SPEAKERS CONTENTS INSERTS
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FIELD HEARING
COMMUNITY DEVELOPMENT BLOCK
GRANTS (CDBG)—THE IMPACT
OF CDBG ON OUR COMMUNITIES
Monday, June 30, 2003
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:01 a.m., 700 State Drive, Los Angeles, California, Hon. Robert W. Ney [chairman of the subcommittee] presiding.
Present: Representatives Ney and Waters.
Chairman NEY. Welcome. Today the subcommittee will hold its first field hearing of the 108th Congress to discuss the effects of the community relative to block rent or the CDBG program. And this is the Subcommittee on Housing Community Opportunity which is within the Financial Services Committee.
CDBG is generally recognized as the mainstay for target of community development of cities, counties and rural areas to be principally dependent as well as moderate income persons. The program attempts to strike an appropriate balance between local flexibility and national targeting to low and moderate-income persons.
It has developed this reputation for the past 28 years, and local officials constantly use CDBG funds to take on new challenges in the areas of housing, neighborhood development, public facilities in the division of Social Services.
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The CDBG program emphasizes HUD's division of partnerships with State and local governments. Due to the flexibility and uses of CDBG funds, the program is in conjunction with many other HUD programs to target specific populations. Notwithstanding the flexibility of the program, rehabilitating and producing housing is the largest singular use of approximately 31 percent of the funds by entitlement communities.
Housing activities include rehabilitation of ownership and rental units assisting new construction, transitional, temporary housing as well as necessary site improvements and administrative assistance. The second largest use of the funds is approximately 25.6 percent of public facilities and prudent, and, I think, in that area as a more generalized area where we could find out the answers to questions where does it is actually go, and how does—how are those decisions actually determined?
Every year HUD provides block raised eligible communities to, one, central cities of metropolitans, MSAs; two, other population cities for the population of at least 50,000; three, qualified urban counties with populations of at least 200,000, excluding the population of entitlement cities; and four, State distributed funds to small communities that are not otherwise eligible.
HUD determines the amount of each entitlement rent by statutory dual formula uses several measures of community needs, including the extent of poverty, population, housing, overcrowding, age of housing and population growth in relationship to other metropolitan areas. I also want to at this time applaud the leadership of my colleague, our ranking member, Maxine Waters. She asked for this hearing, and the Congresswoman has invited me out to California here, and I want to preapologize to my relatives in El Monte, South El Monte, Fontana when they find out I'm here, I'm not able to get to their house. So it will cause a—I am going to make a phone call to them. I want to assure myself of that.
But I want to again thank Maxine Waters. She's played an active role in helping her property maximize their use of CDBG. We also support funds coming from the Federal government, but frankly loan members that have urban or rural settings, where are the funds going, where do they go, what type of input is out there from the Federal representatives of members of Congress themselves and how can they play a part in this process?
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I'm from a very rural area of Appalachia in Eastern Ohio, and I just really want to thank the cooperation and spirit of cooperation that my colleague, our ranking member, Maxine Waters has shown in the U.S. Capital.
But I also would like to share that I appreciate the working relationship that we have developed. We have both discovered that working together, we can deal with the problems of rural America as well as the problem of urban America, and we are attempting to forge an alliance wherever we can to make sure that resources are directed both to rural and to urban. So my—my work on this committee has been extremely enjoyable because we have found that we can, indeed, have bipartisan efforts to deal with the problems that we're charged to take care of.
The Community Development Block Grants are important, too, in the economic development care to revitalizing neighborhoods and providing social services. CDBG funds may be used for a wide range of activities, including acquisition of real property, relocation and demolition, public services and assistance to profit-motivated businesses to carry out economic development and job creation, retention programs.
The City and County of Los Angeles received 92 and $38 million to deliver services. Section 108, the loan guarantee provision of the Community Development Block Grant program is one of the most potent and important public investments materials that HUD offers to local governments. It allows them to transfer a small portion of the CDBG funds into federally guaranteed loans large enough to pursue fiscal and economic revitalization projects that can renew entire neighbors. Such public support is often needed to inspire private and economic activity providing the initial resources or simply the confidence that private firms and individuals may need to invest in distressed areas.
Section 108 loan guarantee funds are extremely important to me. One of my early accomplishments, when I went to Congress, was to discover Section 108 funds that were underutilized, and at that time, they were being scored in the budget. And they were not as attractive because they were being scored, and we went to work. And we helped move the Congress to not score the CDBG, and that year, I was able to pass legislation to identify $10 billion in CDBG—I mean, in Section 108 to be used 2 billion per year for five years to get into the cities to get involved with economic development. I understand some things have changed now in the way that Section 108 is looked at, but I think still, it's a very important tool that is either underutilized, misutilized or just misunderstood. And so we want to find out today what's happening with Section 108 here in Los Angeles.
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Ms. WATERS. Thank you, Mr. Chairman.
It's eight years later, and LACDB will be dissolved at the year 2003. The City of Los Angeles will have access to $190 million of Section 108 guarantee authority available to the LACDB, and I would like to hear what their plans are for the reallocation of this money.
Earlier this year, the city requested that $50 million of the 196 million go to the city's community development division. I and the affected community specifically would like to know which projects or proposals does the city plan to fund with this funding? Also, I'd like to hear how does the city and the county plan to address their affordable housing needs? We understand that the mayor has organized $100 billion housing trust fund, and hopefully, we can learn some more about that today.
The primary purpose of the Community Development Bank programs were designed to create and to retain jobs in the empowerment zone, and I hope that our witnesses today can talk about jobs in relationship to the Community Development Bank programs. Because of the problems that we had here in Los Angeles, we were hopeful—we were supportive of the city and the county receiving exemption of the CDBG cap, and we increased the social services from 15 to 25 percent.
Some of the conditions that were identified when we had our problems here, certainly still exist and remain, and we need to examine the possibility of—as we have been requested to do, to look at permanent exemption for the 25 percent public services cap. I don't know where we are with that at this time.
Again, I'd like to thank the Chairman for holding this field hearing here in Los Angeles. I look forward to hearing from the witnesses today.
Chairman NEY. Thank you. Gentlelady, ranking member of the committee. And our first panel and the first witness.
By the way, this is in the 108th Congress the first time we have ventured outside the capital for a public hearing, so you'll be our first witness on this.
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Nelson Bregon is the Deputy Assistant Secretary for the grant programs in the office of Community Planning and Development of HUD. And he's responsible for the management oversight of the CDBG program the Section 108 loan guarantee problem and the home investment partnership program. He has a Bachelor of Arts from the InterAmerican University of Puerto Rico in 1976, and although he didn't attend the Ohio State University, he got close with Kent State University in Ohio in 1978. Prior to accepting his appointment at HUD, he was the Senior Vice President for the officer of community based securities of Ginny Mae, the Government National Mortgage Association, and we appreciate you and your staff for traveling to California. We'll begin.
STATEMENT OF NELSON BREGON, GENERAL DEPUTY ASSISTANT SECRETARY, COMMUNITY PLANNING AND DEVELOPMENT OF HUD
Mr. BREGON. Good morning, Chairman Ney, ranking member Waters, Mr. Clinton Jones and other members of the subcommittee. Thank you for giving me the opportunity to be here this morning as part of the subcommittee's examination of community and economic development activities for the City of Los Angeles.
As Chairman Ney indicated, my name is Nelson R. Bregón. I am the General Deputy Assistant Secretary for the Office of Community Planning and Development with the U.S. Department of Housing and Urban Development. I am a career employee with the department. I started with the department some 22 years ago, and I've been in and out of the private sector and the public sector on numerous occasions, and here I'm back with the public sector.
I'm here today on behalf of Secretary Martinez and Assistant Secretary Bernardi to discuss one of HUD most important tools for community housing and economic development. That is the Community Development Block Grant program which most of us refer to as ''CDBG.'' As you are aware, State and local governments depend on HUD and a system of grants to support community economic development projects that revive troubled neighborhoods and spark urban revitalization.
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This year, HUD has requested nearly $4.5 billion for the CDBG program to meet local community housing and economic development needs in more than a thousand eligible cities, urban counties, the 50 States, the Commonwealth of Puerto Rico, the U.S. Virgin Islands and in the Insular Areas.
For fiscal year 2003, which is the fiscal year we're in, the City of Los Angeles received approximately $89 million in CDBG funding, and by the same token the County of Los Angeles received about $37 million in CDBG funding. We are all aware that one of the most important reasons for the success of the HUD-sponsored Community Development Block Grant program is its great flexibility and its reliance on local elected officials and community leaders to identify key revitalization projects and activities.
CDBG activities are initiated at the local level, based on a communities identified local needs, priorities and benefits to the communities. As identified in that community's Consolidated Plan, which is a document that is submitted to HUD in conjunction with the CDBG, the home and other formula grant programs.
Entitlement communities such as the City of Los Angeles may use CDBG funds for a variety of community, housing and economic development activities which focus on neighborhood revitalization, economic development and the provision of improved community facilities and services to lower moderate income residents. Those communities receiving a grant are free to determine what activities to fund as long as certain requirements are met, including that the activity is eligible and, in addition, meets one of the three following national objectives: The first one is benefit to low and moderate income persons. The second national objective would be: Aid in the prevention or elimination of slums or blight; and the third is an activity that meets urgent community needs for which that community cannot find the financial resources to fund itself.
In addition to this requirement, 70 percent of an entitlement grantees CDBG funds—and this includes the Section 108 loan guarantee, it includes the economic development initiative grants, as well as the Brownfield economic development initiative grants, must primarily benefit low and moderate income residents. 70 percent of all these monies must primarily benefit low and moderate income residents. And this is calculated by HUD on either a one- or two- or three-year basis, depending on the period of time that the consolidated plan that is submitted by that grantee covers.
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In most instances, we see that most communities have a three-year consolidated plan. Now, the responsibility for ensuring that local Community Development Block Grant funds meet Federal requirements rests initially and primarily with the executive authority and the mayor or the County Commissioner of each CDBG grantee, subject to schedule monitoring by representative of HUD in the case of Los Angeles, the county and the city, it is our Los Angeles field office representative that had the responsibility to monitor on a scheduled basis our grantees.
And by the same token, it's also conditioned on audits by HUD office of Inspector General. As we all know, working with local governments and nonprofit, mostly 501(c)(3) organizations, are an important conduit for neighborhood-based program delivery. Nonprofit organizations such as community development corporations or local development corporations are often asked to undertake projects that are inherently risky because of factors such as locations, which many have high crime, high vacancy rate, high poverty and a lot of this investment.
