United States General Accounting Office GAO Report to the Chairman, Subcommittee on Housing and Community Opportunity, Committee on Banking and Financial Services, House of Representatives August 1997 HOUSING AND URBAN DEVELOPMENT Use and Oversight of the Economic Development Loan Fund GAO/RCED-97-195 United States GAO General Accounting Office Washington, D.C. 20548 Resources, Community, and Economic Development Division B-276545 August 20, 1997 The Honorable Rick Lazio Chairman, Subcommittee on Housing and Community Opportunity Committee on Banking and Financial Services House of Representatives Dear Mr. Chairman: The Department of Housing and Urban Development’s (HUD) Economic Development Loan Fund, formerly known as the Section 108 Loan Guarantee Program, was established by the Congress in 1974 as a component of the Community Development Block Grant (CDBG) Program. Under the loan fund, communities may borrow up to 5 times their current year’s CDBG allotment using their current and future CDBG grants as the principal collateral. Initially, only CDBG entitlement communities—large metropolitan areas and urban counties that receive CDBG grants directly—were eligible for the loan fund; in 1990, nonentitlement communities—small cities and rural areas that receive CDBG grants through their states—became eligible for the fund. Loan proceeds may be used, for the most part, for the same activities as CDBG grants; but because the loan amount can be substantially larger than the annual CDBG grant, communities may use the loan proceeds to finance much larger community development efforts. HUD approves loan commitments but does not directly fund the loan program. Rather, the loans are financed through periodic public offerings of pooled loans on the private sector-capital market and are guaranteed by the full faith and credit of the U.S. government. To encourage communities to make greater use of the loan program, the Congress substantially increased the amount of funds available for the program in 1993. In 1994, it established Economic Development Initiative (EDI) grants, which communities may use to help fund projects or to pay for some of the costs associated with borrowing under the loan program. Concerned about how these changes had affected the loan program, you asked us to examine (1) the extent to which communities are using the loan fund, (2) factors affecting communities’ willingness to use the fund, (3) the types of projects being financed with loan proceeds, and (4) HUD’s procedures for overseeing the program. This report is based on HUD’s data over the life of the program and a representative sample of 100 loans made Page 1 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 in fiscal years 1990 through 1996 that had funding advances. The loan sample was designed to allow us to estimate the types of activities that have been financed by communities and states for those years. From the loan program’s inception through fiscal year 1996, the Results in Brief Department of Housing and Urban Development made 930 loan commitments totaling $4.4 billion. About 38 percent of the Community Development Block Grant entitlement communities have received one or more loan commitments; 16 states, on behalf of their nonentitlement communities, have also received loans. Although communities’ and states’ use of the loan program has fluctuated— generally, 50 or fewer loans were approved each year—program activity increased sharply in fiscal years 1994 through 1996, when the Department approved about 400 loans and nearly 60 percent of the dollars loaned since the program’s inception. The program experienced its greatest activity in fiscal year 1995, with 218 loans totaling $1.8 billion. However, the level of loan commitments has often been well below the level approved by the Congress. For example, although the Department approved $2.6 billion in loans in fiscal years 1994 through 1996, the appropriated level would have supported about $5.6 billion in loans. According to the Department of Housing and Urban Development and associations representing community development officials, the key factor responsible for communities’ and states’ increased willingness to use the loan program has been the availability of Economic Development Initiative grants to loan recipients. Program activity appears to support this view. In 1994, when the Department provided $19 million in grants, loan activity doubled—88 loans compared with 43 the previous year; in 1995, when the Department awarded $350 million in grants, the number of loans jumped to 218; however, in 1996, when no Economic Development Initiative grants were awarded, the number of loans dropped to 89. The officials attributed any unwillingness to use the loan program to communities’ concerns over collateral requirements and their reluctance to pledge future Community Development Block Grants as collateral for loans. The Department does not know the extent to which communities have used Community Development Block Grant funds for loan payments when other intended payment sources did not materialize because it does not track this information. Communities and states reported to the Department of Housing and Urban Development that they have used about 73 percent of their loans to Page 2 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 finance economic development activities. Other eligible Community Development Block Grant activities for which loans were reported to be used included acquisition of real property, housing rehabilitation, and public property rehabilitation. Within the category of economic development, communities and states reported that loans were used for activities such as constructing shopping centers, creating revolving loan funds, and rehabilitating hotels and restaurants. Overall, communities reported that about 88 percent of the loans were to benefit people from households earning less than 80 percent of a local area’s median income. The Department requires an annual review of grantees to determine, among other things, whether the activities funded by Community Development Block Grants are being carried out in a timely manner and in accordance with Department-approved plans. However, according to officials in 5 of the 30 field offices responsible for the loans in our sample, they did not routinely include the loans in their annual reviews because they (1) did not believe they had guidance on how to monitor the program, (2) did not believe they had a responsibility to monitor the loans, (3) had other priorities, or (4) lacked loan-specific information. These five offices oversee about 26 percent of all loans. In addition, in 7 of the 30 field offices in our sample, Department personnel responsible for reviewing block grants told us that they did not have enough information on loans to carry out their loan monitoring responsibilities. The loan program provides communities and states with a way of Background leveraging their CDBG awards to obtain additional resources for financing larger community revitalization projects without waiting for the actual CDBG award. The loans can have repayment terms of up to 20 years. In the loan program, as in the CDBG program, communities and states must use their loan proceeds only for activities that meet one or more of three national objectives: (1) benefit low- and moderate-income people—that is, households earning less than 80 percent of the local area’s median income; (2) aid in the prevention and elimination of slums or blight; or (3) meet other urgent community development needs. In addition, the loan proceeds must be used to help finance one or more of the activities cited in section 108 of the 1974 act. These activities include, among others, the acquisition of real property; the rehabilitation of real property, either publicly owned or acquired; housing rehabilitation and preservation; and economic development. Page 3 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 Although current and future CDBG grants are the principal collateral for loans, since 1995, communities have had to provide additional collateral. To meet this requirement, HUD has generally approved loans only for those activities expected to generate a cash flow that would allow the community to repay the guaranteed loan. A 1994 amendment to the program expanded the list of eligible activities to include the acquisition and restoration of public facilities, which would generally not produce a cash flow to repay the debt. In addition to revenue generated from the project, communities and states may designate tax revenues or other revenue sources as the additional collateral. The Treasury has never had to use public funds to fulfill the federal guarantee, according to HUD’s 1996 Consolidated Annual Report to Congress. Eligible applicants include the CDBG grantees: (1) entitlement communities—generally cities designated as central cities of metropolitan statistical areas, other cities with populations of at least 50,000, and qualified urban counties—that are directly responsible for administering their grants and (2) nonentitlement communities—smaller communities, including many rural communities whose CDBG programs are administered by the state.1 Nonentitlement communities became eligible for the loan program through the Cranston-Gonzalez National Affordable Housing Act of 1990. Both HUD headquarters and field offices play a role in managing the loan program. Generally, headquarters provides final approval; negotiates loan terms with applicants; and, through HUD’s fiscal agent, arranges for