Developmental Disability

HUD boondoggles show why bad government programs are so hard to kill.


With American special forces calculating smart bomb coordinates overseas and legions of students, seniors, and sociology graduates preparing to secure the home front in the USA Freedom Corps, commentators are hailing the return of big government as a glorious ideal. (As a lived reality, it never left.) "President Bush has broken the libertarian grip on the GOP," crows The Weekly Standard's David Brooks, a founding scholar of the "national greatness" school of conservatism.

Against this backdrop, a pair of Washington Post investigative reports on economic development in the nation's capital was most welcome.

Three reporters spent six months digging into the federal, local, and nonprofit partnerships charged with revitalizing economically depressed Washington, D.C., neighborhoods. Like almost every other U.S. city of any significant size, the District supports Community Development Corporations (CDC), whose ostensible mission is to mix taxpayer money with private funds and build things to make neighborhoods better.

The federal money comes in block grants from the Department of Housing and Urban Development (HUD), which each year spreads $4.3 billion among 3,600 groups. Mayors and local pols love the program, which provides them with free money, ribbon cutting ceremonies, and organizations where they can place cronies in cushy jobs. Since much of the money comes from HUD, actually making communities better places to live isn't a requirement.

The District of Columbia is partitioned into eight wards, each overseen by a community development monopolist. During the last decade these groups have blown through $100 million in taxpayer money. The funds have leased a Mercedes-Benz and two Jaguars, paid for a trip to Africa, provided the start-up capital for a law firm in the suburbs, and helped get local political benefactors of the CDCs re-elected. What they haven't funded is community development.

Of the 200 projects that got taxpayer money, only 70 have been completed, and few of those were on schedule and within budget. This failure stands out starkly against a backdrop of economic prosperity and rapidly increasing real estate values in D.C. that has prompted private developers to transform neighborhoods at a profit. "Private developers this summer finished converting two battered 40-unit apartment buildings into condos, which sold out in a few weeks," reports the Post, which notes that they are "just steps from…three boarded-up, decaying apartment buildings the Columbia Heights [CDC] has proposed renovating since the mid-1990s."

D.C.'s CDCs and the larger HUD context in which they operate offer some important lessons on the limits of government—and why government ought to stay limited:

There is no such thing as effective government oversight. This $100 million heist went on under the nose of three layers of supposed oversight: the city, Congress, and HUD. "Officials said they could not locate the contracts for nearly two-thirds of the community development organization projects the city agency has overseen for the past decade," the Post reports.

It's not what's legal that's corrupt, as Sen. John McCain (R-Ariz.) and other grandstanders in Congress tell us. It's what's illegal but still overlooked. The head of one CDC supplements his $116,000 annual salary with a clause in his contract that allows him to take a cut of each deal he negotiates. That sort of self-dealing is prohibited by federal regulations.

That's not to say that McCain doesn't have a point. Politics is about using power to take from some people and give to others, making oneself indispensable in the process. Much of what these CDCs do might be legal, but it certainly smacks of corruption. Former D.C. councilmember Charlene Drew Jarvis played benefactor to the People's Involvement Corporation, which spent $20 million in taxpayer money over the past decade. It completed few renovations but excelled at handing out contracts to friends and campaigning for Jarvis. One of the few projects the Development Corporation of Columbia Heights has completed is a single-family home it sold at a loss to the director's friend.

The H Street Community Development Corporation set itself up as a petty banker, making a loan to its own counsel to start a law firm in the suburbs. It shelled out another $45,000 to Jerry's Seafood, a suburban haunt favored by local politicians. The restaurant's owner, Jerry Gainey, was turned down twice for loans from his own county but got lucky when the H Street CDC's executive director and chief loan officer stopped in for lunch. "I said that I could use $25,000 for soft shell crabs," Gainey told the Post. He had the money in three days.

Beware of public-private and public-nonprofit partnerships. In D.C. it's common practice for the heads of the ostensibly nonprofit CDCs to have ownership stakes in the for-profit companies with which they do business. The CDC that operates in Anacostia, one of D.C.'s most blighted neighborhoods, has for-profit subsidiaries that do such things as make a $25,000 loan for a trip to Africa to purchase gold. (The gold disappeared on the return trip.) The for-profits tend not to earn actual profits, but they do take loans from the nonprofits and pay consulting fees to nonprofit heads, with no obligation to open their books.

Don't put too much faith in faith-based organizations once they get entangled with government. Like the tax status, the religious status is meaningless, as plenty of organizations will become proficient in the Jim Bakker school of finance.

This was the case in Harlem, where faith-based organizations were among the players in a huge scam that bilked taxpayers out of millions. Investors would buy a dilapidated building for next to nothing. They would then work with a community group eligible to secure a federally insured loan. It would buy the property for an inflated price. The players would split the difference in the sales prices, let the properties go into default, and send taxpayers the tab. "In Harlem," an assistant inspector general at HUD told Congress last September, "religious and other not-for-profit organizations working in partnership with criminals aggressively pilfered nearly the entire investment that had been set aside to help vulnerable and disadvantaged elements of our society."

Outsourcing is not always an improvement. HUD's inspector general in the 1990s would point out that the agency couldn't keep its books, wasn't living up to the standards it promised to meet, and was a source of fraud. HUD Secretary Andrew Cuomo solved the problem. He kept busy announcing new HUD initiatives, such as the "teacher next door" and "officer next door" programs, and pursued frivolous lawsuits against gun manufacturers. To counteract critcism, he spent taxpayer money to hire such firms as Booz Allen Hamilton, PricewaterhouseCoopers, and Ernst & Young to produce reports declaring that all was well in HUD land. "Just a few years ago, our critics were calling for the elimination of HUD," said Cuomo in response to a proposed budget boost in 2001. "Today, HUD is held up as a model of successful government reinvention."

Cuomo, who's running for governor of New York after papering the state over with HUD money, is not lying. In a sense, HUD is a model of successful government reinvention. It may have only changed for the worse, but he was able to reinvent its image among those who matter: congressional appropriators. Government institutions are reform-resistant, as self-interested bureaucrats and their clients spare no effort in finding ways to coopt reform efforts and herald their failures as successes.

They can't be abolished for the same reasons. D.C.'s CDCs, or their progeny, will be failing to perform any good works long after the Post's reporters retire. HUD will remain the country's largest slumlord. When you buy a government program, it comes with a no returns policy. That is why such shopping trips, whether in the name of community development or homeland security, are ill-advised. That's the most important lesson to learn as elected officials pursue national greatness through more federal spending.