full production   may be
a long way off.    Also we made no allowance for normal machine
downtime during maintenance or mold changes.     Thus the actual
unit costs to produce the parts could be significantly     higher
than those used in our analysis.

                                30
,
    \



              In December 1969 we brought the results       of our analysis
        to the attention     of Community ProductsO officials    who took
        the following    actions.

             --Raised the selling   prices of all parts included in
                our analysis.   The prices of only four parts, how-
                ever, were increased sufficiently  to cover the esti-
                mated costs.

             --Raised    the overhead rate    to be used in establishing
                future   selling  prices.

             --Reduced the administrative    staff     by three persons
                and thereby reduced administrative       costs by $27,500
                annually.

             --Began, in July 1970, to record the time used in mak-
                ing each part as part of its determination of the
                cost of producing the parts.

             --Hired a chemist part time to determine the most eco-
                nomical rubber compound to be used in each part.

             Additional  actions were taken during the latter       part
        of 1970 and early in 1971 to further     improve the operations.
        These actions included additional    reductions  in staff--the
        number of employees was down to 26 in February 1971 compared
        with 32 in June 1970--and further    price adjustments.

              We were unable to evaluate the effect of most of these
        changes since sufficient     time had not elapsed by the end of
        our fieldwork   for the company to have fully    implemented the
        changes.    Our analysis  of the company's unaudited financial
        statements,   however, indicated   that, although the company
        had not made a profit    during the first   18 months of opera-
        tion, its losses had declined during the latter       months of
        the period.

        OWNERSHIP

              Community Products was incorporated       in October 1968.
        The articles  of incorporation     limited  ownership to employees
        of the company or to persons residing       in Hough or adjacent
        areas and to nonprofit    organizations    working in the area.

                                         31
                                                                       I




No person or organization other than Hough Development may
own more than 5 percent of the total subscribed shares.
      On the advice of a law firm, Hough Development has
decided not to establish   a specific  plan for distribution
of shares until   the company has proved profitable.       Hough
Development, the only shareholder,    owns all 500 shares which
it purchased with $500 of non-Federal     funds.

RECOMMENDATION
             TO THE DIRECTOR, OEO

        Because the continuation    of the company, which can pro-
vide additional    jobs as well as ownership opportunities,       is
linked to profitablity,      we recommend that the Director,    OEO,
through the Office of Program Development, carefully         monitor
with Hough Development future operations       of Community Pro-
ducts, to ascertain     the impact of changes that have been
initiated    by company management as well as the possible need
for further    changes.



        The Deputy Director,  OEO, stated that a financial    mon-
itoring    system, developed by a national   public accounting
firm for the Special Impact program, had been fully        imple-
mented and that this system would give the program office,
on a quarterly     basis, the necessary information  to measure
change over time.

        The Deputy Director   added that Hough Development had
implemented monthly monitoring      reports for all of its sub-
sidiaries    and that the reports measure actual performance
against projected     performance.   He stated further  that from
these reports Hough Development could focus on the problem
areas for each company and could assist it through recom-
mendations and corrective      measures.




                                32
                             CHAF'TEl?6

             HANDYMAN'SMAINTENANCESERVICE, INC.

      Hough Development funded Handyman's Maintenance Service,
Inc., without OEO approval and despite doubt expressed as
to the feasibility     of the venture by outside consultants     in
the maintenance field.       Although Handyman's total operating
costs, from its inception       in December 1968 through Decem-
ber 31, 1970, exceeded revenues by about $119,600, the proj-
ect provided jobs for a number of hard-core unemployed and
both Handyman and Hough Development took a number of actions
during fiscal     year 1970 to improve its operations.

       Also OEO approval for the project  has been requested
several times since February 1969. Although the company had
not demonstrated the ability    to earn a consistent   profit and
although OEO had not approved the project      as of February
1971, Handyman's financial   records indicated    that some of the       -.
actions taken to improve its operations     had had positive  re-
sults.

       In our opinion some of the factors contributing         to
Handyman's operating   loss have been (1) the inability          to
motivate employees who were previously         members of the hard-
core unemployed to give a good day's work, (2) the lack of
adequate day-to-day   supervision,     and (3) the high administra-
tive costs incurred in relation       to size of staff and volume
of business.    Other possible    factors   include difficulty      in
gaining customer confidence and community acceptance of a
service business that uses the previously         hard-core unem-
ployed.