the sale of the loans. The fiscal agent acts as a trustee under contract to HUD and, among other duties, collects loan payments from the communities and notifies HUD to take funds from communities’ CDBG allotment when payments are not received. Field offices assist communities and states in preparing applications, make recommendations to headquarters to approve or deny loans, and monitor funded activities. HUD has financial monitoring procedures to safeguard against communities’ or states’ defaulting on their loans. HUD’s fiscal agent must receive the loan payment 5 days before it is due. Payments are due either semiannually or quarterly. If the payment is not received, the fiscal agent notifies the HUD headquarters program office, which contacts the cognizant community or state. If the fiscal agent does not receive payment within 72 hours of the payment’s due date, HUD will make the loan payment 1 HUD administers the nonentitlement programs in New York State and Hawaii and refers to these programs as its Small Cities Program. For the purposes of this report, nonentitlement communities include state-administered programs and the HUD-administered Small Cities Program. Page 4 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 using funds from the community’s or state’s CDBG allocation. When payments are made late, HUD will credit the community’s or state’s CDBG allocation. Between fiscal years 1994 and 1996, communities and states used the loan Loan Program program in far greater numbers than ever before. Over this period, HUD Recently Experienced approved nearly 60 percent of all the funds loaned, for a total of Significant Growth $2.63 billion. From the program’s inception through September 1996, HUD made 930 commitments to guarantee loans totaling $4.4 billion.2 Figure 1 shows the number of approved loan commitments from 1978—when the first loan application was approved—through September 1996. Figure 1: Number of Approved Loan Commitments, Fiscal Years 1978-96 Number of approved loan commitments 250 200 150 100 50 0 5 6 7 8 9 0 1 0 1 2 3 4 3 2 6 5 4 9 8 199 199 198 198 198 198 198 199 199 198 198 199 199 199 198 198 198 197 197 Fiscal years Source: GAO’s analysis of HUD’s data. 2 In 1996 dollars, HUD’s commitments totaled $5.2 billion from the program’s inception through September 1996. When adjusted for inflation, commitments from 1994 through 1996 represent 52 percent of all commitments. Page 5 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 Entitlement communities used the program significantly more than nonentitlement communities. About 38 percent of entitlement communities have received 884 loan guarantees totaling $4.2 billion. Nonentitlement communities in 16 states have received 46 loan guarantees totaling $235 million. Even though the program has recently experienced significant growth, the level of loan commitments has always been below the level approved by the Congress. For example, in fiscal year 1995—the program’s most active year—HUD approved $1.8 billion in commitments, while the Congress had appropriated $2.1 billion in commitments for that fiscal year. Figure 2 shows the level of commitments approved by the Congress and actual loan commitment levels through September 1996. Figure 2: Actual Loan Dollars and Amount Approved by the Congress, Fiscal Years 1978-96 Dollar value of loan commitments 2,500,000,000 2,000,000,000 1,500,000,000 1,000,000,000 500,000,000 0 1992 1993 1996 1980 1981 1984 1985 1988 1989 1983 19 86 1987 19 90 1991 19 94 1995 1978 1979 1982 Fiscal years Actual Appropriated Source: GAO’s analysis of HUD’s data. According to HUD and associations representing community development EDI Grants Spurred officials, EDI grants encouraged communities to make greater use of the Program Growth, but loan program. HUD provided $369 million in EDI grants from fiscal year 1994 Concerns About through September 1996. However, according to these officials, the program continues to be underutilized because (1) many communities and Collateral Remain Page 6 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 states are reluctant to pledge their future CDBG funds as collateral for the loans, as the 1974 act, as amended, requires, and (2) collateral requirements imposed in 1995 and new procedural guidelines are likely to make communities even more reluctant to use the program. EDI Grants Encouraged Recent growth in the use of the loan program was primarily stimulated by Increased Loan Program the introduction of EDI grants in fiscal year 1994, according to HUD and Use associations representing community development officials. HUD provided EDI grants for 123 out of the 395 loan commitments made between fiscal years 1994 and 1995. These EDI grants totaled $369 million. (App.1 provides detailed information on EDI grants approved during fiscal years 1994 through 1995.) The EDI grants enhance the program’s use because the communities and states can use the grant funds in a number of ways to cover the costs of administering the program, such as creating a loss reserve and writing down loan rates to businesses financing projects within the program. By helping to finance some of the projects’ costs, the grant money also strengthens the economic feasibility of the assisted projects. According to one CDBG entitlement community, the ability to receive an EDI grant along with a loan commitment from the loan fund was the key factor making it possible for the community to take out the loan. If not for the EDI grant, this community would have sought funds from alternative lending sources or issued bonds itself. Communities may use their EDI grants in different ways. For example, in 1994, Los Angeles was awarded a $300 million loan commitment—the largest single loan amount granted under this program—to establish and assist in funding a community development bank. The bank’s mission is to stimulate economic development that will create and/or retain jobs for Los Angeles’ low- and moderate-income families. In addition to the loan commitment, the city was awarded a $100 million EDI grant, bringing the bank’s total reserves to $400 million. The bank will provide loans, loan guarantees, venture capital investments, grants, and technical assistance to area businesses. In another instance, Kingston, New York, was awarded a $3.7 million loan to establish two revolving loan funds, one to rehabilitate housing and one to assist small businesses that are locating or expanding at a former IBM facility. In addition to the loan commitment, the city was awarded a $555,000 EDI grant to establish a revolving loan Page 7 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 fund offering below-market interest rates for small businesses and a loan loss reserve. Collateral Requirements Even though communities and states generally view the loan program May Discourage Use of the favorably, they have concerns about the current collateral requirements Loan Program and the proposed guidance to communities on the collateral to be used when providing third-party loans. As the law requires, communities and states must pledge current and future CDBG grants as the principal collateral for their loan. According to officials from five of six associations that represent community development officials, the collateral requirements are a concern for their members. For example, one association representative told us that while many of the association’s members who used the program viewed it positively, the overall membership was slow to use the program because of the requirement to pledge future CDBG grants. Beginning in February 1995, HUD required all communities and states to pledge collateral beyond their CDBG grant. Previously, only communities and states that had loan repayment terms for 10 years or longer and, in some cases, loans with shorter repayment periods (such as those with “balloon” payments), had to pledge additional collateral. HUD’s new requirement was in response to the Credit Reform Act of 1990 and resulting directives from the Office of Management and Budget (OMB). The 1990 act required agencies to calculate subsidy costs for loan guarantee programs. This cost is the amount of appropriation an agency must have in order to cover anticipated losses in the program. In calculating this cost, OMB told HUD that it cannot use future CDBG grants as the only source of collateral for the loan. If additional collateral were not required, the subsidy cost on the loan program would be prohibitively high. According to HUD’s requirements, for loans that financed some type of tangible item, such as a building or equipment, the items themselves can serve as additional collateral. For public infrastructure activities, additional collateral will generally come from income related to CDBG activities, such as interest from repayments of housing rehabilitation loans. As a final option, communities can pledge revenues from future tax collections. In addition to concerns about collateral, association officials questioned the proposed more stringent guidelines on third-party loans, such as loans that communities make to businesses. HUD plans to issue draft guidance for review and comment on the procedures that communities and states may follow in granting loans from the loan program to third parties. The Page 8 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 proposed guidelines would seek to minimize third-party default rates by using commercial lending practices as the benchmark for the communities’ own loan activities. HUD’s program manager recognized that the new guidance may