CDBG grantees utilize nonprofit organizations because they have specialized skills and neighborhood acceptance. It is important to note, however, that the primary responsibility for insuring that Community Development Block Grant funds are used to revitalize low and moderate income neighborhoods and that the projects and activities undertaken meet all programs, statutory and regulatory requirements, belongs to the CDBG grantee.
In this particular case, we're talking about the City of Los Angeles and the county of Los Angeles. The Community Development Block Grant program statute and regulations requires that grantees identify eligible activities that will provide benefits to communities, especially low and moderate income distress communities.
The flexibility of the CDBG program allows grantees to implement community development activities based on local decisions. Communities may choose to provide assistance to nonprofit organizations for neighborhood development initiatives as they deem necessary. The success of any community development initiative must include accountability for use of program funds to create tangible results for the neighborhoods for which it serves.
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Working together with local leaders, special officials and members of Congress, we at HUD have forged a partnership which has made CDBG a shining example of how government can work. CDBG provides funding for grantees to develop strategies revitalize neighborhoods, promote economic development and provide much needed social services.
Grantees have great latitude in the type of projects and activities that they may fund. As you mentioned, Mrs. Waters, and I agree, a grantee can undertake myriad of activities whether acquisition, disposition, housing rehabilitation, public facilities, social services, economic development, all within the realm of the CDBG program.
For instance, we have some statistics here that shows that in fiscal year 2002, entitlement grantees expended approximately $275 million for economic development activities, about $955 million for public facilities, about $518 million for social services and about $1 billion, the preponderance of the use of these funds for housing-related activities, either housing rehabilitation or down payment assistance or any type of housing assistance.
For the program year, Los Angeles expended about $15 million for economic development activities, about $44 million for public facilities and improvements, about 45 million for social services and approximately about $28 million for housing-related activities.
By the same token, the County of Los Angeles expended approximately $6 million for economic development, $12 million for public facilities and improvements, $9 million for social services and about $15 million for housing-related activities. As part of the CDBG program, each formula's grantee's responsible for developing its own consolidated plan that encompassed funding for the CDBG program, the home program, the housing opportunities for persons with AIDS and the emergency shelter grant program.
So each community prepares a consolidated plan for these four formula grants. They must hold a public hearing, and they must receive the input from the community as to which activities they would like to see funded in their particular neighborhood. HUD's CDBG program currently provides funds directly to entitle units of general local government, cities, town and urban counties, based on the statutory formula that Chairman Ney pretty much gave us what those parameters are, poverty, pre-1940 housing, growth lag and a number of statutory requirements that dictates how we distribute the money to our grantee clients.
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The current method of funding appears to be satisfactory. A grant may not be disbursed. A grantee may not disburse CDBG funds until there is a legal obligation to pay. Generally when contracted goods and services have been delivered or provided. A grantee has full responsibility to assure that his contractors have conformed to all applicable program requirements and that invoices or other type of documentation are proper and represent goods and services provided consistent with the contract.
So the rule is that grantees can draw down the money, when they're ready to use. We have a three-day rule, as you all know, that once they draw down the money from Treasury, they have to disburse that money within three days. So hopefully, they have all the documentation that is required for them to make that payment to a contractor or subrecipient, as the case may be.
I know that this subcommittee has some questions on Los Angeles Community Development Bank, and let me just mention some facts: In December, 1994, the City and County of Los Angeles received designation from HUD for a Supplemental Empowerment Zone in the area covered by the unsuccessful joint City, County and empowerment zone application.
So in 1994, there was an empowerment zone designation competition and, the City and the county applied. They were not successful in obtaining the Empowerment Zone designation, but the previous administration felt that it was a good thing to give a supplemental empowerment zone designation; and that's what this did. The purpose of the Supplemental Empowerment Zone designation was to provide a special name for the award to the City's hundred million dollars in economic development initiative which was a grant and $25 million to the County.
Now, once this grant money was received, one of the conditions was that this money must be matched with Section 108 loan guarantee funds, and both the City and the county did that. The EDI awards to Los Angeles City and County took place pursuant to a notice of funding availability published in the Federal register on December 7th, 1994. And the supplemental empowerment zone designation and the economic development initiative grant were awarded on December 21st, 1994.
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Now, there are a number of different levels of accountability. The Los Angeles Community Development Bank, as an operating entity, is accountable to its Board of Directors, and as a subrecipient of the City and the county, it's also accountable to the City and the county. Concurrently, the City and the county, as CDBG grantees, are accountable to HUD for the expenditure of the Section 108 and the EDI funds by the Los Angeles Community Development Bank in compliance with applicable Federal statutes and regulations.
HUD does not have a direct contractual relationship with the bank. The contractual relationship is between the City, the County and the bank. And the City and the county are accountable to HUD for the uses of the EDI grant and the Section 108 loan guarantee funds. The original intent of the Los Angeles Community Development Bank was to fund economic development activities in some of the most economically disadvantaged areas of the City and the county, primarily the area of the supplemental empowerment zone.
The Los Angeles Community Development Bank has, in fact, utilized approximately $190 million from the combined City and County Section 108 and EDI awards to undertake economic development activities in the designated area.
Thank you very much, and this statement concludes my opening remarks. At this point, I will be more than happy to answer any questions that you may have.
I have next to me Mr. Stanley Gimont who is the Deputy Director for the Financial Management Division, and he's really the expert when it comes to the nuances of the 108 and the EDI grant program. By the same token, we have some of our Los Angeles field office staff members, Mr. Robert Ilymin who is our CBD director and he has a lot information as to the activities that are undertaken by the county and the city utilizing CDBG funds, 108 funds, EDI funds, BEDI funds or any other HUD funds.
So at this point, I'd like to turn it over to you if you have any questions. Thank you.
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[The prepared statement of Nelson Bregón can be found on page 80 in the appendix.]
Chairman NEY. Thank you for your testimony. The question I have is: When was the last time that the formula was reviewed, and do you think it's balanced between the east and the west?
Mr. BREGON. That's a very good question. In 1980 was when we came up with the dual formula that gave a community a grant, based on two formulas. We give that community the benefit of the doubt; and we give them the amount of the greatest formula.
Now, what has happened lately, Chairman Ney, is that with the 2000 data on population, on poverty, on growth lag, we've seen some major dislocations, if you will, from one community to another. We've seen that some communities are loosing maybe up to 20 percent of the CDBG formula grant, and other communities gaining 15 percent of CDBG funds.
So right now, the Department, the Community Planning and Development office in conjunction with the Office of Policy Development and Research at HUD, are looking at the formula, and we're looking at different ways that the formula perhaps could be either tweaked or changed altogether. And we will be making recommendations to Assistant Secretary Bernardi and to Secretary Martinez who will, in turn, make a proposal to you as to whether, in fact, the formula should need some sort of changes or not.
Chairman NEY. That was 22 years ago that formula was established, and that's why you, know, the question should be changed by you're saying that you're looking into it.
Mr. BREGON. That is correct.
Chairman NEY. Do you have an idea of a time frame when you will complete preliminary look at it, it will be given to Secretary Martinez, when he will come to us?
Mr. BREGON. Our Office of Policy Development and Research is telling us that by the end of the fall, they should have concluded their studies. As you know, we work very closely with the Office of Management and Budget. They make sure that they're always looking over our shoulder. Maybe there's someone here from OMB. So we'll be working closely with them. I would say early next year we will have—we'll be meeting with Secretary Martinez and start discussing what the effects and the impacts of the formula is.
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Chairman NEY. In the fall?
Mr. BREGON. I would say late fall, that the report will come out, early next year. I would say February we'll be meeting with Secretary Martinez and giving him different options, if you will.
Chairman NEY. And if you could post us on the progress of that, we'd appreciate it.
Mr. BREGON. We will.
Chairman NEY. Los Angeles has a special exemption to allow 25 percent of the CDBG funds for public services use is the category. So what—what uses can be utilized under that category of public service?
Mr. BREGON. Public service. You are correct. The regulations stipulate that a community may not use more than 15 percent of their grant for public services. The City of Los Angeles was given an exemption, and they can use up to 25 percent as Congresswoman Waters indicated before. The monies can be used for mostly soft cost. It could be for meal for the elderly, it could be operating expenses for day care centers, it could be Meals on Wheels for handicap people. So it is pretty wide how this money can be utilized by—by a grantee.
Chairman NEY. How about—how about oversight between HUD, City, County? How would that work?
Mr. BREGON. Oversight?
Chairman NEY. Uh-huh.
Mr. BREGON. Well, as I indicated before, we do regular monitoring visits of our grantees. Because of our limited resources, we're doing about 40 percent of all grantees in monitoring on a yearly basis. So when we monitor the City, we also try to do the County because a lot of the activities are interrelated. A lot of funding is interrelated. So we do monitor the City and the county on a regular basis.
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Chairman NEY. One other thing. My final question: Dealing as you would with urban and rural, do you—do you see any differences? For example, CDBG in towns of, you know, 4,000, 2,000 also went from what we call 5,000 a city—that would be a large City—we have a lot of places 2-, 300 people, and everybody knows about these funds, trust me. I mean, they're in the paper. They're in meetings. They're small towns.
Now, in—that's why I'm here to learn—and larger urban settings, I know there are people who care about these, but I would assume there would be—or let me ask this: Would there be a difference in communication on where these monies are going or could they go between the urbans and rurals, and is there a difference of how you look oversight between urban and rural?
Mr. BREGON. Yes, sir. As you mentioned on the entitlement grantees, we have central cities. We have cities with the population of 50,000 or more. We have urban counties with population of 200,000 or more. On the other hand, then we have the States. About 30 percent of the funding goes to—I'm sorry, 25 percent—25 percent of funding goes to states.
Chairman NEY. So the $4.5 billion gets divided. 75 percent goes to entitlement communities; 25 percent goes to the States. Now, how the States divvy up that money among the smaller designations is up to the States. Some States might say, ''We're just going to divvy up the money by per capita,'' looking at how many low income residents a community has, and we're going to give them $80 per each low income resident.
Some other State says, ''No, we don't want to do it that way. We going to do priorities,'' and perhaps our first priority is infrastructure. Our second priority is housing rehabilitation. Our third priority is public facilities. And then they would have all the smaller communities come in and compete for the money at the state level.
