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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.
    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.
    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.
    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.
    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.]
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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.
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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.
    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 carry—pull that off and make sure that we reach the 51 percent number; but we continue to try and do that.
    LACDB also understood that the federally funded job training and referral program operating in Los Angeles would provide our clients with the type of resources and workers they needed in a timely manner. Things like work source development and other entities in the community would be a resource that individuals could go to for training and job placement which and would augment the bank's activities which unfortunately, we're not up to par in meeting that opportunity.
    When the founders of the Los Angeles Community Development Bank performing their strategies around what was anticipated to be our targeted customers, the economy shifted as a result of rapid growth in the technology sector. During this time, commercial banks lowered their lending standards and began to offer business loan products, and they were far more competitive and had significantly less red tape than the requirements that accompany Section 108 funding.
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    This resulted in LACDB taking on higher risk loans to businesses that would need to stabilize their infrastructure before they could follow through on their jobs creation commitments. In short, we got even riskier leans. I continue to remain significantly challenged as a board member when I hear statements made like, ''The bank has failed at meeting its national objectives,'' or, ''The bank is out of compliance,'' or, ''The bank doesn't know what they're doing.''.
    It is important to note that the businesses that receive funding and remain in business are not required to create jobs within a specified period of time, but it appears that requirement for jobs creation is open ended with respect to the time line of—of the Section 108 commitment.
    That said, current LACDB statistics once again show us the 90 percent achievement level. While it is true that the founders of LACDB intended for the bank to operate autonomously from the City, it is a significant departure from the truth to say the City of Los Angeles staff has remained hands off and unaware of the level of risk that is involved with LACDB lending, a significant departure from the truth.
    Additionally, it is important to note that the reason the bank is moving towards closure, the reason the bank is moving toward closure is primarily due to the lack of political will to support the bank. In short, the bank was not set up to withstand changes in administration at the local and Federal level.
    So where do we go from here? So where do we go from here? I will tell you as a third-generation citizen of this great City that I am very proud to—to have been born, live in and will die in, I'm encouraged by the fact that this committee is asking the question: What are you going to do with remaining Section 108 funds when the bank closes?
    As a suggestion, I offer the following: While the City of Los Angeles wants to expand on the uses of these funds to include housing development, I am of the mind that we cannot walk away from the job without defined specificity on how the funds will be utilized in the future. Additionally, it is my belief that we must maintain funding for our mid-size and small and/or microbusinesses.
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    Therefore, a significant portion of the remaining funds should be relegated to this activity and should include the areas of the City that meet the low income census track criteria while utilizing the 2000 census data, and not the 1990 census data. Additionally, as the LACDB moves toward closure, I believe local organizations that provide this kind of lending should be considered for tactical deployment of this resource. I offer the following highlights from South L.A. Rioting, opportunities for economic self-sufficiency ten years after the 1992 civil unrest written by two UCLA students, Mark Drisey and Danny Flemming, economic round table briefing paper: ''When business is created and developed, you obviously have jobs, short of that statement. South L.A., in particular, was the hardest hit after the 1992 civil unrest with 547 buildings damaged in Los Angeles. 78 percent of—or 428 of those damaged were in South L.A.
    For the purposes of this study, South Los Angeles included the planning districts of South East L.A., South Central Los Angeles and West Adams/Baldwin Hills. Of the 428 buildings damaged in South Los Angeles, only 19 percent had payroll paying estimates in 1999—excuse me, established. The 81 recovered buildings house 147 businesses employing 985 workers, an average of 7 workers per establishment.
    Of the 195 workers comparatively, they were paid 15 percent lower wages than their counterparts in other parts of the City. The South L.A. Workers are paid an average monthly salary of $1,707, which annually is about $20,884, below poverty wages for a family of four in the county.
    One of the fundamental problems faced by South Los Angeles residents in 1992 was the shortage of jobs. At the time, there was only one job to be found in South L.A. For every 4.5 residents, making it the most out—making it the most job scarce area in the City. According to the economic round table study presented in April of 2002, by 1999, there was a slight decline in City-wide job availability, but a precipitous decline in South Los Angeles.
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    In 1999, there would 2.8 residents per job Citywide and 7.2 residents per job in South Los Angeles. This means that there were only one third as many jobs per residents in South L.A. as in the City as a whole. By the end of the decade, South L.A. had a joblessness rate higher than that—the City average, but three times higher than the national average, three times higher.
    What does this mean to distressed communities in Los Angeles, particularly in South L.A.? It means that the initial designation of the $400 million to boost the local economic engine has a long way to go to create jobs and businesses. Rather than place the $198 million in other areas, why not designate at least half of those dollars to be placed at the local level and local community-based business expansion and job creation retention organizations.
    If you'll allow me a couple more minutes, I will come to a close. Let me give you an example of that statement: The community financial resource center in L.A.'s first private partnership in 1993, in its tenure of community economic development service of the community, it is based right here in South L.A.—by the way, I'm not advocating for one group. What I'm advocating for is that we take the remaining dollars, identify the people that do what LACDB was formed to do, but they do it well, and have a coalition of lenders throughout the City that help these underserved communities.
    I will leave that example open for your reading that since I happen to note in the interest of time, but I want to drive this message home: There are many reasons why we should continue to employ capital to small businesses and inside business in Los Angeles.
    Some additional reasons are: Of the 6 million people estimated to move into California between 1999 and 2010, approximately 900,000 will call Los Angeles home creating a 24 percent increase in Los Angeles's growth rate. Over the next five to ten years, approximately 20,000 to 30,000 people in California will be released from prison. On an annual basis, landing in communities being underserved, poor and low income, where will they work? As communities expand, the need for small businesses required meet the needs of local communities. This is driven by the need for inability for big bucks developers to keep up with the growth rate. Increased businesses mean increased taxes which mean you get a chance to increase the services. As a citizen of this great City, I implore this committee to keep the focus on standing on the side of what's right in supporting our local economy. Thank you.
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    Chairman NEY. Thank you for your testimony. I have a couple of questions just for my complete clarification.
    [The prepared statement of Robert Sausedo can be found on page 124 in the appendix.]
    Mr. Graves, you will, under your auspices of the city, will take over the bank in December; is that right?
    Mr. GRAVES. We will.
    Chairman NEY. Functions of the bank.
    Mr. GRAVES. The bank functions basically, yes.
    Chairman NEY. And then, you feel that you're ready, not you, yourself, you know, the organization is ready to do that, the transition would be occurring in——
    Mr. GRAVES. Yes, I do. Keep in mind, Mr. Chairman, that the department already administers the rest of the 108 program. So we would essentially be merging that into our capacity, the same is true with the EDI grants.
    Chairman NEY. Now, originally the bank, I think it was your statement that it was an independent body from the City. It was completely independent.
    Mr. GRAVES. It was set up——
    Chairman NEY. In '94.
    Mr. GRAVES.——in '94, '95 as an independent body, but the idea was—is that a body that was not bogged down by the red tape of the City or the County could become more aggressive in its economic development activities.
    Chairman NEY. Was it independent of the County at that time in '94?
    Mr. GRAVES. It was the same thing. As Mr. Jackson pointed out, their monitoring process was a little different than ours.
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    Chairman NEY. Looking back on it, if you have Government money that comes in, it's independent of the City and independent of the County, is that wise—I mean, you want to keep it, quote, ''from the bureaucrats,'' or want to keep it, quote, ''out of the hands of politics?'' But sometimes political activities involvement, not on a partisan basis but how politicians actually vote on these items help these programs along. The use of an independent body took it completely out of the realm of the elected Representatives who have the responsibility for the funds. Unfortunately, if the independent body goes a little haywire, which I think it has in this case, then the elected officials say, ''Well, it wasn't us.''
    The question I have is: If you reconstitute this will you have the same type of situation or how will it differ? If anybody wants to answer.
    Mr. GARCETTI. Mr. Chairman, I think maybe the best metaphor for this was, if it was an arranged marriage and either of the spouses live together. So yeah, we have one in which they would——
    Chairman NEY. Are either one of them alive? Has one left the country?
    Mr. GARCETTI. Well, I think we have two alive today. When we look at, you know, whether we have the capacity to, I think we have to ask ourselves a question: In some ways the bank was put in a difficult position because there was never a clear policy direction.
    Do we want this to have great jobs, or do we want this to have a portfolio that works? Do you want this to be a purely functioning financial institution, or do we want this to be something that creates jobs? In high risk areas, those are not going to always dovetail. In fact, it's almost possible to have them dovetail.
    So I think that if the city takes over some of the affects in the way of authority, we're not in the business necessarily of trying to get the highest return in pure fiscal terms for a portfolio. What we are in the business of is getting the best return on a human portfolio, and I think that is something the bank in some areas did something really well.
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    Participating in a microloan program, that was one, I think, in which we see the best of entrepreneurialism, and see money going out there, and it was a model for the entire region, and arguably for the country. Those are the stories of successes on the bank side we want to build on new loans. But our own section of the loan program is definitely in place and ready to go and ready to spend that out in coordination with housing and job development programs.
    Mr. JACKSON. Mr. Chairman, it wasn't totally independent. There was, through the comprehensive agreement, a relationship between accounting and the bank. We had——
    Chairman NEY. Excuse me, but not the City.
    Mr. JACKSON. The City had the same arrangement because there was a joint body and honor committee between the two entities that looked at program performance, looked at different types of——
    Chairman NEY. Not to interrupt. I just want to follow. But I think Mr. Graves said it was autonomous.
    Mr. GRAVES. Well, it was autonomous in the sense that we did not participate directly in their loan program, except for 108 passing through 108 applications to HUD. We did have an annual business plan which was reviewed by the county and the city up through the City council and the board of Supervisors.
    Chairman NEY. Sure. Well, was there a vote on that plan, or was it just there; or did somebody say good or bad?
    Mr. GARCETTI. Well, this information, we still have this coming before us, we decided last week, and since I've only been here the two years, that we get briefed on it and ask questions, and move on. There's no formal vote.
    Mr. SAUSEDO. And that plan is co-authored by the bank, the county and the city.
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    Chairman NEY. What was the role then? If there was autonomy, what was or is the role of the City or the County then? What would you deem your role was? If there was an autonomy of this board, but what was the role, to monitor——
    Mr. JACKSON. It's similar to like a nonprofit organization. We have an agreement that specifies program requirements, program activities, the target areas, and then like I mentioned, we were not satisfied initially with the establishment of the bank in this operation. So we—withheld any approval of any expenditures until we felt comfortable, and at that point, it was at that point that we allow expenditures, loans to be approved. But we were not involved in the daily operation of the bank. That was not our responsibility. So we had guidelines——
    Chairman NEY. Whose responsibility was that, do you know?
    Mr. JACKSON. That was the daily operation staff.
    Chairman NEY. But you had an oversight on the daily—reporting mechanism to the City and the county that sees funds coming through for local control or——
    Mr. SAUSEDO. The answer to your question is yes. I could probably have Mr. Valenzuela speak to that more specifically.
    Chairman NEY. We need your name into the record.
    Mr. VALENZUELA. I'm Steve Valenzuela, President, CEO of the bank. I think in Mr.——
    Chairman NEY. How long have you been CEO of the bank?
    Mr. VALENZUELA. I'm the President and CEO.
    Chairman NEY. I'm sorry. How long have you been CEO?
    Mr. VALENZUELA. Since March of this year. Prior to that, prior to six years, I was chief operating officer.
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    Chairman NEY. Who was the previous?