       Handyman, which was formed in December 1968, was de-
signed to make hard-core unemployed persons productive        mem-
bers of society by training      them to perform minor maintenance
tasks, including     plumbing, plastering,   carpentry, custodial
duties,   landscaping,   and gardening.    Handyman was intended
to give these persons not only jobs but also, eventually,
ownership of the company.

       Since success of this project   is linked largely with
the quality     of the work performed, we believe that, if this
project    is to succeed, Handyman must provide effective

                                   33
supervision  and must stress to each employee the benefits
that are available--a  decent wage, a steady job, promotion,
and ownership of the company--in return for a good day's
work.

PROJECTHISTORY

      Since February 1969 Hough Development has submitted
several proposals to OEO for the use of impact funds for
Handyman. Except for approving $22,000 for personnel and
administrative   costs, however, OEOdid not approve the use
of impact funds because it believed that there was no evi-
dence that the company could become a viable business or
that the expected impact on Hough justified  the expenditures.

        OEO's main objection  was that the administrative    bud-
get, which included three executives having combined annual
salaries    of $32,800, was out of line with the projected     im-
pact of the business-- $159,000 annual gross income and only
20 employees.      During 1969 Hough Development used $110,400
of impact funds-- $88,400 without OEO approval--even      though
it was aware of OEO's opposition.      (The use of the funds is
further   discussed in ch. 10.)

      In a letter  to Hough Development in January 1970,0E0
stated that it would tighten     its controls  over impact funds
if Hough Development continued to fund Handyman. At that
time OEO gave Hough Development 3 weeks to submit a plan
for making the project profitable.       In February 1970 Hough
Development replied with a plan which would immediately re-
sult in a small profit,   primarily   by reducing salaries  and
wages by 25 percent.

      Subsequently OEO questioned certain aspects of Hough
Development's plan and requested certain clarifications.
In February 1971 Hough Development responded with another
plan for the operation  of Handyman, which was under review
by OEO at the time of our follow-up   inquiries  in March 1971,

HANDYMAN'SOPERATIONS

      Although Handyman has done some landscaping and minor
maintenance, most of its work has been custodial   services.
Because of a high turnover,  Handyman hired 82 persons,

                                34
including  46 Hough residents, for full-time       jobs during    1969.
As of February 1971, 31 persons, including        20 residents,
were employed.

       In December 1968, 23 employees entered a 13-week, city-
operated training      course in plumbing, electrical       repairs,
plastering,    carpentry,    glazing,  custodial    duties,   and driver
safety.     They also recived remedial instructions         in English,
mathematics,    spelling,    and geography,      Only 13 employees com-
pleted the course, and all of them had left Handyman by
February 1970.

       During its early months of operations,      Handyman experi-
enced a number of descipline      problems with its employees,
According to a Hough Development report dated January 1970,
many of the employees had been intimidating        their supervi-
sors, which resulted    in a lack of adequate supervision.        In
addition,    the company had difficulty   motivating    its employees
to work and to take care of the equipment.

       In June 1969 Hough Development and the Handyman board
of directors   decided that changes had to be made, They rec-
ognized the need for a tougher policy to obtain better meth-
ods of control    over the employees and the equipment,       Em-
ployees were given a choice of replacing       lost or stolen
equipment, having the cost value of such equipment deducted
from their pay, or being dismissed.      As a result a number
of the employees who had reportedly     intimidated   their super-
visors were dismissed,    along with those employees who had
failed   to meet.adequate work standards.

       As an economy move Handyman discharged the manager of
the landscape division      and the four full-time     employees of
that division.      In February 1970 Hough Development reduced
the salaries    of Handyman's administrative      staff by 25 per-
cent, to emphasize that their salaries        were dependent upon
the company's making a profit.       Hough Development told us
that they believed that this action would be an incentive
for the staff members to provide better management of the
project.     In addition,   the number of Handyman's employees
was reduced by 25 percent.

       Handyman officials     expressed the view that   the improved
financial   situation     in 1970, compared with that   of 1969,

                                  35
had resulted    from such factors   as better management of staff,               -
a further   reduction  in supervisory     staff, greater experience
in bidding for contracts3      and a policy of being more selec-
tive in the hiring    of new employees.

       Handyman's unaudited profit   and loss statements,     which
are summarized below in 13- and E-month intervals         through
December 1970, indicate    some improvement in the financial
condition   of the company since it began operations      in Decem-
ber 1968.