make communities more reluctant to use the program and acknowledged that HUD will have to find ways to help communities adapt to the new guidelines. HUD stated that it is proposing this guidance in response to the 1990 credit reform act, and we identified five instances in which third parties had defaulted on the loans they had received from the community that had secured the loan with its CDBG allotment. Nevertheless, several associations questioned this guidance because it moves the loan program toward more stringent commercial lending practices. They believed the use of more conservative lending practices as a benchmark for any public benefit program is unrealistic and inappropriate because such projects by their nature are riskier and would be unable to qualify in a conservative lending environment. In a letter commenting on a draft of this report, HUD stressed that the underwriting guidelines will not be issued as regulations and their use will not be mandatory. HUD noted that the guidelines are not intended to be used in connection with improvements to public facilities and other activities that do not generate revenue, and that communities will still be able to use CDBG funds to repay loans used to finance activities that do not generate revenue. HUD also noted, however, that communities will have to furnish alternative security to protect the federal financial interest in the event that future appropriations are not made for the CDBG program. According to one CDBG participant, that state chose not to participate in the loan program for its nonentitlement communities because pledging the state’s future CDBG funds would put other nonentitlement communities at risk of losing their CDBG funds if the community receiving the funds were to default. This official added that while the benefits of leveraging future CDBG grants are tempting, the risk posed by the loan on future CDBG awards is too great because of the impact on countless low- and moderate-income persons around the state who depend on CDBG-funded activities. HUD Does Not Track According to the director of HUD’s loan program, communities intend, in Communities’ Use of most instances, to repay loans with revenues generated by the funded CDBG Funds to Make Loan project or from another revenue source identified by the community or state in its loan application. The director emphasized that identifying a Payments viable source of revenue other than the CDBG for loan payments was a critical consideration in HUD’s review of a loan application. However, HUD Page 9 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 was not able to provide information on communities’ actual use of CDBG funds to cover shortfalls when the intended revenue sources for loan payments do not materialize because it has not been tracking these payments. The director agreed that this is important information that HUD should be tracking to improve its oversight of the program. On the basis of our sample of 100 loans approved in fiscal years 1990 Communities Used through 1996 that had funding advances, we estimated the types of Loans Primarily for activities reported as funded by the program for these years. Our analysis Economic relied on the information that the communities and states reported to HUD. (App. II provides detailed information on loans approved in fiscal years Development 1990 through 1996 that had funding advances, and app. III provides Activities detailed information, estimates, and sampling errors for the data presented in this report.) By an overwhelming margin, both entitlement and nonentitlement borrowers reported that they used their loan funds to finance economic development activities. However, nonentitlement communities were more likely than entitlement communities to report that they used their funds for economic development. Table 1 shows our estimates of the types of activities funded overall and by entitlement and nonentitlement communities. Page 10 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 Table 1: Proportion of Loans Used to Fund Eligible Activities, as Reported Entitlement Nonentitlement by Entitlement and Nonentitlement Overall communities communities Communities Eligible activities (percent) (percent) (percent) Economic development 73.2 72.1 87 a Acquisition of real property 12.3 11.9 17.4 Housing rehabilitationb 10.4 10.8 4.3 c Public real property rehabilitation 8.5 9.2 0 Relocation costs 5.2 5.2 4.3 Note: Because all nonentitlement communities were included in our sample, the percentages for these communities are actual and not estimates. The economic development activity is the only category in which we found a statistical difference between entitlement and nonentitlement communities. Percentages do not add up to 100 because, in reporting to HUD, communities and states could indicate more than one eligible activity. a Projects such as the purchase of a commercial office property or property to house a local shopping center. b Projects such as the rehabilitation of a school to convert the facility to housing units for the elderly. c Projects such as engineering and design work associated with the development and construction of three public schools. Source: GAO’s analysis of HUD’s data. Loans for economic development were made for activities such as constructing shopping centers, creating revolving loan funds,3 and rehabilitating hotels and restaurants. On the basis of the information provided to HUD by communities and states, we estimate that at least $1.3 billion was used to finance an economic development activity. This estimate is conservative and includes only instances in which the community reported funds being used for only one purpose. As noted earlier, in reporting to HUD, communities and states could indicate more than one eligible activity for the loan commitment. Figure 3 shows our estimates of the type of economic development activities funded. As the figure shows, 46 percent of the loans went to support for-profit, start-up businesses or to retain for-profit businesses. 3 Revolving loan funds provide an on-going stream of funding to small businesses by providing loans below the market rate. Page 11 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 Figure 3: Estimates of the Types of Economic Development Activity Percentage Funded 60 50 46.8 40 36.1 30 20 9.6 10 7.5 0 Business start-up Commercial property Public property Other & retention Type of project Establishing revolving loan funds is one method that communities use to make even greater use of CDBG funds by providing funding for businesses that might otherwise not qualify for commercial lending opportunities. While we estimate that only 6 percent of the loans were used to establish or enhance such funds, about half of the entitlement communities with the largest loans reported using loan commitments to finance a revolving loan fund. Only one nonentitlement community reported using loan proceeds for this purpose. These revolving loan funds are used to finance a variety of businesses. For example, Philadelphia, Pennsylvania, reported using $20 million in loan proceeds to establish a revolving loan fund for small and mid-sized inner-city businesses. The program’s goal is to foster the retention and expansion of inner-city businesses. Eligible businesses will receive long-term, fixed-rate loans that conventional banks have been unwilling to provide. Businesses that have received assistance from the fund include an insurance company, a wholesale food distributor, a smelting and refining company, an apparel warehouser and distributor, and a card and gift warehouser and distributor. Page 12 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 On the basis of the information in the loan files, we also estimate that communities and states used about 88 percent of their loans to finance activities that benefited low- and moderate-income people from households earning less than 80 percent of the local area’s median income. For example, Greene County, Alabama, reported to HUD that it planned to use $9 million in loan proceeds to finance the construction of a 85,000-square-foot facility to house a tire and wheel assembly plant. The county estimates that the plant will create at least 180 new jobs, 51 percent of which will be for low- and moderate- income persons. Cheboygan, Michigan, reported using $3 million in loan proceeds to help a start-up, for-profit business purchase a vacant paper plant and industrial equipment. The plant will benefit the community by creating 100 jobs for low- to moderate-income persons, according to a state community development official. About 23 percent of the loans funded activities that supported the national objective of aiding in the elimination of slums and blight. However, none of the loans funded activities that supported the national objective of addressing an urgent community development need. Percentages do not add up to 100 because, in reporting to HUD, communities and states could indicate more than one national objective. According to its regulations, the Department must conduct an annual Some Field Offices performance review of CDBG communities and states to determine whether Are Not Including the CDBG-funded activities are being carried out (1) in a timely manner, (2) in Loan Program in accordance with approved plans, and (3) in compliance with primary and national objectives.4 CDBG Monitoring Because the loan program is a component of the CDBG program, loan commitments should be included in annual reviews of CDBG recipients. However, in 5 of the 30 field offices we