    Mr. VALENZUELA. There have been two prior CEOs. The original CEO was Robert Kemp. He was the initial CEO from approximately June of '96 until about late 1999, and then the—we had an interim CEO for about six months in the form of a board member, Linda Griego, and then in February of 2000, the board appointed William Chu as a CEO who served as CEO until March of this year. He's gone to private industry.
    Chairman NEY. Thank you.
    Mr. VALENZUELA. And your question was?
    Chairman NEY. The question I had is: Who—well, I'd gotten to the issue of monitoring, and what I wanted to know: Is there's a certain amount of autonomy between the City and the county, say, that they do have a plan that they review. On a daily basis, as you all were operating the bank, how or do you or when do you report to the City and County and in what manner? Is it just reporting, or are they involved anyway in the decision making process?
    Mr. VALENZUELA. Neither the County nor the City were involved in the decision making by the bank in terms of which loans or investments they were to make or approve. That authority rested with the Board of Directors and credit committee of the Board of Directors.
    Chairman NEY. Okay. Which comes to the point that these are government minds that come down: Any decisions made at the end of the day, who was the bank accountable to? Just the autonomy agency of the board? I mean, was there any accountability to the City and County?
    Mr. VALENZUELA. Well, each year I think as—I think as Mr. Graves indicated, each year the bank submitted under the term of the comprehensive agreement in October, an annual business plan to both the City and the county with copies to HUD, they would outline what the expected loan activity and investment activity was for that particular year.
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    And that—those business plans were—were reviewed and approved by the city and County, and while they didn't identify specific loans, companies or that we would be making specific loans to, it did identify the range of dollars that would be made to small businesses to microloans to the venture capital program.
    We also work closely with the county, the City, and HUD used to participate as a stakeholder as well in oversight committees that would meet on at least a quarterly basis wherein we would report and the county, City and HUD would sit in on these meetings to listen in on the performance of the portfolio, the performance of the achievement of our business plan day and other activities.
    We also reported on a quarterly basis to the City, County and HUD on our progress toward job creation with a detailed report showing how our borrowers, investees are doing with their job creation goals, jobs to date and some of the remedial actions that we would undertake in order to improve performance.
    Chairman NEY. Congresswoman Waters has some questions, so I want to ask one final question.
    When you talked about the—Mr. Sausedo talked about the analysis or about the jobs and the money spent, of the successful loans, is there a breakdown or an analysis of how much money was spent to create what job—was it 35,000 per job, 10,000 per job—is there some kind of average, number one, did that take into account, of course, the loans that didn't make it that were still funded that a person didn't get a job out of, but of the successful ones, was there a dollar figure per job that can be available out there?
    Mr. VALENZUELA. That number is available. We're—we're—the county and the city required that we have quarterly compliance reviews that are conducted by an outside audit firm as well as quarterly financial reviews which are conducted by the same audit firm, and one of the evaluations that they conduct—and I can make that available, I don't have that information with me—is they look at that standard which, I believe, under the Federal regulations is one to 50,000 and—one to 35 for the bank. I think it's one to 50,000 in general. We have that information and can make it available to you.
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    Chairman NEY. I just want to—make one statement. We'll move on to the gentlewoman from California. It seems to me and this is something of importance to us because, you know, when you're in Washington, you're voting I'm all for local control. I'm a preacher of the legislature and you serve on the legislature also. I'm all for local control, but then if there's not a check and balance or an assessment or something, we can't just say, ''Well, we're trying to help poor people.'' It doesn't actually overall do that, not because it was intentional, just because of a series of problems we represented. But then as we tried to support problems that become more difficult here or in Idaho or Ohio or larger or smaller places because it's more difficult to support them. People say, ''Well, how effective was it?''.
    Also, one thing that's unclear to me—and I'll ask you right now—one thing that's unclear to me as you take your next step, was this, the whole request of money and the bank all geared towards helping distressed area and now as you recross this—I shouldn't say you, as this is reconstituted, is it really going to help the distressed areas, or is it going to go somewhere else where it really wasn't meant to be? I have a County at home right now, we're at 13 percent unemployment. It's horrific. We were at 17, but now we went to 13. I had a County that was 26 percent official unemployment, which was depression era on unemployment. As we went to help those counties who needed a wide variety of support, I think we had to get away from this generic, ''Well, we're helping this area,'' and all of a sudden, the money comes in; and we create a small factory, but nobody in that County works in the factory. That's a problem.
    You know, ''Well, gee, this County adjoining it, if we help that County, those individuals that need that job are going to work there,'' but then in actuality, they didn't. And we had a, you know, major corporation of Honda. I just want to give a estimate of the $43 million to, they specifically would not interview anybody from my zip code. I mean, this is a fact. Of course, we didn't testify. I voted on that Honda loan, too, when I was in legislature. I just threw out there as this is all reconstituted, I just think that, first, you have to be careful of how you do it.
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    Mr. SAUSEDO. Absolutely, Chairman Ney. I'm three years into the bank. When I was brought here, I was looking, trying to find innovative ways to make our borrowers successful. For example, the stakeholders are the City, County and the feds. If there's something we can do with the procurement to give these people contracts to pay us back, that was one of the things we needed to discuss that was left out. This was an experiment, I think, that we all have the benefit of hindsight and looking at and saying, ''Well, we probably shouldn't have looked at it this way, or we could have done it that way'' or given certain resources; and you're right, I mean, we have to target the areas, but some of the areas—for example, when we start looking at employment law, can we legitimately prevent someone from getting a job from someone who got a loan from us and not be in violation of labor law because they have to meet a specific criteria.
    There are a lot of unanswered questions. But what I don't want to miss here is that there is a significant lesson learned here, and that is that with an entity like LACDB, what we can do is take the bureaucracy out of deploying money to businesses that need it immediately. And there are other institutions out there—I named one—but if there was the right coalition because what I don't want to see as a citizen is, to be very frank, which is take a hundred million, 50 million or whatever, put it in the hands of CDB and say, ''Do the right thing.''.
    Chairman NEY. That's my—and it's going to take the will of what we call political or elected, and I have to be in preparation, and for the record not in the soft light of day, or we are going to shut the lamp off, if you know what I mean.
    Mr. SAUSEDO. Right.
    Chairman NEY. I'll just mention that I think there's got to be a lot of communication out there.
    Mr. SAUSEDO. Absolutely. What we will tell you in short, is that this board—you can probably hear a little bit ever anger in my voice. And where that comes from is the Board of Directors on this bank are some very savvy folks, some of you know Professor Gene Grigby, who has now transitioned off the board. Rob Amens, Far East National Bank, and—just to name a couple notables. Denise Fairchild, these are people that are critical thinkers that analyze policy that understand business and that came here to do good.
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    We spent the last three years putting out fires, and it's a shame because the last three years, we weren't able to serve the community in the way that it needed to be served. What we were able to do is serve as a buffer to protect the City. And we don't get acknowledged for that, and I take issue with it.
    I take issue when I hear statements like, ''The bank did this wrong,'' but then when you call the City council members to sit down when they're newly elected to say, ''Let me share with you where we've been and where we're going'' and you don't get a return phone call, and you walk the halls on your own time twice to do it, there's a disconnect; and the disconnect with any organization is when there's lack of communication, that is ultimately going to lead to failure. And we cannot not, not let that happen again.
    Chairman NEY. Congresswoman?
    Ms. WATERS. Okay. This has been—this is—I'm going to try and have questions for each of you.
    Mr. Garcetti is an elected official. I've got to ask some questions that may be a little bit uncomfortable.
    Mr. GARCETTI. Please do.
    Ms. WATERS. But I was drawn into making this work kind of a priority despite all the issues that we're confronted with. There's Medi-Care reform and all of that. I said I got to pay attention to CDBG Section 108 and the development bank and how it all works.
    And the reason that I was made to focus on this is several things happened: One was I was sitting with angry young people at one time who said, ''The Federal Government doesn't give us any money.'' ''If it wasn't for my City councilman, I wouldn't get any funding.'' He was talking about Federal money. He was talking about CDBG, and I thought about it; and I said, ''Well, you know, there is a lack of understanding about where this money comes from.''.
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    Now, for people like me who are tagged as old taxing spare liberals who push for money to be sent to my community, I don't like it when somebody says you don't spend any money. Then, I began to pay attention to campaign brochures where some local elected officials were politicking with the money, I'm leaving some blood on the floor here in Congress.
    This is what I did as a City councilman. I developed a shopping center. I did this. I did that, whole long list of it. No mention that that money was Federal money. That it was CDBG or Section 108, any of that. And then at one point in time, when Los Angeles had not spent its money in a timely fashion, $25,000 checks kind of showed up. Okay.
    They were pulled out the back of somebodies pocket and they just started passing them out, and that was CDBG money. So I guess I'm saying this because you kind of mention, you know, it used to be politicize and it's really not so political, and these decisions are made because we have this one reform outreach and response to requests for proposal and on and on and on.
    I'm concerned about all of that, and I'm trying to work with this committee and my delegation to figure out how we straighten all that out. I have a great respect for what was described earlier today about the flexibility that you have in City government to be able to target and identify, set some priorities about what needs to be funded, and I'd like to see that.
    But you know, because I know the community so well and know who's connected, I know who gets funded. I know how it works. This is what I spend my life doing. I know this stuff. Then I figure I got to help straighten this out. So having said that, and I'd asked Mr. Graves this question before, and Mr. Graves, when we talked, kind of gave me a little bit of idea about how you—I asked where is the discretion?
    After all is said and done and you got the CUP and you got the neighborhood councils and all of is that, where is the discretion, and how do we get to write $25,000 checks and pass them out? Where does that come from?
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    Mr. GARCETTI. Well, I think—you ready for me to respond?
    Ms. WATERS. Yeah.
    Mr. GARCETTI. Okay. I think you hit the nail on the head, and I 100 percent agree. I think that passing out on the last round $25,000 checks was the gasping cough of a dying system. Because that was that one time in which there was that surplus, and as Chair, I mean, you can appreciate this when a colleague comes to you and says, ''Help me out, I got this project. I have this, I have that.'' There really is not much to go around anymore.
    So we are looking at community base in terms of discretionary money. There really, we have a list probably five times as long as the money that our members request and that wasn't the case in the past. When Mike Menendez, my predecessor, was there, he was sharing stories with me that he had absolute responsibility and somebody come to me, ''Oh, okay. This isn't spending out. Let's move that. We funded that for five years, and we should have funded it for one,'' and we don't have that. I mean, my position's a lot less powerful, but I'm glad because that means that some of that is being devolved. And I didn't mean to paint too rosy a picture that we're there yet. I guess it's about the intent that it's really permeating the system right now. For me, that's different. It was because we had the crisis of spending down from that 20.5 to the legal limit there was a bunch of checks that just went out the door. And I for one, want to praise the Federal government—I always publicly thank the Federal government and let my constituents know this is Federal money. When I say that we have a hundred million dollar housing trust fund, most of that is our money going out where our money is about $5 million of that is from CDBG money, so we're always trying to leverage that, and I think it is critical for that to be closed. Now——
    Ms. WATERS. Well, go ahead.
    Mr. GARCETTI. The flip side, though, and I respect very much what Mr. Sausedo was saying and I was one of those council members who sat down immediately and did get briefed on the bank, but I understand the lack of interest. It's something that I've tried to get my colleagues to show some interest in, too, and it's been a mixture of, ''Oh, I don't want to be touched by that.''.
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    Because of that perception, sometimes it's unfair to talk about the bank, but nobody wanted to engage in the political will on this when they saw that it's already out the door. But that said, if we just did a system where it only went to the community which I, too, philosophically favor, we get that oversight problem.