                                             December 1968      January
                                                through         through
                                             December 1969   December 1970
                                               (note a>        (note b)

Fee income                                      $ 83,900       $115,700
    Less operating        expenses               114,600         94,700

           Gross profit      or
             loss(-)                             -57,700         21,000

       Less administrative        and
         selling  expense                         48,200         34,700
            ..
           Net operating pro-
             fit or loss(-)                   -_$105,900       $13,700

aStatements audited through             October 1969 by a certified       pub-
 lic accounting  firm.
b
    During March, May, and August 1970, slight profits             of,$600,
    $1,500, and $900, respectively, were reported.

OWNERSHIP

      The Handyman articles   of incorporation     limit ownership
to employees and to Hough Development.         Hough Development
owns all the outstanding    shares of the corporation,      which
it purchased with $500 of non-Federal       funds.    It had plan-
ned to turn ownership over to its employees after the first
year of operation   but had not done so as of March 1971 be-
cause Handyman had not been profitable.         A specific  method
of distributing   the stock had not been established.

                                        36
RECOMMENDATION
             TO THE DIRECTOR, OEO

      We recommend that the Director, OEO, through the Office
of Program Development, evaluate the Handyman project  and
decide whether to approve it for funding,



     The Deputy Director,    OEO, stated:

    "This project    is presently    being evaluated by the
    program office.     New [income] projections       have
    been developed and are being reviewed.           There has
    been a concerted effort       by Hough Development
    through its Department of Operations and Manage-
    ment to develop and maintain financial         records
    and controls    and its Department of Technical/Fea-
    sibility   and Economic Development to develop new
    markets for I-MS [Handyman's Maintenance Service],
    Inc.1'




                               37
                            CHAPTER7

                    MCDOWLD'S RESTAURANTS

       Community tensions reached a high pitch in Cleveland
during the summer of 1969 when four white-owned McDonald's
restaurants   in Cleveland's     black community were shut down
for several weeks by a boycott sparked by pickets demanding
that the restaurant     franchises    be sold to blacks.     Respond-
ing to these demands, an attorney        for McDonald's urged Hough
Development to purchase one of the restaurant         franchises.

       Hough Development, in a memorandum to OEO in November
1969, stated that it took this opportunity     to help lessen
community tensions and, at the same time, to enter into a
profitable   business which would provide jobs--50,   including
13 to Hough residents,    as of February 1971--and would pro-
vide ownership opportunities    to residents.   At the same time
it purchased another franchise    for a McDonald's restaurant
that was under construction    on the east side of Hough, which
provided 28 jobs, including    13 to Hough residents,   as of
February 1971.

PURCHASEPRICES AND PROFIT POTENTIAL

       In January 1970 Hough Development purchased the fran-
chise for the established    McDonald's restaurant    at East 83d
Street and Euclid Avenue for $307,000 and the franchise        for
a new McDonald's restaurant    at East 107th Street and Euclid
Avenue for about $121,000.     Funds for the purchases and the
additional   working capital  came from the following    sources,




                                38
                                             83d St.           107th St.
     Source of funds                       restaurant          restaurant

Impact grant                               $ 75,000             $ 37,500
Owner-manager (note a)                       25,000               12,500
SBA-guaranteed bank loan                                         100,000
Conventional  bank loan                     225,000

     Total                                 $325,000b           $150,000b

aMcDonaldl s requires  that 25 percent           of the franchise      be
 owned by the restaurant   manager.
b Includes    $18,000 and $29,000 for        inventory   and initial
 working     capital,respectively.
       Hough Development began operating   the 83d Street restau-
rant in March 1970 and the 107th Street restaurant      in April
1970.
       Anticipated   annual sales were $810,000 for the 83d
Street restaurant     and $550,000 for the one at 107th Street,
Profits,    before taxes, were expected to be 13 percent of
sales.

       As of December 30, 1970, the 83d Street restaurant              had
gross sales of about $566,000 and a net income of about
$27,000 for its first    9 months of operation under Hough De-
velopment ownership.     The 107th Street restaurant            showed
gross sales of about $305,000 and a net loss of. about $7,000
for its first    8 months of operation.         The 107th Street res-
taurant,   however, sustained its loss during the first             several
months of operation    and showed a slight         profit   during the
latter   half of 1970. A project      official      informed us that
sales and profits    as of December 31, 1970, were below expec-
tations   because of such factors as initial           problems with
youths at the restaurants;    pilfering        of food; and, with ref-
erence to the 107th Street restaurant,           the lack of free
parking prior to the end of December 1970.