The State must do a consolidated plan just like an entitlement community. They must go around the entire state and receive input from the smaller communities to be part of that consolidated plan that is submitted to HUD on a regular basis.
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So the entity that is accountable to HUD for the small cities program is the state. It's not each individual community that receives its monies, but it's the state that entity that is responsible for the management and oversight of the State CDBG program.
Chairman NEY. Gentlelady? Counsel?
Ms. WATERS. Thank you very much.
I certainly appreciate your very well-organized presentation to explain the mission, the national mission for CDBG. I think I'm going to ask some questions that are directly related to this area. I want to know about the Community Development Bank first. I want to understand what happened.
We're going to have some more people here testifying today. The reason I'm so concerned about it at this point is because there are dollars that are now—that could be made available from that Community Development Bank to be used for other purposes or like purposes or purposes that are inconsistent with the intent of Section 108.
As I understand it, the Community Development Bank is no longer the Community Development Bank that, based on a decision by the city of Los Angeles with some maybe encouragement from the Inspector General based on a report, that there is no longer the Community Development Bank as we knew it. And that there's several things going on: Requests for some of that money again to be used for other purposes or for like purposes in different ways. And there's another part of this discussion that I'm recently just getting information about that talks about or discusses the venture capital firm that had a management contract of some sort with the Community Development Bank that placed or invested funds in some businesses.
Some of them went belly up, I suppose—but it's still in that portfolio—we still have some businesses who owe us money who are operating or they may be out of business, and there's further talk about selling off that portfolio in some way that may help us to recapture some of the debt—can I get some discussion on that?
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Mr. BREGON. Sure. As I indicated originally, when the supplemental empowerment zone designation was given to the City and the county of Los Angeles, there was an EDI grant of $100 million to the City and $25 million to the County.
As a minimum requirement, Miss Chairman——
Ms. Waters, the City had to match the hundred million dollars of EDI grant with a hundred million dollars of Section 108 loan guarantees. The City opted to request a higher authority on the 108. So even though the minimum amount of 108 that the City had to apply for was a hundred million dollars, they indicated to HUD that they really wanted to do $300 million.
So the minimum requirement was a hundred million; so there was an additional $200 million in one-way authority for the City. So you are correct. The City has expended the original hundred million dollars to match the EDI, and in addition, they had spent about $4 million of the additional $200 million, so there's about $196 million in Section 108 authority which the City could use in other areas outside the targeted area as long as they meet all the other requirements of the 108 program.
Ms. WATERS. Outside the target area?
Mr. BREGON. Yes.
Mr. GIMONT. And just as a final point, the original application that we considered in 1995 defined something called the Section 108 area outside—which included not only the zone, but other enterprise community areas designated within the City of Los Angeles as well as other census tracts and areas of the City which would meet certain low moderate income thresholds as well as poverty thresholds.
So that was the 108 area as defined in the original application, and our—our understanding at this point with respect to the City proposal is that of the initial $15 million, they would like to carve off the remaining 196, those funds will be expended within the area defined in the original application back in 1995.
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Chairman NEY. Generally—can we have that broken down one more time? The whole——
Mr. BREGON. Sure. The—with the original empowerment supplemental empowerment zone designation, the City received $100 million of EDI grant, the economic development initiative grant—this is free money—the County received $25 million. The city and the county were to meet dollar for dollar the grant with 108 monies. The County did $25 million in 108, and the City, instead of doing the minimum, a hundred million, did 300 million. So now we're looking at a total amount of about $430 million.
Chairman NEY. 430 million?
Mr. BREGON. That is correct.
Ms. WATERS. Okay. Go ahead.
Mr. BREGON. Now, Miss Waters, you indicated that it has come to your attention that the City and the county will be closing down the bank. It is our understanding, that there is an agreement that the bank will cease to operate by the end of this calendar year. There is a portfolio there that is owned by the bank with a number of loans, many of them performing loans. Many of them nonperforming loans as well, and there is a venture capital fund that perhaps Mr. Gimont can give you more details as to how that works and how that came about and what are the nuances there with the venture capital.
Ms. WATERS. Okay. Before you go into that, I want to go back so that we can have a better understanding. The 50 million that's been requested by the city has been requested to be used in the same manner that it would have been used under the Community Development Bank and meeting the requirements of Section 108 expenditures?
Mr. GIMONT. Yes.
Ms. WATERS. Is that what you're saying?
Mr. GIMONT. The before profit businesses. That's what we approved in the original application in 1995, and that is how the city would propose to use this 50 million——
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Ms. WATERS. No. I want to be on the same track.
Are they going to use the $50 million in the same area that they would have had to use it under the agreement that you had when you created the supplemental zone, or are they going to use it in the way that you would use the original Section 108 money that could be used in—throughout the City in other ways that's identified for economic development?
Mr. GIMONT. Well, then let me back up a step. With respect to the $200 million that was over and above the $100 million required as to match the EDI funds, those 200 million could be spending what the City defined as the 108 area which included not only the zone, but the other enterprise community areas within the City as well as other census tracts and areas meeting certain poverty and low to moderate income thresholds.
Ms. WATERS. Well, tell me how that is matching money in order to get the money for the supplemental zone.
Mr. GIMONT. That——
Ms. WATERS.——the Section 108, 200 million or 300 million.
Mr. BREGON. There was a $100 million requirement, minimum.
Ms. WATERS. Okay.
Mr. BREGON. And in addition, to the hundred million, the city requested $200 million that has, let's say is less restrictive, the use of that monies is less restrictive than the original hundred million that was to match the EDI grant.
Ms. WATERS. Okay. So the EDI grant was 100 million. All they had to do was put up $100 million match.
Mr. BREGON. That is correct on 108.
Ms. WATERS. Okay. If they had only put up $100 million match, all of that money would have been confined to the supplemental zone; is that correct?
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Mr. GIMONT. Right.
Mr. BREGON. That is correct.
Ms. WATERS. However, since they decided to use more for that match, you're saying that could be used anywhere——
Mr. BREGON. The original——
Ms. WATERS.——in the other zone.
Mr. BREGON. The original $200 million——
Ms. WATERS. Yeah.
Mr. BREGON.——they identified the service area larger than the supplemental empowerment zone. As Mr. Gimont indicated, it was the supplemental empowerment zone area other areas that showed high incident of poverty and low income.
Ms. WATERS. Well, let me——
Mr. BREGON. For instance——
Ms. WATERS. Let me just interrupt you. It seems to me that if it was—you already had Section 108 identified areas. There was no need for you to put that additional money into the match because you could use it any way that you wanted to.
Mr. BREGON. That is correct.
Ms. WATERS. So why did you—why did you put it into the match? Why did they put it into the match?
Mr. BREGON. The city requested at that time, they said not only did we have—they felt that the need of the community was so great that there was a market, there was a need in the community for more than the $200 million or the—and they decided that they wanted a larger authority under the 108 in the amount of $200 million more, and that is the grantees' prerogative. I mean, if the grantee requests that and it's within the limits under the 108 program which is five times——
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Ms. WATERS. Yeah, they would have done that or could have done that if you had no such thing as a supplemental zone——
Mr. BREGON. That is correct.
Ms. WATERS.——in the way that you normally use it.
Mr. BREGON. Yes, ma'am.
Ms. WATERS. What I'm trying to find out is, why was it connected to the supplemental zone?
Mr. GIMONT. That was a decision on the part of the city.
Ms. WATERS. Well, evidently the city felt there was more money needed in the supplemental zone; is that correct?
Mr. BREGON. That is correct.
Ms. WATERS. Okay. Now, if that is true—if that is true, then we have monies that are now from the Section 108 supplemental zone money, that you're telling me has more flexibility and can be used outside the supplemental zone. Who made that decision, and how do you make it?
Mr. BREGON. The grantee made that decision. The grantee told us which were the areas that they want to service with the additional $200 million.
Ms. WATERS. So now that the bank is closing down and we've got this 196 million, the City is talking about taking a portion of that and doing whatever it is they want to do with it. It doesn't have to be identified or confined to this supplemental zone area, and when HUD looks at that, what does HUD say as the oversight? Is that in compliance with the original purpose of the use of the Section 108?
Mr. BREGON. Yes, it is. The $200 million in addition to the already used $100 million that had to be used within the supplemental empowerment zone. In addition, they have used $4 million more into the zone, which they didn't have to do. Now, they have $196 million. Now, they're saying the bank is going to close. We want to use this 196 authority to do other Section 108 funded projects——
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Ms. WATERS. So then——
Mr. BREGON.——in the larger area that we had identified to you HUD before——
Ms. WATERS. So when HUD worked the agreement with the city of L.A. For the supplemental zone and the application that included the 100 million plus, the 200 million——
Mr. BREGON. Yes, Ma'am.
Ms. WATERS.——there was something in that agreement that said you only have to use $100 million of this in the supplemental zone.
Mr. BREGON. That is correct. As a minimum.
Ms. WATERS. As a minimum.
Mr. BREGON. Yes.
Ms. WATERS. And you could have the flexibility to take the other 200 million and use it in what you have identified as areas——
Mr. BREGON. Areas of distress.
Ms. WATERS.——areas of need that would fit into whatever we call our Section 108 loan guarantee?
Mr. BREGON. That is correct.
Ms. WATERS. Okay. And you will, of course, show to the—the Congresswoman that agreement?
Mr. BREGON. Absolutely, ma'am.
Ms. WATERS. Okay. Thank you.
Mr. BREGON. Now, by the same token, all public documents, ma'am——
Ms. WATERS. Congresswoman wants to see the agreement.
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Mr. BREGON. Okay.
Ms. WATERS. All right.
Mr. BREGON. Now, by the same token, let's say that the city says to us, now we have $196 million but we really want to use it city-wide in any neighborhood, for any activity that is eligible under 108. If they decide to do that, then they would have to amend that agreement, and they would have to go perhaps even amend or consolidate that plan, perhaps even hold public hearings with the citizens of the City of Los Angeles and the county of Los Angeles and then go through that process of amending that agreement.
Ms. WATERS. Okay. Thank you. Now back——
Mr. GIMONT. Is it okay if I just put one additional point on that?
Ms. WATERS. Yeah.
Mr. GIMONT. It's—the real essence here is going to change——
Chairman NEY. Move your mike just a little bit closer. Thank you.