    We have to figure out a thing where if the CDD has failed in the past and certainly I think there's blame with the department as well as with the bank, we have to shoulder that as well. So just to say that I'd be worried CDD take this money and run with it, we have to have a CDD that can take that money and run with it.
    We have no choice in our system but to have a system that works, so the internal reforms that Mr. Sausedo was talking about is something that we're working on just as much from the inside to make sure that happens, but I was not mincing words when I said the leadership term and that attitude is permeating places immeasurably different.
    And I think it's got community members that would begin to wash out toward the community tried to do but we only have gone through one round since those changes have been made.
    Ms. WATERS. Okay. And I'd just like to mention, too, while my mind was on the description of this money or lack of description of where this money comes from. We are pleased about the teams that are put together to do some of this development, whether it is a big private developer and a community group or organization, et cetera, et cetera.
    I've seen some of the private developers who wouldn't walk foot into the community without all this gap financing, who go around touting what they have done for the community, and they don't seem to know where the money comes from. When in fact, those developments would never take place without Section 108 and certain gap financing. So I'm looking at that also in terms of developers because in the final analysis, if we know these are business deals, but we don't mind people making money, but I don't want to see some of the well-healed developers who make these—put together these teams walk away beating their chest about what they did for the community without recognizing that this was a team effort with the Federal and the local government playing an important role. So we're going to be looking at how we can bring some reality to some of this. We're not out to change the mission of—of CDBG, but I think we do have to have some new definitions and I just——
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    Mr. GARCETTI. Absolutely. In fact, if I could make one suggestion. It's not about the name Maxine Waters' name out there or whoever's name not on there. But I think whenever we have those projects and we have those signs that are out there so people know where their tax dollars are going, whether it's Federal or whatever. I will make an instruction of the community redevelopment, that they make sure that Federal moniker's on there, too, because this is made possible by Federal Section 108, that this is the rep for the area, that these are people who are fighting on the floor because I think that is critical for that credit to be out there, too.
    Ms. WATERS. Yes, I think that, too. I've never seen that on a site. That's interesting.
    Mr. GARCETTI. You had my word that I will make that direction to the department and try to see if my colleagues will come on board with that, too.
    Ms. WATERS. We'll have some directions for you also.
    Mr. GARCETTI. Good. Thank you.
    Ms. WATERS. Thank you. I thank you for volunteering that.
    Mr. Graves, why should we support the idea that CDD should have this $196 million, be it in a $50 million allocation or further and whatever, and why shouldn't we insist that the money go into the areas that were intended in the supplemental zone; and could this not be better done by one of these CDFI organizations or take, for example, some of our local banks that are really Community Development Banks? I see small banks, we have them all over. That's what they do. They're in the business to lend money. Now, I know that you said that this Community Development Bank ended up being the bank of last resort. And they had to take businesses to lend money to that the banks and turned down. Now in my mind, that's not so bad. Let me tell you why.
    The banks haven't had a clue for what to do with minority businesses, start-up businesses and never supplied any real substantial capital. This has been a struggle that I've been in for years. So they've turned out a whole lot of people who, in fact, should be given loans and who can pay those loans back. So I'm not disturbed by being the bank of last resort.
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    When I was in the State of California and we had our small business development operation that the banks did guarantee those loans, that was the same kind of idea, too, that we were kind off of the bank of last resort. And that bank discovered ways by which to evaluate the applicants in ways that traditional banks don't always do.
    First of all, looking for the ability to repay. But also, doing some of the kinds of things that have never been done particularly for poor communities and minority communities before. We have people who have—could go out and get signed contracts for goods or services that they could negotiate at any traditional bank, but it's done in nonpoor or nonminority communities where, you know, you've got a whole list of people who say, ''You make this product. I will buy. This is what I need. I'll sign the contract.'' Business does not have money to get the inventory. Can't get it from a traditional bank, but I would expect a Community Development Bank to be able to look at that just a little bit differently, look at the history of the person, look at the entrepreneurial spirit of the person, look to see, ''Well, maybe they have a little something in collateral someplace where they could help out with this,'' put together a package where maybe they could get the family or somebody else involved in what would be some kind of good faith money to show that, you know, you're really struggling for this startup capital and then make it work.
    Now—so I—I'm not again shocked that traditional banks turn people down, and you become the bank of last resort. But what makes a civil servant or a political appointee a better judge than some of the Community Development Banks? We're funding through the community development financial institutions, some banks that are identified as community to do this very work.
    Why can't we go over there and look at what is it, One United or whatever that bank is, that consolidated with family and founders and all of that, these aggressive, young community-minded spirited people. Why can't we put that money into those banks and let them do this work and just wipe your hands of that? Get rid—you don't need that. Why do you want that?
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    Mr. GRAVES. Well, now you made me stop and think about it. Actually, at one level, there is no reason not to consider that. When I was in San Francisco, the redevelopment agency, we worked with a couple of banks to use tax increment funds as loan loss reserve in exchange for their commitment to make loans in our targeted areas.
    There are a lot of ways you can use a bank and not spend a lot of money, by assuming some of the risk that they otherwise wouldn't take. It's not that what CDD would be doing is that much different than what we're doing already.
    As I pointed out, CDD operates the 108 loan program outside the bank now, and I think that our folks have a pretty good track record in terms of the creativity of using our funds to fill in those gaps that you're referring to. At this point, I'm not ruling out any alternative for the use of those funds. I do know that the initial 50 million is a relatively small amount compared to what we're already doing with the same 108 funds.
    With regard to the larger amount, then we probably would need to bring in some different kinds of partners, but I would very definitely prefer to go with an existing lending institution and give them some incentive to take a second look at some of the applicants that——
    Ms. WATERS. Would you take a very close look at that.
    Mr. GRAVES. Sure.
    Ms. WATERS. Because I think that that's something that ought to be considered. While I have both of you.
    Mr. Garcetti and Mr. Graves, there's a pile of money in CDBG that's being used for certain kind of City infrastructure services that I wonder about—code enforcement, why are we using CDBG to do code enforced?
    Mr. GARCETTI. This is for housing, substandard housing for people—kids who have lead paint poisoning. We're using it to make sure that people aren't living—I think it's 15 percent of all of our housing stock qualifies as slum housing, and it's to make sure that we can supplement and everything is in a three-year cycle so that every piece of housing in this city was getting inspected just once every three years.
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    Ms. WATERS. Don't we have some special funding for—Somewhere?
    Mr. GARCETTI. We have some from the State that we've gotten. It wasn't—we found that it is insufficient.
    Ms. WATERS. Okay.
    Mr. GARCETTI. So we wanted to make sure—we had kids, you know, even as a candidate, I remember going to a couple buildings. You could see the kids with gray faces, stunted growth and with that, it wasn't nearly enough when you look at 15 percent of the City of Los Angeles.
    Ms. WATERS. I see.
    Mr. GARCETTI. They had not begun to even look at that, so that was the code enforcement. Also, City infrastructure we supplement other areas, sidewalk repair and other things and census tracks, poverty census tracks, districts like yours and mine.
    Ms. WATERS. Why don't we pay for that with regular City money—sidewalk repair?
    Mr. GARCETTI. We do as well. Say that's split up by 15 districts equally, more or less, then those districts that have greater need are supplemented even more with CDBG so that those districts that are represented are getting more than, say an area where there's not poverty, although we do that as a City anyway, too, that supplements that further.
    Ms. WATERS. I have some questions about that. I'll continue to think about that.
    Mr. GARCETTI. That was cut by half the——
    Ms. WATERS. You did reduce there.
    Mr. GARCETTI. Yeah.
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    Ms. WATERS. Because while you're asking for social service money, it is identified that this is high priority, don't tell me you spend it on sidewalks.
    Mr. GARCETTI. Right. Well——
    Ms. WATERS. Because I expect the City, I expect the City, one of the basic responsibilities of the City is to trim trees and clean alleys and to fix sidewalks.
    Mr. GARCETTI. Sidewalks are not a legal responsibility of the city, so the City wasn't doing them at all up to about 15 years—10 years, at all.
    Ms. WATERS. Is that right?
    Mr. GARCETTI. At all.
    Ms. WATERS. And for the homeowner?
    Mr. GARCETTI. And for the homeowner. We're looking at systems where maybe we share that cost again. We'll go back, I know we're not testifying about sidewalks today. But it's interesting that we never had done that at all. And it was precisely because some of those areas that we're trying to deal with blight, so how can we bring economic development if we have the older blocks, the older sidewalks, older part of it?
    Ms. WATERS. Where'd you get the hundred million dollars done from the housing trust funds?
    Mr. GARCETTI. Mostly a combination of sources. Community redevelopment agency tax increment money, from our general fund which was pretty dramatic considering the last two years has been our worst budget years in a decade. We have monies to be gotten from tax reform, there are tax slough laws that weren't paying any City business tax and so additional monies from that, were dedicated for housing trust funds, and some monies from surplus property sales that the City owned.
    Ms. WATERS. But none of the CDBG——
    Mr. GARCETTI. On top of the balance of $5 million——
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    Ms. WATERS. Five?
    Mr. GARCETTI. Yeah, about 5 million.
    Ms. WATERS. 5 million in CDBG——
    Mr. GARCETTI. With the exception of the housing trust fund.
    Ms. WATERS. A hundred million is a nice amount to package. If you can package 95 million, you can package $100 million and leave that 5 million in CDBG alone.
    Mr. GARCETTI. Well, here's where it came from. Under our previous mayor, about—I don't know, a lot of the money consolidated families for monies used to go to housing was moved away in housing. And so this was found as a commitment because housing had basically been not a priority under the previous administration. So this was a way, whether or not it was through the housing trust fund or whether it was just direct dollars into housing subsidies, we thought it was to rewrite that wrong.
    Ms. WATERS. Oh, don't worry about that.
    We need that 5 million in CDBG for these nonprofit organizations that you want us to continue to support the waiver on, and I can understand what you're saying.
    Mr. GARCETTI. That wasn't coming from that waiver piece, though. Yeah, that was coming from——
    Ms. WATERS. I know, from the regular CDBG.
    Mr. GARCETTI. Okay.
    Ms. WATERS. Yeah, I'd like to encourage you to not to use that as a symptom. Give the people the money because—like I said, if you can package, 95—if you can package, you know, a hundred, we need that so, so, very badly.
    Mr. GARCETTI. I'm sorry. I would be corrected. Of the original plan by the mayor was 5 million, but it's only 500,000.
    Ms. WATERS. We can take that back, too. Okay.
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    Now, before I get to Mr. Sausedo, Mr. Graves, this proposed arrangement for the joint venture company, to divest the City this portfolio and move its management fee over to the new entity that may buy, it sounds to me as if the management company would continue to be able to manage the portfolio, they would just change hats and who's paying for it.
    But that's not a high priority of ours to make sure that the management company stays in business. Your priority is to see what you have in this portfolio and how you can get back the most money that you can get back from this portfolio.
    Now, some of the businesses are performing; some are not performing. I don't know what the total assessment is, but could you look at that very carefully and decide whether or not the way that it's been described to us is the way you really want to go with that, and whether or not—you don't have anymore—you don't have any management by anymore organizations as FAME or any other of the organizations still managing those loans that they made?
    Mr. SAUSEDO. No, FAME actually—there was a breakdown—there was a $5 million allocation for FAME to do similar type work in venture capital. There were no deals brought to the table, and so we subsequently——
    Ms. WATERS. Took that 5 million back?
