Cuts Won’t Stop the Crony Capitalism or Corruption in the CDBG Program

Last month, House Republicans introduced a $44.1 billion transportation and housing bill which includes a $1.3 billion cut to the federal Community Development Block Grant program (CDBG). While the cut does slash government spending for the block grant program in half, it doesn’t address the crony capitalism inherent in the CDBG program which breeds the waste, fraud, and corruption continually seen within the CDBG program.

You don’t need to look far in the past to see this sort of corruption taking place. In June, the Department of Housing and Urban Development (HUD) sent a scathing letter to the Mayor of Honolulu Hawaii, calling on the city to return nearly $8 million in CDBG funds that it gave to Opportunities and Resources Inc. (ORI), a nonprofit redevelopment organization in central Oahu. The Aloha Gardens Wellness Center and Camp Pineapple 808 both were projects developed by ORI with federally issued CDBG money meant to serve elderly and disabled persons, but since completion, the projects haven’t exactly been used for their advertised purpose.

The HUD report claims ORI had been marketing the centers to the public as venues for weddings, parties, banquets, fundraisers, corporate retreats, conferences and family reunions. The city also lent ORI nearly $1.2 million in CDBG funds between 1989 and 1995, which it decided to forgive back in 2010. HUD found that this decision was made by city employees who were running for elected office while receiving campaign donations from ORI representatives. The report states:

“ORI has maintained significant support over many years by the direct involvement of high ranking City and State officials…The direct involvement of the officials’ appears to have placed pressure on staff resulting in the City ignoring regulatory violations in favor of completing the project and satisfying ORI’s requests.”

The fraudulent behavior in cases like Honolulu is precipitated by the crony capitalism sewn into the fabric of the program-in order to get public money you need to have close ties with public officials. It’s how the game works, which leads to certain private companies getting preferential treatment over others at best, and straight up corruption at worst.

Community Development Block Grants are the largest subsidy program run by the Department of Housing and Urban Development (HUD), providing funds to over 1,200 state and local governments. HUD claims the grants support low-income individuals, prevent slums and blight, and address immediate threats to community welfare by funding public and private infrastructure improvements.

But by allowing federal dollars to go towards funding private interests, a system of crony capitalism is created that is nearly impossible to get rid of. Crony capitalism is best defined as private interests colluding with government to acquire subsidies or economic benefits that give them an advantage or special privilege in the marketplace that would not otherwise exist. Usually this takes the form of lobbying, donating to a city council member’s campaign, or just knowing the right people. Sometimes though certain parties will cross the line and engage in outright corruption that no one can defend.

This kind of corruption is not limited to just Hawaii. Once again in June, HUD found that the City of Pine Bluff, Arkansas improperly spent nearly $200,000 in CDBG funds and failed to properly document an additional $279,000 in expenditures. The city is accused of spending more than 20% of CDBG funds on “administrative costs”, purchasing properties without redeveloping them, disbursing funds to contractors before receiving bids, and not following federal project documentation guidelines.

Instances like this happen all too often when it comes to the CDBG program, as private interests jockey for every last bit of taxpayer money from the hands smarmy local politicians who are in charge of distributing it. Cuts to the CDBG program, while welcomed, won’t end the cronyism and corruption inherent in the program. The best solution is to just eliminate the program. The latest cuts bring us halfway there, so now is the time to just go all the way and end the crony capitalism once and for all.

For more on community development cronyism see our piece for the Heartland Institute here.

Also see our Policy Brief, Crony Capitalism and Community Development Subsidies here.