Mr. GIMONT.——is that no longer will the bank be responsible for deciding, making the lending decision would reside with the city's community development department as opposed to the bank. We're still carrying out the same activities. They're going to carry them out in the same areas that they identified in the original 1995 application when there will no longer be LACDB, making decisions as to what community development department as to which activities to fund.
Ms. WATERS. Okay. Now, a little bit about—well, if you can explain to me the contract between the venture capital company and what they did for the Community Development Bank, and I'll ask a little bit more when I get the Community Development Bank here a little bit more detailed question, but just your understanding—did you have to sign off on this also?
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Mr. GIMONT. I did not sign off on the agreement between LACDB And Joint Ventures? No.
Ms. WATERS. This was between the City and the county?
Mr. GIMONT. No, this was between the LACDB And an entity known as Zone Ventures.
Ms. WATERS. And Zone Ventures.
Mr. GIMONT. Yes.
Ms. WATERS. So Zone Ventures was given an amount of money to go around and invest in venture capital. Let's find some businesses put some money into them that was going to make some money nor the bank; is that right?
Mr. GIMONT. Up to $35 million is my understanding.
Ms. WATERS. So they were given 35 million?
Mr. GIMONT. The agreement called for an investment in the bank of the partnership up to a maximum of $35 million.
Ms. WATERS. Now, what did they do with that $35 million?
Mr. GIMONT. They operated the fund to analyze the proposals for investment and when the—based on the applications they did receive, they elected to invest in a number of different businesses. I believe it was 15 or 16 business in total.
Ms. WATERS. I see. So some of that was management. They had management fees.
Mr. GIMONT. Yeah.
Ms. WATERS. How much, do you know what percentage of the $35 was management fee?
Mr. GIMONT. No, I do not right now.
Ms. WATERS. Okay. We'll talk to the Community Development Bank people about that.
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And so what happened with that portfolio?
Mr. GIMONT. Some of the businesses are still up and active; some are in a condition that is called ''hibernation,'' where they—they still exist on paper. There's some possibility that they may resurrect themselves and—and get back on their feet and a number of other businesses are totally closed and out of business—business consistent with the types of—types of investment that venture capitalists make which were primarily high-tech investments in the late 90's.
Ms. WATERS. I see.
And so now, you have—this portfolio some performing, some not performing, we want to sell it off. Who are we selling it to?
Mr. GIMONT. I would not use the term ''sell'' at this point. I would say——
Ms. WATERS. Give?
Mr. GIMONT.——divest. Divest their interest in the Zone Ventures' portfolio.
My understanding of the deal that is currently on the table is that there is a—an investment group interested in taking the LACDB interest in Zone Ventures. They really would not pay anything on the front end with respect to the past investments, the capital investments that have been made on the part of the bank.
However, they would be reimbursement for certain management fees that the bank has paid out to Zone Ventures over the past year or so. So the immediate return to the bank would solely be the management fees that they've paid out in the last 6, 12 months I believe.
And then, ultimately if some of the businesses went—went public, where you had initial public offering, and there was a significant upside to—to the investment made in the business, ultimately, the bank might see some return on that; but the primary return would go to the group that takes on the investment from here on out because they will continue to pay the management fees that are required as well as make any capital calls that are necessary in order to maintain the—the bank's percentage interest in these businesses.
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Ms. WATERS. Okay. Let me see if I understand this: The—the joint venture firm that was doing the management for the Community Development Bank would substitute—who pays them management fees we would no longer pay management fees, and under this agreement, the group who is the recipient of the divested portfolio would be paying the management fees.
We would not receive any money from those performing or nonperforming businesses unless, of course, they went public, and then there's something in an agreement for in perpetuity that would say, ''If this happens a hundred years from now, we want our money''?
Mr. GIMONT. I don't know what the outside time limit is as far as the return would be concerned.
Ms. WATERS. All right. Fine. We'll——
Mr. GIMONT. I also don't believe the agreement's been fully negotiated at this point.
Ms. WATERS. I see. Well, that's good. We'll see what we can find out some more detail about that.
Now, we're going to be talking with—with other panelists about this, but I also understand that if the $50 million is transferred, the balance that's left could be used in any way that the city would like to use it; is that right?
Mr. BREGON. Of the 196, if 50 is used for this revolving loan fund or business fund that is called under the community development requirement of the city, then, yes, you would have then the balance, the 146 available.
Ms. WATERS. And let me see if I understand this correctly: The 146, would the city have to go back out and amend the plan and hold hearings, or they could just spend it?
Mr. BREGON. If they're talking about using the same—funding the same activities in the same areas, then they would not have to come back to us. If they're talking about changing either the scope or the location of the activities, then, yes. They must come to HUD for a—with a formal amendment request, and before they do that, they must go back to the citizens and hold public hearings and go through the formal amendment process that is required in a regulation.
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Ms. WATERS. If they were going to use it in any way different?
Mr. BREGON. Yes, ma'am.
Ms. WATERS. If they were going to use it in the same way, could they still contract with the joint venture firm to do the kind of work that was done for the Community Development Bank—that was under your original agreement—could they still do that again?
Mr. GIMONT. I would say that the city—I would think it highly unlikely that the city would go forward with a proposal of that nature, and they would certainly question it at this point in time.
Ms. WATERS. There's nothing in the agreement that would stop them from doing it. You're saying that HUD may not look kindly on it, but they certainly could if they were going to use it consistent with the way they had used the money in the bank; is that right?
Mr. GIMONT. There's nothing in the agreement right now to prohibit.
Ms. WATERS. Okay. I think that's all.
Chairman NEY. I just have a couple. It's a little bit more complicated than the fire truck we had in the CDBG back home, I'm sure.
I just kind of—I wanted to ask a question: What happened to the initial 100 million, where's that?
Mr. BREGON. That has been invested. That has been invested by the bank on a—for a number of loans to—for profit entities within the zone.
Chairman NEY. So we know where that—where that is?
Mr. BREGON. Yeah. Some of them that are businesses that are no longer in business that went belly up, and there's other businesses that are still performing and doing very well and hiring employees from within the zone, low income residents.
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Chairman NEY. Do we know the percentage of the businesses that are—are hibernating or the percentage of the working, do we have those percentages, or can we get that?
Mr. BREGON. Yes. The City gives us a performance report on a yearly basis, and we would have that information available for you, sir.
Chairman NEY. And then would you rate this overall a successful venture as it went about?
Mr. BREGON. The—the bank venture?
Chairman NEY. I can give you a one to ten scale, if you want.
Mr. BREGON. I—well, I think one thing that we should take into consideration, Mr. Chairman, is that this is a very difficult area for difficult projects. I mean, HUD recognized the difficulty to the point where we were willing to match dollar for dollar giving them a dollar of grant money for every dollar that they invested. I think that that indicates the degree of—of risk that we all knew we were getting into. Measure performance—success can be measured in a number of ways: Has this bank had a positive impact on this particular neighborhood because they have created jobs, they have brought in private investment? I would say yes. Is there nonperformance portfolio out of whack with, let's say, Bank of America? I don't know.
Chairman NEY. Well, I understand what you're saying about the—some difficult investment. I mean, we—our projects, for example, in some areas are more simple. Some people may look at the projects and say, ''What are those worth?'' The impact of a community to actually have a fire truck to save somebody's life. If you don't have that, you lose your insurance in a small community, and it all starts to domino.
Some things are hard probably quantitatively to say what helped the community or didn't? You know, who got a job and month were able to further help their families. But there's got to be other—are you telling me this is such a unique project, or were there other projects in the history of CDBG that we can look and say, ''How did we measure their success versus this project?''.
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Mr. BREGON. Well, we have—there's a couple of things: There is another bank which is the Cleveland Bank that is similar to this one. We have two other Community Development Banks: We haven't done a comparison as to performance, but perhaps we can do that and take a look at how well the other banks have performed in relationship to the Los Angeles Community Development Bank.
Chairman NEY. I would like to see that if you can get the information to myself or Congresswoman Waters.
Mr. BREGON. Absolutely.
Chairman NEY. One final question that I have, and I don't know if we answer this today or not: But if an area embarks on a project of major significance, which at the end of the day is, you know, a lot of money that is, you know, to go towards helping people, but if it has certain flaws and it doesn't then, you know, what happens to that money and how's the public ever served again to be able to utilize that money for the greater good of their communities?
Having said that, are you comfortable that the mechanism that we have—I'm talking about the Fed—is in place and is tight enough so that if a city or a county goes in one direction, they state they're going to do ''A,'' ''B,'' ''C,'' and then all of a sudden for whatever reason, some of the businesses don't come through or whatever, they—they again change direction, but maybe they tell us, in fact, that they're not changing direction. How do we step in as the—as the Federal government to say, ''Wait a minute. You've got to lay out your plan. Is it similar?'' I mean, I'm relating some of the things you've said today.
Mr. BREGON. Yeah, right.
Chairman NEY. Are they going to come back with the same thing, and is it just take your word for it; or is there some type of set criteria that we have—they have to show?
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Mr. BREGON. Absolutely, sir. And that's a very good question. As I indicated to you, the first thing we get from our community, our grantees is a consolidated plan. They tell us how they're going to spend the money. What are the activities they're going to undertake. As you heard throughout this testimony, activities has to be eligible, and they have to be one of the three national objectives that we talked about. As I have indicated, we do monitoring. And by the same token, our office of the Inspector General perform audits of our grantees.
So let's take the example of a community that says that they were going to do something, and when we go out, we find that they do—they did something totally different, perhaps to the point where that activity's not eligible or it doesn't meet one of the three national objectives.
At that point, we will have an audit finding, we will have a monitoring finding, if you will. If it's a matter of us going out and monitoring the grantee, if that finding is sustained, if the grantee cannot explain to us with satisfactory evidence, then we will tell the grantee we have $500,000 in ineligible uses of CDBG monies. You owe us $500,000 of general funds. Now you must repay this to your line of credit with general funds.
So what happens now is this particular community will go into their general fund, they will take $500,000, and they will put it back into the line of credit for CDBG and then reuse that money for an eligible activity.
Chairman NEY. One final question I have: Is the public hearing process different across the U.S., meaning, you have to notify a certain number of people, does it have to be advertised? Does it vary? I don't know what the questions is. Does it vary state to state community?