    Mr. SAUSEDO. Right.
    Ms. WATERS. And you had one other entity——
    Mr. SAUSEDO. Which what associated with FAME which was Hancock Partners.
    Ms. WATERS. Hancock Partners.
    Mr. SAUSEDO. Right.
    Ms. WATERS. So all that 5 million is back into the bank.
    Mr. SAUSEDO. Right.
    Ms. WATERS. So all that you have now is this portfolio that's managed by, what is it, Zone——
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    Mr. SAUSEDO. Zone Ventures.
    Ms. WATERS.——Zone Ventures that you have to be concerned about.
    Mr. SAUSEDO. Yes, and the short of it is—let me give you a little background.
    Ms. WATERS. Yes.
    Mr. SAUSEDO. Because it's important to note history.
    Ms. WATERS. Yes.
    Mr. SAUSEDO. In the fall of 2000, the wonderful ''L.A. Times'' reporter—and I do say that sarcastically—wrote an article about the Zone Ventures portfolio—why is the City involved in venture capital? It's sent a flurry in City hall of some council people, not all, but some influential council folks, I should say at the time, to include staff and the net result of that was, ''You guys need to get out of this, and you need to do it now.''.
    Well, the Board of Directors took the position that, ''We were brought here to make prudent financial decisions. If we walk away from the portfolio, we have a contractual obligation to pay all venture fee, et cetera, et cetera, you will lose any potential up side. We will not make a poor financial decision.''.
    So after some creative thinking, we said, ''How can we make a good financial decision and political decision which sometimes, more often than not, is an oxymoron and do that in a way that the City can win and get them most or best paid back, if you would, from that.''.
    So we came up with a strategy as a board to identify a third-party entity that would take on our responsibilities, and part of that $35 million commitment is about $5 million in fees over the next several years due to the general partner, Zone Ventures.
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    So one of the things we need to do is relieve ourselves from that responsibility. During that time we had about 1.5 million in follow-on investment, meaning if there's a capital call, we have to participate in order not to be what's called ''deluded'' or lose some of our investors. One of the things that we did, we engaged a technology firm to come in and not do a financial audit of the company, but to come in say, ''Look, of what we have, are these companies that are worth continuing to invest in, are we getting our money's worth in Zone Ventures.''
    Okay. So that if we're not, let me take a different tack. At the end of that study, we found that we some funds in the group. We also discovered that for them to—one of the main companies, for them to go public, they're probably going to need about $15 to $20 million in a capital call in the future, and as whether some of the other companies. The next question is: Will we be in a position to do that and as——
    Chairman NEY. Can you—I'm sorry, hold your thought for a second because we're running out of paper, I'm told. So just hold that thought about the next question.
    Mr. SAUSEDO. Fair enough.
    Mr. SAUSEDO. The next question was: Will we have the financial resources to participate in this long term? The answer's no. And you know, it's the will of the City in a position to do so? How will they do so? They're going to pull money from the general fund, et cetera. With the caveat over our head, get out of this deal.
    We then ask ourselves to go out and identify on a performance-based agreement some investors that would be willing to take over the investment from us and then take over our capital commitment, and as part of that, they would be taking on future rounds, taking on future rounds of investment and the remaining fee arrangement.
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    We did talk to a number of other people that potentially, and no one wanted to touch it at the time. And now that we've been in negotiations with—actually, there were two investors at this time: One was MR Bill which was one of the largest bond companies in the City at the time and a local developer Bedford Group who was interested in taking on and stayed in the process.
    MR Bill unfortunately lost their taste to stay in the bill because it was being too bureaucratic so what I thought would be a very simple process. So—so we think that the board had voted on moving forward on this, because we don't feel that we have the venue capital to stay in the game, if you would, if the City makes a decision to stay in the game and they have some other financial resource to do so, then that's a good call, because I do believe that some of the companies in the portfolio are good, but when you're looking at issues like police and fire being challenged by the shortfalls in the budget kind of a difficult call to make.
    So that's why—that's the history behind us looking at selling off or—or divesting, if you would, the portfolio while having some upside in the future should a future event occur mark the conditions allowed more.
    Ms. WATERS. Well, I think that—that certainly should be revisited. For a number of reasons. It seems to me—and I don't know if you've done an assessment of that portfolio—there is some document that talks about each of those companies, the assets, everything, the management, everything, because it seems to me that venture capitalists are not magicians anymore than anybody else who manage monies or companies.
    You make sound decisions based on the information and the facts, and you can determine which companies are going to hold and which ones are going to fold. And it seems to me that rather than a management company, you know, managing that portfolio, that if it's all going to be drawn back in to someplace, that all be vested in that someplace to make some decisions about rather than keeping the management company involved at this point.
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    Mr. SAUSEDO. Unfortunately, we don't have—I concur with you 100 percent. We don't have the luxury of making that decision because there's a contractual obligation.
    Ms. WATERS. I see. How long does the contract run?
    Mr. VALENZUELA. July of '08.
    Ms. WATERS. July of what?
    Mr. VALENZUELA. July of 2008.
    Ms. WATERS. Who made that deal?
    Mr. VALENZUELA. It's fairly standard. I mean, limited partners——
    Ms. WATERS. Really?
    Mr. VALENZUELA. I mean, limited partners generally have a ten-year life span, and in many cases additional options to extend at the option of the general partner with the consent limited partners. In this particular case, I just want to add to the complexity of the matter: Los Angeles Community Bank is the sole limited partner.
    So we're the 99 percent financial interest of the limited partner with Zone Ventures having the 1 percent stake which is fairly common. But we are not in many cases the investments that we have through Zone Ventures and the portfolio companies, there are numerous other investors and so our ability to—well, first of all, we have limited, if any, ability to control the investments were limited, and—and so we take recommendations from the general partner, we review them, we—we try to evaluate, make determinations as to whether the investments will meet national objectives and other criteria that we're subject to, and the portfolio has grown and matured and it's gone through its ''I'' curve and ''S'' curve and beyond.
    We've seen material deterioration and the value of the portfolio very similar to what's occurred in other portfolios with similar or like kind investments. And so the decision process and the bank and the one that we've been communicating and sitting on, how do we preserve, maximize the recovery from this as opposed to walking away and taking a deep loss and worse yet, we think that the proposal that has been approved by the board and approved by the city and is now being discussed with HUD to get their thoughts on it, is the best available to us at the present time.
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    We're not sure—and I think, I'm not sure if they're prepared to comment, but I know the City hired a consultant to do kind of an evaluation or short valuation of the portfolio to evaluate the terms and come up with some additional comfort, but we believe that is on behalf of the bank and for the businesses, this is the best possible proposal of this portfolio that's been put forth that we've seen that preserves the opportunity to participate in the upside, and we do believe that there will be an upside for at least one or two of the other——
    Ms. WATERS. Well, I forgot about the complication of other investors. I was not taking that into consideration when this was described. That complicates the matter somewhat. Let me move on to Mr. Carlos Jackson.
    Mr. Jackson, we know about the RFP process and the City of L.A. And we know about the hearings, and we've heard the CUP described and the neighborhood council is placed on role and all of that. And whether or not that is fully operational or realized, it is a kind of an oversight and involvement that certainly everybody supports it should be done. It should be worked at so that—in fact, it is real. Now, at the County, you don't have an RFP process?
    Mr. JACKSON. For public services? We talking about public services?
    Ms. WATERS. Well, you tell me.
    Mr. JACKSON. In the area of housing, we do have RFPs. In the area of economic development and limited to what we have in the two Supervisorial districts is working in targeted communities, and basically it's a commercial business revitalization or business loans and solid improvements so really owner driven in that sense. In terms of our housing rehab program and income driven which is equitable driven, we can come forward.
    Ms. WATERS. Let's back up so you and I can talk about the same thing. You get $38 million in CDBG money. How do you disburse it? How did you dispense it?
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    Mr. JACKSON. Being in L.A. County for 48 cities involved, and since 1975, the board has adopted a policy for distribution which is using the same formula that HUD uses for the entire jurisdiction, population of current housing and people in poverty. We run the numbers for the 48 cities, so it's very objective in terms——
    Ms. WATERS. Okay.
    Mr. JACKSON. The cities are responsible for developing their program according to the guidelines and requirements of CDBG. And they will do a variety of things. For the unincorporated areas, I work with each of the Supervisors, there's five of them, and predominantly, that money goes into housing.
    Ms. WATERS. Wait just a minute. I'm talking about a process right now.
    Mr. JACKSON. That's——
    Ms. WATERS. You have a pot of money. Do you just divide it up between the five Supervisors?
    Mr. JACKSON. No, it's done again by formula. Same formula we use with the cities, we use for the Supervisorial districts. So——
    Ms. WATERS. How do you do that?
    Mr. JACKSON. Using the three factors again: Housing, population and poverty. We have the census information for the unincorporated areas, and that yields a certain number for each Supervisor. One Supervisor whose district's predominantly in the City of Los Angeles may get 150,000. To Supervisor Burke and to Supervisor Molina, we get the bulk, they have the highest level of poverty or low income housing. And then, we—for the cities, they do it, you know, according to their particular needs.
    Ms. WATERS. Okay. So you've got this formula that's synonymous with the formula that you use to disburse the money to the cities which is the same formula we kind of use in the Fed that divert to the States. We know that. So now you use your formula and we each have this pile of money. How do we spend it?
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    Mr. JACKSON. Each of the—I''m going to focus on the unincorporated areas because, again, for the 48 cities, if I can, as an example mention South El Monte, that City of South El Monte would get a——
    Ms. WATERS. Just because his relatives are in South El Monte.
    Mr. JACKSON. I doubt it. But they've been in a program the entire time. South El Monte would get an allocation stating $200,000.
    Ms. WATERS. Okay.
    Mr. JACKSON. They will work with their council and the staff and the community there as to what is pertinent and important to them. We do not interfere with their programs select in the sense. We allow them to develop their programs, provided it meets all the requirements.
    For the unincorporated areas, it's different. Each of the districts, we work with the Supervisor and the staff and our—and we also conduct community meetings. Like I mentioned earlier, we have 16 communities that we go around and listen to the communities. Unfortunately, when you look at the numbers allocated, we get $30 million, it sounds like a lot. But for the unincorporated areas, it's only $16 million.
    Ms. WATERS. That's not a lot of money. That's very little money.
    Mr. JACKSON. That's the reason for——
    Ms. WATERS. But they do just kind of give it to whoever they want to.
    Mr. JACKSON. Not—on the public service side. But not on the—not on the other targeted for a particular program. And it's really like, say, for instance, in one district we'd have certain streets that are earmarked for community—commercial business revitalization. It's really the participant's willingness to participate in that program, a business. If they wanted to do it for sign improvement. For housing rehab, it's the same story. We will publicize and market the program, but it's a voluntary program. We can't force anybody to take out a loan or to accept it. In some cases, unfortunately, we have gone and walked the neighborhood and offered a grant. People still fear Government, fear the paperwork.
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    Ms. WATERS. So let's get back to process. For your unincorporated areas, you have 48 cities. In that, you have the City of Hawthorne? You have Hawthorne?
    Mr. JACKSON. It's an entirely different jurisdiction.
    Ms. WATERS. Give me—Lawndale?
    Mr. JACKSON. Lawndale is a participating City in our program.
    Ms. WATERS. They get a set amount of money based on this formula, and they do what they want to do with it, but they have some process, some process, but they spend that money.
    Mr. JACKSON. Right.