OWNERSHIP

      Hough Development      established      separate corporations         to
purchase the restaurant       franchises      and used non-Federal


                                    39
      funds to buy 75 percent of the shares in each corporation.
      As required by McDonald's, the other 25 percent of the
      shares were sold to the respective   restaurant  managers.
      Hough Development plans to transfer    its shares to a holding
      company which will eventually   be owned by Hough residents.
      Because of a condition  of sale imposed by McDonald's, how-
      ever, Hough Development will retain voting control over the
      two corporations.

              Although the exact method of selling   shares in the
      holding company has not been decided, Hough Development of-
      ficials     told us that shares would be sold only to residents
      and nonprofit     organizations, the number of shares sold to
      any one person or organization     would be limited,  and the
      price would be low.




1..




                                    40
                           CHAPTER8

                 SMALL BUSINESS LOAN PROGRAM

       Recognizing the need to keep existing  small businesses
operating   and to encourage others to move into the Hough
area, Hough Development established    the Small Business loan
program to help small businesses obtain financing.      Hough
Development planned to make small loans to needy businesses
for use as seed money to enable businesses to obtain larger
loans.

        In &y 1969 OEO approved the use     of $25,000 for the
project    and informed Hough Development    that loans could be
made without OEO's approval.     loans to    any one business,
however, were limited    to a maximum of    $2,500.
      As of June 1970 five applications    had been received,
four of which were approved.     The first  loan--$2,500--made
in August 1969 was used by the recipient      to obtain a $25,000
loan to purchase a supermarket.      In November and December
1969, two loans of $500 and $2,000, respectively,        were made
to a second firm to enable it to obtain $5,000 from the
Black Economic Union to start a restaurant.        The $5,000 loan
from the Black Economic Union, however, was not made. Both
of these firms have gone out of business without making any
repayment to Hough Development.

      The fourth loan of $2,500 to a dry cleaning company
was made in May 1970 and was to be used by the company to
purchase equipment and to pay a debt.   Although this loan
did not meet the program criteria  of providing  seed money3
Bough Development made the loan to assist a business in
need.

        In March 1971 we were informed by Hough Development of-
ficials    that,as of January 1971, 15 more businesses had ob-
tained a total of 21 additional     loans.  The majority   of
these loans, however, were not provided as seed money, as
required under the program, but were made, according to a
Hough Development official,     to meet the borrowers'   needs.




                                41
      The Deputy Director,    OEO, informed us that the size of
the program-component    precluded any major impact on the
Hough community but that the program office was going to
evaluate the program to determine its effectiveness.




                               42
                             CHAPTER9

                         HOMESFOR HOUGH

       Because decent housing is one of the basic needs in
Hough, Hough Development has helped nonprofit      housing cor-
porations,    through the Homes for Hough project,   to acquire
land on which to build houses.     Although it only scratched
the surface of the housing problem, this project was designed
to help develop decent housing for large families       with low
incomes.

       Hough Development set up a revolving       fund with $40,000,
contributed    by a local businessman, to purchase lots scat-
tered throughout Hough and to sell them to nonprofit          housing
corporations.     These corporations    would then be able to get
bank financing    to construct   houses for low-income families.
Prior to April 1970 the only impact funds used for this
project were for the salary costs of Hough Development's
administrative    staff members for the time spent in obtaining
land, planning the project,      and coordinating     project efforts
with nonprofit    housing corporations.      In April 1970 OEO ap-
proved the use of $40,000 in impact funds as additional           seed
money for this project.

       As of February 1971, three houses--one two-family      house
and two single-family      houses --had been completed and con-
struction   was more than half completed on 28 town houses.
The project was far behind the initial       scheduled-51 units
completed by the summer of 1969--but that schedule was an-
other example of Hough Development's       overly optimistic  goals.
Hough Development did not consider such time-consuming         fac-
tors as obtaining     approval from the various city commissions
and committees and getting       the city council's  approval to
purchase land from the city for use in the project.