Mr. BREGON. It varies, sir. For instance, you can have a community like New York City. Our experience in New York City is that they might have five public hearings in the different one in each of their burroughs. They might advertise it in a Spanish-speaking newspaper. A Chinese speaking newspaper.
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They might have interpreters in all these public hearings, and that's the way they satisfy the citizens' participation requirement. You could have another community that says, ''We're just going to hold one public hearing in City hall, and we're going to put it in a paper of general circulation and let everyone know that we're going to have one public hearing''; and everybody comes to one public hearing. So it all depends on the community.
Chairman NEY. It's open; correct? I mean, we really don't have—HUD doesn't say, ''Here, here's the hearing process.'' This is loose or open compared to——
Mr. BREGON. Right. Each community give us a citizens' participation plan. As part of the consolidated plan, they give us something called a citizens' participation plan so the City of Los Angeles would say, ''HUD, this is how we are going to reach out to our community.'' And we will monitor that as well. We will go out and say, ''The City of Los Angeles said that they were going to have five public hearings, and they only had one.'' And we will confront them with that. And if we find——
Chairman NEY. But it may vary, though; correct——
Mr. BREGON. Yes, sir.
Chairman NEY.——community to community?
Mr. BREGON. Local decisions, local—a lot of flexibility in this program.
Chairman NEY. Do they have to contact the office holders in all cases, members of congress?
Mr. BREGON. No, sir. It would be nice if they did, but they—they don't have to.
Chairman NEY. Okay. That's something we should—in my case, frankly again, we will see the notice. We get a phone call, and I'll get a call from any Commissioners; and that's basically how it works down home. Then we get a call from the people who, in fact, submitted a request or the Coalition of Appalachian Development or Housing Coalition or whatever. But I've always kind of assumed, I guess, that that was mandated by somebody else, and I guess it's not. It's just the way they're doing it where I'm from.
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Mr. BREGON. We give them a minimum threshold. We say, ''You must hold a public hearing. It must be accessible to people who speak other languages other than English.''.
Chairman NEY. Does it state the time, the day of the week?
Mr. BREGON. It does not, sir.
Ms. WATERS. It doesn't say anything about public notice?
Mr. BREGON. It does say about public notice. We do tell them that it must be published in a—in a newspaper of general circulation, and some communities, for instance, say, ''Look, our low income residents don't read the—the 'Los Angeles Times.' So what we going to do is we going to have fliers, and we going to distribute fliers door to door,'' some community might say. Some other ones say, ''We will have ads on the radio, some of the Latino radio and the Chinese radio station, the African-American station, and we will put ads in,'' so it all depends.
Chairman NEY. So there's really no particular set standard?
Mr. BREGON. That's correct.
Ms. WATERS. Mr. Chairman, I know that you said that was the last question. I do have just one last question.
Chairman NEY. Go ahead.
Ms. WATERS. I'm looking at the Community Development Bank's $100 million expenditures, the companies that were loaned money.
Am I to understand that these companies are all in the supplemental zone?
Mr. BREGON. If it's for the hundred million——
Ms. WATERS. First 100 million.
Mr. BREGON. Yes, ma'am. They should be. Whether they are or not—for instance, the—our office of the Inspector General has performed an audit. They are some questions as to whether, in fact, all these companies are within the zone.
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Ms. WATERS. The Inspector General's report does discuss this?
Mr. BREGON. It does, ma'am.
Mr. GIMONT. It included a sample is my recollection. Not all—not 100 percent of the portfolio, but it included a sample is my recollection.
Ms. WATERS. I see. So it was a sample. So we don't know, based on the Inspector General's report, whether or not they were able to capture, you know, all of them—where all of these companies might have been operating from.
Mr. BREGON. But since there is a question, we have our field office working with the city to identify the location of each business, not only the ones that the IG select selected randomly, but we're looking at a hundred percent of the universe, if you will.
Ms. WATERS. So while you are looking at it, what if you discovered that they were not, what would you do?
Mr. BREGON. Then it would be an ineligible activity, and perhaps they would have to pay that money back to the line of credit.
Ms. WATERS. Okay. We will get that information from you also?
Mr. BREGON. Absolutely.
Ms. WATERS. Okay.
Chairman NEY. We have had some cases down home where we have a—the use of CDBG money created this pot of money, a policy that would pay in and pay out, somebody came in town, herds of people and then vanished, and by the time you found out what they had bought and purchased, it was too late. We try to, you know, recapture—recapture that money.
Ms. WATERS. Well, my curiosity was raised by the fact that I just happened to see something here that says the Summit Industries of Nevada. They may be, you know, California—Los Angeles company.
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Mr. BREGON. I would hope they're not in Nevada, ma'am. That would definitely be a red flag.
Ms. WATERS. Thank you very much.
Chairman NEY. Thank you for your time. I appreciate your traveling.
[recess.]
Ms. WATERS. Thank you very much.
Mr. Chairman, we have a panel here that includes, first, Supervisor and President of the Board Supervisors, Yvonne Braithwaite-Burke who represents the Second district of the County of Los Angeles. She brings to the board of Supervisors more than 30 years of experience in public service, and at the national and State as well as local levels.
She has focused a great deal of her energy on the needs and education of children, especially those cared for in the county foster child program. Supervisor Burke's Department of Science, Department of Affirmative Action Compliance. Community Development Commission, Department of Human Resources, Museum of Natural History, Department of Parks and Recreation and the county of Public Library and the Public Social Services.
Welcome, Supervisor Yvonne Burke.
We also have Mr. Clifford Graves, who is a General Manager for the Community Development—Development Department, City of Los Angeles. Mr. Graves is the new General Manager in the Community Development Department for the City of Los Angeles. He will oversee the department which creates economic, social and employment opportunities for individuals, families and neighborhoods in need. Prior to Mr. Graves' position as Vice Chancellor for fiscal—physical planning at the University of California, Merced and served as Executive Director of the City and County of San Francisco Redevelopment Agency.
Welcome, Mr. Graves.
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Mr. Carlos Jackson, Executive Director Community Development Commission of Los Angeles County. Mr. Jackson joined the community development commission in June of 1983. On February 19, 1991, he was appointed as Executive Director of the Los Angeles County Board of Supervisors. As Supervisor director, Mr. Jackson directs the County's public housing approximately 3,640 units, housing rehabilitation Section 108 assistance, Redevelopment Community Block Rent and the Housing Revenue Bond programs.
Welcome, Mr. Jackson.
Also, we have here, is this—I think that we'll wait for the introduction of Mr. Sausedo.
Mr. Sausedo, How are you doing? I didn't recognize you, and it's been just a few months back that I'm trying to pick your brain about everything that was going on.
Mr. SAUSEDO. Okay.
Ms. WATERS. So I get to do a little bit more today.
Mr. SAUSEDO. Clean myself up.
Ms. WATERS. He's Chairman of the Board of the Los Angeles Community Development Bank. Thank you so much for coming today.
Chairman NEY. The Honorable Ms. Burke.
STATEMENT OF HON. YVONNE BRAITHWAITE-BURKE, CHAIR COUNTY BOARD OF SUPERVISORS, LOS ANGELES COUNTY, CALIFORNIA
Ms. BURKE. Thank you very much. Good morning.
And we want to welcome you, Chairman Ney, and Congresswoman Waters. Very pleased that you're here in Los Angeles at this Exposition Park Center which is growing and has really brought many dimensions to this area. I also welcome you because this is part of you're Supervisorial district that I chair and that I represent.
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In fact, and Federal programs play a great—important part, of course, in this district. It's—in the county of Los Angeles, and I'm really here speaking for the entire County of Los Angeles, not just for the Second District. And there are two programs that are certainly very important, is the CDBG as well as the Section 8 housing voucher system that you maintain.
I do want to thank Congress, and particularly you Congresswoman Waters, for your support of CDBG and your support of many of the programs that are very important to Los Angeles. And we depend upon the support of Congress obviously for the growth and the extent to which we receive CDBG funds. Many of those funds that we have are not just CAPA projects. And we have some very successful CAPA projects, and I have to kind of distinguish the County of Los Angeles. Our funds are used only in unincorporated areas. In other words, our funds that we receive—is about a million people who live in the unincorporated area of Los Angeles County. There are 88 cities in that County so those 88 cities, their funds, the City of Los Angeles being the largest, of course, their funds go directly to them, and the 88 cities are funded separately; but we administer those million people and those areas that are in unincorporated areas where they do not have a City, and we're all the City they have, we're the mayor, the council and everything in those cases.
And so the impact of CDBG funds in those areas are so important, and first of all, we have been fortunate to have that waiver; and that 25 percent waiver has made it possible for us to do a number of things in terms of public interest projects. I hope that will continue.
I know it's supposed to terminate in 2004, but it's—we use those funds and we use them in a very positive way and in a diverse County, we have to realize that this is probably one of the most diverse counties in the world, 136 languages spoken.
So it's very important to try to address these separate communities, each of which have their demands, their needs. I can say to you, you know, we provide assistance in one community where there's really a lack of ability to relate to other communities adjacent to them. So we have to address each one of these individual communities and try to meet their specific needs and their resources.
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I'd like to address—I know you're going to talk a lot about the Community Development Bank. We were part of that bank, and our portion that we are withdrawing is 15 million. It is our intention to use that 15 million for what is called the Los Angeles Eye Institute. It's a—an institute that is being established at one of the major complexes that exists in the unincorporated area that is covered by this empowerment zone and the Martin Luther King Drew Medical complex.
Much of our money, the CDBG money, has gone into that complex—housing, everybody open two large developments recently in terms of housing, whether it's rental housing or condo or home ownership, but a—surrounding that area. Major commercial development, but what we're really planning to so is to establish an eye institute which will provide care and also outreach to provide specialty eye care, in an institute in that area.
We will also probably include—some of those funds will go to what's called the Drew Child Care Center. So a lot of the—they're working together, so it will be child care as well as the eye institute that will probably be the beneficiaries of that 15 million we withdraw. So I think that we can be very proud of the funds that we have utilized in that Community Development Bank.
And all of it in those areas that are very in need—and I mean, very much in need—but what you see it, you can see it, you can look at it, you can walk, you know that those things have been very effective. Now, I'm not—I know that I won't be here tomorrow when you're talking about Section 8.
I just want to say a couple of things about that. The administration of Section 8, moving to the State, we feel would have a detrimental impact upon our Section 8 program. We have long waited for Section 8 as it is now. There are many people who were served after the earthquake with Section 8.