    Ms. WATERS. You have the unincorporated areas, and in your unincorporated areas, you have should have some targets that you'd like to see the money spent on. The money is basically divided up between the Supervisors.
    Mr. JACKSON. By formula.
    Ms. WATERS. By something, formula. For the unincorporated——
    Mr. JACKSON. Same formula we use for the cities, everything's above board on that.
    Ms. WATERS. And people apply for the money. People ask for the money. You have community booster organizations who would like to see—see some funding and maybe small amounts of money because you don't have that much. And so you look at it and say, even eeni-meeni-mini-mo, or I know this person. This is a good program, something. You do something like that.
    Mr. JACKSON. In one program home, which you know we can buy with our block grant.
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    Ms. WATERS. Right.
    Mr. JACKSON. Home is an open RFP.
    Ms. WATERS. Oh, okay. But that's not the money that was included in 38 million.
    Mr. JACKSON. No, just——
    Ms. WATERS. I want to talk about 38 million.
    Mr. JACKSON. Under the public services category.
    Ms. WATERS. Uh-huh.
    Mr. JACKSON. Under the RFP program, it might be money targeted for the redevelopment area, small redevelopment area, Willowbrook, say, for instance, and we have certain things we're going to do there. But the area that we're—I think we're talking about the public service category, this is the—the dollars that Supervisors as well as the County we look at in terms for social services.
    Ms. WATERS. Look, I'm not——
    Mr. JACKSON. No.
    Ms. WATERS.——saying you shouldn't do it. But I don't want you to labor at this too hard. There is no RFP process for those dollars.
    Mr. JACKSON. I didn't say there was an RFP.
    Ms. WATERS. I know. I know. You have a hard time getting me. I'm not beating you up about it. I just—I have to understand it before I have to start talking about making law to try and deal with this. They have the flexibility to fund programs that they'd like.
    Mr. JACKSON. That's right.
    Ms. WATERS. That's right. That's okay. Now, you mentioned something that I did not know about—the monies that you get from something to do with the city of Industry. What is that?
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    Mr. JACKSON. Back in early 1990, '91, the City of Industry had specialization set aside at the state level. For City of Industry, they're set aside money for a tax increment for the redevelopment areas, 20 percent set aside. They claimed and the legislature approved it that there was no need for housing within the City of Industry, and it reverted to the L.A. County Housing Authority.
    Ms. WATERS. Great.
    Mr. JACKSON. Our agreement with the city of Industry was that we would do it by housing program, without any input from the—in terms of decision making, and so since then, since 1997 because there was a lot of litigation on that particular matter, we've been using the money to elaborate for homeownership, senior housing, special needs housing, and a few other ones, you know.
    Ms. WATERS. That's good. Now I know there was something about the City of Industry, and I remember some years ago when we found that there were elected officials who lived every place but the City of Industry who didn't have to worry about it because it was all commercial and industrial. That's okay. I'm glad that the county is the beneficiary of that. That's fine. But now let me ask you the same question I asked the City when I kind of talked to them about not using—maybe they should be using money for a certain kind of infrastructure, that maybe the money should be used for social service programs, et cetera. What—how much of that 38 million are you using for something like that, some kind of infrastructure, are you repairing rec and parks—park and rec, facilities with CDBG money?
    Mr. JACKSON. We do limited park improvements.
    Ms. WATERS. Why are you using CDBG money to do that?
    Mr. JACKSON. Well, the County itself has the park improvements.
    Ms. WATERS. Why don't you use some of that City of Industry money?
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    Mr. JACKSON. It's strictly for housing.
    Ms. WATERS. It was strictly for housing based on the legislature?
    Mr. JACKSON. Yeah.
    Ms. WATERS. The legis—Sacramento?
    Mr. JACKSON. No. In the redevelopment area, 20 percent of the tax increment monies that are collected is set aside for housing by law in any development area. That 20 percent is transferred over to and—us, and we have to use that more housing and no other purpose.
    Ms. WATERS. The tax increment cannot be used for any other purpose, even though when you're developing housing and considering the neighborhood or the environment which should include recreation, parks, all of that, you can't use any of that money for that?
    Mr. JACKSON. We do not receive the balance of the dollars that they—you know, the 80 percent—we're not using that. They keep that money. We're only receiving the 20 percent of the housing set aside. We're not receiving any other portion. That money's restricted to housing only.
    Ms. WATERS. And so tell me again, how much was your last—I mean, give me some idea of how much money that is, that the City of Industry tax increment?
    Mr. JACKSON. On an annual basis in July, we get maybe $11, $12 million.
    Ms. WATERS. You say housing——
    Mr. JACKSON. Strictly housing.
    Ms. WATERS. So what do you do with it? I mean, how do you spend it on housing?
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    Mr. JACKSON. The board of Supervisors adopted an allocation plans, and 50 percent went for affordable housing which is home ownership, multi-family housing and senior housing, three categories.
    Ms. WATERS. That's to the developer.
    Mr. JACKSON. It could be to nonprofit.
    Ms. WATERS. Computer down payments.
    Mr. JACKSON. Not that money. There's another half—the other half is special needs housing. It's housing, and it cannot be emergency housing. It has to be transitional.
    Ms. WATERS. So how do you use 50 percent of that 11 million. Give me some idea of how you use that for multi-family, for example.
    Mr. JACKSON. We have—we allocate money for helping them on acquisition, of property——
    Ms. WATERS. Developers.
    Mr. JACKSON. Right.
    Ms. WATERS. You give it to developers to do acquisition and land packaging in order to build multi-family housing.
    Mr. JACKSON. It's not just—well, again——
    Ms. WATERS. Profit on nonprofit.
    Mr. JACKSON. And that is strictly on an RFF process.
    Ms. WATERS. Okay. On an RFP process. Right, okay. And the other 50 percent, you do on special needs?
    Mr. JACKSON. Special needs housing.
    Ms. WATERS. Okay. You use any of this for homeless?
    Mr. JACKSON. If it's transitional housing. By law, we cannot do emergency housing under the redevelopment law.
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    Ms. WATERS. Okay. All right.
    Mr. JACKSON. So we do—again, we do domestic violence. A lot of our focus is emancipated youth that come out of foster care at 18.
    Ms. WATERS. You have a lot of focus on emancipated youth? What are you doing for them?
    Mr. JACKSON. This. We will develop transitional housing.
    Ms. WATERS. Where is it?
    Mr. JACKSON. Disbursed throughout the County.
    Ms. WATERS. We can't find any homes for people coming out of foster care.
    Mr. JACKSON. You have to be 21, and the need is tremendous.
    Ms. WATERS. Okay. Thank you.
    Mr. Chairman, you were very generous.
    Mr. GARCETTI. Just because of your line of questioning, I want wanted to give one—and I'll try to make a succinct argument for some of the more infrastructure-based things.
    Ms. WATERS. Okay.
    Mr. GARCETTI. I think all of us want to grant money to provide people with self-sufficiency——
    Ms. WATERS. Yes.
    Mr. GARCETTI.——and communities with self-sufficiency.
    Ms. WATERS. Yes.
    Mr. GARCETTI. It's really a lather. So when I think about where we spend the money as the City, first you have to have a safe community.
    Ms. WATERS. That's right.
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    Mr. GARCETTI. I represent an area, which in a 2-month period, 13 young people, 5 were taking drugs, in a similar district.
    Ms. WATERS. Sure.
    Mr. GARCETTI. We were able to take some block rent money and bring gang intervention folks, chased away at gunpoint. Within two months, they had 70 percent of the gang members positively enrolled in becoming forest fighters, just one example. The second step on the ladder is the infrastructure buildings so the community has some capacity.
    In Echo Park where I live, where there was gunshots just this weekend, we had an improvement project which had to do with sidewalks and trash cans and actually the facade of our businesses, things which gave the community pride, things like the City should be doing, but the City cannot similar afford to use those Federal dollars to get to the third step which is the delivering of services, the economic development projects, the community pool project.
    Ms. WATERS. Can you use Section 108 for infrastructure repair?
    Mr. GARCETTI. I don't know.
    Ms. WATERS. Who mentioned that? Who mentioned the City of Santa Fe to you?
    Mr. JACKSON. I did.
    Ms. WATERS. Did you tell any——
    Mr. JACKSON. No. That was economic development project where——
    Ms. WATERS. Where you had to do some cleanup where——
    Mr. JACKSON. Major cleanup.
    Mr. GARCETTI. And if you get all those pieces in place, then you have Federal money with which you will be able to provide self-sufficiency to some parts of communities and actually get the rest going and get the community going.
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    Ms. WATERS. Okay.
    Mr. GARCETTI. But I think that's the last round of actually being able to deliver services.
    Ms. WATERS. It may be, and it's not a lot of money, and I——
    Mr. GARCETTI. I hear you.
    Ms. WATERS. The City of responsibility.
    Mr. GARCETTI. Absolutely.
    Ms. WATERS. Now, having said all of that and—I'm finished Mr. Chairman.
    As we look at the possibility of the management of the bank by a financial institution, CDFI institution on bank or something, we would really like to keep in contact with you as you think this through.
    Mr. GARCETTI. Absolutely.
    Ms. WATERS. We think that's very important. The other thing I'd like to impress upon you is this: You talk about infrastructure, the sidewalks, the trees, the alleys, the poverty, the unemployment, buildings that are still boarded up, since the insurrection, I am going to have to really, really, really work—look very closely at what you talk about doing with that money, that 50 million and the 146 million because we know politically it's very hard oftentimes to direct the money where it should go because everybody wants a piece.
    You know, it's just a political reality, but we have to resist that. We can't continue to look at the epicenter of the problem and divert the resources that were intended for that epicenter away from there. I think that most of us have been very, very generous in our lack of criticism about this Condit thing, but we're in a deficit situation in the Federal government, the state's in a deficit situation.
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    So this is precious money. I mean, this is precious money. And I would like very much to see it go where it was intended, and so I'll stay on top of that; and.
    Mr. Sausedo, where I don't agree with everything, I think you've made some very valid points about the bank, and if you're not to do it, what you think ought to be done in some of the statistics that you have cited have been riveting and forces us to have to focus on what happened with this very precious money that's before us.
    Thank you very much.
    Chairman NEY. Thank you. I would also note to the witness's first and second and also in vase of the third panel, some members of the subcommittee may have some questions that they would like to ask, keep the hearing open for 30 days so their questions may be asked in writing potentially.
    Thank you for a very interesting panel.
    We'll take a five-minute recess.
    Chairman NEY. We'll begin your testimony.
    Ms. GAY. Thank you. Good afternoon, subcommittee, ranking Member Ney and ranking Member Waters. It's a pleasure to be here. Welcome to Los Angeles.
    Just a quick word about NHS, and since this is a field hearing, we'll focus our comments on what CDBG's been helping us do here in Los Angeles. LANHS is 18 years old. We've served over 1.8 million people. We are a CDFI as well, and last year generated $72 million of business assisting families to improve their homes and obtain their homes.
    We provide financial literacy, education, affordable loans, construction management services and neighborhood revitalization programs. We are members of the national NeighborWorks Network, and we spoke to this committee in April on the down payment assistance fund, so I won't reiterate all the information that I have.
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    Chairman NEY. Just a note, I was so impressed I stopped you, and I said I wanted to visit——
    Ms. GAY. You did.
    Chairman NEY.——you.
    Ms. GAY. You did, and we welcome you to do that at any point. We are interested in leveraging. That's the business we're in, so the other panels that spoke before us, one of the things I thought was interesting was the capacity for leverage. We're at a 35 to 1 leverage now in the housing business we're in, and I think that the small business sector has a very difficult challenge.