contacted, these loan commitments were not reviewed. These five offices accounted for about 26 percent of all loan commitments. The five offices that did not include loan fund activities said that they did not do so because they (1) did not believe they had guidance on how to monitor the program, (2) did not believe they had a responsibility to monitor the loans, (3) had other priorities, or (4) lacked loan-specific information. Another two field offices did not monitor these loans because one had recently opened and one had 4 An annual review may consist of the field office’s conducting (1) an on-site review during which a team of specialists reviews various aspects of a community’s or state’s activities to determine compliance with CDBG program requirements or (2) an in-house assessment during which HUD identifies areas in which communities are doing well and those in which they need improvement. Page 13 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 its records destroyed. The remaining 23 field offices included the loan fund activities in their review. Even when the field offices include loan activities in the annual CDBG review, their task is made more difficult by poor communication between HUD headquarters and its field offices. According to officials in 7 of the 30 field offices we contacted, HUD representatives did not have enough information on loans to fully carry out their monitoring responsibilities. According to the HUD headquarters program director, field offices may not routinely receive copies of all loan documentation, but he was surprised to learn that some offices may not be receiving documentation containing sufficient information for monitoring purposes. Communities and states have made greater use of the loan program since Conclusions the EDI grants were instituted. Nonetheless, the total amount of money loaned has remained less than the amount that congressional appropriations would support. This may be due in part to communities’ and states’ reluctance to risk having to use future CDBG funds to repay loans. However, because HUD does not track the use of CDBG funds for loan payments, it does not know the extent to which CDBG funds have been used in this manner. Furthermore, some HUD field offices have not been routinely including loan commitments in their oversight of CDBG communities and states. Seven different field offices were not getting information from headquarters on final loan terms, which affected their ability to monitor loan activities; and five field offices were not including loans in their monitoring of CDBG communities. With the increased growth in the loan program, the need to ensure that funds are being spent as reported is of even greater importance. To determine the extent to which communities and states are using CDBG Recommendations allotments to repay loans, the Secretary of Housing and Urban Development should implement procedures for tracking loan payments made from communities’ or states’ CDBG allocations. To ensure that HUD’s field offices have accurate and timely information for monitoring loan fund activities and that loan fund activities are routinely reviewed, the Secretary of Housing and Urban Development should Page 14 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 • develop procedures to ensure that the information necessary to monitor program performance and compliance with program requirements is promptly provided to the cognizant field offices and • direct field offices to include a review of loan fund activities when they review CDBG communities and states. We provided a draft of this report to HUD for its review and comment. We Agency Comments obtained comments in a meeting with the Deputy Assistant Secretary for Grant Programs and other HUD officials and subsequently received written comments. In our meeting, the Deputy Assistant Secretary stated that HUD generally agreed with the information in our report and with our recommendations. He stressed HUD’s commitment to making sure that it effectively oversees the loan program. The Deputy Assistant Secretary and the other officials provided suggestions for clarifying the report, which we incorporated as appropriate. In its letter, HUD noted that it views the growth in the loan program as positive and encourages communities to use the program to create jobs and revitalize distressed neighborhoods. At the same time, HUD stated, it is mindful of its stewardship responsibilities and therefore considers our report as constructive and generally agrees with our recommendations. HUD raised several points about collateral requirements that, while consistent with our report, provided details of HUD’s intent. HUD emphasized that the underwriting guidelines will not be issued as regulations and their use is not mandatory; rather, HUD views them as a tool for communities to underwrite revenue-generating projects financed with the loan fund. These guidelines will assist communities in protecting their CDBG programs and in providing adequate security for the loan guarantees. HUD also noted that the guidelines were not intended to be used for loans used to finance public facilities or other activities that do not generate income. Although HUD points out that the guidelines will not be mandatory, it was clear during our work that associations representing communities perceive the guidelines as requirements. Accordingly, we believe that the program may benefit from HUD’s opening and maintaining a dialogue with communities as it develops these guidelines to ensure that they are understood and not viewed as an obstacle to using the program. In connection with our recommendations, HUD agreed to implement procedures to require reporting of unplanned use of CDBG funds to make loan payments. However, our first recommendation goes beyond a reporting requirement. We believe that routine tracking of these data will Page 15 GAO/RCED-97-195 HUD’s Economic Development Loan Fund B-276545 provide HUD and communities with useful information on, among other things, the likelihood that communities may need to use future CDBG funds to repay loans when other intended revenue sources fail to materialize. In connection with our second recommendation, HUD noted that the distribution of oversight information needed by the field offices must be comprehensive and that while HUD has improved in this area in recent years, the current system is inadequate for accomplishing that result. HUD plans to implement our recommendation to correct this problem through a design change to its integrated disbursement and information system —a computer-based information system. HUD noted that it will consult with its field offices to ensure that they are receiving the information needed for monitoring. HUD also agreed to develop procedures to ensure that loan information is provided promptly to field offices and to direct field offices to include loan activities in their monitoring of CDBG recipients, as we recommend. HUD’s written comments and our response appear in appendix VI. We performed our review from November 1996 through July 1997 in accordance with generally accepted government auditing standards. As arranged with your office, unless you announce its contents earlier, we plan no further distribution of this report until 7 days after the date of this letter. At that time, we will send copies to appropriate congressional committees, the Secretary of Housing and Urban Development, and the Director of the Office of Management and Budget. We will also make copies available to others upon request. Please call me on (202) 512-7631 if you or your staff have any questions. Major contributors to this report are listed in appendix VII. Sincerely yours, Judy A. England-Joseph Director, Housing and Community Development Issues Page 16 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Page 17 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Contents Letter 1 Appendix I 20 EDI Grants and Economic Development Loan Fund Loans, Fiscal Years 1994 and 1995 Appendix II 24 Loan Fund Commitments, Fiscal Years 1990-96 Appendix III 35 Estimates and Related Sampling Errors for Projected Data Appendix IV 38 Objectives, Scope, and Methodology Appendix V 41 HUD Field Offices Surveyed Page 18 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Contents Appendix VI 42 Comments From the Department of Housing and Urban Development Appendix VII 46 Major Contributors to This Report Tables Table 1: Proportion of Loans Used to Fund Eligible Activities, as 11 Reported by Entitlement and Nonentitlement Communities Table I.1: Economic Development Initiative Grants and Economic 20 Development Loan Fund Loans, Fiscal Year 1994 Table I.2: EDI Grants and Economic Development Loan Fund 21 Loans, Fiscal Year 1995 Figures Figure 1: Number of Approved Loan Commitments, Fiscal Years 5 1978-96 Figure 2: Actual Loan Dollars and Amount Approved by the 6 Congress, Fiscal Years 1978-96 Figure 3: Estimates of the Types of Economic Development 12 Activity Funded Abbreviations CDBG Community Development Block Grant EDI Economic Development Initiative FMD Financial Management Division HUD Department of Housing and Urban Development OMB Office of Mangement and Budget Page 19 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix I EDI Grants and Economic Development Loan Fund Loans, Fiscal Years 1994 and 1995 This appendix presents information on Economic Development Initiative (EDI) grants and corresponding loans from the Economic Development Loan Fund for fiscal years 1994 and 1995. Table I.1: Economic Development Initiative