I have calls every day, people are homeless who are looking for Section 8, and to move it, this administration, we think would be an unnecessary labor as far as the administration and the bureaucracy. I know that these are very difficult times. They're difficult for us, they're difficult for the State, and I know they're difficult for the Federal Government; and we recognize that we have taken some cuts in CDBG, but to the extent that this program can continue in the very vital way that it has and continue to make impact is going to be very important for us.
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And I know through these hearings, you'll be able to see how it's being used here, the dimensions of the problem as well as some of the solutions that have been provided by these very important funds. So I thank you very much for being here.
Chairman NEY. Thank you.
[The prepared statement of Yvonne Braithwaite-Burke can be found on page 85 in the appendix.]
Ms. BURKE. I won't be here during the rest of the panel. I see that Councilman Garcetti is here. If there are questions that you want to address to me, I'd be very happy to answer them.
And if not, Carlos Jackson will be able to address detailed questions about it in the bank.
Chairman NEY. Thank you for your attendance.
Ms. BURKE. Thank you.
Ms. WATERS. I'd like to thank you also for coming, and Carlos is here; and we can get into a bit more detail——
Ms. BURKE. Sure.
Ms. WATERS.——with him about the bank and some other things. But we do appreciate your coming making the statement about the important of these funds, too.
Ms. BURKE. And we appreciate the strong support we've received from Congress, and particularly, I know Congresswoman Waters has a deep interest in and has been a strong supporter.
Chairman NEY. I also appreciate having a former colleague here.
Ms. BURKE. Thank you very much.
Chairman NEY. Thank you.
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Ms. WATERS. Thank you. Mr. Chairman, I'd like to introduce Councilman Garcetti representing the 13th Commercial District as Chair of the economic development and employment committee and vice Chair of the housing and development committee. Councilman Garcetti has promoted affordable housing and strengthened unit intervention programs, community and senior centers and overseeing the expansion of after school programs.
Welcome, Councilman Garcetti.
STATEMENT OF HON. ERIC GARCETTI, MEMBER, DISTRICT 13, LOS ANGELES CITY COUNCIL, LOS ANGELES, CALIFORNIA
Mr. GARCETTI. Thank you very much, Congresswoman. It's great to be here, and I want to thank the Chair, Mr. Ney, for coming all the way out to Los Angeles. It's really wonderful to have you here. We're trying to beat the June gloom. So hopefully, we won't have it too much longer, and I hope you enjoy your stay. And I want to praise the leadership of Maxine Waters, too, and thank you for making this happen as well.
The testimony I'm going to give, I couldn't give two years ago: One, because I wasn't a councilman, so that makes it uneasy. But also, because I think the City of Los Angeles was in a very different place in terms of block rent, in terms of how we spent it, in terms of how we looked at it, and I have hopefully much better news, good news to share with you and not because I've been captured by the bureaucracy, not because I'm simply now on this side of things; but because I've seen this change, I've lived that change, and I've been a part of the change.
Cliff Graves will speak next who is one of the original authors of the block rent legislation from his work in D.C. Now as head of our community development department. An entire leadership team I think has really changed the way we do block rent from the city level.
My testimony will really focus on that. When I came here two years ago, we were almost, I think, two-and-a-half over our yearly balance, and we were being threatened by HUD of losing some of the block rent monies because we simply weren't spending it out. We really—the mayor and the council took a hard look at how they did it, the department, and we were able to in a year period really spend that down to the proper ratio that it should be at.
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What we did in that process, too, is we changed the way that the grant is being spend, making sure that it was really going back to the root of the seed money that it's intended to be and not to just sustain programs, not to just be another place to fill in services, but something that would be encouraging entrepreneurialism, something that would encourage creativity and something that would plant those seeds in communities that would hopefully blossom into true community development.
I know that Los Angeles is a poor city and that it needs more resources. The census count has us at 22 percent. The official poverty line, obviously, if we go to 200 percent of the poverty line, we have the majority of our children being born into that essentially working poverty. And we have an estimated undercount of about 80,000, mostly people of color, which equals a loss of about $180 million in funding over the ten-year shelf life of that census.
And we have an extreme housing and homelessness crisis. We need to be building in this city about 8,000 units of affordable housing just to keep up with population growth. Most of that is not migration. About two thirds of that is just the baby boom echo. So the baby boomers' kids are having kids, and we are building about 2,000 units of affordable units.
So each year we're falling behind by about 3,000 units. As a way of answering that, we have now—so that you don't think we're not putting our money where our mouths are, we build the largest affordable housing trust fund per capita in the country, which would be $100 million every year hereafter for the building of affordable housing. If you want to leverage that to about half a billion dollars a year, combined with the State funds, we've really prioritized that in a new and dynamic way.
Phil Mangano who is the President and Director of the Interagency Council on Homelessness recently came to our skid row and called it Calcutta to give you an idea of what his view and his extensive work throughout the country was. He really was struck by what he saw on our own skid row in Hollywood, where I represent is the second biggest population that we have some similar areas.
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I think we do need an extension on 25 percent CAPA services where we do face a dramatic cut in-services. Now, I know it's not going to be easy to say, ''Why are we funding services,'' and I think that block rent is intended again as seed money. But the way that we do services is not just to sustain programs and groups.
We really are focusing on those programs which do build capacity, intellectual capacity, work force capacity, things that—where it's read as services essentially as doing much more. As much CAPA infrastructure as a building because it's a human physical infrastructure.
If we do have the services reduced to the 15 percent level, about $11 million in direct services will be cut in the City. So please consider extending that waiver at the very least phasing it out over time for us to be able to see how we can use work force investment monies or other human infrastructure dollars to get there.
With the Community Development Bank—this has been one of the more fun areas to work on in the last two years, and we certainly, even though we are aren't directly overseeing the bank, our work in the City was—I think they're as experienced as anybody else to see what direction the bark had gone.
And when we look not at the bank itself, but at the problems, the civil unrest of 1992, you have essentially increase in unemployment in South Los Angeles; you have the problems which have manifested themselves have gotten even worse, and I think it would be one of the worst things we could do not to keep that Section 108 authority.
Now, what we do with it is the question: I think we can use the same target areas, the easy, the 20 percent poverty areas. And I would make the formal request the $1$96 million be kept available. But I think that the leadership team that we have, as opposed to what the bank was doing before, really has the experience, right here on my left, the knowledge and the know-how and the innovation to spend this in very creative ways, in capital deprived areas that will spur the economy, spur employment and deal with blight.
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We should have the flexibility to use the section 108 funding to adjust these problems holistically. To be able to combine—and this is what we're trying to do in the council, too—our housing programs together with our economic development programs, and job training programs and our community development programs. Instead of taking these all in silos, we're trying to mix these grains together to really see in a community, you know, I don't think a child care is where the school district ends and the City begins, where one department ends and another one begins.
They want to see that mix of housing and economic development and education and work force development go hand in hand. I think the Section 108 authority is a critical piece of this. As I said, I couldn't have given this testimony two years ago, but I have a lot of confidence in this leadership team that we have right now.
We have a committee chair for the development committee which oversees the block rent and helped distributes it. We are now actually focusing on having yearly priorities. So it isn't just this big grab bag of different things, whatever we inherited. I'm really saying that nothing is safe anymore, that's on this table.
One of the four or five areas that we want this committee to really impact on, not just who do we know from one organization, depoliticize that process as much as possible, and I should say to both Congresswoman Waters and to Chairman Ney, that we really have a pretty apolitical process.
I know in a lot of places block rent is all about who knows who, and I see here that there's very—a small percentage of that really has to do with personal pet projects of any council members. It is spent, I think, in a very neutral and fair way. But increasing that and really focusing on certain policy areas, again, affordable housing, work force development, literacy is one of the areas that we're focusing on, too.
And quite literally, this is our lifeline to other programs. Surprisingly and not political and dealing with infrastructure issues, I think the way that I would categorize how we're dealing with the block rent money, and the last thing that I'll conclude with is I know that to talk about whether we should administer this differently.
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To me, you know, I think the council level, the local level is one that is most in touch with what's happening out there, you know. Every Saturday I meet with constituents, I have office hours where people come up and talk to me where we get that kind of on-the-ground intelligence, but it's difficult to get through any departmental agency.
And certainly as you go higher up the—the food chain, I think it's more and more removed from the people on the ground. We have citizens' units for participation that have done some incredible things here. They are all representatives from the community, but they did polling for this entire city.
They took a political polster, one of the best in the country, and they actually came in and asked me about block rent money, where they would want to see it spent. I don't know if that's been done by a CPA in the country, but we then broke that down by district, and every council member has seen that.
That gives us a real jumping off point, not just to say, ''One of my priorities as an elected official, I'm the gatekeeper, but what does my community want?'' And lastly, with the Section 8 stuff, just goes—I know Supervisor Burke mentioned that, too.
I did want to say with our $100 million housing trust fund that I mentioned, a lot of what we're spending it on is the preservation of project based Section 8, which we really have a lot that is risking being lost, and so for us being able to keep that in place is critical, too, as we address the housing crisis and not falling further behind, but I will be here for the rest of the testimony and thank you very much for coming out here.
[The prepared statement of Hon. Eric Garcetti can be found on page 88 in the appendix.]
STATEMENT OF CLIFFORD GRAVES, DIRECTOR, COMMUNITY DEVELOPMENT DEPARTMENT, CITY OF LOS ANGELES, CALIFORNIA
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Mr. GRAVES. That was great. Let me add my welcome to those that you've already had.
As was pointed out, I'm relatively new to Los Angeles and to this position, and I thought I'd open my testimony by reciting some numbers that amazed me when I got here. The City of Los Angeles is home to nearly 3.6 million people. 816,000 of them are below the poverty line. When you use a percentage like 6 percent or 20 percent, it hides the real number, but if you think of 816,000 people and compare those to the populations of other major cities, it gives you an idea of the magnitude of what we're trying to address here—147,000 families below the poverty line.
Supervisor Burke mentioned the number of languages that are spoken around the City. 226,000 persons are disabled. Focus on that absolute number to understand what we're dealing with.
Beyond the census figures, think about what's happening to the housing stock here. We grew by about 6 percent from census to census. That translates into new households. During that same period, only 5,400 dwelling units were added to the housing stock. That's a very simple explanation of why housing costs are increasing beyond the means of more and more of Los Angeles residents
Mr. Garcetti did mention the census undercount which concerns us deeply. The undercount (which we estimate at about 79,000) represents a large shortfall in Federal funding to which we would otherwise be entitled.