    It will be interesting to see if they can leverage the funds that you so adequately place with them, and I thought it particular intriguing, the idea that we're suggesting for the Community Development Bank resource is what I would certainly offer is the notion, that's not our business.
    We don't do small business development detail or investment peaks. But a group like LALDC, Little Tokyo Service Center here was earlier this morning. These are entities that are CDF investments. They along with banks put money on the street aggressively, and so just the notion of being able to perhaps share some of that 196 million, spread it around, I think, would particularly behoove a lot of the communities that were formerly served by the bank.
    The other thing I'd note just on CDBG, some of the communities we've referred to throughout L.A. County and low income census tracts lack economic resources, lack neighborhood facilities, lack basic affordable housing so we've spent the bulk of our time working with the municipalities and now, seeing ourselves as one of the largest home ownership providers in the region putting 42 families a day onto home ownership paths, we see now the importance of being able to utilize flexible CDBG dollars, not only to assist families to get ownership, that's just one piece in your district. Congresswoman, just as a sample, HUD ran studies several years ago which I was certainly happy to provide to your staff involving a third-party predatory lending detail going on in your district and Congresswoman Diane Watson's district as well, and one of the interesting statistics I recall was that moderate income blacks borrowed at nine times the rate of low-income whites from subprime lenders.
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    Hispanics were borrowing from FHA at 20 times the rate of whites. 14 times the rate of whites for blacks from FHA, and just the notion of affordable money being available in our communities, it's a huge lack, it looks black, brown, Asian, rural, poor whites in many instances—and I raised this because I didn't quite hear it today yet on the other panels—that the families who are underserved look like some of all us. You mention the fire truck.
    I'm interested in the very simple stories. You mentioned $500,000. Some might ask: Why are we talking at these levels, but for practitioners like us, I'm interested in every single dime getting to every single family that needs help. In certain instances, it eliminates the opportunity for families to participate so that's why I mentioned the bank's resource allocation for the future would be very intriguing to privatize it, let CDD have some oversight, but whatever's appropriate, but see how the people on the street can get the money out.
    That would be a real notion that we've seen work in housing. The other thing I'd mention with CDBG, in particular, we were given—I'm from the old school—a lump sum draw down grant to get or revolving loan fund started 18 years ago, and when I came to the NHS it hadn't leveraged very well; and so as we got a little more sophisticated, what we found was that, our revolving loan fund that's now made up of mostly private dollars, could be utilized to leverage Freddie Mac and Fannie Mae-type programs, leverage individual down payments and/or closing cost assistance.
    And what we see is in using a system to get that money on the street, we've been able to maximize as the City of L.A.'s primary contractor on their home maintenance program, neighborhood preservation program, we end up helping, you know, maybe it's only a hundred families a year, but those are people who are in danger of losing their home and are at risk of falling subject to predatory lenders and are living in homes that really are in disrepair.
    So it's how do you utilize CDBG as maybe an initial source which the housing department, I believe, has tried to do well in this city over the years and then leverage that well past the original intent so that the government's money is not wasted? And that, in fact, more consumers are assisted because your money got it started perhaps.
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    Your initial investment of a thousand dollar grant into a fund like ours 18 years ago is now generating $72 million a year. I mean, that's the kind of story you want to be able to have with every single dollar that's spent on CDBG, I would think. Similarly, programs like Section 8 to home ownership, particularly interesting I think in Congress right now, we're watching it, we see those kinds of programs.
    In L.A. There are probably only four or five homeowners among 9,200 right now who are able to receive that assistance and use their Section 8 voucher to make their mortgage payment, but the notion is: How do you make that 40 people? You know, how do you take many people off the voucher program and, in fact, assist them to grow their lives to a place where their capacity is beyond utilizing Section 8, and they're working contributing citizens who then give back by becoming homeowners on their own?
    The final points I'll make, everything from code enforcement to nuisance abatement to graffiti removal to the city's handiworker program are all things we've seen in what we call full-cycle-type revitalization effort that are needed to make neighborhoods work. And what we keep finding is that if we limit our vision to thinking that our little home ownership stuff and our little home maintenance stuff is all that matters, we screw up, quite frankly, the capacity of families to make their lives better because as soon as you get them in the house, then you have to deal with an alley closure because there may be gang members driving behind the alley of the house they just bought, okay? Okay, to traffic their drugs.
    There may be some nuisance abatement problem. There may be some sidewalk that is a hazard to their children in front of their homes. So it's how do you strike the balance? That's always the question. Groups like ours have been asked to help strike it clearly on the housing, affordable housing and the rental side, but I think we have a lot more work to do.
    What we certainly want to encourage the subcommittee to consider, is that whether it's small business, economic development or affordable housing, commercial resources, we need all those pieces of the pie to be able to make the whole pie work.
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    And the real job of the nonprofit community in our meager opinion is to take one small percentage of a pie that makes up a community and then stretch that as far as possible so that everyone gets to eat from the pie, and that's our job as your partner so we're committed to that.
    If you end up having more specific questions on the types of programs that we've managed for the City of L.A. Because they do privatize through the housing department much more aggressive than they did even a decade ago, I'm happy to answer them. Just wanted to offer some of the solutions that we see.
    Thank you for your time.
    [The prepared statement of Lori Gay can be found on page 91 in the appendix.]
    Chairman NEY. Mr. Mistrano.
    Mr. MISTRANO. Ranking member Waters, Council. Thank you very much for having me.
    My name is Sam Mistrano, the Executive Director of SCANH, which is the worst acronym, which stands for Southern California Association of Nonprofit Housing, and I get introduced all the time as working for SCAM or SANK or something like that. There are two syllables in our time.
    We have over 500 organizational members who help produce and develop affordable housing throughout Southern California. Our members have built 76,000 affordable housing units since 1986, and last year, started, completed or were in construction on $1.7 billion worth of projects.
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    Our members are great supporters of CDBG, and I'm going to touch on two reasons why in my testimony briefly: First of all, Los Angeles City is in a housing crisis. There's not enough housing units being built. For example, between 1990 and 2000, the L.A. City population grew by 200,000 people. 80 percent of that, by the way, from births.
    However, L.A. County only produced 37,000 new units despite the 200,000 population growth. So there's a very large mismatch between the need and the production. In fact, the Southern California Association of Governments SCAG, perhaps another horrible acronym estimates the City needs to produce 47,000 new units to meet the current demand.
    What happens when demand is not, assuming production, doesn't meet demand prices rise. Of course, it's basic economics, and last year the medium price for a house in this city was $328,000. That's the medium price of a house. That's a 30 percent increase since the year before. So it makes sense that the statistics show that home ownership rates in Los Angeles have actually dropped in the last ten years.
    They—home ownership has risen in California, it's risen across the country, but not in Los Angeles. It's dropped. And so again, it's understandable that most of the City rents—62 percent of the City residents rent. The medium rent for a two bedroom/one bath apartment in the county is $1,100. $1,100 for a low-end basic two bedroom/one bathroom apartment. That means people cannot afford this.
    A person earning a minimum wage has to work a 124 hours a weak to be able to afford that which means a family—a family of two people working minimum wage still have to work over 60 hours. So there's a massive housing crisis in L.A. City that's still current. That's my first point.
    My second point is easing the housing crisis our members believe happens to be production of new units. Production of affordable housing to meet the demand. CDBG helps ease the housing crisis. Basically, local officials and the people who live in the region understand that we need to build our layout of this crisis.
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    Earlier this year L.A. City Council and Mayor Jim Hahn approved $100 million affordable housing trust fund to help produce new units. And last year 63 percent of L.A. County voters voted yes on the statewide initiative of Prop 46 which is all about housing, a $2.1 billion housing bond. So people who voted for this knew what they were voting for. 63 percent of County voters voted yes.
    Despite this new money, L.A. Still desperately needs CDBG. It's a critically important financial tool. As Miss Gay pointed out, it's a tool that our people—our members leverage. So we're a portion of the City funding helps fund L.A.'s high leverage program which is a key source of local support.
    So for example, Esperanza Community Housing Corporation, one of our members, was awarded almost $600,000 from the housing department. Some of that money is from CDBG. Well, Esperanza used that first grant of $600,000 to raise an additional $2.8 million and was able to build its Alley Grave Court project. So the money was used to leverage other money.
    And CDBG also helps to fund the City trust fund. An example of the trust fund which is new to L.A City, it committed its first rent of 13 projects earlier in the year, and these 13 projects will produce 700 new affordable units, and CDBG's a factor within this fund. So in conclusion, I'd like to say this our members or semi-five area developers all have CDBG money in their projects. They all need it.
    One of the most important strengths of the program is its flexibility. It allows the counties to use the money to best fit their own needs. The rest of the state does not understand Los Angeles's unique needs, its overcrowding, its high prices, its unique City needs. So we support the program as is. I appreciate the time. Thank you.
    [The prepared statement of Sam Mistrano can be found on page 121 in the appendix.]
    Chairman NEY. Ms. Gay.
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    Ms. GAY. I'm here wearing two hats, Chairman Ney and Congresswoman Waters and other members. I just want to thank you for having me. I'm here as the associate director for the Los Angeles Metropolitan Churches, and we are an organization of 45 small and mid-size churches.
    Most of our work focuses on employment linking residents to job opportunities as well as education opportunities for exoffenders. I also happen to be the chairperson for the Los Angeles Empowerment Zone Oversight Committee, which is the community group that was convened as a result of the Community Development Bank we had formed in 1994 and 1995.
    So I'm here today to make testimony in terms of the Community Development Bank's contribution to CDBG, but more importantly I want to lift up for you that the task of the Community Development Bank's lending was to raise the economic status of empowerment zone residents, and in our opinion, that was not done.
    The other point that I want to lift up for you is that the result of the lending was to link residents to job opportunities. There was no mechanism to do that which means that that component of the bank's goal went unfulfilled. As a requirement by the Federal regulations, the empowerment zone and oversight committee was established and firmly fostered those partnerships between the public sector and the private sector.
    In January, 1997, the L.A. City Council had to instruct the Community Development Department to identify a source of funds. These funds were CDBG funds of approximately 144,000, and those funds would be used by the empowerment zone oversight committee to carry out its oversight work of the job linkage and job creation.
    So as you can see, from '95 to '97, there was no funding, no apparatus, no infrastructure that was put in place behind that mandate in the cooperative agreement. It took the community two years to get funding to make a phone call, to send out a fax, to be at the table. In order for residents to participate, we have to be at the table. Since that time, the empowerment zone oversight committee has approved over $100 million in a request for Federal funds by both public and private entities that operate in the zone or that serve zone families.
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    About 60 million of those funds have actually come into the zone from other sources than the loans that were made by the Community Development Bank. Also, our committee has provided technical assistance and capacity only for microbusinesses, small businesses and community-based organizations in the empowerment zone since 1995.
    We've also provided ongoing staff support using CDD staff which is our administrator in this project to support the youth programs in the empowerment zone, Yo Watts, the Cooley Program, all of these were initial employment demonstration programs in the empowerment zone. In 2000 when the zone actually received the wage tax credits, remember prior to 199—to 2000, we didn't have that. In 1998, HUD gave us our full designation as the empowerment zone which the tax credit would take effect in January 1, 2000.
    So from 1994 until January, 2000, there was actually no mechanism and no incentive under this particular lending apparatus to attract or retain businesses. Neither was there a wage incentive for them to employ residents from the zone. One of the questions I want you to ask is: If they're not going to tell us what happened to all the money, where are the jobs?
