SUMMARY OF BUDGET REQUEST

1. SUMMARY OF BUDGET REQUEST The Budget requests $400 million for the Economic Development Initiative (EDI)/Community Empowerment Fund (CEF) in 1999. This funding will support the financing for a variety of economic development efforts, in tandem with the existing Section 108 guaranteed loan program, to facilitate and encourage use of the loan guarantee program by State and local governments. The purpose of the EDI program is to help communities enhance the security of Section 108 guaranteed loans and to improve the viability of projects financed with these loans. The EDI/CEF financing will support the creation or retention of jobs, thereby assisting former welfare recipients to successfully move from welfare to work. It will be used in conjunction with Section 108 loan guarantees to support a variety of employment-generating investments, including revolving loan funds for business expansion or modernization; start-up funds for new, small- and medium-sized businesses; preservation and expansion of new and existing industrial facilities; neighborhood-based commercial revitalization efforts; and regional economic strategies. The 1999 request of $400 million will leverage an estimated $2 billion in private sector loans over time and will support an estimated 280,000 jobs when projects are completed. The EDI/CEF grants will include mechanisms to foster a secondary market for economic development loans, and to expand and improve operation of the Section 108 loan guarantee program. These grants will help reduce risk to the communities' and States' Community Development Block Grant (CDBG) program funds, which are used to cover the costs of loan defaults and thereby remove impediments to the use of the Section 108 loan guarantee program. In addition, the new EDI/CEF program will help State and local governments standardize the underwriting and documentation of loans to businesses in distressed areas, expand credit for economic and community development lending, augment communities' underwriting and loan servicing capacity, and use funds more efficiently for credit enhancement. The EDI/CEF program is a major component of the President's Urban Agenda for the Future providing the resources that spur private investment in our Nation's cities. This program focuses on four issues: First, significant job and economic disparity has developed over the past 25 years between cities and suburbs. Eighty-seven percent of the new jobs in the lower-paying and lower-skilled service and retail trade sectors were created in the suburbs in the early 1990's. In addition, between 1970 and 1990, the number of employed suburban residents grew by 76 percent while central city employment grew by only 25 percent. Second, America's poor are socially and economically isolated and more physically concentrated, including continued significant hyper-segregation in housing patterns. More than 10 percent of all city residents live in census tracts with poverty rates of 40 percent or more. Third, the long-term migration of the middle class from cities to suburbs has continued into the 1990's. Lastly, EDI funding will be targeted to populations that are striving to make the transition from welfare to work. It is estimated that one million new jobs are needed in cities in order to make this transition possible. During the latest EDI competition (with 1996 funds), the Department received 143 applications requesting approximately $620 million. Only 17 (including six Homeownership Zones) of these applications could be funded with the $50 million available in 1996. It is projected that if all of the EDI requests could have been funded, it would have leveraged almost $1.4 billion in Section 108 loan guarantees, and an additional $2 billion in local and private funds. In fact, the fall-off in Section 108 usage from 1995 through 1997 is directly correlated with the lack of EDI funds to address the needs identified in the applications. With $38 million in competitive EDI funds available in 1998, it is anticipated that usage of the Section 108 program will increase accordingly. Prior to the establishment of the EDI program in April 1994, some communities had been reluctant to utilize the Section 108 loan program. Throughout the first 17 years of the loan guarantee program, the Department made 623 loan commitments totaling just under $2.2 billion. In the 2 years after enactment of EDI, in 1995 and 1996, 307 loan commitments were made for almost $2.3 billion. Of this amount, almost $1.3 billion in commitments is directly related to EDI grants made to communities. While communities can and do apply for Section 108 loan guarantees without EDI backing, it is often for less money since they are unable to fully pledge their future Community Development Block Grant funds. In addition, new underwriting standards often require collateral in addition to CDBG funds. EDI can and should continue to be a viable and important tool for job creation projects, and for providing more flexibility for meeting community and economic development needs. The availability of EDI funds for interest rate or project cost subsidies increases the likelihood that economic development projects can generate sufficient cash flow to repay the Section 108 indebtedness. Thus, EDI funding not only benefits CDBG recipients by reducing the risk that future CDBG funds will have to be used for Section 108 debt service, but it also allows HUD to guarantee loans that would otherwise require higher credit subsidies. EDI and the related Section 108 economic development guaranteed loans will be used for a variety of job creation projects across the Nation, including the generation of jobs for former welfare recipients. To accomplish this, the competitive factors in the Notice of Funding Availability will seek projects that demonstrate the extent to which the proposal creates or retains jobs to move individuals from welfare to employment. EDI has historically been very successful in funding projects that support jobs in neighborhoods with poverty rates in excess of 20 percent. The program is aimed at projects that support jobs in economically distressed neighborhoods for low- and moderate-income persons, including those on or coming off of welfare. EDI funds have resulted in loan guarantee commitments with ratios as high as 1:10, with $1 dollar in grant funds leading to $10 in loan guarantees commitments. Depending on the types of projects being assisted, however, this ratio may be significantly lower. For this proposal, a 1:5 ratio is estimated. Therefore, $400 million in grant funds would result in $2 billion in loan guarantee commitments, which would in turn lead to the creation or support of approximately 280,000 jobs. The majority of these jobs would be made available to low- and moderate-income persons, including those recently off of welfare.     