Grants and Economic Community Grant amount Loan amount Development Loan Fund Loans, Fiscal Selma, Alabama $330,000 $2,200,000 Year 1994 San Francisco, California 600,000 6,000,000 San Diego, California 720,000 7,200,000 Compton, California 500,000 5,000,000 Los Angeles County, California 1,000,000 10,000,000 Inglewood, California 500,000 5,000,000 San Bernadino, California 344,000 2,295,000 Lakewood, Colorado 45,000 450,000 Washington, D.C. 1,000,000 11,500,000 Miami Beach, Florida 1,000,000 12,670,000 Miami, Florida 300,000 2,000,000 Atlanta, Georgia 185,017 1,850,170 Atlanta, Georgia 617,000 6,170,000 Athens/Clarke County, Georgia 500,000 5,000,000 Atlanta, Georgia 197,983 1,979,830 Chicago, Illinois 1,000,000 10,000,000 Gary, Indiana 380,000 2,550,000 Indianapolis, Indiana 450,000 3,000,000 Louisville, Kentucky 700,000 7,000,000 Boston, Massachusetts 300,000 2,000,000 Lowell, Massachusetts 500,000 5,000,000 Worcester, Massachusetts 500,000 5,000,000 Prince George’s County, Maryland 600,000 6,000,00 Jackson, Michigan 315,000 2,110,000 Detroit, Michigan 243,000 1,626,521 Detroit, Michigan 90,000 600,000 Wilmington, North Carolina 150,000 1,000,000 Newark, New Jersey 129,000 1,290,000 Atlantic City, New Jersey 300,000 3,000,000 Syracuse, New York 129,000 1,290,000 Buffalo, New York 500,000 5,000,000 Babylon, New York 90,000 600,000 Buffalo, New York 129,000 1,290,000 Utica, New York 600,000 6,000,000 (continued) Page 20 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix I EDI Grants and Economic Development Loan Fund Loans, Fiscal Years 1994 and 1995 Community Grant amount Loan amount Rochester, New York 700,000 7,000,000 Cleveland, Ohio 306,000 2,044,250 Toledo, Ohio 129,000 1,290,000 Dayton, Ohio 129,000 1,290,000 Cleveland, Ohio 86,000 573,750 Philadelphia, Pennsylvania 1,000,000 10,000,000 Providence, Rhode Island 500,000 5,000,000 Columbia, South Carolina 227,000 1,515,000 Harris County, Texas 129,000 1,290,000 Fort Worth, Texas 660,000 6,600,000 Tacoma, Washington 165,000 1,135,000 Total fiscal year 1994 $18,975,000 $181,409,521 Table I.2: EDI Grants and Economic Development Loan Fund Loans, Fiscal Community Grant amount Loan amount Year 1995 Selma, Alabama $450,000 $450,000 South Gate, California 475,000 2,370,000 Alhambra, California 675,000 2,025,000 San Francisco, California 1,000,000 10,000,000 San Jose, California 475,000 2,710,000 San Bernadino County, California 475,000 1,360,000 Oakland, California 22,000,000 27,000,000 Fresno, California 1,000,000 1,630,000 Riverside, California 950,000 4,130,000 Sacramento, California 1,500,000 8,000,000 Pico Rivera, California 750,000 1,850,000 Los Angeles County, California 25,000,000 25,000,000 Los Angeles, California 100,000,000 300,000,000 San Diego, California 1,000,000 1,000,000 Denver, Colorado 1,000,000 3,330,000 Bridgeport, Connecticut 475,000 1,580,000 New Haven, Connecticut 1,000,000 2,000,000 Fort Myers, Florida 500,000 500,000 Miami, Florida 670,000 2,700,000 Gary, Indiana 1,000,000 4,680,000 Kansas City, Kansas 7,800,000 7,800,000 Louisville, Kentucky 4,000,000 4,000,000 Boston, Massachusetts 22,000,000 22,000,000 Fall River, Massachusetts 1,155,000 1,210,000 (continued) Page 21 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix I EDI Grants and Economic Development Loan Fund Loans, Fiscal Years 1994 and 1995 Community Grant amount Loan amount Lynn, Massachusetts 899,000 1,200,000 Lawrence, Massachusetts 1,000,000 6,670,000 Boston, Massachusetts 1,000,000 2,000,000 Lewiston, Maine 500,000 5,000,000 Detroit, Michigan 250,000 2,390,000 Detroit, Michigan 70,000 400,000 Detroit, Michigan 90,000 450,000 Saint Paul, Minnesota 1,000,000 4,000,000 Kansas City, Missouri 14,200,000 14,200,000 St. Louis, Missouri 1,000,000 1,000,000 Moss Point, Mississippi 475,000 1,900,000 Hudson County, New Jersey 1,000,000 8,300,000 Syracuse, New York 475,000 475,000 Buffalo, New York 1,000,000 3,400,000 Rochester, New York 475,000 1,900,000 Yonkers, New York 40,000 180,000 Elmira, New York 385,000 2,420,000 New York, New York 4,600,000 13,800,000 Kingston, New York 555,000 3,700,000 Yonkers, New York 41,000 170,000 Yonkers, New York 94,000 380,000 Warren, Ohio 170,000 1,000,000 Trumbull County, Ohio 340,000 2,000,000 Columbiana County, Ohio 102,000 600,000 Columbus, Ohio 1,000,000 9,000,000 Youngstown, Ohio 340,000 2,000,000 Akron, Ohio 300,000 1,700,000 Cleveland, Ohio 87,000,000 87,000,000 Cuyahoga County, Ohio 1,000,000 6,670,000 East Liverpool, Ohio 21,000 120,000 Youngstown, Ohio 435,000 3,300,000 Mahoning County, Ohio 170,000 1,000,000 Oklahoma City, Oklahoma 1,000,000 3,330,000 Tulsa, Oklahoma 1,000,000 2,800,000 Philadelphia, Pennsylvania 1,000,000 6,000,000 Pittsburgh, Pennsylvania 1,000,000 4,010,000 McKeesport, Pennsylvania 1,000,000 2,000,000 Harrisburg, Pennsylvania 1,000,000 2,430,000 Columbia, South Carolina 200,000 200,000 (continued) Page 22 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix I EDI Grants and Economic Development Loan Fund Loans, Fiscal Years 1994 and 1995 Community Grant amount Loan amount Houston, Texas 22,000,000 175,000,000 Abilene, Texas 1,000,000 2,800,000 Hidalgo County, Texas 250,000 1,000,000 Austin, Texas 475,000 475,000 Fillmore, Utah 200,000 650,000 Fairfax County, Virginia 150,000 1,000,000 Kitsap County, Washington 348,000 1,500,000 Tacoma, Washington 475,000 2,380,000 Kitsap County, Washington 475,000 920,000 Seattle, Washington 350,000 2,400,000 Spokane, Washington 1,000,000 6,610,000 Milwaukee, Wisconsin 1,000,000 1,700,000 Huntington, West Virginia 350,000 3,500,000 Cheyenne, Wyoming 105,000 695,000 Laramie, Wyoming 300,000 1,500,000 Total fiscal year-1995 $350,055,000 $848,550,000 Page 23 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix II Loan Fund Commitments, Fiscal Years 1990-96 Fiscal State Community Project description Amount year Status Ala. Gadsden $1,000,000 90 Ala. Mobile 1,000,000 94 Ala. Florence 800,000 95 Ala. Birmingham 3,300,000 95 Ala. Bessemer Construction of a business incubator facility 1,000,000 92 Underway Ala. Selma Renovation of a hospital into a medical clinic 2,200,000 95 Underway Ala. Mobile Acqusition/Rehabilitation of a hotel 2,000,000 91 Completed Ala. Greene County Financial assistance for business start up 9,000,000 95 Underway costs; construct plant Ariz. Little Rock 1,800,000 91 Ariz. Yuma 1,500,000 94 Ariz. Pima County 1,200,000 90 Calif. Riverside 4,130,000 95 Calif. Oakland 2,500,000 94 Calif. Norwalk 2,500,000 95 Calif. Los Angeles County 1,060,000 90 Calif. Lancaster 4,000,000 95 Calif. Westminster 2,900,000 95 Calif. Sacramento 805,000 93 Calif. Livermore 185,000 94 Calif. Sacramento 8,000,000 95 Calif. Sacramento County 2,020,000 93 Calif. Sacramento County 1,000,000 94 Calif. Vacaville 555,000 92 Calif. Sacramento 400,000 94 Calif. San Bernardino 500,000 94 Calif. Sacramento County 1,500,000 90 Calif. San Diego 4,400,000 94 Calif. Pasadena 3,725,000 93 Calif. Sacramento 1,250,000 90 Calif. San Diego 1,760,000 95 Calif. San Diego 990,000 94 Calif. San Bernardino 7,350,000 95 Calif. Sacramento Establishment of a loan fund 1,000,000 93 Underway Calif. Los Angeles Fund the Los Angeles Community 300,000,000 95 Underway Development Bank Calif. San Diego Construction of a shopping center 7,200,000 95 Underway Calif. Chula Vista 750,000 91 (continued) Page 24 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix II Loan Fund Commitments, Fiscal Years 1990-96 Fiscal State Community Project description Amount year Status Calif. Bakersfield Purchase of furniture and fixtures for a 2,500,000 94 Completed convention center hotel Calif. Los Angeles Housing rehabilitation, revolving loan fund 60,000,000 93 Underway Calif. Oakland Renovation of the Martin Luther King, Jr. 10,945,000 95 Underway Plaza Calif. Oakland Finance Enterprise Community economic 27,000,000 95 Underway development activities Calif. Santa Ana Acquisition of land for street widening 20,000,000 93 Completed Calif. Sacramento County Low interest loans for rehabilitation 360,000 90 Completed Calif. San Francisco Capitalization of an existing revolving loan 50,000,000 95 Underway Calif. Alhambra 3,000,000 95 Calif. Carlsbad 1,200,000 94 Calif. Santa Ana 13,900,000 95 Calif. Huntington Park 2,970,000 95 Calif. San Mateo County 2,000,000 95 Calif. Woodland 800,000 95 Calif. Fresno 3,150,000 95 Calif. Downey 1,700,000 91 Colo. Denver Establishment of three interim financing 15,000,000 93 Completed programs Colo. Lakewood 2,805,000 94 Colo. Lakewood Construction of public facilities; 2,050,000 95 Underway infrastructure improvements Colo. Denver 1,300,000 93 Colo. Denver 7,000,000 94 Conn. Bridgeport 5,000,000 95 Conn. New Haven 5,000,000 91 D.C. Washington 5,000,000 92 Fla. Fort Myers Construction of a shopping center 500,000 95 Underway Fla. Miami 2,500,000 93 Fla. Fort Myers Acquisition/Redevelopment of land for 750,000 93 Completed low-income housing Fla. Jacksonvillea Acquisition/Renovation of a waterfront 2,850,000 90 Underway resturant Fla. West Palm Beach Rehabilitation of two privately owned rental 1,095,000 94 Don’t know housing complexes Fla. Jacksonville 3,845,000 95 Fla. Pompano Beach 2,000,000 91 Fla. Jacksonville 10,000,000 94 Fla. Miami 8,000,000 90 (continued) Page 25 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix II Loan Fund Commitments, Fiscal Years 1990-96 Fiscal State Community Project description Amount year Status Fla. Boca Raton 700,000 94 Ga. Savannah Rehabilitation of 74 unit low- and 1,855,000 92 Completed moderate-income rental housing Ga Atlanta 6,170,000 95 Ga Atlanta 6,825,000 95 Ga Atlanta 4,980,000 93 Ga