    Where are the individuals that were hired by the jobs, the 90 percent jobs that were created, which are those empowerment zone residents? That's one question we want to know. Of the 51 percent that were supposed to be retained, are any of those employees actually living in the empowerment zone or these high-census poverty tracks? We have been unable to get that information.
    Additionally, a couple of months ago, HUD came out with a report that tells us that there's five states in the union that have a disproportionate number of homeless, undocumented immigrants and individuals who are below the Federal poverty line. California is one of those states.
    HUD has lowered the average medium income which is going to place an additional burden on our community development corporations, economic development corporations who offer affordable housing and other services that these residents need that's going to place an additional burden on them, and they may no longer be able to provide those services.
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    So I wanted to lift that up for you. The employment needs that are emerging in the empowerment zone are particularly in the 35th Congressional District are comprehensive and adverse. We've been told by another division within the corporation of the city, our public safety arm, and the State Department of Corrections that approximately 30,000 parolees and probationers will be returning to these very communities that are currently designated at empowerment zone census tracts. How do we want to address this problem? We're also being told that there's a tremendous housing shortage. How are we going to meet those needs? The County also has a health crisis. How are we going to meet those needs? The very census tracts and zip codes that the economic development activities that were treated by the empowerment zone with all of these other myriad domino effects happening, we still would like to know, the bank didn't do this; the loans didn't do that, how are we going to address the job linkage, job creation, job placement requirement? This was not an option.
    This was an express outcome in the cooperative agreement as well as the empowerment zone initiative, so we have these recommendations. For the committee: We believe that about $50 million of the Section 108 fund which is equivalent to 1,400 jobs at the market rate of 35,000 for one job, we're not sure if that is the equivalent market rate today, but we're going to go with that number, that that should be used for broader CDBG-eligible purposes to create an empowerment zone job creation and training center that could address the needs of this population in the empowerment zone.
    We already have a study that's been commissioned to June, 2003 with refunds investment at the empowerment zone oversight committee worked to put in place. That study will be complete in May, 2004. So our request is for implementation funding of which these funds that are on the table for discussion right now could be used for implementation of the recommendations that the City will produce in May, 2004.
    Finally, the empowerment zone oversight committee recommends that the following criteria be applied for all remaining activities for Section 108 funds including any portion of the funds that are reprogrammed for CDBG objectives or for outside the zone.
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    Number one, the empowerment zone residents must have access to at least 51 percent of all jobs resulting from loans made on any economic development activity with remaining Section 108 funds. $50 million to create an empowerment zone job creation and training center with four satellite subsites in the other remaining communities. Empowerment zone residents must be trained in the areas where they are deficient. Empowerment zone consideration in review of the cumulative effect of ecological and environmental impact, as they are improving our areas, and whenever possible, headquarters of businesses should be located in the community, and they should be—utilize local services and its suppliers.
    So what we want to leave you with is that even though the bank has struggled, and I will admit that it's—I personally, I think it's important to know that I personally have been a part of this process since 1992, when the application was actually prepared, we didn't get anything, so everyone whose come to speak to you outside of myself and one other individual are new.
    So I think it's important to understand the historical process that has gone on and that the community participation experiment is only real if the community is actually participating in decisions, sharing power and having a real voice, and so I'm here to represent those 200,000 nameless, faceless men and women in the empowerment zone who need these jobs, who did not participate in the economic benefits from the lending that has occurred; and we would like to know: If we don't have the money, where are the jobs?
    Thank you for your time.
    Chairman NEY. Thank you.
    For the record, we have two additional witnesses who have joined us. One is Felipe Merino and—with the Molina Gardens Improvement. The other is Arturo Ybarra with Watts Century Latino Organization.
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    Mr. MERINO. Good afternoon, Mr. Chairman and Congresswoman Waters.
    Thank you very much for allowing me to testify before the subcommittee today. My name is Felipe Merino. I'm the Executive Director of the Molina Gardens Improvement. I'm the 501C3 community-based nonprofit in the City of Hawthorne, serving Hawthorne, Lawndale, Lennox Gardena and other surrounding areas.
    Our community-based organization provides very vital services to the community, services that I would say are at the front line of survival for a lot of families. We help folks with housing issues, Government benefits, health care access to State-sponsored programs and other social services that are very necessary for a lot of our families.
    We work in direct partnership with over 150 partner agencies including educational institutions, electrical government agencies and other nonprofit organizations. Most namely, we work with the Hawthorne School District directly so we can make sure that the children of our community have access to resources so that students can get a good quality education. We've found in working with the Hawthorne School District that a good quality education doesn't just mean the textbooks. It doesn't just mean what happens in the classroom. It means everything after the home, after school and before school. It means making sure that the child is safe, making sure that the child has a roof over his head, that they have food on the table. That their parents are able to get medical insurance. That their parents are able to teach them that the cycle of poverty can be broken, and that they can excel at everything that they set their hearts to.
    As a small nonprofit organization, what we've been able to find is that CDBG resources are tremendously necessary in the community. They really are an access to other resources is not readily available to everyone, which is a sad state of affairs particularly in our community where so many things are needed.
    But let me share with you a little bit, and I'll be brief. I'll share you with a little bit about what happens in our community in the City of Hawthorne. In our community, we started off this nonprofit organization. When I came on board, we had an annual budget of 6,700 and something dollars which is amazing that an association of nearly 150 different partner agencies was getting all those different types of things done in the community. However, there was nobody on board to make it a concerted effort or to channel the agency of those other nonprofit agencies or other individuals from the community.
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    After our first year, through the budgetary cycle, we were at $87,000, I believe, for an annual budget. The reason largely—the reason why we were able to expand our budget, and now we're at a point where we're going to be closing out our books at about $250,000 a day after two years is because of CDBG funds because that money was accessible to us by way the City of the Hawthorne, and we had the support of people here are CDBG funds.
    Why don't you apply for them? Now before that point, we had a terrible time as a small nonprofit organization trying to raise money and develop the kind of credibility that we needed in the community and in—with foundations and with other government agencies to do the kind of things that we're doing now.
    But once that money was available to us, it was to—would have a multiplier effect. We were able to leverage those funds because all of a sudden we had the backing of not only the City but the Federal Government, and we were table to say, ''We have Federal dollars by way of the CDBG program—and mind you it was only $10,000 because it's—a percentage of the budget goes to direct program services by way of nonprofit organizations, but that amount of money has now multiplied to what, next year our budget will be closing out at about $600,000 is our projection at this point—and that's not even starting the fiscal year yet.
    So I want to thank the Federal Government for the CDBG program; however, I caution you that in the written testimony that I've provided there are three different concerns that I have as far as access to the community block rent funds: The first one being that many nonprofits don't even know that the funds exist.
    Whether it's because they're grass roots nonprofit organizations where the education level attained by a lot of the individuals that are part of the nonprofit board doesn't permit them to know about such resources and because they start off with such humble beginnings like ours.
    The second is that a lot of times elected officials are disconnected from what's going on at the grass roots level, and they really don't understand that the survival of these organizations depends on funding like CDBG funds, and unless you have somebody who's completely savvy on your Board of Directors or involved in your organization, it never trickles down to those organizations.
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    It only trickles down to the organizations that people know about which is very unfortunate, as Miss Waters mentioned earlier, that that's been what's been happening.
    And the third point that I have is—is the notice requirements. The notice that's given about CDBG funds is done by newspaper—by way of newspaper which is a very minimum requirement for people to satisfy. However, not all of the individuals involved in community agencies in the business of survival of community members have time to read through every one of those little notice provisions that comes in those throwaway papers that go through the communities or even some of the larger papers where they're compacted and put in some obscure section of the newspaper.
    And at the end of the written testimony that I provided, I make a few suggestions that you may want to consider or reject, whichever you prefer: The first in order to deal with nonprofit organizations, the smaller nonprofits becoming aware of those resources and also being able to apply for CDBG funds.
    I've suggested that some kind of technical assistance be provided to nonprofit agencies so they're able to develop the kind of accounting mechanism that they need to have a place in order to track funding and be able to receive funds from cities and from counties in the area. The second is addressing the concern about elected officials not being aware of what's going on at the grass roots level and needing somebody politically to be involved.
    I don't think that funding for CDBG programs should be contingent upon whether or not you know a political or elected official. I really believe that it should be a broad enough process where everyone has an equal chance and equal access to those kinds of resources because I think there are many good causes that are being looked over for whatever the reason, and I think in order to employ that, you would have to require some kind of mechanism in which you were able to get information about other nonprofits.
    I know that there are several Web sites in place right now where, if you wanted to investigate a nonprofit organization, you wouldn't have to call the IRS. You could get on Web sites and find out financial information about nonprofits. I don't know how difficult it would be to link that up with some kind of database that local governments would have to access in order to identify nonprofits within their zip code or within their community that could provide equally as good services as the ones that are being contracted for elsewhere.
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    And the third is the notice provision of CDBG services. A lot of nonprofit organizations have absolutely no idea that the CDBG funding exists. And I've suggested here as a—as a way of notifying nonprofits that that funding is accessible, that there probably be some kind of collaboration with the Internal Revenue Service that when nonprofit organizations are notified of their nonprofit status, that there be an instrument of some sort notifying them that there's Federal funding available and a possible suggestion of some Web sites that they could combine possible resources from some other resources.
    [The prepared statement of Felipe Merino can be found on page 131 in the appendix.]
    Chairman NEY. Mr. Ybarra.
    Mr. YBARRA. Good afternoon, Chairman Ney and Congresswoman Waters and Mr. Jones. My name is Arturo Ybarra, and I'm the Executive Director of the Watt Century Latino Organization. Watt Century Latino is the only Latino Multicultural oriented in existence in the whole south central area of Los Angeles. We have been in existence for the last 12 years. We are currently involved in programs to—that go from violence prevention to emergency education, homeless prevention and counseling, job training and placement.
    And we also have other projects distributing safety car seats for needy families in the community. And we are concentrated in serving a community that is growing all over California, especially in South Central Los Angeles. Latinos are now 60 to 65 percent of the total population in South Central Los Angeles.
    Watts Latinos are close to 70 percent of the population. And unfortunately, there is a total lack of infrastructure to channel services and resources to these communities. A public official mentioned earlier that many people in our communities are reluctant to deal with government programs because—because of the stress of government, and it's very much true within the Latino community or the immigrant community.
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    But whenever there is—there are programs that are culturally and—and very sensitive to these sectors, special sectors, the—the programs are property market are very successful. In 1994, the Watts Century Latino Organization insisted they become an action of the Los Angeles Housing Department to successfully market a residential loan program in Watts.
    Unfortunately, it was only a drop in the bucket because despite the success of this type of program, it has never been implemented. Watts has a very large old housing stock with many senior citizens and many houses that are in urgent need for rehab. But never, as I have told you, never again, these are residential low interest loan program, has revisited our community.
    My organization will be more than happy to help any senior or County officials or department in conducting these kinds of committee outreach comprehensive and sensitive marketing activities to market these rehab loans or even those grants that are available to improve facade, if those housing—houses are in need of.
    Finally, I would like to suggest to local officials to—that are in charge of distributing the CDBG funds, to get in touch with my organization. We will be more than happy to coordinate the development of a kind of strategy to facilitate access for available funds for rehandle grants improvements and other community development programs especially for monolingual Spanish-speaking and immigrants.
    Chairman NEY. Thank you. Just—I really don't have a question. I want to thank you for your testimony, and you know, it helps to acknowledge whether you're supporting CDBG or not.
