Good morning Chairwoman Morella and Members of the Subcommittee:

My name is Nelson Rapha�l Breg�n and I am the Deputy Assistant Secretary for Grant Programs in the Office of Community Planning and Development. Thank you for the opportunity to be here this morning as part of the Subcommittee's examination of the District of Columbia's community and economic development activities.

I am here, at your request, to discuss one of HUD's most important tools for community and economic development -- the Community Development Block Grant (CDBG) program-- and our review of the city's use of CDBG funds to assist community development corporations (CDCs). Secretary Mart�nez and Assistant Secretary Bernardi are as concerned as you are regarding the District of Columbia's CDCs, HUD's recent monitoring findings and the reports published by the Washington Post. For this reason, my colleagues and I would like to provide you the information that we have on this matter.

Before I begin, I would like to introduce Mr. Richard J. Kennedy, Director of the Office of Block Grant Assistance at HUD Headquarters. Mr. Kennedy reports to me and is responsible for developing policies and procedures related to the CDBG program.

And also with me is Mr. Ronald Herbert, Director of the Office of Community Planning and Development in our HUD District of Columbia Field Office. Mr. Herbert is responsible for assisting and working directly with our program grantees, such as the District of Columbia.

The Community Development Block Grant (CDBG) program is a $4.4 billion program that provides annual grants on a formula basis to states, as well as entitlement metropolitan cities and urban counties. Each entitlement community, such as the District of Columbia, may use CDBG funds for a variety of community, housing and economic development activities focused on neighborhood revitalization, economic development and the provision of improved community facilities and services for low- and moderate-income residents. CDBG activities are initiated at the local level based on a community's identified local needs, priorities, and benefits to the community. Each entitlement community receiving a grant is free to determine what activities it will fund as long as certain requirements are met, including that the activity is eligible and meets one of the following three national objectives: 1) benefits low- and moderate-income persons; 2) aids in the prevention or elimination of slums or blight; or 3) meets urgent community needs that the community is unable to finance on its own.

The responsibility for ensuring that local CDBG programs meet Federal requirements rests with the executive authority (e.g., Mayor, County Commissioner) of each CDBG grantee. As in the case of the District of Columbia, many executive authorities delegate CDBG program administration responsibilities to local community development departments. In addition, those local community development departments may provide assistance to nonprofit organizations to carry out CDBG-funded activities. In fact, 17 percent of all CDBG funds are passed through nonprofit organizations. Thus, nonprofit organizations are an important conduit for neighborhood-based program delivery. It is important to note that nonprofit organizations, such as community development corporations (CDCs), are often asked to undertake projects that are inherently risky because of factors such as location, crime, poverty and disinvestment; cities utilize CDCs because they have skills and neighborhood acceptance. It is important to note, however, that the responsibility for ensuring that CDBG funds are used to revitalize low- and moderate-income neighborhoods belongs to the CDBG grantee, including the District of Columbia.

The District of Columbia provides approximately $4 million of CDBG funds to CDCs as part of the District's Neighborhood Development Assistance Program (NDAP). The goal of the Neighborhood Development Assistance Program is to assist CDCs by providing funds for financial support and capacity building as part of the CDCs' efforts to implement community development activities and, as a result, revitalize low- and moderate-income neighborhoods, such as Anacostia and Columbia Heights. The District's grant agreements with CDCs indicate that CDCs will undertake administrative and technical activities to pursue, for example, joint ventures with developers, secure project financing, and apply for grants or loans from other sources.

After reviewing the District's annual performance reports, and based on HUD's risk management approach to monitoring, the HUD District of Columbia Office conducted a monitoring review of the city's Neighborhood Development Assistance Program in August 2001. During that monitoring, HUD reviewed several project files for CDCs and conducted site-visits to several CDCs. The HUD District of Columbia staff found that the city provided funds to CDCs to carry out CDBG-eligible activities. However, the District's grant agreements with CDCs and program files lacked sufficient budget details to link the sub-allocation of the CDC grant award to specific projects and activities cited in CDC grant agreement. In addition, it did not appear that the city conducted any cost analyses for the items purchased with CDBG funds. Moreover, CDC grant agreements failed to specify measurable outcomes for each project or activity to be assisted. Finally, the HUD District of Columbia Office found that CDC grant awards were renewed for a second year without competition or an evaluation of performance in the prior year. The HUD Field Office was particularly concerned about the inefficient and ineffective use of Federal resources, and the possibility of questionable costs. Tracking CDBG activities was further complicated by the fact that these organizations often leverage resources and may be receiving funds from private, public, city and Federal sources, making it difficult to isolate which activities were funded with Federal dollars.

HUD's monitoring review also concluded that the current design of the NDAP program lacked detailed policies and internal management controls for governing the use of CDBG funds. As part of the monitoring finding, HUD advised the city to discontinue funding under the existing Neighborhood Development Assistance Program and especially all "core funding" awards to CDCs for projects that were not directly related to carrying out eligible CDBG activities. HUD also advised the District to revise the NDAP application funding process to include a review and analysis of all proposed costs to ensure that each project was eligible, met a national objective, and that the costs were reasonable and appropriate. Finally, the Department advised the city to provide a copy of the city's FY 2002 Neighborhood Development Assistance Program's Request for Applications (RFA) as well as internal procedures and guidelines for pre- and post-award reviews and monitoring.

In response to HUD's monitoring letter, the District indicated that, effective with the city's 2002 fiscal year, the city would discontinue disbursements to CDCs for "core funding" using CDBG funds and that the District would use CDBG funds to pay for costs that are directly related to project delivery.

These monitoring findings and advisories are in addition to the on-going technical assistance and guidance the District receives from the HUD District of Columbia Field Office to assist the District with implementing CDBG activities, including the Neighborhood Development Assistance Program. In June 2000, HUD advised the city to incorporate outcome measures and performance indicators to ensure that CDCs carrying out community development activities produce tangible results that impact low- and moderate-income neighborhoods. In January 2001, HUD again advised the city to review the Neighborhood Development Assistance Program procedures to ensure that CDBG assistance to CDCs were for eligible activities and that the program incorporated performance measures and tangible outcomes.

HUD is concerned that the District's use of CDBG funds to assist CDCs cannot be linked to activities that achieve tangible neighborhood development in its communities. HUD continues to advise the District to either discontinue funding community development corporations or provide these organizations with funding that must be used for specific community and economic development activities. HUD is currently awaiting further information from the District of Columbia to demonstrate that review guidelines and procedures are in place that will correct program deficiencies. If the city's response is not satisfactory, HUD will be forced to take further sanctions, including possible grant reductions.

The CDBG program statute and regulations require that grantees identify eligible activities that will provide benefits to communities, especially low- and moderate-income communities. It is important to note, however, that 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. But, the success of any community development initiative must include accountability, and the District of Columbia is responsible for ensuring that CDBG funds are used to create tangible results in its neighborhoods.

Thank you very much and this statement concludes my opening remarks.