                                  43
                            CHAPTER10

                      FINANCIAL MANAGEMENT

       As of January 1, 1970, Hough Development had used im-
pact funds on three projects--$88,400        for Handman, $15,000
for Community Products,      and $10,200 for a junior-achievement-
type business-- without OEO's approval.         OEO, however, later
approved the use of the funds for Community Products and
the junior-achievement-type      business.     The unauthorized   use
of fundsseverelylimits       OEO's ability   to analyze proposed
projects    and to influence   any decisions    on project   implemen-
tation   to ensure that only those projects       which enhance
program objectives      are implemented.
        OEO advised Hough Development that it would establish
tighter    controls over the use of funds by withdrawing    the
letter    of credit under which Hough Development operates if
Hough Development continued to provide financial      support
to Handyman.

       OEO releases funds to Hough Development through a let-
ter of credit    at the Cleveland Federal Reserve Bank. At
least once a month, Hough Development obtains funds for
financing    its operations  by submitting a payment voucher
to a local bank which draws the funds from the Cleveland
Federal Reserve Bank and deposits them in Hough Development's
account.

       Although we believe that Hough Development's       financial
system is adequate to control       the receipt  and expenditure
of impact funds, we found a number of minor weaknesses in
the system.       Hough Development officials   told us that cor-
rective    actions were being taken to eliminate     these weak-
nesses,

       Because violations  of grant conditions  minimize OEO's
influence   over the Special Impact program, we proposed in
our draft report that OEOwithdraw the letter       of credit
under which Hough Development is funded, if, in the future,
funds are used on projects    without OEO approval,   and then
release funds on a monthly basis only after Hough Develop-
ment shows how the funds will be used.

                                  44
The Deputy     Director,      OEO, stated:

"The entire        system of releasing       funds for Special
Impact Programs has been completely               revised      to in-
corporate       these concerns.      The system being used is
one that releases          only those funds to be used for
administrative          and planning   purposes.        The venture
capital      funds are held by OEO until          projects       are
approved       by OEO and then funds are released.                 While
there iS no guarantee           that administrative         funds
will    not be used for projects          the quarterly        ***
reporting       system furnishes     financial       information
of a nature        that corrective     actions     can be taken.
Additionally,         the OEO *** financial        expenditure
reports      submitted     by Hough Development         monthly     are
analyzed       by the Program Office        to ensure that the
expenditure        of funds is as has been approved."




                                  45
                                CHAPTER11

                           SCOPEOF R.EVIEW

       To evaluate the program results and efficiency           in ad-
ministering    the Special Impact program in Cleveland,          we

      --reviewed   pertinent  legislation and OEOpolicies  and
         procedures concerning the Special Impact program;
      --examined records on the various projects  administered
         by Hough Development and funded by OEO Special Impact
         funds;

      --visited   the project     sites;

      --reviewed   the results of audits and evaluations          of
         the Special Impact program in Cleveland;    and

      --interviewed    city officials,        Hough community leaders,
         program participants,      officials     of local poverty
         agencies,  and SBA officials.

        Our review generally   covered Hough Development's activ-
ities from June 1968 to December 1969. Although our field-
work was basically     completed in July 1970, for certain     sub-
sequent actions cdncerning those projects        which Hough Devel-
opment had undertaken as of December 1969, we updated our
data through Feburary, March, or May 1971. Our work, after
the completion of our detailed       review in July 1970, was
limited    to that necessary to ascertain     the status of those
projects    or problem areas that we had concerned ourselves
with during our earlier      work.

      Our work was performed primarily   at the Hough Area De-
velopment Corporation,   which is responsible  for the Special
Impact program in Cleveland,   and at OEO Headquarters in
Washington, D.C.




                                   46
             APPENDIXES




                              P.




     \
         k
               b          .




(I
               47
                                                                                  APPENDIX I



0FFIC’E OF ECOXOMK




                                                                      Feb 4 1971



   Mr. Henry Eschwege
   Associate Director
   United States General
     Accounting Office
   Washington, D. C. 20548

    Dear Mr. Eschwege:

    I am pleased to enclose the comments of the Office of Economic
    Opportunity     on your proposed report on progress toward developing
    minority    businesses and employment in the Hough Area of Cleveland,
    Ohio, under the Special Impact Program. A copy of the draft re-
    port was shared with the Hough Area Development Corporation.

       I appreciate     having the opportunity        of submitting       these comments.

       Sincerely,
                                      t /’  r




   dd
   Wesl y L.           0 nevi
                      ctor

   9
       Enclosure




                                                                      .