    Just a couple of, I guess, points: One, for Ms. Branch, any questions, and we have for the record your testimony now; but other questions you want—you would want asked, and it seems you have probably a few people that have been there from two years to today through the home situation.
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    I think it's good to pose the questions of what happened, because if there's going to be oversight and HUD is going to be involved in an oversight sense, whether it's here or where I live or whatever state, we've got to ask questions of—of what went wrong in order to find the ability to make sure things go right. Not just here, anywhere in the country.
    So any other questions you'd have, I think it—it kind of interesting to me that something just hasn't been answered. They always elicit testimony, and then I kind of clear and then confused. That happens to me quite a lot wherever it is. But anyway, I thought I deserved that.
    Ms. BRANCH. I think you understand how we feel. It's just the most frustrating for me to be in a process where they say the goal is to have community participation, and then we're not there. But I think in addition to asking for a breakdown, ask Mr. Sausedo and the community development department, Mr. Graves, to provide for you a breakdown of the so-called 9 percent jobs that were created.
    We want the census track breakdown or the Zip code. The mandate when the bank was created, was there were 2000 criteria in order for an individual to get a loan from the bank. Number one was that they had to be turned down by a conventional banker.
    Number 51—they had to have a business plan. That included that 51 percent of the jobs would be given to zone residents. They also had to have a business plan that indicated how for every $35,000 borrowed, they create a job. No one ever—they say that there's no time frame on when this should occur. That—that shouldn't—that's a question: Why are we doing it that way? Why is there an open ended because the community doesn't have an open ended option on balance, you know in terms of meeting our needs. So we would like to see—there should be a time frame, and actually, our committee has made a question for that in 1998, 1999 and 2000 that borrowers be given two years.
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    Some of those things we haven't been able to get any feedback. You can ask them: When did they inform the borrowers that they had a job creation requirement? I have heard from some borrowers and some individuals who've tried to access funds or who got funds and their business failed and they weren't aware of the job creation requirement when I inquired to them from any question. Where is the job?
    They didn't know so we want to know: At loan closing? At quarterly report? Disbursement of the first payment? When are you telling individuals that they have had job requirement? How is the City assisting them in meeting that job requirement? We heard Mr. Sausedo did support the community's position in that the bank turned to the city's work force development system, the ones that used to be JTPA.
    Now, it's one stop, and that that system was not able to help them. That's not a response because you're—your mandate, the requirement, this is not an option. It's expressly stated was to link residents to job creation. So you want—you want some real question—you want some real answers as to why did none of these things occur, and if they didn't occur in the empowerment zone, the committee group has gone to our council reps and CDD and asked for that to be addressed in the transition plan.
    So the community is attempting to behavior like the other key stakeholders. If we were unable to fulfill what is written, then we're going to request a reprogram and try to make lemonade out of lemons, and the community is making the same question, if we were unable to get the jobs that were promised.
    We're asking if you're going to reprogram the 108 monies, you must include our response to the job linkage and creation piece. I think those would be some key—ask them how are they teaching microbusinesses and small businesses to utilize the wage tax credits? Is there any technical assistance or capacity building apparatus in the City to assist a microlender or a small bid owner if they even wanted to take advantage of these so-called incentive.
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    Chairman NEY. Another real quick observation. It's a matter of, I think, communication to you, Mr. Merino. You know of this. I don't know that they would do that or they could technically, but still an idea of trying to get communication out there somehow. I understand that maybe we do look at ways to do that, and Mr. Ybarra, one other thing, too, is you might be able to find out who you were saying about the crews contacting the Latino community, through HUD, I would assume, I'll be checking it, of who, in fact, has the hearings, and you would then contact them to let them know that you're out there.
    Mr. YBARRA. All right. Well, we have found from City agencies and even foundations very hard to invest in emerging conditions and organizations. Like Watt Century Organizations. I mentioned to you before, we are the only Latino organization in an area that has experiment that bring dramatic changes in the composition of its population, that brings lots of challenges, and some of those challenges and various for Latinos are the language barrier. Not knowing how the system works, we—we don't know how to process the government processes work, you know, and foundations and City agencies rarely want to invest or to risk any investment of funds in this emerging organizations.
    So if there are no resources for us to learn how to work with the system, how we are going to be able to work with the system? Something we have to learn, but in order for us to learn, we need—we need people with—with the know-how to show us where is the way. You know, how can we get access to those funds? We have a—a community resource center. You know, we got it in 1998 out of a class action suit against a Public Housing Authority of the City of Los Angeles due to the institution of neglect because of the living conditions for residents in the public housing in Watts.
    Out of those $50,000, we bought a liquor store, a former liquor store, to convert to a community resource center. The government—and we got a $50,000 from this class action suit, and we invested it in this community resource center.
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    Out of that, we haven't received any—any kind of assistance from the government, and this is a very particular situation for a recent immigrants and mono English-speaking people in Los Angeles and in Watts.
    Ms. WATERS. Thank you very much, Mr. Chairman.
    Let me just say thank you to Chairman Ney for coming to Los Angeles during his break when he could be in his own district or taking vacation as many of our fellows are doing. But I made this request to him, and he listened and we have formed a bipartisan effort to try and deal with some of the problems of housing and rural—and in urban communities and, of course, this CDBG Section 108 which turns out to be large and important sources of—of funding for our communities.
    So I'd like you to know that I would not be able to do this without him, and it's very important that he's here. Mr. Chairman, the people that you see before you are extremely important for a number of reasons. I'd first like to say to Mr. Merino and Mr. Ybarra, thank you for responding on such short notice.
    I want you to know that as our Washington, D.C., staffs attempt to work to put this together, it is difficult—and what normally happens is the—the traditional well-connected organizations get here, but the new ones don't often get here. And when we discovered what had happened, we were anxious for Mr. Ney to hear some new voices about what is and what is not happening.
    And you represent that for us, and I'm very appreciative for the work that you do. Mr. Merino is an attorney who went off to school and came back to work in his community and struggle, like he said, starting with $6,000 nonprofit donations and fighting the establishment on all of those things in order to bring some services to his community. I was recently at Mr. Ybarra's to celebrate ''Cinco de Mayo'' and was reminded one more time about the struggle of that corner of the district and lack of—of resources.
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    Now, Ms. Branch is extremely special because not only does she understand this game, she is a professional grantsmanship person who understands the rules, written and unwritten, of this response to request proposal magnes that all these nonprofits are caught up trying to access a few dollars. And her work is such that she's committed to the community, not only in trying to help them access funds, but trying to make the establishment do what it's supposed to do and given of her time to get the kind of oversight that she was so articulate in describing.
    I take her recommendations seriously, and I need to ask you just briefly, whether or not the $50 million that you point to that need to be erected toward the supplemental zone or the zone that was intended under the following insurrection, that's the same 50 million that you're talking about that Mr. Graves is talking about, you know, they have a plan, they want $50 million. They said they are going to use that $50 million to do the same thing that they would have been doing with—with the money from the Section 108, from the Community Development Bank. That's what they say. Then the other 4,800 or 46 or so, they say that they want some flexibility, I think, with that to be able to not only service the zone, but also to service the old Section 108 identified areas in the City. I'm a little bit skeptical of that. Are you all on the same track? Are you talking about the same thing?
    Ms. BRANCH. We're talking about the same funding, the same 50 million, yes. The same total 46, yes. We're talking about the same money, yes. But we're not talking about the same uses. We would support the city's desire to spend some of the 108 funding in low to mod census tracks outside of the zone. We support some of that because we understand why.
    Ms. WATERS. Okay.
    Ms. BRANCH. We understand why; however, we will need that of that—not with that proposal there should be at least 50 million earmarked to continue the job linkage and creation for lending activity that occurs with whatever's remaining.
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    Ms. WATERS. Now, that's what he claims they want to do with that 50 million, that first 50 million request. That's what he's——
    Ms. BRANCH. That's not true. I didn't read that, and I do have a copy of the city's transition plans because it comes to my committee for approval. As of last Thursday, it wasn't in my board meeting, and I raised in the board meeting there.
    Today what I heard, the City wants to use 50 million to continue lending activities with a broader CDBG use. That's what I heard today.
    Ms. WATERS. Ah.
    Ms. BRANCH. I did not hear that they want to use that money to focus on linking residents to job opportunities as a result of lending from the full portfolio.
    Ms. WATERS. Okay.
    Ms. BRANCH. I think that's worked in part.
    Ms. WATERS. All right. Well, that's very good. And let me suggest to you Miss Branch. You know, they very timely and, you know, as our maker would have it, we're just at the right point in time to catch the transition plan before it is given to HUD by September.
    And we may be at the right point in time to pull the community together to have our own hearings and bring everybody out and lay this plan out so that we can influence what happens with it. I am committed to the prop signatures that that money was intended to be spent in a certain way, and we can't see it distributed away with some other wishes by the city, so I'm so glad that you're here. Thank you.
    Miss Gay, I want to thank you, and I'd like you to know that we are focused on predatory lending. As a matter of fact, as you know, we've had a number of pieces of legislation, and there's more legislation that is coming forth; and we've got to try and find a way to make this a bipartisan effort so that we can get something real. I don't want to be in a fight with my colleagues about whether or not we have a bill that simply puts some window dressing on this very, very terrible problem.
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    Let me just say this to you: And a lot of people don't understand it, I am so outraged with the predatory lending practices of our banks and our financial institutions that I do not allow them to be sanitized for donations to the community.
    As a matter of fact, I resent what I call the fifty cents to the Boy Scouts, in an effort to get CRA credits, and at the same time, they are taking somebody's grandmother's house. So what I—and one of the things I want to work with the housing organizations and—and talk about is getting tougher.
    Because what they do, they come to you all, and so many different ways, and they come to support something or they'll be at the annual dinner or they will come with us to help paint a house once a year and the bank get their name all over the house; and I don't do that stuff.
    But what I want to do with the housing groups is, I want to get tougher on the banks and not let them buy off with this shell game so that we can force them to do better from, you know, whatever we're attempting to do with predatory lending.
    So I thank you for being here. I know that—I will tell you the nonprofits that you talk about are doing an extraordinary job in building capacity. From my own view of things in the past ten years or so, all of that housing that we have, it's because of these nonprofits who learn the game and build capacity and went out there and did it.
    Now, you got to stop building so much single homes and build some more multi-family, for just poor people. I respect that. They're not here today. You're here. I'm speaking for them. But we know them all. We know who all the players are. And they—we—we respect the work that's done, and when I ride through my district and I see some of that housing, I'm very thankful for it. So we're glad that you're here.
    Again, thank all of you for coming today, and that concludes my comments.
    Chairman NEY. I want to thank the ranking member, my boss from Ohio, the ranking member of Massachusets, and my name's Bob Ney. I chair the subcommittee. Our ranking member's Maxine Waters. I want to thank Congresswoman Waters for having us here. This is the first hearing of the 108th—first field hearing. That's right. I've got to say we've had 11—we've had more activity, both of us, in—and I think in recent history, we've had 11 hearings within the Capital. This is the first outside, and so—so happy to be here.
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    Ms. WATERS. He hasn't even been in his own district to a hearing. Give him a clap.
    Chairman NEY. I want to thank Congresswoman Waters, not how you voted to 2:30 in the morning last week and a long flight here, and obviously she could be doing also with her time take a little bit of breather. We're doing a hearing tomorrow. It's wonderful being here in sunny good weather California. Thank you.
    Ms. WATERS. Thank you all so very much.
    [Whereupon, at 3:15 p.m., the subcommittee was adjourned.]