Macon 500,000 95 Ga Macon 2,500,000 93 Ia Des Moines 1,000,000 94 Ia Des Moines 1,000,000 95 Ia Des Moines 407,000 90 Ia Sioux City 600,000 92 Ia Dubuque 1,000,000 91 Ia Dubuque Acquisition of land; construction of a hotel 1,200,000 90 Completed Ill. Chicago Finance seven economic and community 50,000,000 95 Underway development programs Ill. Rockford 250,000 94 Ill. Schaumburg 550,000 93 Ill. Moline Acquisition of land to redevelop harbor area 3,000,000 92 Underway Ind. South Bend 450,000 92 Ind. Hammond 1,050,000 93 Ind. South Bend 1,050,000 94 Ind. East Chicago 3,500,000 95 Ind. Gary 7,440,000 94 Ind. South Bend 750,000 90 Ind. Gary Construction of a building leased to US 3,470,000 95 Completed Postal Service Ind. Indianapolis 3,200,000 95 Kans. Kansas City 7,800,000 95 Kans. Baxter Springs Construct manufacturing facility; purchase 7,000,000 94 Completed equipment La. Kenner 700,000 92 La. Jefferson Parish 6,800,000 90 La. New Orleans Conversion of a building into hotel suites 5,600,000 91 Underway a La. Jefferson Parish Acquisition of equipment; refinance loan; 2,625,000 94 Underway working capital for for-profit business Mass. Malden Finance handicapped accessibility 500,000 95 Completed improvements Mass. Boston Establishment of the Enterprise Community 22,000,000 95 Underway Economic Development Loan program (continued) Page 26 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix II Loan Fund Commitments, Fiscal Years 1990-96 Fiscal State Community Project description Amount year Status Mass. Lawrence 700,000 93 Mass. Lynn 7,890,000 92 Mass. Lowell 10,000,000 94 Mass. Springfield Construction of a medical center 900,000 94 Completed Mass. Boston Construction of hotel and parking garage 40,000,000 94 Underway Mass. Lynn Acquisition/Site preparation work for schools 3,400,000 95 Completed and firehouses Mass. Westfield Working capital for local manufacturer 2,200,000 94 Underway Mass. Malden Acquisition/Relocation/Demolition of 1,800,000 92 Underway commercial buildings Mass. Salem 600,000 95 Mass. Springfield 350,000 94 Mass. Lynn 3,000,000 95 Mass. Cambridge 1,000,000 94 Mass. Gloucester 1,750,000 94 Mass. Medford 3,500,000 94 Mass. Cambridge 5,000,000 93 Mass. Malden 3,000,000 95 Mass. Springfield 2,000,000 95 Mass. Malden 475,000 90 Md. Baltimore 4,700,000 93 Md. Cumberland 550,000 94 Md. Baltimore 14,000,000 95 Md. Annapolis 210,000 94 Md. Prince George’s Acquisition/Renovation of a shopping center 6,000,000 95 Underway County Md. Prince George’s 1,600,000 93 County Md. Baltimore 6,750,000 91 Me. Lewiston 500,000 95 Mich. Cheboygan Assistance to for-profit business for 3,000,000 93 Completed purchase of a vacant paper plant and machinery Mich. Royal Oak 2,400,000 92 Mich. Saginaw Rehabilitation of a parking garage 1,715,000 93 Completed Mich. Bay City Renovation of commercial property into 350,000 90 Completed printing, graphics arts and sales facility Mich. Muskegon Purchase private property ; 650,000 92 Completed removal/installation of public facilities and improvements (continued) Page 27 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix II Loan Fund Commitments, Fiscal Years 1990-96 Fiscal State Community Project description Amount year Status Mich. Royal Oak 3,097,000 90 Mich. Detroit 2,000,000 90 Mich. Norton Shores 250,000 94 Mich. Detroit 3,060,000 95 Mich. Waterford 255,000 93 Mich. St. Clair Shores 1,250,000 91 Mich. Detroit 2,000,000 92 Mich. Detroit Construction of 23,000 sq foot addition to 1,150,000 95 Completed Riverbend Shopping Center Mo. Kansas City 1,600,000 95 Mo. Kansas City 1,500,000 95 Mo. Kansas City 1,500,000 94 Mo. Kansas City 500,000 94 Mo. Kansas City 5,000,000 94 Mo. Kansas City 2,000,000 92 Mo. Kansas City 3,250,000 92 Mo. Kansas City 3,000,000 90 Mo. Kansas City Construction/Rehabilitation of a building 250,000 94 Completed used by public service organization Mo. St. Josepha Renovation of building and provide business 1,260,000 93 Underway expansion opportunities Mo. St. Louis Housing and neighborhood development; 15,000,000 90 Completed land acquisition; economic development activities Mo. Kansas City Acquisition/Relocation/Demolition of 4,500,000 92 Completed blighted and substandard properties Miss. Greenville Construction of water and sewer facilities; 2,445,000 93 Underway acquisition of real property; relocation costs Mont. Billings 400,000 90 N.C. Greensboro 1,640,000 94 N.C. Gastonia 3,305,000 94 N.C. Charlotte Rehabilitation of a historic mill into 1,645,000 95 Completed low-income housing units Nebr. Lincoln 675,000 91 Nebr. Lincoln 315,000 94 N.H. Portsmouth Acquisition/Rehabilitation of the Mariner’s 820,000 94 Completed Village housing complex N.J. Jersey City 8,000,000 95 N.J. Elizabeth 5,000,000 91 N.J. Trenton 6,000,000 92 (continued) Page 28 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix II Loan Fund Commitments, Fiscal Years 1990-96 Fiscal State Community Project description Amount year Status N.J. Hudson County 5,000,000 92 N.J. Camden 475,000 92 N.J. Camden 3,000,000 90 N.J. West Windsor Provide working capital, acquire office 870,000 96 Underway Township property and machinery N.J. Camden Construction of an industrial building and 180,000 92 Underway provide permanent financing N.J. Egg Harbor City Finance for-profit business’ acquisition of 3,550,000 93 Underway fixed assets and provide working capital N.J. Pohatcong Township Acquisition/Rehabilitation of a facility into a 4,495,000 93 Underway hotel N.J. Buena Vista Assistance to for-profit business; working 1,400,000 93 Terminated Townshipb capital and expansion N.J. Wanaque Acquisition of land and construction of a 2,310,000 95 Underway supermarket N.Y. Rochester 500,000 94 N.Y. Utica 9,000,000 92 N.Y. Rochester 2,000,000 94 N.Y. Union 2,000,000 95 N.Y. Middletown 70,000 95 N.Y. Buffalo 5,000,000 95 N.Y. Rochester 10,000,000 94 N.Y. Nassau County 6,025,000 92 N.Y. Binghamton 4,205,000 92 N.Y. Buffalo 1,000,000 93 N.Y. Buffalo 5,000,000 92 N.Y. Newburgh 1,500,000 92 N.Y. Syracuse 14,395,000 92 N.Y. Suffolk County 1,500,000 95 N.Y. Rochester 4,000,000 91 N.Y. Buffalo 8,000,000 90 N.Y. Rochester Establishment of revolving loan fund for 5,000,000 92 Don’t know commercial and industrial projects N.Y. Buffalo Refinance an existing Section 108 loan and 2,200,000 94 Completed make improvements to hotel. N.Y. Yonkers Provide working capital for credit worthy 18,000,000 95 Underway businesses, finance site improvement N.Y. Kingston Assistance in capitalization of a revolving 3,700,000 95 Underway loan fund N.Y. Babylon Acquisition/Rehabilitation of shopping 1,600,000 94 Underway centers (continued) Page 29 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix II Loan Fund Commitments, Fiscal Years 1990-96 Fiscal State Community Project description Amount year Status N.Y. Monroe County Expansion of an ice arena and various other 6,345,000 94 Don’t Know projects. N.Y. Binghamton Refinance an existing Section 108 loan to 800,000 94 Completed retain 119 jobs N.Y. Buffalo Purchase 5 new fire trucks 2,235,000 95 Underway N.Y. Buffalo Refinance loan, renovate property, re-open 3,000,000 94 Don’t know restaurant N.Y. Buffalo Rehabilitation of a vacant store and 1,290,000 95 Has not started establish a revolving loan fund O.H. Youngstown 1,250,000 90 O.H. Youngstown 1,275,000 90 O.H. Euclid 1,250,000 93 O.H. Columbus Rehabilitation of 400 room ocupancy units in 8,360,000 95 Underway YMCA O.H. Cleveland Establishment of two loan programs for 87,000,000 95 Don’t know economic development activities O.H. Warren 650,000 90 O.H. Youngstown 810,000 92 O.H. Cleveland 2,100,000 95 O.H. Youngstown 850,000 94 O.H. Cleveland Heights 700,000 92 O.H. Cincinnati 9,400,000 90 O.H. Youngstown 650,000 94 O.H. Canton 5,000,000 94 O.H. Youngstown 2,500,000 93 O.H. Akron 1,700,000 95 O.H. Lake County 3,000,000 93 O.H. Lorain 170,000 92 O.H. Toledo 550,000 96 O.H. Lorain 350,000 91 O.H. Youngstown 2,300,000 96 O.H. Youngstown 300,000 95 O.H. Toledo 650,000 95 O.H. Lorain 2,200,000 92 O.H. Youngstown Construction of a manufacturing facility, 4,000,000 93 Completed equipment acquisition O.H. Cleveland Renovation of 3 vacant buildings in the city’s 2,100,000 95 Completed historic warehouse district O.H. Barberton Renovation of theater, restaurant, and 2,225,000 93 Completed amusement center (continued) Page 30 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix II Loan Fund Commitments, Fiscal Years 1990-96 Fiscal State Community Project description Amount year Status Okla. Shawnee 450,000 95 Okla. Oklahoma City Establishment of a loan fund for business 20,000,000 93 Has not started creation and expansion Pa. Allentown 1,900,000 91 Pa. Berks County 2,000,000 94 Pa. Bethlehem 1,364,000 91 Pa. Easton 1,000,000 94 Pa. Erie 2,000,000 93 Pa. Harrisburg 1,680,000 90 Pa Johnstown 5,500,000 94 Pa. Montgomery County 500,000 90 Pa. Philadelphia 8,915,000 94 Pa. Philadelphia 800,000 92 Pa. Norristown 550,000 90 Pa. Philadelphia 3,000,000 94 Pa. Lancaster 1,500,000 94 Pa. Scranton 1,000,000 92 Pa. Reading 580,000 92 Pa. Philadelphia Establishment of loan pool 20,000,000 95 Underway (all projects) Pa. Cambria County Acquisition/Modernization of former steel 3,000,000 94 Completed facility Pa. Philadelphia Expansion/Enhancement of an existing 30,000,000 95 Has not started Section 108 loan program Pa. Philadelphia Renovation of building into a 351 room hotel 16,000,000 95 Underway Pa. Allentown Acquisition/Clearance of obsolete structures 4,000,000 95 Underway for installation of public facilities Pa. Scranton Assistance to for-profit business in the 9,957,000 91 Don’t know development of a downtown mall P.R. Caguas Final improvements on Civic Center Complex 2,800,000 91 Completed P.R. Cayey 4,800,000 95 P.R. Vieques Construction of a sports complex 5,000,000 94 Underway P.R. Ponce Acquisition of building and land, district 20,600,000 95 Underway redevelopment, and construction P.R. Cayey 5,000,000 95 P.R. Vega Baja 6,455,000 95 P.R. Vega Baja 4,500,000 94 P.R. Carolina 8,000,000 93 P.R. Toa Baja 7,600,000 92 P.R. Toa Baja 9,550,000 95 (continued) Page 31 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix II Loan Fund Commitments, Fiscal Years 1990-96 Fiscal State Community Project description Amount year Status P.R. Fajardo 2,500,000 95 P.R. Fajardo 3,700,000 91 P.R. Trujillo Alto 1,600,000 90 P.R. Aguadilla 3,200,000 90 P.R. Arecibo 9,575,000 94 P.R. Guaynabo Rehabilitation of a public facility and make 9,870,000 95 Underway various site improvements P.R. Dorado Rehabilitation of public facilities for arts 4,105,000 95 Underway theater; acquisition/rehabilitiation of commercial property P.R. Barceloneta Site improvements on land 2,800,000 95 Completed R.I. Providence 9,000,000 92 R.I. Providence Partially finance the rehabilitation of the 2,000,000 94 Don’t know Performing Arts Center R.I. Newport Acquisition/Rehabilitation of a closed and 1,350,000 94 Completed vacant school R.I. Providence 2,000,000 93 R.I. Cranston 285,000 93 R.I. Providence 1,500,000 94 S.C. Greenville 750,000 95 S.C. Lexington County Partially fund the start up of a regional airline 12,000,000 94 Underway carrier S.C. Columbia 1,515,000 94 S.C. Charleston 4,250,000 94 c S.C. Berkeley County Acquisition of a closed industrial facility 12,000,000 95 Foreclosure S.C. Columbia Assistance in the acquisition of a 25 acre 1,515,000 95 Underway site for redevelopment Tenn. Nashville 2,500,000 90 Tenn. Memphis 3,350,000 94 Tex. Abilene 190,000 90 Tex. Fort Bend 1,030,000 95 Tex. Bryan 500,000 94 Tex. Port Arthur 565,000 94 Tex. Hidalgo County 335,000 90 Tex. Tyler 400,000 90 Tex. Abilene 1,865,000 92 Tex. Harris County 1,290,000 95 Tex. San Benitod Business expansion 820,000 90 Terminated (continued) Page 32 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix II Loan Fund Commitments, Fiscal Years 1990-96 Fiscal State Community Project description Amount year Status Tex. Dallas Rehabilitation/Conversion of building into 25,000,000 94 Some underway; multi-family rental units some haven’t started U.T. Fillmore City Construction of a facility, acquisition of 650,000 95 Underway machinery; training U.T. Salt Lake County 5,000,000 93 Va. Fairfax County 5,691,000 90 Va. Fairfax County 2,120,000 91 Va. Fairfax County 4,755,000 92 Va. Fairfax County 500,000 94 Va. Fairfax County 500,000 95 Va. Fairfax County 80,000 95 Va. Roanoke 3,470,000 91 Va. Roanoke 2,530,000 92 Va. Richmond Acquisition/Rehabilitation of real property, 15,000,000 92 Underway clearance and relocation Va. Virginia Beach Housing rehabilitation in three targeted 2,000,000 93 Underway neighborhoods Wash. Seattle Assistance in financing,expanding and 2,400,000 95 Completed stabalizing a shopping center Wash. Spokane 5,555,000 91 Wash. Tacoma 1,135,000 95 Wash. Bellingham Gap financing for private businesses to 1,755,000 90 Completed revitalize central business district Wash. Hoquiam Working capital to acquire and reopen a 3,300,000 94 Completed paper mill Wash. Tacoma Acquisition of first mortgage on downtown 5,180,000 93 Completed hotel Wash. Ocean Shores Finance construction and permanent 3,600,000 94 Completed financing of a full service hotel Wash. Leavenworth Finance land, equipment, and other costs to 2,220,000 95 Completed develop amusement center Wash. Seattle Acquisition of a building to eliminate slum 24,200,000 94 Completed and blight on a spot basis Wis. Wausau 2,000,000 95 Wyo. Cheyenne 800,000 95 Wyo. Laramie Assistance in financing a distribution and 1,500,000 95 Completed manufacturing facility TOTAL $1,738,916,000 (Table notes on next page) Page 33 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix II Loan Fund Commitments, Fiscal Years 1990-96 Note: Project descriptions are included for the 100 loans in our sample. a Loan to a for-profit business is in default. The community is repaying the loan. b Loan to a for-profit business is in default. The state is repaying the loan c State is foreclosing on for-profit business. The state is repaying the loan. d HUD terminated the project due to the community’s mismanagement of loan funds. The community is repaying the loan. Page 34 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix III Estimates and Related Sampling Errors for Projected Data Confidence interval Description Estimate Sampling error From To What type of activity was financed with the loan? (%) Economic development 73.2 9.0 64.2 82.2 activities Acquisition of real property 12.3 6.1 6.2 18.4 Housing rehabilitation 10.4 6.1 4.3 16.5 Public property rehabilitation 8.5 5.7 2.8 14.2 What type of activity was financed with the loan by entitlement communities? (%) Economic development 72.1 9.4 62.7 81.5 activities Acquisition of real property 11.9 6.5 5.4 18.4 Housing rehabilitation 10.8 6.5 4.3 17.3 Public property rehabilitation 9.2 5.9 3.3 15.1 Relocation costs 5.2 4.7 0.5 9.9 What type of activity was financed with the loan by non-entitlement communities? (%) Economic development 87.0 Not applicable activities Acquisition of real property 17.4 Not applicable Housing rehabilitation 4.3 Not applicable Public property rehabilitation 0 Not applicable Relocation costs 4.3 Not applicable What percentage of loans fulfilled the national objectives? National objective to benefit 88.4 6.7 81.7 95.1 low- and moderate-income people National objective to reduce 23.2 8.4 14.8 31.6 slums and blight What amount of loan proceeds were used to finance economic development activities? At least this amount of loan $1,303,483,421 $2,738,961 $1,300,744,460 $1,306,222,382 proceeds to finance economic development activities What number of loans were used to finance economic development activities? At least this number of 210 20 190 230 loans to finance economic development activities What percentage of loans financed specific types of economic development activities? Financing acquisition, 36.6 11.4 25.2 48.0 construction, or renovation of commercial properties (continued) Page 35 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix III Estimates and Related Sampling Errors for Projected Data Confidence interval Description Estimate Sampling error From To Financing acquisition, 9.6 6.9 2.7 16.5 construction, or renovation of public property Financing business start up 46.4 11.6 34.8 58.0 or retention of for-profit business/ revolving loan funds What number of loans financed specific types of economic development activities? Financing acquisition, 84 28 56 112 construction, or renovation of commercial properties Financing acquisition, 22 14 8 36 construction, or renovation of public property Financing business start up 106 29 77 135 or retention of for-profit business/ revolving loan funds What percentage of loans financed revolving loan funds? Financing revolving loan 6.2 3.7 2.5 9.9 funds-all loans Financing revolving loan 45.0 Not applicable funds-top 20 entitlement communities Financing revolving loan 4.3 Not applicable funds-non-entitlement communities What number of loans financed revolving loan funds? Financing revolving loan 19 12 7 31 funds-all loans Financing revolving loan 9 Not applicable funds-top 20 entitlement communities Financing revolving loan 1 Not applicable funds-non-entitlement communities What percentage of loans received reviews? Receiving technical 24.2 8.8 15.4 33.0 assistance Receiving an on-site 29.4 8.6 20.8 38.0 inspection Receiving an annual 54.9 9.6 45.3 64.5 in-house assessment Receiving another type of 7.9 5.4 2.5 13.3 review (continued) Page 36 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix III Estimates and Related Sampling Errors for Projected Data Confidence interval Description Estimate Sampling error From To For the field offices that do not routinely include a review of Economic Development Loan Fund loans, what is the percentage of loans for which those field offices are responsible? Loan responsibility for the 5 26.5 8.8 17.7 35.3 field offices not routinely including a review of the loan in their regular CDBG monitoring Loan responsibility for the 7 39.6 9.8 29.8 49.4 field offices who did not routinely have the final loan terms For the field offices that do not routinely include a review of Economic Development Loan Fund loans, what is the amount of loans for which those field offices are responsible? Amount of funds for the 5 $292,746,316 $735,649 $292,010,767 $293,481,965 field offices not routinely including a review of the loan in their regular CDBG monitoring Amount of funds for the 7 $792,141,053 $1,128,487 $791,012,566 $793,269,540 field offices that did not routinely have the final loan terms Page 37 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix IV Objectives, Scope, and Methodology As requested, we reviewed (1) the extent to which communities and states are using the loan fund; (2) factors affecting communities’ and states’ willingness to use the program; (3) the types of projects being financed with loan proceeds; and (4) the Department of Housing and Urban Development ’s (HUD) procedures for overseeing the program. To obtain information on the loan fund, we reviewed the program’s history, regulations, policies, and procedures. We also reviewed HUD’s annual reports to the Congress for community development