So this is the setting for our Block grant activities. One of the virtues of the Block grant program is the flexibility it provides to local officials to establish priorities and allocate resources. Los Angeles, with an allotment of approximately $90 million a year, takes advantage of that flexibility.
I'd like to go through the main categories of what we fund and give you a few examples: We spend about $41 million a year on public services. This includes the Community-Based Development Organizations. These fund a variety of services. We have a human services delivery system which integrates CDBG funds with other Community Services, Block Grant and others. We fund a number of youth and family centers, supplemental youth recreation and youth nutrition, just to name a few.
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The impact of reverting to the 15 percent public services cap would be greatly felt. That amounts to an $11 million reduction, a 40 percent cut in the services we have been providing.
We also fund neighborhood improvement activities to the tune of about $9 million. These include such things as alley closure programs, code enforcement, nuisance property abatement, sidewalks and tree planting, the kind of things that increase the quality of life in our most difficult neighborhoods.
For public facilities, we have allocated approximately $6 million this year for such things as neighborhood parks, multi-purpose centers for seniors, and the Temple Beverly Recreation Center. As the Deputy Assistant Secretary pointed out, the framework for all of what we do is the multi-year consolidated plan. Our job is to make sure that the program is well publicized, that there's ample public participation and that we get creative ideas.
We then test the submitted applications for eligibility and compile them as a list which is made public. Then it's subjected to our community review process. Councilman Garcetti mentioned the Citizens' Unit for Participation cup, which is our public participation arm.
Members of that organization are selected to represent the various facets of the community. Most of the members are appointed by the city Councilmembers from each district. We also have a couple of at-large members. Mr. Garcetti mentioned the polling that they do. They hold several public meetings and hearings. They meet once a month. We go before CUP to explain to them what we are doing, any issues that we have. CUP will be deeply involved in our reprogramming effort, which we do to keep our spend rate within HUD requirements.
In addition to the CUP, we also post the consolidated plan on our Website. We work with 72 neighborhood councils. The City Council Committees hold hearings, and finally, the City Council reviews and adopts the consolidated plan. Once the plan is done, we submit an annual CAPERS report. This Consolidated Annual Performance and Evaluation Report to HUD discusses our accomplishments and issues. Every one of our CDBG-funded project is required to file a quarterly report with us. We review the reports which rolls up into HUD's own information system.
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So we have a fairly good handle on where the money is going and its effectiveness. Is it perfect? Nothing is, but I think we're improving it every year. The monitoring that is done on the ground, is the one area that I'd like to see us improve.
Like most City departments, we could always use more funds, but we're trying to make our monitoring less of an audit and more of a technical assistance review. We work with a number of very fine agencies here in Los Angeles, but staying on the right side of the regulations isn't always the easiest thing to do. We're trying to shape our monitoring program to be more assistive to these agencies.
Moving to the Community Development Bank, you'll be hearing directly from Mr. Sausedo, but I'll give you the City's perspective on the Community Development Bank.
Chairman NEY. I don't mean to interrupt you, but just based on the councilman's statement, now will you be taking over the development bank? I didn't know if that was your reference?
Mr. GRAVES. The activities of the bank will be undertaken by the Community Development Department.
Chairman NEY. I didn't mean to interrupt you. I just wanted to make sure I could follow you.
Mr. GRAVES. The Community Development Bank was an experiment, and I think it was recognized as such when it was formed. And I think there have been a lot of lessons learned as a result of it. But as was pointed out by Mr. Bregon, when it comes down to do the loans go to the right places, and do they make a difference? Yes, they probably did. Was it the most efficient way of doing it? Probably not. And were there some things we will do better based on lessons learned? Yes, and I'll go through those.
The contract between the City and the Community Development Bank is in the form of a comprehensive agreement which lays out the roles and responsibilities of the bank and the other parties and obligates the Department to perform annual reviews to review annual business plans.
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It is not the role of the City to get involved with individual transactions. The LACDB was set up as an independent body, and we have respected that. The question was raised about the Zone Ventures' aspect of the bank. That was a part of the original business plan that the bank submitted to the city and to HUD.
The agreement between Zone Ventures and the Bank is between those two entities. The city is not involved in that aspect of it. There is an issue of accountability here. I think this is one of the weaknesses of the original business plan. The Board of Directors of the Bank and the Bank itself are independent and accountable only to themselves with regard to the loans that they make, subject to the general criteria set forth in the funding.
However, the way I look at it, the LACDB is using CDBG money, for which the City is ultimately responsible to HUD. So any issues that arise with regard to the Bank, we end up holding the bag, and that has caused some concerns. I think we're addressing that through the transition.
I'd like to go to the lessons learned. And I think these are lessons which we will apply to the loan authority when we receive it. One is to make sure that the requirements of the program are really practical. For example, one of the more difficult charges that the Bank had was that it could not loan money to anyone except persons who had been turned down by other banks.
It was in effect, a lender of last resort. So that the loans that were funded for by the Bank generally were of a poorer credit than most banks would have. In retrospect, that probably wasn't necessary. It was more important where the money went and how to get the best community impact.
There is a need for more adequate financial and compliance controls. The bank had a very difficult set of requirements to follow, and we believe that under the Department, we will be able to apply the same type of controls that we apply to our own programs.
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The bank was originally chartered to attract private investment as well as the HUD funds. This did not happen which left the Federal funds further exposed than I think they should have been.
And finally, with regard to strategic utilization of resources, the bank, lent money to individual applicants who met their criteria without regard to overall impact on an area, without regard to broader priorities that the City might have. We would like to be able to utilize them in a targeted way in concert with other programs by our department and by the city.
To emphasize a point I think that's been made previously, of the $196 million in loan authority which still exists from the bank, we have asked HUD for an immediate allocation of $50 million to be used exactly as provided in the Bank's plan in terms of the activities to be funded and the geographic area to be supported.
We believe we can do this, Mr. Bregon said, without amending the current plan. We would like to amend the plan for the other $146 billion. The intent would be to continue to invest in the geographic area that the bank was chartered to invest in, but we would like the flexibility to use the funds for a broader range of purposes within the domain of Section 108.
We believe that that will allow us to use the funds more effectively and still carry out the spirit of the supplemental empowerment zone plan.
Mr. Chairman, I'll stop my remarks at this point.
Chairman NEY. Thank you.
[The prepared statement of Clifford Graves can be found on page 91 in the appendix.]
Chairman NEY. Mr. Jackson.
STATEMENT OF CARLOS JACKSON, EXECUTIVE DIRECTOR, COMMUNITY DEVELOPMENT COMMISSION, LOS ANGELES COUNTY, CALIFORNIA
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Mr. JACKSON. Thank you.
First of all, I'd like to also welcome you to Los Angeles. And also, this is the first major opportunity that we have had a chance to express our support that the community block program here on the West Coast. Typically, we have to travel back east to express our needs, and to express, you know, what kind of things we need here on the West Coast. So this is a grand opportunity.
The Los Angeles County Community Development Commission is responsible for the Urban County Block Rent Program. We have 88 cities in the county of Los Angeles, 40—53 cities have a population of 50,000 or less. Of that 48 cities participate in our program including the City of south El Monte. But we represent approximately 2 million people, a million from the 48 cities, and a million in the unincorporated areas. In Los Angeles County, historically, the only corporate areas have been rated from all its commercial viable communities. Most of the cities either incorporate those areas and take you know the industry part, the manufacturing part, so we're spaced with communities and major infrastructure needs, major housing needs, some old housing style. So our focus is not only the unincorporated areas, but the 48 cities. And many times when I'm asked to describe what we do as an urban County, which happens to the largest one in the nation, we receive about $38 million annually. The allocation between the cities and the county is almost split down the middle. The cities get about 14 million; the unincorporated areas gets awarded about 16 million. We use the allocation formula that HUD uses for awarding the times, their allocations, we use the same with the county and 48 cities.
That has been in place since 1975, that policy that was adopted by the board. And we have found it to be very effective in terms of working with the cities. Over the years, the cities have been responsible for developing the programs with the city council requiring approval of such a program. I work closely with each of the Supervisors for developing the unincorporated area programs, and that has been intact again since 1975.
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I'd like to say that recently 93 percent—I'm sorry, 94 percent of the recipients have been low income residents of the County, both the cities and the unincorporated areas. Our focus is predominantly to—to look at how we can best improve the communities. Unfortunately, like the City of Los Angeles, you know, it's—it's dealing with a variety of resources. The County is not, and I have to focus really on the unincorporated areas. Our tax base is lower than—in other areas. The challenge that we have is how to leverage our resources. Because again, when you look at $60 million published or a million—of a million of unincorporated area, it's not a whole lot of money. If you look at the allocations made for by the Supervisorial district, the highest one which is in the first Supervisorial district is about $6 million, and has tremendous needs of money, development housing, infrastructure to the loan, communities that have not been intended to.
One of the matters that have—you have to asked me to address, which is more in detail than my testimony, was how our monies—how do we involve the communities? You know, it was mentioned that by law we're required to have one public hearing which is before the board of Supervisors when our action plan or consolidated plan is adopted, but we have—we have 60 communities throughout the unincorporated areas of Los Angeles.
We ask the cities, the 48 cities, to have their own community meetings. When you tally that, that's quite a few community meetings. We go to the community stakeholders invite them to participate, we will go to the churches. We go to other community organizations that will provide any input, not only as to what is needed. We return back to the community and say, ''This is how the monies were allocated this past year'' and ask feedback, not only up front but at the back end.
As an agency, we—I have the opportunity to look at public housing, Section 8, administration of the home dollars, the homeless dollars, as well as the monies for affordable housing, the community development of block rent. The challenge that we have is how best to leverage those dollars, because the needs are tremendous.
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It's mentioned that the homeless crisis is surfacing again. It was interested in seeing that the—there was a plan of ten-year plan to eliminate the homelessness. Well, since I've been around, it's the second one. And that is really a confronting problem that I'm not sure no one—as one agency can resolve that problem.
It requires really a multijurisdictional agency. But there's one funding source that we have fortunately that we administer, and this is where I'd like to use the leveraging factor.