                                                 49
APPENDIX I


  Comments of the Office of Economic Opportunity   on the draft GAO
  report of the Comptroller  General of the United States entitled
  "Progress Toward Developing Minority  Business and Employment
  in the Hough Area of Cleveland, Ohio under the Special Impact
  Program"



  The draft      GAO report        differs      slightly         from the internal              evaluation1

  conducted      last     summer by OEO. We,therefore,                     will       limit     our comments

  to the specific          recommendations           made by the GAO draft                    report.

  1,    Impact on Hough, A.               GAO draft         report,      p0 15:        "That the Director

  of OEO through          the Office         of Program Development,                  direct      Hough

  Development to place a moratorium                        on the initiating             of additional

  projects      in order to direct             all   its     efforts       toward making its

  ongoing projects          successful".


  OEO Comment:

  This has been imposed by the program office                              since June 1970, for

  the exact purpose mentioned by GAO. Present                               efforts       of Hough

  Development are focused on projects                        in place.                           ,


           B. - GAO draft      report,       p.15:         u . . . we recommend that                    the

  Director      require     that    HoughDevelopment               submit     for      OEO approval

  within     a specific      period       of time a detailed               plan showing how

  ownership      of existing        businesses        assisted          by the Special            Impact

  Program will      be distributed            to Hough residents              and/or          the planned

  use for funds derived             from ownership              retain&d     with      Hough Development.

  We also recommend that,                for future         projects,      Hough Development


       1GAOnote:            OEO was advised  of GAO's                         preliminary                findings
                            during OEO's evaluation.




                                                           50
                                                                                             APPENDIX I



should be required            to submit     such plans as a condition                 for

approval".


OEO Comment:

The Board of Directors               of Hough Development has a Cormnittee on

Community Benefits           which is addressing              the issue of showing how

ownership       of existing         businesses     will     be distributed         to Hough

residents.        For each project          in place there          has been a tentative

plan and/or       discussion         on the divestiture           scheme.        These plans

are being submitted            to OEO for        approval.        In .addition,       the use of

funds derived           from such divestitures             will   be used to further            the

economic objectives            of the program.             For future      prdjects         Hough

Development will           be required      to submit divestiture                plans as a

condition       of approval.


2.   Martin      Luther     Ring, Jr.     Plaza,       CA0 draft       report,     page 21:

"Because of the tremendous                impact the project            can have both on

the Hough Community and in renewing                       confidence      in Hough Development,'

we recommend that           the Director         of OEO through         the Office          of Program

Development,       work with         Hough Development and the Federal'and                      local

agencies      involved      to expedite      the construction            of the Martin

Luther   King     Jr.     Plaza".




                                                  51
APPENDIX I


    OEO Comment:

    We are in total           agreement with            the need for such an effort,

    Local agencies have been responsive,                           The program office            has

    notified      the SBA of the importance                  of expediting          decisions      related

    to this      project.


    3.      Community Products,             Inc,,     GAO draft        report,     page 30:       "Because

    additional       jobs as well           as ownership          opportunities       are linked

    to profitability,               we recommend that            the Director       of OEO, through

    the Office       of Program Development,                 and Hough Development               carefully

    monitor      future      operations         of Community Products,              Inc.    to

    ascertain       the impact of changes that                    have already       been initiated

    by company management as well                     as the possible            need for    further

    changes".


    OEO Comment:

    The major steps taken +-e the full                       utilization          of the Peat,

    Marwick,      Mitchell          financial       monitoring         system which is now

    fully      implemented and will            give the program,office  on a quarterly
                                                               c
    basis      the necessary          information   to measure change over time.


    In addition,          Hough Development has eplemented                        monthly    monitoring

    reports      for all      its     subsidiaries.              The    reports     measure

    actual     performance           against        projected      performance.




                                                        52
                                                                                             APPENDIX I


From these reports          Hough can focus          into     the problem areas

for   each company and assist             through      recommendations         and

corrective      measures.      These reports          will     be shared with          the

program office.


4.    Handyman Maintenance         Service,         Inc.,     CA0 draft      report,     P. 35:

"We recommend that          the Director      of OEO through              the Office     of

Program Development,          evaluate      the Handyman project              and make a

decision      whether     to approve it      for     funding      and take whatever

actions      may be necessary          to uphold its         decision".


OEO Comment:

This project      is presently         being evaluated          by the program office.

New projections          have been developed and are being reviewed,                           There

has been a concerted          effort      by Hough Development              through     its

Department      of Operations          and Management to develop and maintain

financial      records     and controls       and its        Department      of Technical/

Feasibility      and Economic Development to develop new markets                              for

HMS, Inc.