programs for 1994 and 1996.5 We interviewed the Director, Office of Block Grant Assistance; the Director, Financial Management Division (FMD) (the loan fund program office); FMD representatives; HUD Community Planning and Development officials in HUD field offices in Atlanta, Georgia; Columbia, South Carolina; and Portland, Oregon. We also interviewed community development officials for the states of Georgia and South Carolina, and the cities of Atlanta, Georgia, and Columbia, South Carolina. We reviewed Inspector General reports issued as of January 7, 1997. To determine the extent to which communities and states use the program, we obtained and analyzed FMD’s database of HUD’s loan fund. We identified the manner in which the data were collected and summarized. We reviewed annual reports to the Congress for community development programs for 1994 and 1996. We interviewed the Director, Financial Management Division, and Community Planning and Development officials at HUD’s field offices in Atlanta, Georgia, and Columbia, South Carolina. To identify the factors affecting communities’ willingness to use the program, we interviewed officials of associations that represent communities eligible for the program, including the Council of State Community Development Agencies, the National Congress for Community Economic Development, the National Council for Urban Economic Development, the U.S. Conference of Mayors, the National Community Development Association, and the National Association of State Development Agencies. We discussed this issue with the Director of HUD’s Financial Management Division; and HUD Community Planning and Development officials at two HUD field offices. In addition, we interviewed state community development officials in Georgia and South Carolina, and city development officials in Atlanta and Columbia. We also reviewed documentation obtained during these interviews. 5 The fiscal year 1996 contains program results for 1995 and 1996. Page 38 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix IV Objectives, Scope, and Methodology To identify the types of projects financed with loan proceeds, we obtained and analyzed FMD’s database of HUD’s loan fund. We developed two data collection instruments to obtain additional information about loan commitments. With the first, we recorded data from loan files on the activities communities and states financed with loan proceeds. With the second, we conducted a telephone survey with HUD community planning and development officials at HUD field offices responsible for monitoring loan commitments in our sample. HUD program officials reviewed and commented on the telephone data collection instrument, and we incorporated their suggested changes. (App. V shows the locations of HUD field offices contacted.) In developing these instruments, we interviewed program officials, reviewed Economic Development Loan Fund legislation and regulations, and examined selected loan fund files. We used these data collection instruments to collect information about a sample of loan commitments. We selected a stratified random sample of 100 loan commitments approved (out of 313 loan commitments) in fiscal years 1990 through 1996 that had funding advances. We included all loan commitments of $15 million and above (20 loans) given to entitlement communities and states, all loan commitments to nonentitlement communities (23 loans), and a random sample of the remaining loan commitments to entitlement communities and states (57 of 270 loans). We appropriately weighted the information to take into consideration the stratification used to select loan commitments. Since we used a sample (called a probability sample) of loan commitments to develop our estimates, each estimate has a measurable precision, or sampling error, that may be expressed as a plus/minus figure. A sampling error indicates how closely we can reproduce from a sample the results that we would obtain if we were to take a complete count of the universe using the same measurement methods. By adding the sampling error to and subtracting it from the estimate, we can develop upper and lower bounds for each estimate. This range is called a confidence interval. Sampling errors and confidence intervals are stated at a certain confidence level—in this case, 95 percent. For example, a confidence interval at the 95-percent confidence level means that in 95 out of 100 instances, the sampling procedure we used would produce a confidence interval containing the universe value we are estimating. To determine HUD’s monitoring of the program, we conducted a telephone survey of HUD community planning and development officials in HUD field offices responsible for monitoring loan fund commitments in our sample. Page 39 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix IV Objectives, Scope, and Methodology This resulted in our interviewing HUD officials in 30 of 44 field offices. We also obtained and reviewed HUD reports of the most recent monitoring activities performed on the CDBG communities or states that held the respective loan commitments. Using the information collected about the sample of 100 loans, we are able to provides estimates for the 313 loan commitments approved in fiscal years 1990 and 1996 which had funding advances. Appendix IV provides the sampling errors of estimates, referred to in this report, that were made from the above mentioned data collection instruments. In contrast, information obtained from the 30 of 44 field offices is not projectable to the program, as a whole. However, we were able to describe these offices in terms of the number of loan commitments for which they were responsible. Page 40 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix V HUD Field Offices Surveyed Indianapolis Chicago Detroit Milwaukee Columbus St. Louis Buffalo Minneapolis Seattle Omaha Pittsburgh Portland Manchester Boston Hartford Newark New York San Francisco Philadelphia Denver Baltimore Washington Richmond Greensboro Los Angeles Phoenix Louisville Albuquerque Columbia Knoxville Kansas City Jacksonville Anchorage Coral Gables Honolulu Oklahoma City Atlanta Fort Worth Birmingham San Antonio New Orleans Little Rock Jackson Puerto Rico Sampled Not sampled Page 41 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix VI Comments From the Department of Housing and Urban Development Note: GAO comments supplementing those in the report text appear at the end of this appendix. See comment 1. See comment 2 Page 42 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix VI Comments From the Department of Housing and Urban Development See comment 3. Page 43 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix VI Comments From the Department of Housing and Urban Development See comment 4. See comment 5. Page 44 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix VI Comments From the Department of Housing and Urban Development GAO’s Comments 1. We revised the title of the report after we sent it to HUD for comment. 2. We added a discussion of HUD’s view of the underwriting guidelines to the text and at the end of the report. As we point out, although HUD may not regard the collateral guidelines as mandatory, the associations we spoke with perceived that they will be required. We believe the program may benefit if HUD would open and maintain a dialogue with communities as it develops these guidelines to ensure that they are understood and not viewed as an obstacle to using the program. 3. HUD’s comment addressed the first part of our second recommendation. HUD noted that the distribution of oversight information needed by the field offices must be comprehensive and that, while HUD has improved in this area in recent years, the current system—as our report points out— is inadequate to accomplish that result. HUD plans to implement our recommendation through a design change to its integrated disbursement and information system—a computer-based information system. As we discussed, HUD noted that it will consult with its field offices to ensure that the field offices are receiving the information needed for monitoring. 4. HUD’s comment addressed the first and second part of our second recommendation. As we discussed, HUD agreed to develop procedures to ensure that the necessary monitoring information is provided promptly to field offices and to direct field offices to include loan activities in their monitoring of CDBG recipients as we recommend. We discuss this at the end of our report. 5. HUD’s comment addressed our first recommendation. HUD agreed to implement procedures to require reporting of unplanned use of CDBG funds to make loan payments. However, our recommendation goes beyond a reporting requirement. As we discussed, we believe that routine tracking of these data will provide HUD and communities with useful information on, among other things, the likelihood that communities may need to use future CDBG funds to repay loans when other intended revenue sources fail to materialize. Page 45 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Appendix VII Major Contributors to This Report Erin Lansburgh Signora J. May Johnnie E. Barnes Sherrill C. Dunbar Alice G. Feldesman John T. McGrail (385660) Page 46 GAO/RCED-97-195 HUD’s Economic Development Loan Fund Ordering Information The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Housing and Urban Development: Use and Oversight of the Economic Development Loan Fund
Published by the Government Accountability Office on 1997-08-20.
Below is a raw (and likely hideous) rendition of the original report. (PDF)