And it's the housing money that we get from the City of Industry which is for the redevelopment set aside, special legislation was passed in early 1990 at the State level. When we first started allocating dollars for this housing program in 1998, we have allocated $102 million from that fund, had to leverage $600 million and produced 2,400 affordable housing units, home ownership, special needs housing, housing for domestic violence victims, emancipated youth, the whole gambit. Some of them have been used in the City of Los Angeles. How we can encourage similarly leveraging from other jurisdictions, not just from the County of Los Angeles.
We do a five-year consolidated plan. We just completed ours recently. Again, we go out and solicit information from the various communities that we're involved with, and then, finally, a formal public hearing before the board of Supervisors. But you know, our meetings have taken place prior to them.
Most of our funds, I would say—and I don't have the numbers handy—but it's been owned housing, economic development, public services and public facilities. And most of our public facilities are—are easily fund expended by the cities our 48 participating cities. The County unincorporated area needs really are prioritized around housing, economic development and public services.
Different from the City of Los Angeles, the counties have mandated prudent health, welfare, protective children's services, a variety of things that local jurisdictions are not faced with. The discretionary funds that the county has are very limited. So really the future of the Walkman program because it's a very viable program to look at these areas of needs that typically the County are not able to fund. And it really is a—it's a major challenge if you look at reducing our 25 percent from 50 percent. Overall, it's a $4 million loss for us.
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I think poverty probably describes our world with the city as the mini HUD. We're responsible for assuring that their funds are spent properly and according to all the regulations. We're the grantee of the funds so that we're the ones who are responsible. For anything that doesn't occur, we have agreements with the cities for expenditures for eligibility in case there are disallowances, you know, we have a mechanism to recover those funds.
Even though it may have been political before, we have that mechanism and then we are also responsible for compliance in the unincorporated areas. We do—we have spent a lot of time over the years in improving our compliance systems. We have learned through experiences that in working with participating cities, we have to work with them a certain way with our CBOs, we have to do a lot up-front technical assistance because many are not equipped to deal with all the Federal regulations that area is confronted with.
Not only eligible projects, but as well how can they account for the expenditures which are—sometimes gets them in trouble. But we have done an extensive rebuilding of actually building up a system. We do desk top reviews, performances, we check their accounting systems before they are contracted to make sure that it can handle the funds coming in, and then we do our field reviews at the different sites. Not only the CBOs, but as well as the cities, as well as the county departments. And we go through a lot of data collection to make sure that the funds are accounted for.
The 108 loan program is a viable one for the county. Cities have been using the 108s to help them develop economic development packaging. For example, in the City of Santa Fe Springs, we had a $23 million project that was to clean up old oil tank field, and it has now become a very viable industrial warehousing facility that creates over 600 jobs; but without the assistance of the 108 and their EDI and their bedding, they wouldn't have undertaken a particular project, and now it's become a major cornerstone in the southeast Los Angeles area.
We had just resumed work with West Hollywood again to do an economic development project. We have undertaken some in our area, in East Rancho Dominguez, West Altadena, which is in the 5th Supervisorial District. Because of the lack of resources that the county has, 108 is a field to us again to leverage and to get investments locally for viable projects.
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And lastly in the Community Development Bank, I don't know if I have the pleasure or really, but I was beginning—I was there at the beginning of the bank; and if I have to reflect back as to what took place: One of the key—one of the key factors that the board of Supervisors took was that any project dollars belonging to the County required authorization by the County prior to any expenditure or commitment.
And the reason we did that was that the bank, when it first started, didn't have the administrative infrastructure to undertake all the requirements, Federal requirements and local requirements, that really would put them on the right track. We were conservative on how we approached that, and of course, the County took a lot of criticism being conservative; but the Inspector General report pointed out that administrative policies and procedures were not there.
For some reasons why some of the loans were made out of the zone or were questionable, there was environmental issues of clearances. So my staff spent a lot of time with the bank early on developing manuals and administrative policies and procedures to ensure the accountability took place, but I think that when we have two legal entities, the county and the city and our—we have five census tracks in the environment zone, supplemental environment zone, which equated about 13 percent of the area.
We were dominated, in essence, but in our agreement, we require that they—that it get approval from us for any expenditure or agreement. So we're protected on that. Now, we were confronted with trying to come up with viable projects in the five census tracks, and Supervisor Burke has identified one of them which I think will really assist the undeserved communities, the medical undeserved, and we're working with a group of doctors from Drew Medical University to look at this in terms of an eye institute.
But again, we're in a transition. We are requesting, you know, that once the bank is closed that the money reverts back to the County of Los Angeles and we already have anticipated how to spend those dollars. I'd be available for any questions.
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Chairman NEY. Thank you.
[The prepared statement of Carlos Jackson can be found on page 114 in the appendix.]
Chairman NEY. Mr. Sausedo.
STATEMENT OF ROBERT SAUSEDO, CHAIRMAN OF THE BOARD, LOS ANGELES COMMUNITY DEVELOPMENT BANK, LOS ANGELES, CALIFORNIA
Mr. SAUSEDO. Good afternoon.
Now, Chairman Ney, and ranking Member Waters, and once again, my name is Robert Sausedo. I'm the Chairman of the Board of the Los Angeles Community Development Bank, and I was appointed to the Board of Directors by former Los Angeles City Councilman Marjorie Thomas in July of 1999 and subsequently elected by the entire Board of Directors to serve as Chairman of the Board in 2001.
My role as the Chairman of the Board is a nonpaid position and is strictly that of a volunteer. In short, I'm a community guy. That means what I say here, I have nothing to lose with respect to politics or what have you. I represent the community.
I—before I move on, though, I do want to compliment your staff, Congresswoman Waters, for always being there when a cause is to be made and being responsive. As you well know, there are times when you call certain political figures and don't get return calls, and staff is less than sufficient; so I do appreciate a good staff and always take the opportunity to compliment you.
I'm here today to offer testimony on behalf of the Board of Directors, and again, as a concerned citizen and volunteer. Additionally, I am joined by our President and CEO Mr. Steve Valenzuela for any of the more specific questions with respect to day-to-day operations of the bank.
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Let me begin by talking about access to capital. As you heard earlier, HUD provided the bank with $100 million in Section 108 funds and $100 million in matching EDI funds. This is the City side of those funds. This extraordinary allocation of EDI was made in recognition of the additional risk and lending that the bank would undertake.
Credit risk was an enigma to most commercial banks resulting in capital star businesses in the intercity community of Los Angeles. The bank adopted credit guidelines and underwriting criteria similar to those employed by the largest commercial banks in the City. This was done, in part, to help facilitate co-lending with these banks in both these significant pledges made early on by three large banks in the Los Angeles area in 1995.
The pledges of co-lending with major banks were worth a lot less, of course, than imagine they just didn't show up. The Los Angeles Community Development Bank was forced to assume even greater risk than originally forecasted in order to meet unmet capital need for businesses in the empowerment zone.
So what have we accomplished? Let's talk about that. What have we accomplished? To date, the Los Angeles Community Development Bank has closed over 250 loans and investments totalling over $130 million in funding. We are especially proud of having received an award from HUD for implementing an innovative microloan program that funded over $1 million in loans to very small businesses in L.A. With an average loan size of $15,000 of LACBD funding, all of it in the form of EDI, reached approximately 70 businesses, while many of these very small junior experienced spent time expanding their businesses to create new jobs, I will say that the vast majority have either repaid their loans in full or are making good on their commitments.
The bulk of the loans made by LACDB have been to small- and medium-sized businesses in the empowerment zone and the one-mile buffer which, by the way, is across the street from the empowerment zone. Okay. We have a number of success stories of businesses that remain open and viable that met the national objective of creating jobs for the benefit of low and moderate-income persons and that repaired their financial obligations to LACDB.
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We also have experienced, as you all well know, some set backs—borrowers who have failed to execute their business plans and, of course, media stories about the bank's missteps. Rarely has the local press published a story prominently about the bank accomplishments in light of its challenges.
Recognizing that some companies require capital and not debt to further their business plans and create jobs, LACDB also partnered with Draper, Fisher, Jergenson and formed its own ventures. The partnership focused on funding early-stage investments and portfolio companies in the empowerment zone.
We formed a similar partnership with Fame Renaissance and Hancock Partners that focused on operating companies in the empowerment zone. The strategic exits from Zone Ventures partnerships relied heavily on continued vitality of the IPO and MNA markets. And as we've seen of late, with the .com busts, those markets somewhat have within dried up to some degree which affected our long-term strategy in short—that's the short of that.
We do, however, remain hopeful and optimistic that the economic benefits resulting from these efforts doing the new high-tech companies populating the empowerment zone in the central City of L.A. And possible zoning impact will continue far into the future. We've laid the ground work for the baseline infrastructure.
Let me talk about reduction of liabilities. In 2000, the bank, by direction of the Board of Directors, moved aggressively to defease its outstanding HUD debt, which as of July 2000, totaled $105 million. During 2001, the bank reduced the City and County's liabilities to HUD by $10 million and $4 million respectively, approximately 16 years ahead of schedule.
The reduction liabilities occurred through a defeasance of county long-term debt. The bank has successfully resolved all outstanding significant legal issues and prevailed on appeal and in the Supreme Court in overturning a 12 million-dollar judgment. Our Board of Directors continues to remain pleased with the hard work our senior staff put into this successful conclusion because we have, in short, one hell of a staff.
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With respect to job creation, providing eligible companies with capital was always intended to be a means and not the end of economic development. The measure of success we strive for is job creation. Primarily benefiting residents hopefully of the empowerment zone and/or other low to mod persons. That's the standard set forth by the comprehensive agreement with the city and County of Los Angeles and that's the national objective set forth in the HUD regulations.
Each company assisted by LACDB is required to demonstrate they have the capacity to create one job for every $35,000 in financial assistance which is quite difficult to do, but it is what it is. Taken together the portfolio of companies are required to create approximately $3,800—excuse me, 3,800 jobs. So essentially, based on the money loaned, 3,800 jobs should have been created. Through December 31, 2002, LACDB-funded small businesses have created 3,400 jobs. So what that means is that 90 percent of the goal—90 percent of the goal has been achieved, from a numbers standpoint. And while the number of empowerment zone residents benefiting from these jobs totals only one out of every five jobs created, low and moderate income persons hold 80 percent of the jobs created by those companies who receive funding. While we are proud of these accomplishments, we expected to achieve greater results, but to be quite frank, it was a difficult, difficult task to car