                                   [See      GAOhate, p. 54.1




                                                    53
APPENDIX I




                                        [See GAO note.1




    6. Financial          Management, CA0 draft          report,    page 44:      "Because

    violations       of grant     conditions    minimize       OEO's influence      over the

    program, we recommend that             the Director        of OEO through      the Office

    of Program Development withdraw               the letter       of credit     under which

    Hough Development           is funded if,     in the future,         funds are used

    on projects      without      OEO approval,        and then release        funds on a

    monthly      basis    only after    Hough Development shows how the funds

    will    be used".                                                              D


    OEO Comment:

    The entire      system of releasing         funds for      Special     Impact Programs

    has been completely          revised   to incorporate          these co&ems.         The

    system being used is one that releases                   only those funds to be used

    for    administrative       and planning      purposes.        The venture     capital     funds

   GAO note:             The deleted       comments relate to matters which were
                         discussed     in the draft report but omitked from
                         this final      report.




                                                  54
                                                                                        APPENDIX I



are held by OEO until             projects      are approved by OEO and then

funds are released.           While there          is no guarantee         that   administra-

tive   funds will       not be used for projects             the quarterly         PMM

reporting      system     furnishes          financial    information       of a nature

that   corrective       actions     can be taken.          Additionally,          the OEO

CAP 15 financial         expenditure          reports    submitted      by Hough

Development monthly          are analyzed          by the Program Office           to   ensure

that   the expenditure        of funds is as has been approved,




                                    R




                                                   55
APPENDIX II



                                           U.S.     GOVERNMENT
                              SMALL     BUSINESS           ADMINISTRATION
                                      WASHINGTON,           D.C.   20416




        Dee 4, 1970

       Honorable Henry Eschwege
       Associate Director
       Civil Division
       U. S. General Accounting Office
       Washington, D. C. 20548

        Dear Mr. Eschwege:

        Reference is made to your letter    of October 29, 1970, regarding your
        draft report on developing minority      businesses and employment in the
        Hough area of Cleveland,   Ohio. We have reviewed the sections of the
        report which you called to our attention       and found them to be substantially
        correct with the following   exceptions:




                                                       [See GAO note.]


        Also, it is of importance to emphasize that the nature and purpose of
  I
        the Local Development Compaw Program is to aid in the economic develop-
        ment of an area by providing             loans to assist identifiable     small busf-
        nesses.      Section 502 development company loans cannot be made for
        speculative       purposes.     Therefore,    before loans can be committed, a
        specific,      identifiable,     eligible,     small business must agree to utilize
        the facilities         being financed by the loan.        However, the small business         .
        must provide SRA with a reasonable assurance that it can pay the rent
        and earn a reasonable profit.              We suggest that consideration     be given
        to rewording Chapter 3 so as to take into consideration                the nature of
        the 502 loan program.

        If we can be of further       assistance           to you, please     don't   hesitate   to
        call on us.




       Administrate

       Enclosure

       GAO note:       The deleted comments pertain                         to matters which
                       were discussed in the draft                         report but omitted
                       from this final  report.
                                                               APPENDIX III


                             PRINCIPAL OFFICIALS OF THE

                            OFFICE OF ECONOMICOPPORTUNITY

                      RESPONSIBLEFOR THE ADMINISTRATION OF THE

                               SPECIAL IMPACT PROGRAM


                                                   Tenure of office
                                                   From
 DIRECTOR:
     Frank C. Carlucci                          Dec.    1970     Present
     Donald Rumsfeld                            May     1969     Dec. 1970
     Bertrand M. H&ding              (acting)   Mar.    1968     May     1969

 ASSISTANT DIRECTORFOR COMMUNITY
   ACTION PROGRAMS(note a>:
     Theodore M. Berry                          Apr.    1965     Sept.   1969

 ASSISTANT DIRECTOR*FORPROGRAM
   DEVELOPMENT:
     Alfred H. Taylor (acting)                  June    1971     Present
     Joseph P. Maldonado                        Aug.    1970     June 1971
     Marvin J. Feldman                          Jan.    1970     Aug. 1970
     Robert Perrin (acting)                     Sept.   1969     Jan.    1970
 aIn September 1969 this position     was terminated  as an or-
  ganizational entity   and responsibility    for the Special Im-
  pact program was transferred    to the Office of Program De-
  velopment.
                      .a




U.S. GAO,   Wash..   D.C.
                                           57
              L




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