2. CHANGES FROM 1997 ESTIMATES INCLUDED IN 1998 BUDGET Not applicable.        3. CHANGES FROM ORIGINAL 1998 BUDGET ESTIMATES Funding of $50 million was requested for EDI under the Community Development Block Grant appropriation in 1998. The 1998 Appropriations Act provided $138 million. Of this total, $100 million was earmarked for specific projects. Two of these totaling $1,015,000 were deleted under the President's line-item veto authority. The remainder of the earmarked funds are being made available to the appropriate organizations as expeditiously as possible. The $38 million in competitive funds will be announced in a Notice of Funding Availability (NOFA) in the near future. It is anticipated that all 1998 funds will be obligated this year, and that approximately 2 percent of these funds will be drawn down (outlayed) by grantees during this year. EXPLANATION OF INCREASES AND DECREASES This Budget proposes that $400 million for the EDI/CEF program be made available as a separate appropriation in 1999. It is anticipated that the full amount will be obligated in 1999, resulting in outlays of $8 million in 1999. It is further anticipated that $400 million in EDI grant funds will result in $2 billion in Section 108 loan commitments, and billions of dollars of private investment in our Nation's urban communities. It is estimated that this level of Section 108 loans will lead to the creation or retention of approximately 280,000 jobs when projects are completed. Even with the strong domestic economy in recent years, American cities remain unacceptably distressed. Although rates of unemployment and poverty have declined in cities, they are still at high levels. As welfare reform puts more people into the job market, it will be especially important that residents of the cities have access to jobs. PROGRAM DESCRIPTION AND ACTIVITY 1. Legislative Authority. Economic Development Grants are authorized under Section 108(q) of the Housing and Community Development Act of 1974, as amended. 2. Program Area Organization. The purpose of the EDI grant program is to enhance the security of Section 108 economic development guaranteed loans and to improve the viability of projects financed with guaranteed loans. The availability of EDI funds in 1995 and 1996 greatly enhanced the usage by communities of the Section 108 loan guarantee program. EDI and Section 108 have generated tremendous amounts of local and private investment in economic development projects. The trend has been that for every $1 in Section 108 loans made, $1 in private funds have been committed to the projects.      The envisioned improvements to this program for 1999 include enhancements that will facilitate and encourage the use of the Section 108 loan guarantee program by States and local governments. The EDI/CEF financing will support the creation or retention of jobs, thereby assisting former welfare recipients to successfully move from welfare to work. It will be used in conjunction with Section 108 loan guarantees to support a variety of employment-generating investments, including revolving loan funds for business expansion or modernization; start-up funds for new, small- and medium-sized businesses; preservation and expansion of new and existing industrial facilities; neighborhood-based commercial revitalization efforts; and regional economic strategies. The 1999 request of $400 million will leverage an estimated $2 billion in private sector loans and will support an estimated 280,000 jobs when projects are completed.      The EDI/CEF grants will include mechanisms to assist State and local governments to standardize the underwriting and documentation of loans to businesses in distressed areas, expand credit for economic and community development lending, augment communities' underwriting and loan servicing capacity, and use funds more efficiently for credit enhancement. These will help reduce risk to the communities' and States' Community Development Block Grant (CDBG) program funds and remove the impediments to the use of the Section 108 loan guarantee program.      EDI advances the Department's Strategic Plan Objective #5, "Provide empowerment and self-sufficiency opportunities to support low-income individuals and families as they make the transition from dependency to work," and Strategic Objective #6, "Provide economic opportunities for low- and moderate-income persons through creation and retention of jobs. It also supports Strategic Objective #1, "Empower communities to meet local needs."      a. Recipients. Eligible grant recipients include CDBG Entitlement Communities and, with the assistance of their States, Non-Entitlement Communities.      b. Allocation of Funds. EDI is a competitive program, with statutory selection criteria for awarding assistance. Two particular criteria, the extent of need for the assistance and the level of distress in the jurisdiction and the area served by the project, have resulted in a high degree of targeting of economic development projects funded by EDI and Section 108 loan guarantees to neighborhoods with poverty rates of 20 to 40 percent. As a result, EDI and Section 108 support substantial numbers of jobs for residents of these neighborhoods.      c. Eligible Activities. EDI grants may be used for all of the activities that are eligible under the Section 108 loan guarantee program. Historically, almost 50 percent of the funds have been used to support or capitalize community development loan funds or programs, including community development banks and revolving loan funds. PROGRAM ACCOMPLISHMENTS The estimated jobs supported by EDI and Section 108 increased from 16,900 in 1994, when $19 million in EDI funds were available, to more than 201,000 jobs in 1995, when EDI funding totaled $350 million. Loan guarantee commitments grew from $229 million in 1993 to $1.85 billion in 1995. It is estimated that through the end of fiscal year 1997, the combination of EDI and Section 108 economic development guaranteed loans supported approximately 291,000 new or retained jobs, primarily for low- and moderate-income persons. STATUS OF FUNDS 1. Authorization. Authorizing legislation is not required. 2. Balances Available.     a. Unobligated Balances. The following table compares the program obligations with funds available by year. EDI funding included as a set-aside within the Community Development Block Grant program is not reflected.     b. Obligated Balances. The status of obligated balances is as follows: