Community Development Block Grant Program Economic Development Guidelines

SUMMARY: This rule establishes guidelines to assist Community

Development Block Grant (CDBG) recipients in evaluating and selecting

economic development activities for assistance with CDBG funds. The

guidelines deal with project costs and financial requirements and with

the public benefit provided by such activities. This rule also makes

certain other changes to facilitate the use of CDBG funds for economic

development objectives.

EFFECTIVE DATE: February 6, 1995.

FOR FURTHER INFORMATION CONTACT: James R. Broughman, Director, Office

of Block Grant Assistance, Room 7286, 451 Seventh Street, SW,

Washington, DC 20410. Telephone: (202) 708-3587; TDD: (202) 708-2565.

(These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION: One of the Department of Housing and Urban

Development's (HUD's) expressed goals is to provide an economic lift

for distressed cities. Toward this end, HUD has embarked on a course

designed to make the Community Development Block Grant (CDBG) program a

potentially major contributor to the provision of jobs, especially for

low-income persons residing in our poorest areas. To accomplish this

goal, the Department recognizes that it will need to change both the

perception and the reality concerning the usefulness of CDBG for

economic development objectives.

Section 806 of the Housing and Community Development Act of 1992

(the 1992 Act) requires the Secretary to establish, by regulation,

guidelines to assist CDBG recipients to evaluate and select economic

development activities for assistance with CDBG funds. The 1992 Act

also made further changes in the CDBG program affecting the use of

funds for economic development activities, particularly those carried

out under the national objective of benefiting low- and moderate-income

persons through the creation or retention of jobs. These changes

necessitate revisions to the CDBG regulations. HUD has also determined

that it is appropriate to take this opportunity to make certain other

changes to the regulations to facilitate the use of CDBG funds for

economic development objectives. These changes are designed to reduce

the administrative burden on grantees while, at the same time, focusing

efforts on assisting the residents of low- and moderate-income

neighborhoods.

A proposed rule regarding these issues was published on May 31,

1994, at 59 FR 28175. The rule gave the public 30 days in which to

submit comments. Fifty-one comments were received, and many of the

comments were extensive. The following types and numbers of commenters

were represented: 14 local government agencies, 7 state agencies, 12

national associations, 7 development organizations, 1 regional planning

agency, 3 private citizens, and 7 HUD Field staff.

Applicability of This Rule to the State CDBG Program

Separate regulatory language for the Entitlement and State CDBG

programs is contained in this rule. This preamble generally discusses

the changes for the two programs together, with differences between the

requirements for the two programs noted. Overall, such differences have

been kept to a minimum.

The State CDBG program regulations do not contain an explanatory

list of eligible activities, and relatively few terms are defined in

regulation. The changes to Secs. 570.201, 570.203, 570.204, 570.500 and

570.506 (and the accompanying preamble discussions thereof) are thus

not applicable to the State CDBG program, as there are no comparable

sections in the State regulations. In interpreting the list of eligible

activities found in Section 105 of the Housing and Community

Development Act of 1974, as amended, states may use the Entitlement

regulations as interpretive guidance.

Applicability of This Rule to the HUD-Administered Small Cities and

Insular Areas CDBG Programs

Portions of the Entitlement CDBG Program regulations are

incorporated by reference into the regulations for the HUD-Administered

Small Cities program and the Insular Areas CDBG program. Thus, the

changes to the Entitlement regulations also apply to the HUD-

Administered Small Cities and Insular Areas programs. Further

clarification will be provided (such as through annual Notices of

Funding Availability or other instructions) for those programs,

particularly regarding applications proposing a limited number of

activities subject to the public benefit guidelines.

Applicability of This Rule to the Indian CDBG Program

It has been determined by the Office of Native American Programs

that this regulation will not be applicable to the Indian Community

Development Block Grant (ICDBG) program. The nature of the ICDBG

program is so separate and distinct from the Entitlement or the State

and Small Cities program that it is in the best interest of the ICDBG

to address these issues separately. A specific rule will be proposed at

a later date to address the needs of the Indian Tribes and Alaskan

Native Villages served by the ICDBG program to comply with the

requirements of the Housing and Community Development Act of 1992.

Summary of Public Comments and HUD Responses

Assistance for Microenterprises

Issue. Three commenters requested that the maximum number of

employees permitted in order for a business to be considered a

microenterprise be increased. (2 local government agencies and 1 state

agency)

Response. The term ``microenterprise'' is defined by Section

807(c)(2) of the 1992 Act as a ``commercial enterprise that has five or

fewer employees, one or more of whom owns the enterprise.'' With this

statutory limitation, the maximum number of employees cannot be

increased.

Issue. Four commenters requested further clarification of the

definition of a microenterprise. Issues raised included: whether the

limitation on the number of employees applies to actual persons or

full-time-equivalent positions; the scope of the term ``commercial'';

and the length of time a CDBG-assisted microenterprise must remain

within the five-employee maximum. (2 national associations, 1 state

agency, and 1 private citizen)

Response. The Department interprets the statutory language

regarding the size limitations for a microenterprise as referring to

number of actual persons employed by the business, including the

owner(s).

As noted above, the statutory definition of a microenterprise

describes [[Page 1923]] such a business as a ``commercial enterprise. .

. .'' The Department does not believe that it was Congress' intent to

construe the term ``commercial'' so narrowly in this instance that it

would encompass only retail businesses. Rather, the HUD interprets this

term broadly to mean any ``entity engaged in commerce,'' subject to the

size limitations further imposed by the statutory definition of a

microenterprise. Definitions of the terms ``microenterprise'' and

``small business'' are being incorporated into the CDBG regulations at

Sec. 570.3 in this final rule.

In regard to the length of time a CDBG-assisted microenterprise

must remain within these size limitations, the same general rule that

applies to other CDBG activities would also apply to microenterprise

assistance. That is, the size limitation applies only at the time the

CDBG assistance is provided. There may often be the expectation that,

in the future, the business will grow beyond five employees; that

expectation should not block assistance to a currently qualified

microenterprise. A grantee need not track the size of the business

throughout the term of any CDBG loan received, as the commenters feared

might be the case. However, it should be noted that when CDBG

assistance is provided on an ongoing basis, as may often be the case

for ``general support'' activities, such assistance ceases to qualify

under the microenterprise eligibility category at the point when the

business grows beyond the five-employee size limitation. Further

assistance to the business after that time must qualify under other

existing eligibility categories.

Issue. Two commenters requested that HUD further define the term

``persons developing microenterprises.'' (1 state agency and 1 private

citizen)

Response. HUD agrees that it is useful to include such a definition

in the regulations. Thus, a new paragraph Sec. 570.201(o)(3) has been

added to this final rule to provide such a definition. Generally, the

term ``persons developing microenterprises'' is defined as persons who

have expressed interest and who are, or after an initial screening

process are expected to be, actively working toward developing

businesses, each of which is expected to be a microenterprise at the

time it is formed. It should be noted that HUD does not expect that all

such persons will actually start a microenterprise; some ``fallout'' is

expected. However, patterns of excessive ``fallout'' rates in a

grantee's microenterprise activities may cause HUD to question whether

such activities truly serve ``persons developing microenterprises.''

Issue. Two commenters requested that HUD revise the regulations to

permit ``general support'' services to also be provided, outside of the

public service cap, to businesses larger than microenterprises. (1

state agency and 1 national association)

Response. The Department cannot accommodate the requested change.

Flexibility to provide such services outside the public service

category is only statutorily provided for microenterprise assistance

carried out under Section 105(a)(23) of the Housing and Community

Development Act of 1974, as amended, and, to a less direct extent,

qualified activities carried out under Section 105(a)(15) of the Act

(Sec. 570.204 of the Entitlement regulations). As noted above, the

statute also imposes the five-employee size limitation on

microenterprises.

Issue. Seven commenters requested that HUD clarify various aspects

of the ``general support'' portion of the microenterprise eligibility

provision. Issues raised included: whether there were any circumstances

in which such support activities would be considered public service

activities; whether ``general support'' could be provided to employees

of microenterprises who are not part-owners; whether ``general

support'' included costs related to the delivery of microenterprise

assistance; and whether the entities providing assistance under this

category would be those most attuned to the special needs of

microenterprises. (1 local government agency, 3 national associations,

2 development organizations, and 1 private citizen)

Response. As noted above, the statute limits the instances in which

``general support'' services may be provided to businesses outside the

public service eligibility category. In any circumstances which fall

outside the specified instances, the provision of such support services

would need to qualify as public service activities.

Under the microenterprise eligibility provision, the statute limits

the direct provision of ``general support'' to ``owners of

microenterprises and persons developing microenterprises.'' Thus,

``general support'' cannot be provided directly to employees of

microenterprises who are not part-owners. However, there may often be

other ways of structuring the activity to achieve essentially the same

end result. For example, financial assistance may be provided to the

microenterprise owner under Sec. 570.201(o)(1)(i) to permit the owner

to provide certain benefits to his/her employees if that can be shown

to assist in the ``development, stabilization, or expansion'' of the

microenterprise. Alternatively, the extent of financial assistance

provided to the microenterprise owner for the capital needs of the

business could be sized taking into account the owner's cost of

providing such benefits for his/her employees.

The term ``general support'' as it is used in the statute and

Sec. 570.201(o)(1)(iii) is not intended to specifically include the

activity administrator's cost of delivering microenterprise assistance

to owners of microenterprises and persons developing them. As with any

CDBG activity, it is recognized that there are various necessary costs

associated with carrying out a microenterprise assistance activity. As

the commenters note, these may include the costs of outreach and

screening, curriculum development, coordination with other agencies,

formation and management of peer lending groups, and certain staff

training and development. As with any other CDBG activity, such costs

directly related to carrying out the microenterprise assistance

activity are considered eligible as part of that activity, without

being categorized as ``general support.'' Such ``activity delivery''

costs are not considered to be general administrative costs that would

be subject to the 20 percent cap.

In regard to the nature of the entities carrying out activities

under this eligibility category and their familiarity with the needs of

microenterprises, HUD has interpreted the statutory provision as

broadly as possible in developing this rule. This should permit

grantees significant flexibility in determining how, and by whom,

microenterprise assistance activities should be carried out, based on

local needs and priorities. The specific selection of service providers

is a matter of local discretion.

Issue. Four commenters recommended that some form of

``appropriate'' test be required for microenterprise assistance carried

out under the new eligibility category or that the rule include some

language stating that such assistance must be reasonable and necessary.

(2 local government agencies, 1 state agency, and 1 HUD Field staff

person)

Response. As noted in the preamble to the proposed rule, this new

microenterprise eligibility category was added to the Act as a new

Section 105(a)(23). This new paragraph of the statute does not contain

any requirement that assistance for such activities be determined to be

``appropriate.'' In addition, this new paragraph is not included among

those eligibility categories listed as covered by [[Page 1924]] the

economic development ``guidelines'' to be established pursuant to the

new Section 105(e) of the statute, as added by Section 806(a) of the

1992 Act. HUD does not believe that adding any regulatory requirements

to this eligibility category that are not required by statute is

warranted. As with any other CDBG activity, however, grantees are free

to develop more restrictive local policies as they feel are appropriate

to meeting their local needs and objectives. Also, pursuant to

Secs. 570.200(a)(5) and 570.502 of the CDBG regulations, all costs

incurred for CDBG assisted activities must be in conformance with the

applicable uniform administrative requirements. This includes the

requirement that the costs be necessary and reasonable for the proper

and efficient administration of the program. Thus, HUD does not believe

it is necessary to include any special language in this regard in

Sec. 570.201(o).

Issue. A concern was raised over the fact that no revision to the

Section 108 Loan Guarantee regulations at Sec. 570.703 was proposed to

reflect the addition of microenterprise assistance as a separate

eligibility category. (1 HUD Field staff person)

Response. Activities eligible for assistance under the Section 108

Loan Guarantee program are specifically delineated at Section 108(a) of

the Act. While the 1992 Act added the separate microenterprise

eligibility category as a new Section 105(a)(23) of the statute, no

reference to this new paragraph was added to Section 108(a) of the

statute. Thus, this eligibility category is not directly eligible for

assistance using Section 108 Loan Guarantees. However, the provision of

direct assistance to microenterprises has long been, and continues to

be, eligible as a special economic development activity under Section

105(a)(17) of the Act (Sec. 570.203(b) of the Entitlement regulations).

Section 105(a)(17) is included at Section 108(a) among the list of

activities eligible for Loan Guarantee assistance under that section.

Therefore, grantees may use Section 108 Loan Guarantees to directly

assist microenterprises, subject to the statutorily required

``appropriateness'' determination and coverage under the economic

development ``guidelines'' (established in this final rule as a new

Sec. 570.209 of the Entitlement regulations and additions to

Sec. 570.482 of the State regulations). These ``guidelines'' take into

account the special needs and limitations arising from the size of such

businesses assisted under Sec. 570.203(b) as required by the new

Section 105(g)(1) of the statute (as added by Section 807(c)(1) of the

1992 Act).

Issue. One commenter asked whether (or how) certain assistance to

in-home day care providers might be eligible under the proposed

Sec. 570.201(o) or Sec. 570.203. The commenter noted that day care is

often provided by people within their own homes. Improvements to the

house may be necessary or beneficial to the provision of day care

services. The existing regulations do not provide guidance as to

whether improvements to a residence in this case should be classified

as rehabilitation or as assistance to a business.

Response. The Department agrees that this issue is not clear in the

existing regulations; the addition of the microenterprise assistance

eligibility section further muddies the issue, as many home day care

providers might also qualify as a microenterprise. Situations in which

businesses are operated from a residence are not limited to day care

provision. To address this comment, the Department has revised

Sec. 570.202 (eligible rehabilitation activities) of the Entitlement

regulations. With this revision, certain situations in which physical

improvements to a residence are undertaken to benefit a business

operated therein may be classified as housing rehabilitation.

Ensuring That Economic Development Projects Minimize Displacement

Issue. Section 907(a) of the National Affordable Housing Act of

1990 amended Section 105(a)(17) of the statute to require, in part,

that economic development projects assisted under this provision must

minimize, to the extent practicable, displacement of existing

businesses and jobs in neighborhoods. The proposed rule implemented

this provision by amending Sec. 570.203 of the Entitlement regulations

with language on displacement that was identical to that contained in

the statute. Six commenters addressed this issue, and several of them

recommended that further guidance be provided. However, few specific

recommendations were received. (3 national associations, 1 local

government agency, 1 private citizen, and 1 HUD Field staff person)

Response. HUD has determined that it is most appropriate to leave

the final rule provision as proposed on this issue. Within the

parameters of the statutory language, grantees will have flexibility to

demonstrate compliance with this requirement as appropriate for their

circumstances. One possible way in which a grantee could demonstrate

compliance with this requirement is by conducting an analysis for each

covered economic development project to determine that any displacement

of existing businesses and jobs that is likely to occur as a result of

the economic development project, both in the neighborhood in which the

project is located and in other surrounding neighborhoods, is

justifiable given an examination of possible alternatives.

Additional Changes to Sec. 570.203, Special Economic Development

Activities

Issue. A total of eight commenters addressed the new paragraph (c)

that was proposed to be added to Sec. 570.203 of the Entitlement

regulations to specifically address items that may be considered

activity delivery costs in conjunction with special economic

development activities assisted under this section. The Department's

principal purpose in proposing the addition of this paragraph was to

permit certain job training and placement activities in direct

conjunction with otherwise assisted CDBG special economic development

activities to be considered part of the ``delivery cost'' of those

special economic development activities. All eight commenters supported

this general concept, but five of them requested modification or

clarification of the provision. The recommended modifications included:

extending this provision to include construction jobs created as part

of CDBG projects; extending it to include all ``CDBG-eligible''

economic development projects rather than just actual ``CDBG-assisted''

projects; limiting the job training and placement activities permitted

under this provision to actual low- and moderate-income persons; and

reclassifying the outreach and monitoring portions of this provision as

general administrative costs subject to the 20 percent cap.

Clarification was also requested as to whether there were any

circumstances where the job training activities discussed would still

be considered a public service. (3 local government agencies, 3

national associations, and 2 development organizations)

Response. HUD has determined that it is not appropriate to extend

the coverage of this provision to include job training for construction

jobs created as part of all CDBG projects in general. This new economic

development services provision specifically applies only to activities

qualifying as special economic development activities under the CDBG

program. Costs for training and apprenticeship programs directly

related to the construction for these activities can generally be

considered to be covered under this provision. Costs of such programs

for other types of [[Page 1925]] CDBG projects can often be considered

as activity delivery costs of the respective projects to which they

pertain.

In regard to the comment that the proposed provision should be

extended to include all ``CDBG-eligible'' economic development projects

rather than just otherwise ``CDBG-assisted'' projects, the Department

has determined that this recommendation has merit. Under the CDBG

program, grant funds may be used to assist an activity ``in whole or in

part,'' as noted at Sec. 570.200(a) of the Entitlement regulations.

There are many cases in which ``activity delivery'' costs are the only

portion of an activity's overall costs that are paid for with CDBG

funds. Thus, Sec. 570.203(c) has been revised in this final rule to

reflect the recommended change. In order to qualify under this

provision, job training and placement activities must still constitute

activity delivery costs for an economic development project that would

otherwise be eligible for further assistance under Sec. 570.203. HUD

considers this to permit such training activities only where the

grantee has an agreement with a specific business(es) to actually

employ the person(s) trained. This provision does not authorize

programs that will merely create a ``pool'' of trained persons from

which a business(es) may possibly hire. (Such activities must continue

to qualify as public service activities under Sec. 570.201(e) of the

Entitlement regulations unless they meet the requirements of the new

Sec. 570.201(o) or Sec. 570.204.) It should also be noted that the use

of CDBG funds for activity delivery costs qualifying under

Sec. 570.203(c) constitutes CDBG assistance to the related economic

development project, regardless of the funding sources for any other

portion of the project. Thus, that project becomes subject to all

applicable CDBG requirements, including national objective and public

benefit requirements.

In regard to the comment that the job training and placement

activities permitted under this provision should be limited to actual

low- and moderate-income persons, the Department has decided not to

adopt this recommendation. Such a proposal confuses the distinction

between eligibility and national objective requirements. As activity

delivery costs, job training and placement activities carried out under

Sec. 570.203(c) are considered part of the economic development project

to which they relate. Thus, they are generally considered to qualify

under the same national objective as that economic development project.

Such CDBG special economic development activities can qualify under a

variety of national objective provisions; they are not limited to

creating or retaining jobs for low- and moderate-income persons.

This comment has raised an issue, however, that HUD found to merit

further consideration. Under existing regulations, with very few

exceptions, the majority of persons benefiting from a CDBG-assisted

activity must be low- and moderate-income persons. HUD is aware of

various proposals under which certain entities have indicated a

willingness to train low- and moderate-income persons for jobs and/or

provide such persons with other employment opportunities, but these

entities cannot agree that 51 percent of all assisted persons will be

low or moderate income. HUD believes that such proposals can often

provide valuable opportunities for employment of low- and moderate-

income persons and that a way should be found to permit CDBG funds to

assist such efforts. Thus, HUD is amending the low- and moderate-income

limited clientele national objective requirements in this final rule

[with a new Sec. 570.208(a)(2)(iv) in the Entitlement regulations and a

new Sec. 570.483(b)(2)(v) in the State regulations] to authorize the

use of CDBG funds for such activities that provide training and/or

other employment support services in limited circumstances. This

provision is discussed more fully in detail in the national objective

portion of this preamble.

There also appears to be some general confusion regarding what can

be considered as activity delivery costs and what must be classified as

general administration subject to the 20 percent cap. Apart from the

job training and placement activities discussed above, most of the

remaining types of activities delineated in the proposed

Sec. 570.203(c) are already considered to be activity delivery costs

eligible under the currently-existing Sec. 570.203. The proposed new

paragraph only provides a more specific statement of this point. One

commenter specifically took issue with the outreach and monitoring

portions of this provision, arguing that such activities should be

considered part of general administration. HUD agrees that

``monitoring'' should be considered a general administration activity,

and thus, that term has been deleted from the new Sec. 570.203(c) in

this final rule. However, reasonable outreach efforts by grantees to

obtain applicants for available assistance and the direct management of

resulting activities are routinely considered part of the delivery cost

of such activities. The commenter compares the above type of outreach

and marketing efforts to activities designed to help inform low-income

residents about CDBG. If that reference is to activities that are

designed to make residents generally aware of the CDBG program and how

they may participate in determining what types of activities the

community funds, such a comparison is imprecise. Rather, the type of

outreach and marketing efforts included under the new Sec. 570.203(c)

would be comparable to activities designed to make residents aware of

how they could apply for assistance under specific activities, such as

a housing rehabilitation program.

Special Activities by Community-Based Development Organizations

(CBDOs)--Sec. 570.204 (Section 105(a)(15) of the Act)

Issue. Six commenters addressed the eligible activities and project

definition sections of the proposed rule changes at Sec. 570.204 (a)

and (b). Most of these commenters requested clarification of the

proposed definitions and discussion of eligible activities. (2 national

associations, 1 local government agency, 1 private individual, and 2

HUD Field staff persons)

Response. HUD has not accepted the recommendation from one national

association to add language to the beginning of Sec. 570.204(a) to

specifically state that the recipient may provide CDBG funds to a

subrecipient under this section ``if permitted by state or local law.''

Compliance with applicable state or local laws is a requirement for

recipients in carrying out all CDBG activities; thus, there is no need

to make a special statement here.

In response to the various requests for clarification of the

definitions for the projects made eligible by Section 105(a)(15) of the

Act, HUD has made minor changes to those definitions included in

Sec. 570.204(a) (1), (2), and (3) in this final rule. For the

definition of a ``community economic development project,'' this

includes a cross-reference to the Consolidated Plan rule at 24 CFR

91.1(a)(1)(iii), which describes the types of activities HUD generally

considers to aid in ``expanding economic opportunities,'' which is part

of the primary objective of the CDBG program as delineated at Section

101(c)(1) of the Act. The definition also notes the general conditions

under which the construction or rehabilitation of housing may be

included as part of a ``community economic development

project.'' [[Page 1926]]

One commenter, a private citizen, raised a question as to whether a

``project'' qualifying under Sec. 570.204 included only activities for

which there is funding committed and which are occurring now or whether

it could include proposed future activities for which no funding has

yet been secured. HUD has determined that specific limits on the scope

of a project cannot easily be prescribed in this regard. Thus, it has

not been addressed in the text of this final rule. HUD expects

recipients to use a plausible interpretation of the term ``project''

and only include activities that are to be carried out within a

reasonable period of time. Such an interpretation should at least

exclude activities which have not yet received necessary conceptual

approvals from the local government.

HUD has also revised the reference to permitted services under

Sec. 570.204. Two commenters, a private citizen and a HUD Field staff

person, requested clarification of this provision. Also, under a

similar expansion of service activities as part of the new

microenterprise eligibility category at Sec. 570.201(o), one of those

same commenters raised a concern about potential abuse of the expanded

flexibility if the requirements were not clearly defined. HUD has

reconsidered the proposed provision and has determined that it is

appropriate to limit the type of services that may be excluded from the

public service cap by qualifying under this section to those (1) that

are specifically designed to increase economic opportunities by

supporting the development of permanent jobs, or (2) services of any

type carried out under this section pursuant to a strategy approved by

HUD under the provisions of Sec. 91.215(e). To reflect this change, the

proposed paragraph Sec. 570.204(a)(5) has been deleted, the proposed

paragraph Sec. 570.204(b)(2) has been renumbered to (b)(3), and a new

paragraph Sec. 570.204(b)(2) has been added to this final rule. In the

State program regulations, proposed Sec. 570.482(c)(2) has been

deleted, and a new paragraph Sec. 570.482(d) has been added to discuss

the eligibility of employment-related services and microenterprise

support services.

Issue. One commenter recommended that the Department consider the

eligible project carried out by the qualified organization under

Sec. 570.204 to be a single eligible activity instead of ``only a loose

grouping of other eligible activities.'' The commenter recommends that

this approach be reflected throughout the regulations, including

national objective requirements, the economic development guidelines,

and record keeping requirements. (1 HUD Field staff person)

Response. In regard to eligibility requirements under Sec. 570.204,

it already is the overall project that is assessed to determine if it

qualifies as one of the three types of projects authorized by this

section. Problems arise when trying to apply this approach for

assessing compliance with national objective requirements, economic

development guidelines, and other applicable requirements, however,

because of statutory requirements that must be applied to specific

types of activities that may be part of the qualified project. For

example, Section 105(c)(3) of the Act limits the manner in which any

housing activities may be considered to benefit low- and moderate-

income persons. Also, Section 105(e) of the Act, as added by Section

806(a) of the 1992 Act, subjects economic development activities to

compliance with the public benefit requirements. Beyond such statutory

restrictions, the Department also believes that requiring detailed

information on what the organization is actually doing with the CDBG

funds helps ensure accountability to both the local citizens and HUD.

However, HUD has determined that the commenter's recommendation does

have a certain degree of merit. Thus, HUD has made certain changes to

the CDBG regulations in this final rule to ease grantees' burden in

tracking national objective compliance for certain activities that may

qualify for eligibility under this category. These changes are

discussed further in the respective national objective portions of this

preamble.

Issue. In regard to the types of entities that qualify under

Sec. 570.204, one commenter noted that such entities are commonly

referred to by practitioners as ``community-based development

organizations (CBDOs)'' or ``community development corporations

(CDCs).'' (1 national association)

Response. HUD has determined that is appropriate, in adopting a

single generic name for the entities that may qualify under

Sec. 570.204, to use a name that is commonly understood by

practitioners. It was also apparent from various comments that the

proposed rule's use of the term ``local development corporations

(LDCs)'' in this regard caused some confusion with some commenters

thinking HUD was ``picking'' one of the entities in the current rule

over the others. Use of the ``CDC'' term noted by the above commenter

could create confusion with existing entities funded under other

Federal programs. Therefore, to reduce confusion, the term ``community-

based development organization (CBDO)'' is now used in this final rule

as the generic term to describe all entities that may qualify under

Sec. 570.204.

Issue. Five commenters addressed the proposed revision to the

definition of the term ``subrecipient'' at Sec. 570.500(c). The

proposed revision was intended only to expand that current provision to

include for-profit entities that are now specifically authorized by

statute to carry out microenterprise assistance activities under the

new eligibility provision implemented in this final rule by a new

Sec. 570.201(o) in the Entitlement regulations [Section 105(a)(23) of

the Act]. Most of the commenters recommended that HUD not consider any

entities carrying out activities under the new microenterprise category

as ``subrecipients'' but rather as ``end beneficiaries.'' These

commenters also requested a similar change in classification for

entities receiving CDBG assistance under Sec. 570.204 of the

Entitlement regulations [Section 105(a)(15) of the Act]. Other

commenters asked only for a clarification of the proposed revision to

Sec. 570.500(c). (1 local government agency, 1 development

organization, and 3 HUD Field staff persons)

Response. The comments regarding entities carrying out activities

under the new microenterprise category will be discussed later in this

preamble in further discussion of the revision to Sec. 570.500(c) in

this final rule. This specific section will only respond to these

comments as they relate to entities receiving CDBG assistance under

Sec. 570.204 of the Entitlement regulations (Section 105(a)(15) of the

Act). The Department has re-examined the status of these entities

within the context of the statutory language at Section 105(a)(15).

This section of the statute authorizes the provision of CDBG assistance

to certain qualified entities to carry out specific types of projects.

Upon review, HUD has determined that the comments questioning the

status of these entities as subrecipients have merit. The Department

has determined that, similar to for-profit businesses carrying out

economic development projects, the entities carrying out qualified

activities under Sec. 570.204 (Section 105(a)(15) of the Act) can be

considered not to be an intermediary organization in the grant

assistance chain acting for the grantee, but rather as being

specifically eligible to receive CDBG assistance itself. While these

entities are not true ``end beneficiaries'' as the commenters argue

(that term applies to the persons served by the activities), they are

not strictly intermediaries either. Thus, the Department has determined

that such [[Page 1927]] eligible entities carrying out qualified

activities under this section will no longer be considered as

subrecipients under the CDBG program. In this final rule,

Sec. 570.500(c) has been amended, in part, to reflect this change.

Issue. Two commenters addressed the general jurisdictional

limitations for organizations qualifying under this section as proposed

at Sec. 570.204(c)(1)(i). One of these, a national association,

recommended that these regulations mirror the Community Housing

Development Organization (CHDO) requirements which permit an entity to

operate in a rural ``multi-county area (but not a whole state).'' The

other commenter, a local government agency, recommended that the

proposed regulatory language be amended to read:

``. . . primarily within an identified geographic area of operation

within the jurisdiction of the recipient. . . .'' The commenter argues

that this would permit an organization with a successful track record

to share its experience by consulting or entering into a joint venture

to support a project in other areas. (1 national association and 1

local government agency)

Response. HUD has determined not to accept the ``multi-county''

recommendation because maintaining local community control of a

organization qualifying under Sec. 570.204 is crucial. Also, it should

be noted that truly rural organizations would not be subject to these

regulatory restrictions anyway. This is because Section 807(f) of the

1992 Act expanded the list of organizations eligible to carry out

activities in nonentitlement areas under Section 105(a)(15) of the

Housing and Community Development Act of 1974, as amended. ``Nonprofit

organizations serving the development needs of the communities of

nonentitlement areas'' now qualify under Section 105(a)(15) of the Act.

Since the State CDBG program regulations contain no listing of eligible

activities, no regulatory language is needed to implement that change.

In regard to the second comment above regarding jurisdictional

limitations, the Department agrees with the commenter's reasoning and

has revised Sec. 570.204(c)(1)(i) to reflect the recommended language

in this final rule. In this regard, however, HUD does note that it

interprets the term ``primarily'' as it is used in this section to mean

that most of the organization's projects are located, funds are used,

and staff time is expended on a project or projects within the

identified geographic area of operation and that outside projects are

largely incidental to the organization's activities and purposes.

Issue. One commenter recommended that HUD provide a definition for

the term ``particular attention'' as it is used in the new

Sec. 570.204(c)(1)(ii) regarding addressing the needs of low- and

moderate-income persons. (1 national association)

Response. The ``particular attention'' language as used in the

above-noted section comes from those statutes that have been referenced

for several years in the CDBG regulations at Sec. 570.204(c)(3)

defining local development corporations. The Department is not aware of

any significant problems with conflicting interpretations of this

language, which is the commenter's stated concern. Thus, the rule has

not been modified to include a formal definition of this term. In

general, HUD would expect the charter, bylaws, etc., of the CBDO to

reflect a commitment to meeting the needs of low- and moderate-income

persons.

Issue. In reference to the new Sec. 570.204(c)(1)(iii), another

commenter expressed ``serious reservations'' about allowing for-profit

organizations to qualify under this section of the regulations. (1

development organization)

Response. The statute at Section 105(a)(15) and the CDBG

regulations at Sec. 570.204 have long permitted for-profit

organizations under this section with the inclusion of Small Business

Investment Companies. The rule now includes only a clearer statement of

what already is permitted. The rule does provide a stipulation that any

monetary profits to a CBDO's shareholders or members must be only

incidental to its operations.

Issue. Four commenters addressed the board structure requirements

under Sec. 570.204(c)(1)(iv). Concerns raised included an objection to

excluding organizations composed solely of institutional members from

qualifying under this section and comments both for and against the

inclusion of business owners in defining permitted board structures.

One of the commenters also recommended that HUD permit the low- and

moderate-income presumptions added by the 1992 Act to be used under

this section in determining whether a sufficient percentage of board

members are low- and moderate-income persons. (1 local government

agency, 2 development organizations, and 1 national association)

Response. HUD has determined that all of the comments regarding the

inclusion of institutions and business owners on the boards of

qualifying CBDOs have some merit. Thus, the Department has refined the

requirements at Sec. 570.204(c)(1)(iv) in this final rule to permit

consideration of both institutional board members and business owners,

but only to the extent that the entities that they represent are both

located in and serve the CBDO's geographic area of operation. In regard

to the comment about permitting the presumption of low- and moderate-

income residents status under this section, it is noted that the

presumptions at Section 105(c)(4) of the HCD Act, as added by Section

806(e) of the 1992 Act, apply only to activities qualifying under the

national objective of job creation or retention for low- and moderate-

income persons. Permitting them to be used in determining compliance

with the board structure requirements of this section would include too

broad of a spectrum of organizations to qualify under this provision.

Thus, the Department has rejected this comment.

Issue. Three commenters addressed the proposed Sec. 570.204(c)(2)

that provided further ways in which an organization might qualify as an

eligible CBDO under this section. These commenters requested

clarification of when this paragraph would apply, and two of the

commenters specifically requested that HUD expand the jurisdictional

restrictions imposed on CHDOs, as designated by the HOME program,

qualifying under this paragraph. (1 national association, 1 development

organization, and 1 HUD Field staff person)

Response. HUD's intent in the proposed Sec. 570.204(c)(2) was to

give organizations that did not meet the general qualification

requirements of (c)(1) certain additional ways of qualifying as a CBDO

under this section of the CDBG regulations. It was not intended that

qualifying organizations would have to meet both (c) (1) and (2); an

entity can qualify under either standard. HUD has revised the

introductory language to Sec. 570.204(c)(2) in this final rule to

clarify that intent. An understanding of this approach is critical in

assessing the requirements that a CHDO under the HOME program must meet

in order to qualify under Sec. 570.204 of the CDBG Entitlement

regulations. A CHDO qualifying under the HOME program may or may not

meet the general qualification requirements for a CBDO under the CDBG

Entitlement program, as delineated at Sec. 570.204(c)(1) of this final

rule. If a CHDO meets those requirements, it may have an area of

operation as large as the jurisdiction of the recipient, just as any

other qualified CBDO. The more restrictive jurisdictional limits at

Sec. 570.204(c)(2)(iii) are only applicable to [[Page 1928]] CHDOs that

cannot meet the general CDBG Entitlement qualification requirements for

CBDOs. An example of such an entity would be a CHDO that meets only the

minimum HOME percentage requirement for low- and moderate-income

persons on its board (33 percent) and cannot show that it has

sufficient types of representatives on that board to meet the 51

percent standard delineated in Sec. 570.204(c)(1)(iv).

In assessing the comments on this issue, HUD has determined that it

is appropriate to provide organizations with an additional alternative

for qualifying as a CBDO under this section of the CDBG regulations.

Thus, in this final rule, HUD has added a new Sec. 570.204(c)(3) under

which an organization that does not qualify under either

Sec. 570.204(c) (1) or (2) may also be determined to qualify as an

eligible entity under this section if the grantee demonstrates to the

satisfaction of HUD, through the provision of information regarding the

organization's charter and by-laws, that the organization is

sufficiently similar in purpose, function, and scope to those entities

qualifying under the above-referenced paragraphs. The Department

intends to have this determination made at the HUD Field Office level.

Also in this regard, it should be noted that HUD expects that many

Community Development Financial Institutions meeting the criteria in

Title I, Subtitle A of the Riegle Community Development and Regulatory

Improvement Act of 1994 (P. L. 103-325, enacted September 23, 1994)

will qualify as CBDOs under Sec. 570.204 of the CDBG Entitlement

regulations. The above-referenced subtitle comprises the Community

Development Banking and Financial Institutions Act. The purpose of this

subtitle is to create a Community Development Financial Institutions

Fund to promote economic revitalization and community development

through investment in, and assistance to, CDFIs, including enhancing

the liquidity of such institutions. The CDFI Fund is to be a wholly-

owned Government corporation that will not be affiliated with any other

agency of the Federal Government. In this final rule, HUD is adding to

the Entitlement regulations a definition of the term CDFI that

references the above-noted new legislation. A CDFI is generally defined

at Section 103 of that Act as an entity that (i) has a primary mission

of promoting community development; (ii) serves an investment area or a

targeted population; (iii) provides development services in conjunction

with equity investments or loans, directly or through a subsidiary or

affiliate; (iv) maintains accountability to residents of its investment

area or targeted population; and (v) is not a government agency or

instrumentality. An ``investment area'' is defined as an area that

either (i) meets objective criteria of economic distress developed by

the Fund and has significant unmet needs for loans or equity

investments; or (ii) is located in a designated Empowerment Zone or

Enterprise Community. These CDFI criteria are similar to those now set

forth in Sec. 570.204(c).

It should again be noted that the requirements of Sec. 570.204 only

apply to the qualification of CBDOs serving Entitlement jurisdictions

under the CDBG program. As discussed earlier in this preamble, Section

807(f) of the 1992 Act expanded the list of organizations eligible to

carry out activities in nonentitlement areas under Section 105(a)(15)

of the HCD Act. Any nonprofit organization serving the development

needs of nonentitlement areas now qualifies under Section 105(a)(15) of

the Act for the State CDBG program.

Issue. One commenter also recommended that HUD allow a limited

partnership in which the managing general partner is an eligible CBDO

to qualify under Sec. 570.204. The commenter argues that the use of

low-income tax credits (LITCs) necessitates a limited partnership

structure and that adding the limited partnership itself as a

qualifying entity would remove the necessity of having two levels of

contracts--one between the grantee and the CBDO and one between that

CBDO and the limited partnership. (1 local government agency)

Response. Limited partnerships are single purpose entities which

exist to syndicate and develop one project. It would be difficult to

construe the definitions of the statutorily eligible entities to

include limited partnerships. Thus, HUD has decided against expressly

adding a provision to the regulations to include the type of limited

partnership described by the commenter. However, in cases in which the

activities of an LIHTC limited partnership are controlled by a

Sec. 570.204 qualified entity, usually by that entity either serving as

the general partner of the limited partnership or establishing such an

entity as a subsidiary, the Department has accepted that CDBG

assistance may be provided by the Sec. 570.204 qualified entity to the

limited partnership for the purpose of carrying out all or part of the

eligible project. The Department will continue to explore ways of

removing unnecessary administrative burdens for such projects.

Issue. Specifically in regard to qualified entities in

nonentitlement areas, one commenter (a state agency) took issue with

the discussion of such entities contained in the preamble to the

proposed rule. The state agency disagreed with HUD's statutory

interpretation that the term ``nonprofit organizations serving the

development needs of communities in non-entitlement areas'' excludes

units of general local government. This interpretation, according to

the state, would restrict the use of CDBG funds by certain State-

sanctioned local entities.

Response. The Department has chosen not to accept this comment. The

preamble to the proposed rule noted that a public nonprofit

organization which meets Internal Revenue Service requirements for

nonprofit status may qualify under Section 105(a)(15) of the Act. The

Department does not define a number of terms (``neighborhood

revitalization project'', ``community economic development project'',

``energy conservation project'', ``carrying out an activity'') which

are significant to the discussion of CBDOs above, in order to give

States maximum flexibility to implement Section 105(a)(15) within the

context of their particular situations.

National Objective Standards for Low- and Moderate-Income Area Benefit

Activities

Issue. A total of seven commenters addressed the proposed revisions

to Sec. 570.208(a)(1)(i) of the Entitlement regulations and

Sec. 570.483(b)(1)(i) of the State regulations dealing with activities

qualifying under the national objective of benefiting low- and

moderate-income persons as area benefit activities. This revision

relates specifically to a proposed presumption of compliance for

special economic development activities that may be carried out under

Sec. 570.203 [Sections 105(a) (14) and (17) of the HCD Act] by a

community development financial institution (CDFI) meeting certain

criteria. Concerns raised by the commenters included statements both

for and against the proposed presumption; requests for clarification of

the types of entities that would qualify as CDFIs; and requests for

revisions to the ``primarily residential'' and other aspects of the

regulation. (1 local government agency, 1 state agency, 1 development

organization, 1 national association, 1 private citizen, and 2 HUD

Field staff persons)

Response. Supporting the development and growth of CDFIs can be a

critical component in the comprehensive revitalization of

[[Page 1929]] distressed neighborhoods because they often address the

financing needs of these areas that are otherwise unmet. Existing CDFIs

have demonstrated their ability to identify and respond to community

needs for equity investments, loans, and development services. Thus,

HUD has decided to include a modified version of the proposed

presumption in this final rule.

First, it is important to define the types of entities that may

qualify as CDFIs, as some of the commenters noted. As noted earlier in

this preamble, HUD is herein adding to the CDBG regulations a

definition of the term CDFI that references the Title I, Subtitle A of

the Riegle Community Development and Regulatory Improvement Act of 1994

(P. L. 103-325, enacted September 23, 1994). Secondly, HUD has

determined that it is more appropriate to create separate paragraphs in

Sec. 570.208 of the Entitlement regulations and Sec. 570.483 of the

State regulations to reflect the options that may be used for

activities carried out by certain CDFIs, rather than to simply include

the proposed presumption in Sec. 570.208(a)(1)(i) and

Sec. 570.483(b)(1). Thus, in this final rule, HUD has added new

paragraphs under the ``additional criteria'' section of the national

objective requirements at Sec. 570.208(d)(6) of the Entitlement

regulations and Sec. 570.483(e)(4) of the State regulations to list the

options that may be used for CDBG activities carried out by any CDFI

whose charter limits its investment area to a primarily residential

area consisting of at least 51 percent low- and moderate-income

persons. The new paragraphs Sec. 507.208(d)(6)(i) and

Sec. 570.483(e)(4)(i) cross reference with additional new paragraphs

Sec. 570.208(a)(1)(v) and Sec. 570.483(b)(1)(iv) of the Entitlement and

State regulations, respectively. Pursuant to these paragraphs, job

creation or retention activities carried out by CDFIs meeting the above

criteria may be presumed to meet the low- and moderate-income area

benefit criteria. It should be noted that with the area benefit

presumption applied in this manner, the ``exception criteria'' for

Entitlement communities cannot be used in this regard. Thus, in order

to take advantage of the area benefit presumption, the CDFI's

investment area must be at least 51 percent low- and moderate-income

regardless of the community's usual area benefit threshold requirement.

HUD has determined that it is also appropriate to offer a similar

benefit for job creation or retention activities carried out under

certain other circumstances. Thus, in this final rule, HUD has also

added Sec. 570.208(d)(5) in the Entitlement regulations, which is

cross-referenced in Sec. 570.208(a)(1)(v). Under this provision, job

creation or retention activities undertaken in an area pursuant to a

HUD-approved economic revitalization strategy developed in accordance

with the authority of Sec. 91.215(e) of the Consolidated Plan final

rule may be presumed to meet the low- and moderate-income area benefit

criteria. It should be noted that in order to reduce the potential for

abuse of this provision, HUD is limiting this form of area benefit

presumption to areas that are primarily residential and contain a

percentage of low- and moderate-income residents that is no less than

the percentage computed by HUD pursuant to Sec. 570.208(a)(1)(ii) but

in no event less than 51 percent. This means that the required low- and

moderate-income percentage for the area may be significantly higher

than that which the community generally uses for its area benefit

activities. For those communities that generally use the ``exception

criteria,'' the required low- and moderate-income percentage for this

area benefit presumption is 51 percent. For a community that generally

is required to meet 51 percent for regular area benefit activities, the

required low- and moderate-income percentage for this area benefit

presumption is that percentage level of low- and moderate-income

persons in the last census block group in the community's highest

quartile of block groups ranked in order of proportion of low- and

moderate-income persons, as computed by HUD pursuant to

Sec. 570.208(a)(1)(ii).

The Department will develop guidelines for determining when

grantees should be authorized to take advantage of the benefits of this

economic revitalization strategy area approach. These guidelines will

be distributed to both grantees and HUD Field Office staff.

In developing this approach for the Entitlement program, the

Department became aware of significant issues concerning how the

economic revitalization strategy provision might be applied to the

State program. Therefore, the Department is not implementing comparable

regulation language for the State program at this time. In order to

gain public comment, the economic revitalization strategy area concept

for states will be the subject of a future proposed rule. In the

meantime, the Department welcomes any comments or suggestions on how

the economic revitalization strategy area approach might be applied to

the State CDBG program.

Two commenters expressed concern about the requirement in

Sec. 570.208(a)(1)(i) that limits the use of the low- and moderate-

income area benefit provision in general to only those activities that

serve areas that are ``primarily residential.'' It should be noted this

requirement is a long-standing provision of the CDBG regulations and

has served the program well. Thus, HUD has decided not to make any

changes to that requirement in this final rule. One of the commenters,

a HUD Field staff person, recommended that a specific exception to the

``primarily residential'' requirement be made for projects qualifying

under Sec. 570.204 of the Entitlement regulations [Section 105(a)(15)

of the HCD Act] because the types of projects made eligible under that

section, including ``neighborhood revitalization'' and ``community

economic development,'' appear to lend themselves to an area-wide

benefit test. Such a change has not been incorporated into this final

rule. The activities most often carried out under Sec. 570.204 [Section

105(a)(15)] involve the provision of housing, and Section 105(c)(3) of

the HCD Act specifically precludes the use of a low- and moderate-

income area benefit national objective claim for such activities.

However, in recognition of the merit of the recommendation, HUD has

made certain changes in this final rule to ease grantees' burden in

tracking low- and moderate-income national objective compliance for

housing activities in certain areas. These changes are more fully

discussed later in this preamble.

One commenter, a national association, expressed support for a

supposed ``revision to permit area benefit . . . without requiring that

the area be defined in terms of census tracts or other official

boundaries.'' The commenter appears to misunderstand current

requirements. While the CDBG regulations do require entitlement

grantees to use, to the greatest extent feasible, the most recently

available decennial census data to support the low- and moderate-income

character of the area (and Sec. 570.208(a)(1)(iv) has been modified to

incorporate a reference to the new Sec. 570.208(a)(1)(v) in this

regard), there is no current requirement that the service area be

defined along census tract or other official boundaries. The language

included in this regard in Sec. 570.208(a)(1)(i) (for Entitlements) and

Sec. 570.483(b)(1) (for States) in the proposed rule is unchanged from

current requirements. [[Page 1930]]

National Objective Compliance by Microenterprise Assistance Activities

Issue. A total of 15 commenters addressed the proposed new

Sec. 570.208(a)(2)(iii) to be added to the Entitlement regulations and

the proposed new Sec. 570.483(b)(2)(iv) to be added to the State

regulations to specifically provide the limited clientele national

objective option for activities qualifying under the new

microenterprise assistance eligibility category. Many of these

commenters specifically supported the provision, and a few specifically

opposed it. Various commenters requested revisions to or clarification

of certain aspects of the provision, most of which related to the

manner in which jobs created by such activities would be considered (2

local government agencies, 3 state agencies, 4 national associations, 4

development organizations, 1 private citizen, and 1 HUD Field staff

person).

Response. As discussed in the preamble to the proposed rule,

activities carried out under the new microenterprise eligibility

category are not statutorily subject to the same low- and moderate

income national objective limitations as are generally applicable to

special economic development activities carried out under Sec. 570.203

[and Sections 105(a)(14) & (17) of the HCD Act]. Thus, the low- and

moderate-income limited clientele method of meeting a national

objective becomes an option for activities carried out under the new

microenterprise eligibility category. While many commenters

specifically supported the subject proposed provision, a few commenters

specifically opposed it, particularly the fact that only 51 percent of

the owners of microenterprises and persons developing them would be

required to be low- and moderate-income persons. Thus, there would be

the potential to permit sizable numbers of non-low- and moderate-income

persons to receive financial assistance to develop a for-profit

business. HUD has found these arguments to be compelling. Thus, the

Department has revised the subject limited clientele provision in this

final rule to restrict its use to qualify only those assisted owners of

microenterprises and persons developing microenterprises who are low-

and moderate-income persons. This change should not be a significant

issue for many of the microenterprise activities assisted under the

CDBG program. Many such programs are designed to provide a means to

help disadvantaged persons become more economically self-sufficient and

are thus often targeted to persons who meet income qualification

criteria at least as restrictive as the CDBG definition of low and

moderate income. Also, to allow for some continuity of service to a

low- or moderate-income person initially assisted under a

microenterprise activity who later may no longer meet the income

guidelines after the microenterprise actually becomes operational, the

Department has retained the option that permits, for purposes of

meeting this national objective requirement, any person determined to

be of low or moderate income to be presumed to continue to qualify as

such for up to a three-year period before that person would have to

requalify. The language in this final rule also clarifies that under

this new limited clientele provision, it is only owners of

microenterprises and persons developing microenterprises that are

considered for national objective purposes and not employees of such

businesses who are not part-owners.

While the new limited clientele provision has been restricted to

only low- and moderate-income persons, activities qualifying under the

new microenterprise eligibility category that may serve non-low- and

moderate-income entrepreneurs may still be assisted under the criteria

for creation and/or retention of jobs principally for low- and

moderate-income persons. Under that national objective claim, all

employees of a microenterprise, including the owner(s), are considered,

and a grantee can use the new presumptions added by Section 806(e) of

the 1992 Act for determining a person's status as a low- or moderate-

income person, as implemented in this final rule at Sec. 570.208(a)(4)

of the Entitlement regulations and Sec. 570.483(b)(4) of the State

regulations. These presumptions cannot be used under the new limited

clientele provision because the 1992 Act added them as a new Section

105(c)(4) of the HCD Act which refers only to activities qualifying

under the national objective of job creation or retention for low- and

moderate-income persons.

One commenter asked that HUD specifically name examples of low- and

moderate-income clientele. Certain such examples that apply to all

activities benefiting low- and moderate-income persons are included in

Sec. 570.506(b) of the Entitlement regulations.

Two commenters requested clarification as to whether HUD's

proposing the limited clientele provision for microenterprise

assistance activities means that ``cost per job'' created will not be a

primary consideration in the evaluation of a CDBG-funded

microenterprise program. ``Cost per job'' is not a primary HUD

consideration for any microenterprise assistance activities carried out

under the new separate microenterprise eligibility category. Such a

calculation only comes into play in the public benefit standards

(established elsewhere in this final rule), which are not statutorily

applicable to activities carried out under the new microenterprise

eligibility category. As with any CDBG activity, however, grantees have

the flexibility to add additional local criteria for activity

evaluation. Also, given the general requirement that all costs charged

to the CDBG program must be necessary and reasonable for the proper and

efficient administration of the program, HUD expects grantees to

consider cost in relation to results for all activities and to take

steps to curb unusually high costs.

National Objective Compliance for Employment Support Activities

As delineated earlier in this preamble under the discussion of the

new Sec. 570.203(c) economic development services provision in the

Entitlement regulations, HUD is aware of various proposals under which

certain entities have indicated a willingness to train low- and

moderate-income persons for jobs and/or provide such persons with other

employment opportunities, but these entities cannot agree that 51

percent of all assisted persons will be low- or moderate-income. HUD

believes that such proposals can often provide valuable opportunities

for employment of low- and moderate-income persons and that a way

should be found to permit CDBG funds to assist such efforts. Thus, HUD

is amending the low- and moderate-income limited clientele national

objective requirements in this final rule [with a new

Sec. 570.208(a)(2)(iv) in the Entitlement regulations and a new

Sec. 570.483(b)(2)(v) in the State regulations] to authorize the use of

CDBG funds for such activities that provide training and/or other

employment support services in limited circumstances. In order to

qualify under this provision, CDBG assistance for the project must be

limited to the provision of such training and/or supportive services;

the percentage of the total project cost borne by CDBG may not exceed

the percentage of all persons assisted who are low or moderate income.

HUD has included this provision under the limited clientele category

rather than the job creation or retention national objective category

because while such use of CDBG funds solely for job training and/or

supportive services can often be considered to [[Page 1931]] ``involve

employment'' of low- and moderate-income persons (reference Section

105(c)(1) of the Act), they cannot generally be considered to directly

``create'' or ``retain'' jobs as those terms are used in the CDBG

regulations.

National Objective Standards for Low- and Moderate-Income Housing

Activities

As noted under the low- and moderate-income area benefit discussion

earlier in this preamble, HUD has added in this final rule new

paragraphs Sec. 570.208(d)(5) and (6) in the Entitlement regulations

and Sec. 570.483(e)(4) in the State regulations. These paragraphs lay

out various national objective options for activities undertaken in

certain lower-income areas either by a CDFI or (in Entitlement

communities) pursuant to a HUD-approved economic revitalization

strategy. Paragraph (ii) of each of these new sections refers to

housing activities carried out under these circumstances, and they are

cross referenced in Sec. 570.208(a)(3) in the Entitlement regulations

and Sec. 570.483(b)(3) in the State regulations in this final rule. As

noted earlier, Section 105(c)(3) of the Act limits the manner in which

housing activities may be considered to benefit low- and moderate-

income persons, and it precludes the use of an area benefit claim for

such activities. As an alternative, the new provisions in this final

rule permit all housing activities carried out under the delineated

limited circumstances to be grouped together and considered as a single

structure for purposes of complying with the low- and moderate-income

housing national objective requirements. (For example, a grantee

providing rehabilitation assistance to 10 single-family housing units

in such an area could classify all 10 units as meeting the low- and

moderate-income benefit national objective if at least six of the units

were occupied by low- and moderate-income persons.) For the calculation

of the overall low- and moderate-income benefit level of a grantee's

CDBG program, such housing is still subject to the limitation on

benefit to low- and moderate-income persons relative to activity costs,

pursuant to Sec. 570.200(a)(3)(iv) of the Entitlement regulations and

Sec. 570.484(b)(4) of the State regulations.

National Objective Standards for Benefiting Low- and Moderate-Income

Persons Through the Creation or Retention of Jobs

Presumptions Added by 1992 Act

Issue. A total of 19 commenters addressed the general manner in

which HUD proposed to implement the presumptions for determining an

employee's status as a low- and moderate-income person that were added

to the HCD Act as a new Section 105(c)(4) by Section 806(e) of the 1992

Act for job creation and retention activities. Of the total number of

commenters, 11 clearly indicated their support for the proposed change,

and five stated their opposition. Most of the support comments were

based on the reduced burden and ``less intrusive'' means for

determining the low- and moderate-income status of employees. Most of

the comments opposing the proposed change referenced the fact that the

proposed rule used only the minimum test for Empowerment Zone and

Enterprise Community census tract. Concern was particularly expressed

that there was no reference to the ``pervasive poverty, unemployment,

and general distress'' requirement for Empowerment Zone and Enterprise

Communities. (6 local government agencies, 6 national associations, 1

state agency, 3 development organizations, 2 private citizens, and 1

HUD Field staff person)

Response. After a thorough review of all of the above comments and

the applicable statutory references at Title XIII, Chapter I,

Subchapter C, Part I of the Omnibus Budget Reconciliation Act of 1993

regarding the eligibility criteria for Empowerment Zones and Enterprise

Communities, HUD has determined that the presumptions added by the 1992

Act should be implemented in a more stringent manner than was set forth

in the proposed rule. The Department particularly agrees with those

commenters who noted that the ``pervasive poverty, unemployment, and

general distress'' eligibility requirement for Empowerment Zone and

Enterprise Communities should be reflected in the implementation of the

subject low- and moderate-income presumptions for job creation and

retention activities under the CDBG program. Thus, a new paragraph

Sec. 570.208(a)(4)(v) of the Entitlement regulations and a new

paragraph Sec. 570.483(b)(4)(v) of the State regulations have been

added to define the requirements a census tract (or block numbering

area) must meet in order to qualify for the presumptions added by the

1992 Act. Under these provisions, a census tract must, in part,

demonstrate pervasive poverty and general distress by meeting at least

one of three delineated standards. Two of these standards relate to the

poverty levels in the various block groups comprising the census tract.

The third standard provides a grantee with the option of requesting a

determination from HUD that a census tract meets the ``pervasive'' test

based on other objectively determinable signs of general distress. The

Department intends to have the subject determinations made at the HUD

Field Office level.

A conforming change to the new Sec. 570.506(b)(7) of the

Entitlement regulations regarding records that need to be maintained

for the subject presumptions is also included in the final rule.

Issue. A total of 10 commenters responded to HUD's specific request

for comment as to whether tighter presumption standards should be

established for census tracts that comprise or include any part of a

community's central business district (CBD), as discussed in the

Empowerment Zone and Enterprise Community legislation. Six of the

commenters wanted no special standards for CBDs. Four of the commenters

argued that there must be tighter standards for such areas given the

statutory eligibility criteria for Empowerment Zones and Enterprise

Communities (4 local government agencies, 3 national associations, 1

development organization, and 2 private citizens).

Response. After a thorough review of all of the above comments and

the applicable statutory references, HUD has determined that tighter

presumption standards must be established for CBDs. The statutory

arguments are compelling. Thus, in the new paragraph

Sec. 570.208(a)(4)(v) of the Entitlement regulations and a new

paragraph Sec. 570.483(b)(4)(v) of the State regulations added by this

final rule, HUD has included language similar to that which appears in

the Empowerment Zone and Enterprise Community regulations regarding

this issue, establishing a 30 percent poverty standard for any census

tract that includes any portion of a CBD (as that term is used in the

most recent Census of Retail Trade).

Issue. Two commenters recommended that HUD revise the proposed rule

language to include census tracts that qualify for Empowerment Zone or

Enterprise Community eligibility under that program's special rules

relating to the determination of poverty rates for census tracts with

small populations, particularly those tracts that are more

[[Page 1932]] than 75 percent zoned for commercial or industrial use (1

local government agency and 1 development organization).

Response. HUD has determined that it is not appropriate to revise

the regulations implementing the CDBG presumptions to include such

tracts in general. While the Empowerment Zone/Enterprise Community

legislation does permit these tracts to be considered as passing the

minimum poverty tests, this is done mainly in the context of qualifying

the tract as part of an overall area to be designated. Because the CDBG

presumptions apply only on an individual census tract basis, the

Department has determined that including such tracts without limitation

would unduly broaden the scope of the subject presumptions. However, it

is recognized that many federally designated Empowerment Zones and

Enterprise Communities could include such census tracts. Thus, the new

paragraph Sec. 570.208(a)(4)(v) of the Entitlement regulations and a

new paragraph Sec. 570.483(b)(4)(v) of the State regulations added in

this final rule to implement the CDBG presumptions permit any census

tract that is part of a federally designated Empowerment Zone or

Enterprise Community to qualify for the CDBG presumption regardless of

whether it meets the other general criteria delineated in the

regulation.

Issue. Several commenters raised other concerns that relate to the

statutory bases for the subject presumptions of a person's low- and

moderate-income status for CDBG activities carried out under the

national objective of job creation or retention. Issues raised

included: concerns regarding the use of census tract data instead of

block group or ``neighborhood'' data; a recommendation to permit

communities to use data obtained through a survey; questions as to why

one of the presumptions only applied to the residence of the employee

while the other applied to either the employee's residence or the

location of the assisted business; and concerns about the

interpretation of the terms ``assisted business'' and ``job under

consideration'' as used in the proposed rule, as opposed to the term

``assisted activity'' as used in the Act (4 national associations and 1

private citizen).

Response. Section 105(c)(4) of the Act, as added by Section 806(e)

of the 1992 Act, which expressly authorizes the subject low- and

moderate-income presumptions for job creation and retention activities,

specifically refers to ``census tracts.'' Thus, overall tract data must

be used in determining these presumptions. In regard to the presumption

that is determined by the tract meeting what Section 105(c)(4) calls

``Federal enterprise zone eligibility criteria,'' it is noted that the

Empowerment Zone/Enterprise Community legislation requires poverty

rates to be determined using the most recent decennial census data

available. Thus, this requirement is carried over into a new paragraph

Sec. 570.208(a)(4)(v) of the Entitlement regulations and a new

paragraph Sec. 570.483(b)(4)(v) of the State regulations added in this

final rule to implement the related CDBG presumption. The other CDBG

presumption, which is based on the low- and moderate-income character

of the census tract in which an employee resides, does not carry with

it the specific requirement that the most recent decennial census data

available must be used. Thus, while HUD expects grantees to follow the

general CDBG rule of using such census data to the fullest extent

feasible, it would be possible for a grantee to conduct a survey to

support a census tract's qualification for that presumption. However,

given the statutory ``census tract'' language noted above, the area for

which such a survey would be undertaken must coincide with the census

tract boundary. It is further noted that this latter presumption only

applies to a census tract in which an employee resides and not to the

location of the assisted economic development project because of the

statutory language in Section 105(c)(4).

In expressing concern over the possible interpretation of the terms

``assisted business'' and ``job under consideration,'' as used in the

regulations implementing the broader presumption, one commenter gave

two examples. First, the commenter states that assistance to a ``branch

office'' located in a qualified tract should be able to use the

presumption resulting from ``Federal enterprise zone eligibility

criteria'' even if the business' principal office is located elsewhere.

This is entirely consistent with the language included in the new

paragraph Sec. 570.208(a)(4)(iv) of the Entitlement regulations and the

new paragraph Sec. 570.483(b)(4)(iv) of the State regulations. In using

the term ``assisted business'' in those portions of the rule, HUD does

not intend to imply that the business' main office or corporate

headquarters must be located in a qualified tract in order to use the

presumption. The regulatory language is designed to provide sufficient

restrictions to prohibit businesses from establishing only a ``shell''

office to make use of the location presumption while the actual

activity being assisted is in fact being carried out elsewhere.

Assistance to legitimate ``branch offices'' is not restricted under the

regulatory language. As a second example, the commenter states that a

``job training center or small business assistance office'' should be

able to use the presumption even though such a facility ``helps people

who do not yet have businesses nor specific `jobs under

consideration'.'' It is not clear how this second example would be able

to use the presumption given the statutory language at Section

105(c)(4). Based on that provision, the new presumptions can only be

used for activities qualifying under the national objective of job

creation or retention for low- and moderate-income persons. Job

training centers or business assistance offices such as those which

appear to be described in the commenter's second example generally

would not qualify under that national objective and would thus not be

able to use the presumption.

Issue. Two commenters raised questions about how the subject

presumptions would be implemented. The first question relates to

whether the presumptions based on an employee's residence could be used

together with the traditional way of documenting an employee as a low-

or moderate-income person in order to meet the overall 51 percent low-

and moderate-income requirement for jobs created or retained by a

particular assisted business. One of the commenters also asked what

documentation HUD will require to verify that jobs are created when the

presumption on the basis of the location of the business is used. (1

state agency and 1 private citizen)

Response. In regard to the first question, it is entirely

permissible for a grantee, in a single activity, to combine counting

employees presumed to be low- and moderate-income persons on the basis

of their residence with those employees documented as being such

persons under more traditional means. Any concerns that this could

possibly lead to the company and/or the grantee being accused of

``singling out certain individuals'' for requests for income

information (as one of the commenters states), is as unfounded as the

``privacy'' concerns certain persons have raised for several years in

discussions of this section of the CDBG regulations. In regard to the

second question, a grantee qualifying a business based on its location

must still obtain sufficient documentation to demonstrate that jobs are

actually created or retained by the activity. This documentation would

be [[Page 1933]] similar to that which the grantee currently receives

for such activities, with the exception that any employee income

information would be omitted.

Issue. Two commenters recommended that the final rule contain

language which would make it easy for low- and moderate-income people

to challenge an ``unwarranted presumption.'' They recommend that HUD

reiterate the regulatory ``substantial evidence to the contrary''

language in this section of the regulations and add wording that would

encourage residents to submit challenges and direct HUD to quickly

respond to such challenges. (1 national association and 1 development

organization)

Response. HUD cannot accommodate this recommendation. The subject

presumptions of a person's low- and moderate-income status for job

creation or retention activities is specifically authorized by statute.

It does not matter if the presumption appears ``unwarranted'' in a

specific case; if the activity meets the requirements delineated in

Section 105(c)(4) of the Act, it is entitled to use the presumption.

There is a distinct difference between these presumptions and those

that are HUD has otherwise established only on a regulatory basis under

the limited clientele standards.

Job Creation or Retention by Public Infrastructure Improvements

The Department proposed another amendment to Sec. 570.208(a)(4) of

the CDBG Entitlement regulations and Sec. 570.483(b)(4) of the State

regulations concerning the requirements for demonstrating national

objective compliance by CDBG-assisted infrastructure improvements.

Eight entities commented on this proposed change: 4 states, 2 national

associations, one HUD staff person and one citizen. Nearly all

commenters supported HUD's efforts to provide more flexibility in this

area. Several comments suggested specific revisions to HUD's proposal.

Issue. Communities often over-design public facilities to

accommodate future growth; this frequently makes sense for the

community. However, CDBG funds should only be used to pay costs

associated with the capacity needed by presently-identified businesses,

or else the grantee should track future job creation for three years.

Response. The Department has chosen not to accept this suggestion.

As noted in the preamble to the proposed rule, the Department proposed

shortening the three-year tracking period to one year because it has

received numerous comments from states that the existing State CDBG

regulations are unduly burdensome. The Department believes it would be

cumbersome for HUD staff to attempt to identify and prorate

construction costs associated with current vs. future capacity needs;

this could place HUD staff in the role of second-guessing grantees'

engineering reports.

Issue. Two commenters requested that projected, rather than actual,

job creation/retention be compared to the $10,000 CDBG cost-per-job

threshold. Because grantees cannot be completely certain how many jobs

will actually be created, there may be instances where the projected

cost per job is less than $10,000, but the actual cost per job is over

$10,000.

Response. The Department concurs with these comments. The

Department is concerned that grantees might intentionally overstate the

projected number of jobs so as to take advantage of the less stringent

requirements for projects whose per-job cost is less than $10,000.

However, it is impossible for job creation or retention estimates to be

100% accurate. As the proposed regulations are worded, a grantee could

be retroactively held responsible for tracking a wider universe of

businesses for job creation/retention if the actual cost per job was

over $10,000, even though the projected cost per job was under $10,000.

In the final regulations, references to actual vs. projected job

creation/retention have been eliminated. Instead, the regulations refer

to jobs ``to be created or retained.''

In the regulations on public benefit documentation, the Department

indicates that, where a grantee shows a pattern of substantial

variation between projected and actual benefits received, a grantee

will be expected to take actions to improve the accuracy of its

projections. The Department has not included comparable language in

this section. If, for purposes of this section, a grantee's projections

show a pattern of substantial variation from actual job creation/

retention, the Department will expect grantees to take steps to improve

the accuracy of their projections.

Issue. One commenter recommended that, rather than requiring

grantees to conduct an assessment of businesses in the service area of

the public facility or improvement, the rule should require an

``appropriate'' review for public improvement projects undertaken to

create or retain jobs.

Response. The Department does not accept this comment, for two

reasons. This suggestion confuses requirements for meeting a national

objective with requirements for demonstrating the eligibility of an

activity. Equally significant is that the new statutory requirements

regarding evaluating and selecting economic development projects

effectively replace the ``appropriate'' determinations previously

required. The Guidelines for Evaluating Project Costs and Financial

Requirements are not applicable to public improvement projects; a

grantee may choose to develop guidelines for evaluating public

improvement projects if it wishes. The Department has chosen to apply

the public Benefit standards only to those public improvement projects

(undertaken to create or retain jobs) for which the projected cost per

job is $10,000 or more.

Issue. HUD should restrict the use of CDBG funds in situations

where economic development infrastructure activities cross privately-

owned property. This would be construed as a potential windfall to the

private property owner or company.

Response. The Department has chosen not to accept this

recommendation. HUD is unaware of any evidence that this is a

significant problem in the CDBG program. As the commenter acknowledges,

states and localities have legal mechanisms to govern hookup access to

public utilities.

Issue. One commenter noted that the proposed Entitlement and State

regulation language differs regarding businesses with which agreements

must be signed; the commenter prefers the language in the proposed

State CDBG regulation.

Response. The Department has revised the relevant sections [which

are now Sec. 570.483(b)(4)(vi)(F) and Sec. 570.208(a)(4)(vi)(F) to

provide greater consistency between the two paragraphs. In revamping

this section of the regulations, the Department has eliminated

references to agreements with businesses.

Issue. Two states urged the Department to delete portions of the

proposed regulations: the requirement for conducting an assessment of

businesses in the service area of the public facility or improvement;

the requirement that job creation should be tracked for each business

until the business' job creation/retention obligation is fulfilled;

and, where the cost per job is $10,000 or more, applying the time

period for tracking businesses to just the business(es) with signed

agreements for which the improvement is undertaken.

Response. Based on relevant statutory language in the Housing and

Community Development Act, the Department disagrees with the

implication that documentation regarding national objectives should

cease once the originally-projected [[Page 1934]] number of jobs has

been created. Furthermore, these recommendations would eliminate the

distinction in requirements between activities in which the cost per

job is $10,000 or more and those in which the cost per job is under

$10,000. Based on the data from the State CDBG program, the $10,000 per

job created/retained threshold appears to be significantly above the

median costs for public facility/improvement projects of this sort; few

projects should thus be subject to the stricter requirements. The

Department believes that stricter requirements are appropriate for

projects costing $10,000 per job or more, because less public benefit

is being obtained per CDBG dollar expended.

However, the Department has taken seriously the underlying desire

for simplicity, and as a result has worked to streamline this section

of the regulations. Eliminated in the final regulations is the

requirement that the recipient undertake an assessment of all

businesses in the service area of the public facility/improvement to

determine which businesses may create/retain jobs as a result of the

public facility/improvement. Grantees are cautioned, however, that

should the CDBG per-job cost of the project be $10,000 or more, the

recipient must still aggregate jobs created/retained by all businesses

which locate or expand in the service area of the public improvement/

facility. Grantees will thus need some mechanism for identifying such

businesses.

Issue. One state requested that the proposed public improvement-job

creation requirements for the State program be made retroactively

applicable to projects funded by states after December 9, 1992. That

was the effective date of the current State CDBG regulations, in which

the existing requirements concerning public improvement-job creation

activities were first effected.

Response. A recent U.S. Supreme Court decision casts uncertainty on

the constitutionality of retroactive rulemaking. The Department feels

an attempt to provide some retroactive flexibility through the rule-

making process could be legally problematic. States may, as always,

request a waiver of the existing regulations for individual cases.

Other Job Creation/Retention Issues

Issue. One commenter raised a concern regarding the provision at

the new Sec. 570.208(a)(4)(vi)(B) of the Entitlement regulations which

permits the aggregation of jobs for loan funds administered by a

subrecipient where CDBG pays only for the staff and overhead and loans

are made exclusively from non-CDBG funds. The commenter recommended

that HUD change the phrase ``. . . jobs created by all the businesses

receiving loans during each program year'' to ``. . . jobs projected by

all the businesses receiving . . .'' This recommendation is based on

the claim that during the early years of a program's operation, ``few

jobs may actually have been created, even though many loans have been

`committed.''' (1 private citizen)

Response. The commenter appears to misunderstand the subject

provision. The regulation does not measure the number of jobs actually

created in each program year. Instead, it measures all the jobs created

as a result of the CDBG assistance by all the businesses that receive

loans in each program year, regardless of when the jobs are actually

created.

In developing this final rule, HUD has pursued additional job

aggregation options in consideration of the many comments received in

support of less burdensome job tracking. Also, in considering the

comments on the public benefit standards, HUD has determined that it is

appropriate to offer certain flexibility for activities that serve

important national interests. Thus, in this final rule, HUD is

delineating three additional instances under which jobs created or

retained may be aggregated for purposes of determining compliance with

national objective requirements. Aggregation of jobs is now also

permitted for (1) activities providing technical assistance to for-

profit businesses; (2) activities meeting the criteria in the public

benefit standards at Sec. 570.209(b)(2)(v) of the Entitlement

regulations and Sec. 570.482(f)(3)(v) of the State regulations; and (3)

for activities carried out by a CDFI. To reflect this,

Sec. 570.208(a)(4)(vi) of the Entitlement regulations and

Sec. 570.483(b)(4)(vi) of the State regulations have been amended. In

this regard, it should also be noted new paragraphs Sec. 570.208(d)(7)

and Sec. 570.483(e)(5), added to the Entitlement and State regulations

respectively, require that for an activity that may meet the standards

for more than one of these options, the grantee may elect only one

option under which to qualify the activity. No ``double counting'' is

permitted.

Issue. One commenter raised a concern regarding the requirement

regarding the criteria now at Sec. 570.208(a)(4)(iii) and

Sec. 570.483(b)(4) making jobs ``available to'' low- and moderate-

income persons, particularly the ``no special skills'' requirement

unless the business agrees to hire unqualified people and then provide

training. The commenters argues that HUD should not ``presume'' that

low- and moderate-income persons have no education because many such

persons may have a community college or vocational technical education

and still be underemployed or poorly paid because of various factors.

The commenter also notes that in certain cases, the jobs to be created

by an assisted activity will not actually be created for a year or

more, which would provide time for necessary training before the

business completes its hiring process. (1 national association)

Response. The reference requirement is important to ensure that no

special skill or education requirements form a barrier to low- and

moderate-income persons being considered for the jobs under the

``available to'' option under Sec. 570.208(a)(4). If a community knows

that there is a pool of more skilled low- and moderate-income persons

available, it can always choose to demonstrate compliance with the

national objective requirement under the ``held by'' option where skill

level is not considered. The new low- and moderate-income presumptions

should also make it easier for grantees to use the ``held by'' option.

In regard to the issue of the timing of the training versus hiring, the

Department wants to ensure that any training claimed under the new

``economic development services'' provision at Sec. 570.203(c) of the

Entitlement regulations and Sec. 570.482(d) of the State regulations is

limited to persons whom the respective business has actually agreed to

employ and not to include training just to provide a general ``pool''

of persons from which a business may possibly hire. This is important

in distinguishing ``economic development services'' that qualify as

part of the ``delivery costs'' of a related economic development

project from more generic public service activities that qualify under

Sec. 570.201(e) of the Entitlement regulations. It is noted that under

this final rule, activities qualifying under either of these

eligibility categories can also take advantage of the new low- and

moderate-income limited clientele option at Sec. 570.208(a)(2)(iv) of

the Entitlement regulations and Sec. 570.483(b)(2)(v) of the State

regulations in certain circumstances.

Request for Comment on Certain Other Job Creation/Retention Issues Not

Contained in the Proposed Rule

In addition to a discussion of specific regulatory revisions, the

preamble to the May 31, 1994, proposed rule also contained a specific

request for public comment on certain other issues which HUD is

examining in an attempt to [[Page 1935]] determine whether further

changes should be proposed regarding the national objective standards

for benefiting low- and moderate-income persons through the creation or

retention of jobs. These issues included: (1) whether any further low-

and moderate-income presumptions should be made for job creation or

retention activities; (2) whether any modification should be made to

the CDBG job retention requirement to document that jobs claimed as

being retained would actually be lost without the CDBG assistance; and

(3) whether any modification should be made to the requirement in job

retention activities that, except for some allowance for jobs that may

become available through turnover, the low- and moderate-income

standards are applied at the time the assistance is provided, which is

while the employees still have the income from the jobs that they are

subject to lose. (Please refer to the preamble to the proposed rule

published in the Federal Register on May 31, 1994, for a more complete

discussion of these issues.)

A sizable amount of public comment in response to these issues was

received. Many of the comments offered interesting suggestions, and HUD

will be publishing an additional proposed rule in response to some of

the recommendations provided. Such items must go through the proposed

rulemaking process in order to provide the general public with an

opportunity to comment on them before they would be published for

effect. The public comments received on these issues based on the

request contained in the preamble to the May 31, 1994, proposed rule

will be discussed fully in the preamble to the new proposed rule.

National Objective Standards for Addressing Slums or Blight on an Area

Basis

The proposed rule included a revision to Sec. 570.208(b)(1)(ii) of

the Entitlement regulations and Sec. 570.483(c)(1)(ii) of the State

regulations. This proposal would allow designated slum/blighted areas

to qualify under the slum/blight national objective if the area

exhibited pervasive economic disinvestment in the form of high turnover

or vacancy rates in previously occupied commercial or industrial

buildings.

In addition, the Department sought comment on whether instances of

environmental contamination should be considered as evidence of

blighting conditions. No specific regulatory language was proposed in

that area, however.

The Department received valuable input on both topics relating to

the slum/blight national objective. As a result, the Department has

decided to propose additions to the slum/blight criteria to accommodate

environmental contamination, and to revise its initially proposed

criteria regarding pervasive economic disinvestment. The existing

regulations would be significantly restructured to accommodate these

changes.

The Department has decided to publish a new set of proposed

regulations dealing with the slum/blight national objectives. The

comments received by the Department on slum/blight issues will be

discussed in the preamble to those new proposed regulations.

Guidelines for Evaluating and Selecting Economic Development Activities

for CDBG Assistance

The proposed rule contained language implementing section 806(a) of

the 1992 Act at a proposed new Sec. 570.209 in the Entitlement

regulations and additions to Sec. 570.482 in the State regulations. The

proposed regulations described guidelines for evaluating certain

economic development activities assisted with CDBG funds. These

guidelines consist of two parts: guidelines and objectives for

evaluating project costs and financial requirements, the use of which

are not mandatory, and public benefit standards, which are mandatory.

Numerous comments were received on various aspects of this section

of the proposed regulations. The comments can be categorized into

groups of issues, and will be discussed by category of issue.

Underwriting Guidelines--General

The proposed rule described HUD's Guidelines and Objectives for

Evaluating Project Costs and Financial Requirements (the ``underwriting

guidelines''); the proposed guidelines themselves were published as a

separate Federal Register notice on the same day. Sixteen commenters

commented on HUD's proposed Guidelines and Objectives for Evaluating

Project Costs and Financial Requirements: 5 local governments, 4

national associations, 2 States, 3 HUD Field Office staffs, one citizen

and one business development entity. Four commenters expressed overall

support for the approach proposed to be taken by the Department in

implementing the requirements of the 1992 Act.

Issue. Three commenters stated that the underwriting guidelines

themselves should be included in the text of the regulations, rather

than in a separate Federal Register notice. By not being part of the

regulations themselves, commenters felt that the guidelines would be

more easily overlooked or forgotten about in future years.

Response. These issues were carefully considered by the Department

in developing the proposed rule. The rule stated that the use of the

underwriting guidelines proposed at Sec. 570.209(a) and Sec. 570.482(e)

is not mandatory. To further demonstrate this point, the specific

elements of the underwriting guidelines were not included within the

text of the proposed rule itself. Instead, they were proposed to be

published in a concurrent but separate Federal Register notice.

Outweighing the conmmenters' concerns is the fact that, while Congress

directed that the guidelines be published by regulation, the use of the

underwriting guidelines is not mandatory. To publish non-binding

guidance within a set of otherwise binding regulations would be

contradictory and confusing. In disseminating information on the final

regulations, the Department will take steps to include the guidelines

along with the final regulations, to help ensure that the Federal

Register notice does not get overlooked.

Issue. Three widely divergent comments were received regarding the

applicability of the underwriting guidelines to microenterprise and

small business assistance programs. One commenter argued that

``appropriate determinations'' should not be required on a loan-by-loan

basis for microenterprise activities, but could be addressed by overall

program design. Another argued that the underwriting guidelines should

apply to microenterprise assistance activities, so that communities

will have a stronger regulatory framework upon which to develop their

own guidelines for evaluating microenterprise loans. A third commenter

stated that small businesses which do not qualify as microenterprises

should be given some relief from the underwriting criteria and

financial documentation requirements.

Response. The 1992 Act specifies that HUD is to develop guidelines

for evaluating and selecting economic development activities funded

under sections 105(a) (14), (15) and (17) of the Act. Microenterprise

assistance activities were made separately eligible under the new

Sec. 105(a)(23) of the 1992 Act, and thus were not subjected to the

underwriting guidelines by Congress. The Department feels it is

inappropriate to extend coverage of the underwriting guidelines to

programs which provide assistance exclusively to microenterprises and

which are eligible under Sec. 105(a)(23). Grantees may

[[Page 1936]] develop their own underwriting guidelines for the

evaluation of microenterprise assistance programs. However, if a

grantee designs a program to provide assistance to both

microenterprises and other small businesses, the public benefit

standards and underwriting guidelines apply to the entire program, and

grantees will be expected to evaluate each instance of assistance

individually. Regarding the third comment, both the proposed and the

final regulations state that different levels of review and financial

documentation are appropriate for different sizes of projects and

businesses; grantees are encouraged to develop guidelines which take

into consideration the size of the business being assisted.

From the first of these comments, as well as from several comments

addressed elsewhere in this preamble, it is clear that the relationship

between the financial guidelines, the public benefit standards and the

``appropriate determination'' requirements (which the Department has

heretofore relied on) is not understood. In the 1987 ``Stokvis Memo''

and in the 1992 ``Kondratas Memo'', the Department outlined its policy

for implementing the statutory requirement that assistance to private

for-profit entities must be ``appropriate to carry out an economic

development project''. The Department believes that the new

underwriting guidelines and public benefit standards, taken together,

effectively comprise a methodology for determining that such assistance

is appropriate, and supplant the previously-required ``appropriate

determinations''.

It is important to note that the financial and public benefit

standards cover a wider range of activities than did the ``appropriate

determinations'', including all economic development activities funded

under sections 105(a) (14) and (15) of the Act. Grantees are encouraged

to develop guidelines to cover the evaluation and selection of other

types of economic development activities, beyond those statutorily

required. However, HUD will not evaluate or enforce locally-developed

guidelines covering economic development activities other than those

described in the regulations.

Issue. Three commenters expressed apprehension about a statement

contained in the preamble to the proposed regulations. The Department

noted that, in cases where an activity receiving CDBG financial

assistance fails to meet other applicable program requirements, such as

the public benefit standards or the national objective requirements,

HUD will consider the extent to which the recipient conducted prudent

underwriting in determining appropriate sanctions to be imposed on the

recipient for such noncompliance. Commenters questioned the consistency

of this statement with statutory language, felt this represented a

``gotcha'' mentality by HUD, and opened the door to HUD ``second-

guessing'' grantees' underwriting decisions.

Response. Commenters are correct in noting that the Department is

prohibited from basing a determination of project ineligibility on the

failure of a project to meet the objectives of the underwriting

guidelines. The Department will not monitor grantees' projects for

compliance with HUD's underwriting guidelines. The proposed

underwriting guidelines also state, however, that the Department

expects that grantees will engage in some form of underwriting of

projects, regardless of whether or not a grantee adopts HUD's

guidelines. The intent of the preamble statement was not to suggest

that HUD would ``second-guess'' local underwriting guidelines or

decisions about specific projects pursuant to them. When the Department

discovers cases of noncompliance with other program requirements (such

as national objectives or eligibility), it has flexibility to determine

the appropriate action to resolve the noncompliance. In cases of

noncompliance with other program requirements, the Department reserves

the right to examine whether the grantee conducted any underwriting on

the activity in question. If a grantee performed no underwriting

whatsoever (or purely perfunctory underwriting) on a project that

fails, the Department may look to see whether even rudimentary

underwriting would have disclosed to the grantee that the project was

likely to fall into noncompliance. Similarly, the Department will also

consider whether a grantee's underwriting disclosed that a project was

likely to fail, but the grantee chose to fund the project anyway for

reasons unrelated to underwriting decisions.

Issue. One HUD staff person inquired about the relationship between

the public benefit standards and the underwriting guidelines. The

commenter asked what HUD would do in a case where a grantee followed

established underwriting guidelines, yet knowingly chose to fund a

project which exceeded the public benefit standards (particularly the

individual activity standards).

Response. Having complied with a grantee's underwriting standards

would not recuse this project from failure to meet the regulatory

requirements for public benefit. In such a situation, the Department

may still consider the extent to which underwriting was performed in

assessing what corrective action is appropriate to resolve the

noncompliance.

Issue. One correspondent requested clarification or examples of

what is meant by the statement that guidelines also apply to

``activities carried out under the authority of Sec. 570.204 that would

otherwise be eligible under Sec. 570.203.''

Response. The Department's position is, and has been, that all

activities involving assistance to a for-profit business are subject to

the same requirements (including the underwriting guidelines, the

public benefit standards, and the previously- required ``appropriate

determinations''). Provision of CDBG assistance to a for-profit

business through a non-profit subrecipient does not exempt such an

activity from the underwriting guidelines or public benefit standards.

In the final regulations, this principle is clarified and illustrated

with an example.

Issue. Three commenters raised questions about the treatment of

non-financial or indirect assistance to businesses in the underwriting

guidelines. Two commenters felt that by not specifically addressing the

level of underwriting documentation needed for technical assistance

activities, the proposed regulations imply that the same degree of

analysis is required for technical assistance to a business as for

direct financial assistance. Two commenters also urged the department

to accept yearly aggregation of technical assistance activities for

demonstrating compliance with national objectives.

Response. The Department concurs with the comments regarding

technical assistance activities. The underwriting guidelines published

today specifically mention that different levels of underwriting

documentation may be appropriate for technical assistance activities,

given the nature and dollar value of assistance being provided to

businesses. The Department has also added a provision to the national

objectives requirements for low- and moderate-income benefit, to allow

job creation/retention to be aggregated for technical assistance

activities.

Certain indirect forms of assistance to business, such as land

acquisition or certain public improvement projects, are not statutorily

subject to the underwriting guidelines. The Department believes that,

while not mandatory, grantees should evaluate all forms of assistance

to businesses, to ensure that the project represents an appropriate use

of the grantee's funds. Grantees are encouraged to develop

[[Page 1937]] underwriting guidelines which include other economic

development activities beyond those subject to the regulations.

Issue. Several comments were received on the wording of several of

the objectives in the guidelines. These comments generally spring from

the commenters' professional opinions on the desirable design features

or outcomes of individual programs.

Response. Because the underwriting guidelines are not mandatory,

the Department has chosen not to adopt most of these suggestions.

Commenters are encouraged to incorporate their ideas into their local

guidelines.

Public Benefit Standards

HUD heard from 20 different commenters on the public benefit

standards (and how they would be applied) in the proposed regulations:

3 local governments, 2 states, 8 national associations, 2 development

organizations, one citizen and 4 HUD staff. Comments on public benefit

fell into four categories of concern: the overall approach and

terminology used; the individual activity standards; activities

providing insufficient public benefit; and the aggregate standards.

While numerous questions and concerns were raised, individual

commenters also expressed general support for various aspects of the

proposed approach to public benefit: the concept of aggregating public

benefit; the flexibility provided by multiple approaches to measuring

public benefit; and the concept of allowing certain categories of

activities to be excluded from the aggregate dollar standards.

It was also very clear that many commenters did not understand the

relationship among the different public benefit standards. Confusion

was also expressed about the meaning of various terms used in the

proposed regulations, which apparently added to confusion over the

relationships among the standards. To overcome this confusion, the

Department has substantially rewritten and reorganized the final

regulations sections on public benefit.

Overall Approach and Terminology

Issue. Three different commenters asked for clarification of

various terms such as ``tests'', ``criteria'', ``portfolio'' and

``obligated''. One asked what constituted an ``activity'' for purposes

of aggregation: an individual loan? All activity in one particular loan

program run by a grantee? Would a grantee with 10 different programs

subject to the public benefit standards develop 10 aggregate numbers,

or one? Another asked for confirmation that the public benefit

measurement period differs from the time period in which job creation/

retention is measured for national objectives documentation.

Response. In the final regulation, the Department has attempted to

use more precise wording. The term ``obligated'' here has the same

meaning as it does elsewhere in the CDBG program--a formal commitment

of funds to fund a specific activity, such as a signed contract with a

business, or written notification of loan approval. The term ``test''

has been replaced with ``standard''; each numerical measure by which

activities are judged (individually or in aggregate) is a standard. Use

of the term ``portfolio'' has been avoided in discussing the aggregate

standards. Use of the term ``criteria'' is limited to describing the

``important national interests'' activities which may be excluded from

the aggregate standards.

The comment regarding the measurement period for public benefit vs.

national objectives is correct. For most covered activities designed to

create/retain jobs, each provision of assistance to a business is

judged separately for whether it meets a national objective; each

business is discretely tracked for job creation/retention until the

business has fulfilled its jobs commitment. In contrast, public benefit

for any given business is judged at the time assistance is first

obligated to the business; the levels of public benefit determined at

the time funds are obligated are then aggregated for all instances of

assistance provided by a grantee through all covered activities. (The

period of time over which activities are aggregated varies among the

Entitlement, State, Insular and HUD-Administered CDBG programs.) Thus,

for any given business, job creation/retention is primarily measured

prospectively for public benefit and retrospectively for national

objectives purposes. (However, this explanation does not apply

universally; as the regulations note, certain types of activities may

be aggregated differently. In addition, grantees are to keep

comparative documentation on the projected vs. actual public benefit

from projects.)

Issue. A number of commenters voiced various objections to the

overall approach to public benefit: the proposed standards are

arbitrary and simplistic, and invite ``second-guessing'' of projects by

HUD; more study is needed in this area before specific standards are

proposed; the standards focus too much on the cost per job and assume

that more jobs per CDBG dollar is a more important outcome than job

quality; the standards ignore present or future values of assistance

provided; the standards focus too much on individual activities,

ignoring overall program outcomes; the standards focus too much on

aggregate benefits, ignoring individual activities.

Response. As discussed in the preamble to the proposed regulations,

the Department considered all of these issues in developing the

proposed public benefit standards. More sophisticated measurement

systems involve greater complexity, and may increase the documentation

burden on grantees and/or reduce flexibility. The Department strives to

effect a system which is flexible enough to encompass the great variety

of individual programs and individual activities which exist across the

CDBG program, and yet ensures at least some modicum of public benefit

will be obtained from any given activity. The Department has made

revisions to the public benefit standards in response to comments, but

has chosen not to radically change the overall approach.

Issue. Two commenters (including one state) suggested that each

community (or the state) be allowed to establish its own public benefit

standards; HUD could then monitor communities or states for compliance

with their standards.

Response. The Department believes these suggestions are

inconsistent with the statute. The 1992 Act specified that HUD is to

develop, by regulation, guidelines to ensure that public benefit is

appropriate relative to the amount of CDBG assistance provided. The

commenters' approach could increase, not decrease, grantee complaints

about HUD ``second guessing'' local decisions.

Individual Activity Standards

Issue. Five commenters opined that the proposed $100,000-per-job

individual activity standard is much too high to ensure reasonable

public benefit for any given activity; various figures between $12,000

and $50,000 were suggested as replacements. On the other hand, one

commenter expressed concern that the $100,000 standard could preclude

use of CDBG funds for massive real estate redevelopment projects or

capital-intensive industrial projects; other public benefits from such

projects may well justify the expenditure of CDBG funds even when the

cost per job is high.

Response. After weighing these arguments, the Department has

decided to lower the individual activity per-job standard to $50,000.

This should still provide flexibility to undertake vitally important

projects with high capital costs per job created or retained;

[[Page 1938]] grantees may request a waiver of regulations for projects

which would exceed this level. The ``CDBG cost per job'' and the ``CDBG

cost per low- and moderate-income person served'' standards are

designed to establish absolute upper limits for what HUD would consider

to be reasonable on an individual project basis. Grantees are free to

set lower per-job maximums for their own projects, if they wish.

Another example of high-cost projects which the Department has

become aware of is the removal of environmental contaminants as part of

a redevelopment project. The use of CDBG funds for such ``brownfields

remediation'' activities is of growing interest among grantees.

Projects of this nature can present high costs relative to the amount

of public benefit as defined in these regulations. However, grantees

may have additional flexibility in structuring the use of CDBG funds to

treat environmental conditions. For example, publicly-owned land may be

cleaned up before title is transferred to a private owner. In this way,

the environmental remediation activity would not be subject to the

public benefit standards.

Issue. Two commenters opined that the proposed $1,000 per area-

resident standard is similarly too high to ensure reasonable public

benefit; one recommended $50 instead.

Response. The Department has decided to leave the per-area-resident

standard as proposed. A lower figure could hinder economic development

activities in small communities or sparsely-populated rural areas.

Grantees are free to set lower per-area-resident maximums for their own

projects, if they wish.

``Insufficient Public Benefit'' Activities

The proposed regulations contained a list of activities for which

HUD believes insufficient public benefit is derived; these activities

would therefore not be eligible for CDBG assistance. Six comments were

received on this list of activities (one each from a citizen, a local

government, a national association and a HUD staff person, and two from

states). Three commenters suggested additional activities to be added

to the list of activities, two commenters objected to the inclusion of

one activity on the list, and two commenters requested clarification of

language.

Issue. Use of grant funds for projects that will directly compete

with existing businesses should be prohibited.

Response. The Department believes this proposal would severely

restrict grantees' use of CDBG funds for economic development and would

handcuff the Department's efforts to make CDBG a more flexible funding

resource. There is nothing which would prevent individual grantees from

adopting such a policy, if they wish.

Issue. Gaming facilities (whether on or off Indian Reservations)

should also be made ineligible.

Response. The Department has considered this issue in the past and

has decided not to pursue it.

Issue. Job Pirating (the use of CDBG funds to move a business from

one community to another, with no net expansion of activity) is a waste

of taxpayers' money and should be determined to be an ineligible

activity.

Response. The Department has studied the problem of job piracy a

number of times in the past, but has not taken action to prohibit this

activity. Determining whether a business is relocating principally

because of the CDBG assistance, or because of other reasons, is a

particularly intractable problem in attempting to define job piracy.

Recently, Congress has shown interest in legislating on this issue. The

Department has therefore decided to defer action on the issue of job

piracy until it is clear what action might be taken in authorizing

legislation.

Issue. Three commenters opposed including the acquisition of land

for which no specific use has been determined on the list of

``insufficient public benefit'' activities. Commenters argued that this

would eliminate future economic development activities, and that

forcing grantees to prematurely identify the use of land drives up the

development cost. One commenter suggested that HUD require land

acquisition to meet a national objective within two years of the

expenditure of funds.

Response. The Department does not find the arguments for removing

this activity from the list to be convincing. The Department is aware

of a number of situations in which land has been purchased using CDBG

funds with no specific use in mind, and in which the Department later

determined that no national objective was ever met by the acquisition.

In the Department's opinion, ``landbanking'' with CDBG funds does not

provide any public benefit. It should be noted that the proposed

regulation would not prohibit the construction of speculative buildings

for which no tenant has been identified; nor does it mean that a

specific occupant must be identified before land can be purchased.

However, a grantee should at least be able to identify the intended use

of the property (such as for a shopping center or office building).

That does not mean, however, that grantees could satisfy the regulatory

intent simply by identifying just any vaguely described proposed use.

The language has been revised slightly in the final regulations to

refer to ``acquisition of land for which the specific use has not been

identified''.

Issue. One commenter requested specific examples of types of

privately-owned recreational facilities serving a predominantly-higher

income clientele which might be determined ineligible under the

proposed regulations. Concerning another activity on the list, this

commenter also noted that the proposed language would not prevent the

provision of assistance to a ``corporate shell'' or another corporate

entity established by the same owner(s) of a business which is the

subject of unresolved findings.

Response. The Department has chosen not to try to develop such a

list of recreational facilities, as that list might be misinterpreted

as all-encompassing; furthermore, a comparison of the recreational

benefits vs. other benefit to low- and moderate-income persons must of

necessity be done on a case-by-case basis. The Department concurs with

the second comment; the final regulations have been revised to include

other businesses owned by the same owner(s). The final rule also makes

minor clarifying revisions to several of the other ``insufficient

public benefit'' activities.

Aggregate Activity Standards

Issue. Three commenters argued that the aggregate standards are too

complex, and so should be eliminated. Some commenters feared that

grantees may focus only on the individual activity standards and

overlook the aggregate standards; the human tendency will be to fund

high-profile, high-cost-per-benefit projects first and ``make it up

later'' with smaller projects. Another commenter expressed concern that

for low-volume economic development programs, the individual and

aggregate standards would effectively be the same; if a grantee does

one loan early in a year with a per-job cost over $35,000 and then ends

up making no other loans, the grantee automatically fails the aggregate

standard.

Response. To reinforce the significance of the aggregate public

standards, the regulations concerning public benefit have been re-

ordered to discuss the aggregate standards first. It is not the

Department's intent to unduly penalize low-volume economic development

programs for noncompliance by one or two loans. However, in evaluating

projects for possible funding, all grantees are well

[[Page 1939]] advised to consider their historical levels of economic

development activity to ensure that the aggregate standards will be

met. It should be noted that HUD's decision to lower the individual

activity standard for job creation/retention from $100,000 to $50,000

should reduce the possibility that grantees will fail the aggregate

standard because they funded very high cost-per-job projects early in

the year.

Issue. One commenter argued that the $35,000 per-job aggregate

standard is too high to ensure reasonable public benefit; several

alternative standards in the range of $5,000-$10,000 per job were

recommended instead.

Response. The Department has chosen not to accept this

recommendation. This commenter also raised other objections to HUD's

proposed method for assessing public benefit; taken together, their

comments argue for a much more rigorous approach to economic

development funding, which would reduce grantee flexibility.

Issue. One commenter argued in favor of either eliminating the $350

per low- and moderate-income area resident standard, or at least

raising it to $500.

Response. The Department has decided to retain the proposed $350

figure.

Issue. One HUD staff person questioned how public benefit would be

measured in the aggregate under the HUD-Administered Small Cities CDBG

program, given that many grantees have revolving loan funds funded with

program income from previous grants.

Response. The Department agrees that the proposed regulations do

not adequately address this issue. In the final Entitlement

regulations, Sec. 570.209(b)(2) has been revised to address aggregate

public benefit in the HUD-Administered Small Cities and Insular Areas

CDBG programs.

Issue. Four comments were received on the list of ``important

national interest'' activities. Two commenters felt that more than 75%

of a grantee's funds should be used for such ``important national

interest'' activities in order to meet the alternate aggregate

standard. One commenter felt the criteria were so broadly written as to

allow virtually all activities to qualify, and particularly objected to

four of the proposed criteria [(E), (F), (H), (L)] as inappropriate.

Another questioned why microenterprise assistance activities [(G)] were

included on the list, when microenterprise assistance activities funded

under Sec. 105(a)(23) of the Act are not subject to the public benefit

standards. One commenter favored keeping the percentage of funds

requirement at 75%.

Response. In developing final regulations, the Department has

substantially revised the concept that certain activities can be

excluded from the $35,000 per-job or $350 per-area-resident aggregate

standards. The 75% provision has been eliminated as an alternate to the

aggregate dollar standards. Instead, grantees may, at their option,

exclude individual ``important national interest'' activities from the

aggregate standards. The list of ``important national interest''

activities which can be excluded from the aggregate standards has also

been revised. Proposed criterion (G) has been eliminated, and proposed

criteria (A) and (B) have been combined. Two new criteria [(L) and (M)]

have been added to the Entitlement program final rule; these criteria

provide additional flexibility in support of the new ``economic

revitalization strategy area'' approach to demonstrating national

objectives compliance. (This approach is discussed under ``Low and

Moderate Income Area Benefit Activities'' above; as noted there, the

approach is being implemented in the Entitlement program only at this

time.) The remaining criteria are now more narrowly defined to better

target assistance to certain population groups. One significant effect

of these changes to the ``important national interest'' activities is

worth noting. All activities which do not meet one of these ``important

national interest'' criteria must be subject to the aggregate dollar

standards.

Issue. Two commenters expressed concern about the relationship of

the aggregate standards to the Section 108 Loan Guarantee Program.

Concern is expressed that the $35,000 per-job aggregate standard will

hinder grantees' use of the Section 108 Loan Guarantee program; Section

108 projects are often big projects which could overwhelm the aggregate

average. If an expenditure of CDBG funds is required several years down

the line to cover a default, the grantee's aggregate level of public

benefit would suddenly become skewed too late for a grantee to make

adjustments.

Response. It is acknowledged that certain large Section 108

projects might have a high cost per job; however, the Department

believes Section 108 projects should be treated consistently with other

CDBG-funded projects. The Department has revised the requirements

applying to the ``important national interests'' activities listed in

the final rule; grantees may now, at their option, exclude activities

meeting these criteria from the aggregate standards. The Department

believes many Section 108 projects could meet one or more of these

criteria. Grantees may also request a waiver of the regulations for

individual activities which may not meet the public benefit

requirements. Concerning an unexpected skewing of aggregate benefit

resulting from a default, grantees should consider the possibility of a

default when deciding whether to fund proposed projects.

Issue. One commenter suggested that economic development services

activities funded under proposed Sec. 570.203(c) of the Entitlement

regulations be excluded from the public benefit standards, either

categorically or at the grantee's option.

Response. The Department does not believe it possible to exempt

this type of economic development activity from the public benefit

standards, given the statutory language mandating the development of

public benefit standards for activities qualifying under this

authority.

The Department has added language to the discussion of public

benefit which clarifies how to apply the individual and aggregate

standards to activities which provide job training, job placement and

other employment support services. Except for microenterprise

assistance activities eligible under Sec. 105(a)(23) of the Act, many

such activities will be subject to the public benefit standards because

they are undertaken pursuant to Sections 105(a)(14), (15) or (17) of

the Act. For purposes of the individual and aggregate public benefit

standards only, the jobs which such services involve are counted as

jobs created or retained. (See also the preamble discussion of national

objectives for further information on these activities.)

Public Benefit Standards--Documentation of Benefit

Five commenters (two states and three national associations)

offered comments on proposed paragraphs 570.209(d) and 570.482(e)(6).

Comments fell into two groups: those concerned about what constitutes a

substantial difference in actual versus projected benefits; and those

concerned about what sanctions the Department might take where actual

benefits were found to be substantially less than projected benefits.

One of the comments expressed general support for the approach to allow

adjustment to the projection process.

Issue. One commenter felt that if a grantee re-evaluates an amended

project, it should be held accountable to its amended projections, not

to its initial projections. The commenter recommended that the

regulations [[Page 1940]] should refer to ``initial or amended

projections''.

Response. The Department concurs with this point; the final

regulations discuss benefits in terms of benefits ``anticipated when

the CDBG assistance was obligated.'' This is intended to include

situations in which projections are revised because of changes in a

project which a grantee agrees to allow.

Issue. One commenter recommended that grantees' records concerning

the amount of public benefit derived from projects be made available to

the public at no cost. This commenter also recommended that Entitlement

grantees' Grantee Performance Reports should contain information on

differences between projected and actual public benefits from projects.

Response. Existing requirement concerning the availability of

documents to the public (such as the CDBG citizen participation

requirements) already cover the commenter's first concern. The

Department will take under advisement the suggestion concerning

reporting of benefits, at such time in the future that reporting

requirements are revised.

Issue. One commenter expressed the opinion that if a grantee shows

a pattern of substantial differences between projected and actual

benefits, over perhaps a two year period, HUD should impose a two-year

moratorium on the offending activity for that grantee.

Response. The Department does not accept this recommendation, as it

is inconsistent with existing CDBG regulations concerning sanctions for

noncompliance. The Department opposes the concept of developing

different, prescribed sanctions for different categories of

noncompliance.

Issue. One commenter expressed concern over the proposal that the

Department might hold a grantee to more stringent public benefit

standards in the future when the Department found a grantee to have

failed the public benefit standards. The commenter recommended that the

Department not take such action unless a grantee failed the standards

for two consecutive years, so as not to punish a grantee which might do

only one project in a year and have that one project prove

unsuccessful.

Response. While the Department agrees that low-volume economic

development programs should not be unduly penalized for the failure of

one project, the Department considers it inappropriate to identify a

specific time period over which to measure success or failure. The

final regulations have been revised to discuss situations in which ``a

pattern of substantial variation'' occurs.

Issue. Two states expressed concern about proposed language

requiring a state to ``take all actions reasonably within its control''

to improve a unit of local government's public benefit projections,

when actual results vary substantially from initial projections. This

language was seen as imprecise, and calls into question just what

actions are within a state's (versus the local government's) control to

rectify the problem. One state expressed concern that HUD might

sanction a state even after the state took all actions available to it

to correct a problem. The other state, while recognizing HUD's

oversight role, felt it inappropriate for HUD to second-guess a state's

actions, as only the state can impose on itself those actions necessary

to resolve the problem at the local level.

Response. These comments, as well as those discussed previously,

clearly indicate concern by grantees over what sanctions the Department

might take against a grantee, and over what local-level actions are

``enough'' to address a problem. The Department concurs up to a point

with the states' comments. The intended meaning of this paragraph was

that if local governments' results disclose a pattern of inaccurately

projecting pubic benefits, then the state should take actions to insure

that localities improve projection accuracy; if a state were to do

little or nothing to correct the problems, then HUD could impose

stricter standards upon a state. Similarly, if an Entitlement grantee

demonstrates that its projection process is inaccurate, it should take

steps to improve the accuracy of its projections; if local efforts to

resolve the problem were ineffective or nonexistent, then HUD could

impose stricter public benefit standards upon the grantee. HUD does not

intend that problems by one state recipient should be cause for

sanctions against an entire state's program.

HUD does not consider it useful to attempt to define what actions

are ``reasonably within the grantee's control'', as every situation

would involve a judgement call as to what could or should be done. The

concept of deferring entirely to a state's judgement about what actions

could or should be taken (against a state grant recipient) is

impractical, given HUD's statutory mandate to determine grantees'

compliance.

The paragraphs on documentation have been revised to respond to all

the above comments, and to provide greater clarity of meaning. In

addition, Sec. 570.482(f)(6) of the final State regulations clarifies

HUD's expectations upon states concerning local governments'

performance.

Amendments to Projects After Determinations

Four commenters (three local governments and one national

association) commented on the paragraphs concerning amendments to

projects after a funding decision has been reached.

Issue. Three commenters questioned as imprecise HUD's use of the

term ``material change'' in referring to situations in which a grantee

should reevaluate a project (after committing funding to it) because of

changes in the project. One commenter felt the proposed wording implied

that reanalysis would be required for any change, which would in their

opinion be overkill. Another commenter suggested use of the term

``substantial change'', which is used in the existing Entitlement

regulations to describe situations in which the Final Statement must be

amended.

Response. It is not the Department's intent that any change in a

project should necessitate its complete reevaluation. Minor changes,

such as the shifting of small dollar amounts among budget categories,

or a one-month extension to the construction period, probably would not

affect the underlying assumptions upon which a grantee decided to

assist the project. However, if the project changes to the extent that

the revised project would be very different in its scope, public

benefit, total cost or CDBG cost (compared to the project as initially

approved by the grantee), the Department believes that the project

should be reexamined under the public benefit and underwriting

guidelines. A grantee should confirm whether it still wishes to

participate in the project, whether the costs and benefits of the

project are still reasonable, and whether the amount of public benefit

is still reasonable given the amount of assistance being provided.

In the final regulations, these paragraphs have been rewritten to

state that a project should be reevaluated if the project changes to

the extent that ``a significant amendment to the contract (with the

business) is appropriate.'' The use of the term ``substantial'' was

avoided, as some might attempt to apply the same concept of

``substantial'' as used concerning Final Statement amendments--a

borrowing of concepts which the Department feels is not appropriate or

relevant. The Department has chosen not to define what constitutes a

``significant amendment'', nor to define the types of changes which

[[Page 1941]] would call for reevaluation. Grantees are strongly

encouraged, in developing their guidelines, to define what they will

consider to be ``significant changes'', and to identify how they will

reevaluate projects.

Issue. One commenter objected to the example provided at the end of

the paragraph concerning a situation in which total project costs

change. In this example, the Department suggested that if total project

costs decreased, it would be appropriate to reduce the amount of CDBG

assistance to the project. The commenter felt that this implies that

any reduction in total project cost should automatically result in a

comparable reduction in the amount of CDBG assistance, which may not be

practical. The commenter recommended eliminating the example.

Response. The Department concurs with the basic point that it may

not always be appropriate to reduce the amount of CDBG assistance in

such cases. The example has been retained in the final rule, but has

been modified to state that ``it may be appropriate'' to reduce the

amount of CDBG assistance. The final regulation also notes that when a

project is amended to receive additional CDBG assistance, the project

as amended must still comply with the public benefit standards.

Modification to the Definition of Subrecipient Related to

Microenterprise Assistance Activities

Issue. As noted earlier under the CBDO discussion regarding

Sec. 570.204 of the Entitlement regulations (Section 105(a)(15) of the

Act), five commenters addressed the proposed revision to the definition

of the term ``subrecipient'' at Sec. 570.500(c) to expand that

provision to include for-profit entities that are now specifically

authorized by statute to carry out microenterprise assistance

activities under the new eligibility provision implemented in this

final rule by a new Sec. 570.201(o) in the Entitlement regulations

[Section 105(a)(23) of the Act]. Most of the commenters recommended

that HUD not consider any entities carrying out activities under the

new microenterprise category as ``subrecipients'' but rather as ``end

beneficiaries.'' These commenters also requested a similar change in

classification for entities receiving CDBG assistance under

Sec. 570.204 of the Entitlement regulations [Section 105(a)(15) of the

Act]. Other commenters asked only for a clarification of the proposed

revision to Sec. 570.500(c). (1 local government agency, 1 development

organization, and 3 HUD Field staff persons)

Response. The new Section 105(a)(23) of the Act authorizes ``the

provision of assistance to public and private organizations, agencies,

and other entities (including nonprofit and for-profit entities) to

enable such entities to facilitate economic development'' by providing

various forms of assistance to owners of microenterprises and persons

developing microenterprises. The Department interprets this provision

to mean that any such entities beyond the grantee itself are to serve

as intermediaries in the grant assistance chain rather than being

considered beneficiaries in and of themselves. Thus, the Department

considers such organizations to be subrecipients under the CDBG

program. The existing definition of the term ``subrecipient'' at

Sec. 570.500(c) of the CDBG Entitlement regulations is being revised in

this final rule only to include a specific reference to the for-profit

entities now authorized to carry out microenterprise assistance

activities. (Nonprofit entities carrying out such activities are

already covered by the existing definition of a ``subrecipient.'') The

language in the proposed change to Sec. 570.500(c) has been revised,

however, to clarify the Department's intent.

Other Issues Regarding Income Documentation

Issue. One commenter recommended that HUD take this opportunity to

clarify what is meant by a ``verifiable certification'' as the term is

used in Sec. 570.506(b). The commenter asks whether this term implies

that a sample of the certifications should be verified. (1 private

citizen)

Response. HUD does not believe that this issue need be further

specified in the text of the regulation itself. However, as guidance

for grantees, it should be noted that, over time, HUD does expect that

some sample of such certifications would be verified by the grantee or

subrecipient, as applicable. This verification is important to

maintaining program accountability and integrity.

Issue. One commenter raised concerns about the burden of keeping

family size and income data for job creation or retention activities.

As another option, the commenter recommended that HUD only look at the

wages of the individual employee and compare that figure against the

income limits for one-person households. (1 development organization)

Response. HUD cannot accept this recommendation. First, the

proposal is not consistent with the general statutory definition of a

low- and moderate-income person as being a member of a low- and

moderate-income family. Secondly, the proposal's use of the wages of a

created job as the basis for determining a person's income status runs

counter to CDBG program requirements. To be counted toward compliance

with low- and moderate-income national objective compliance, a person

need only be low- and moderate-income at the time the CDBG assistance

is provided, i.e., for a created job, at the time he or she is hired.

The CDBG program does not and should not impose any requirement that

the person would have to stay low- and moderate-income based on the

wages of the created job. Finally, it should be noted that presumptions

added by the 1992 Act for determining whether a person is considered

low- and moderate-income for job creation or retention activities, as

implemented in this final rule, should significantly reduce the burden

described by the commenter.

Issue. One commenter stated that, in regard to the State CDBG

program, it is good that HUD is consulting and negotiating with States

on record keeping issue, but the commenter complained that the number

of States being consulted was too small. The commenter argued that HUD

should negotiate record keeping requirements with each and every State

because since they represent such broad and varied regions. (1 state

agency)

Response. It is not logistically possible for HUD to negotiate with

each and every State before issuing record keeping regulations for the

State CDBG program. HUD is still negotiating with a sample of States

and is hoping to devise certain minimum record keeping standards for

States that will be accepted on a consensus basis.

Other Issues Not Specifically Addressed in the Proposed Rule

A number of comments were received on issues not specifically

addressed in the proposed regulations, but which were seen (by

commenters) as having significant bearing on the use of CDBG funds for

economic development activity.

Issue. Two commenters (both local governments) requested that the

Department address the issue of using CDBG funds for economic

development activities on military bases which are being closed.

Response. The Department does not see the reuse or redevelopment of

closed military bases as an activity per se, but rather a goal which

CDBG funds can be used to address. The Department believes the current

regulations concerning eligibility and national objectives, along with

these revised [[Page 1942]] regulations, give communities considerable

flexibility to carry out a broad range of economic development

activities, including those on former military bases.

Issue. Six commenters (3 national associations, 2 states and one

local government) identified other Federal requirements as major

inhibitors to the use of CDBG for economic development (particularly

for microenterprise assistance), and asked the Department to examine

ways to streamline these other requirements. Specifically identified

were environmental review procedures, program income requirements, and

the Davis-Bacon Wage Rate Act.

Response. HUD acknowledges that these areas are the source of

frequent complaints. However, as some commenters noted, the underlying

bases for many of the regulatory requirements in these areas are

statutory, and thus lie beyond HUD's span of control. HUD is willing to

explore ways in which regulations governing these other federal

requirements might be made more amenable to the use of CDBG funds for

economic development.

In particular, the Department realizes that CDBG regulations

governing the use of CDBG program income must be revised to include

1992 changes to the Act. Issues concerning program income will be dealt

with more comprehensively in separate future rule-making. In the

meantime, and in response to these comments, the Department has

identified three incremental changes which can be made regarding

program income, and has included them in this final rule.

1. The 1992 State CDBG program regulations included a provision

excluding from the definition of program income an amount of up to

$10,000 per year per state grant recipient. This provision was

consistent with 1992 amendments to the Act, which permitted the

Secretary to exclude from program requirements amounts of program

income that are determined to be so small that compliance with

requirements would place an unreasonable administrative burden on units

of local government. During the past two years, a number of states have

commented to HUD that many of their grant recipients regularly receive

over $10,000 per year in program income; thus, at its present level,

this exclusion provision is of little or no benefit to state grant

recipients. Since state grant award amounts are typically smaller than

the average yearly entitlement grant amount, state grant recipients

typically receive less program per year than entitlement grantees. The

problem noted by states is likely to be equally or more problematic for

entitlement grantees.

The Department has determined that $25,000 is a more appropriate

level at which to set the yearly exclusion amount. These final

regulations also extend the exclusion provision to the Entitlement

program for the first time. In a separate rulemaking, the Department is

also adding the exclusion provision to the HUD-Administered Small

Cities program regulations.

2. The existing definition of program income includes revenue

generated by activities carried out with the proceeds from loans

guaranteed under Section 108. Such revenue is now treated as program

income even if the guaranteed loan is repaid with non-CDBG funds. Such

revenue is treated as program income notwithstanding that it is

required to be pledged to the repayment of the Section 108 loan. The

final rule excludes from the definition of program income certain

amounts generated by activities financed by Section 108 loans, to the

extent that non-CDBG funds are used to repay the loan. Activities which

can qualify for this exclusion are those meeting the criteria at

Sec. 570.209(b)(2)(v) or Sec. 570.482(f)(3)(v) (the ``important

national interest'' activities), and those carried out in conjunction

with an Economic Development Initiative grant in an area determined by

the Department to meet the eligibility requirements for Urban

Empowerment Zone designation.

Any revenue generated by activities financed with Section 108 loan

guarantees which is not defined as program income would be

miscellaneous revenue. In addition, any amounts in debt service

accounts that were funded with non-CDBG funds (e.g. Section 108 funds

and monies provided by the assisted business) that remain after full

and final repayment of the guaranteed loan would also be considered

miscellaneous revenue.

3. As discussed earlier under the heading of Community-Based

Development Organizations, the Department has substantially revised the

requirements governing activities funded under Sec. 105(a)(15) of the

Act (and Sec. 570.204 of the Entitlement regulations). As a result of

those changes, the department has determined that amounts generated by

such activities can also be excluded from the requirements governing

the use of program income.

Because Sec. 105(a)(15) of the Act differentiates between the types

of eligible entities in entitlement jurisdictions and nonentitled

areas, this change has been effected by different means for the

Entitlement and State CDBG programs. Section 570.500(c) of the

Entitlement regulations, which defines the term ``subrecipient'', has

been revised; entities described in Sec. 570.204(c) [which implements

Sec. 105(a)(15) of the Act], are no longer defined as subrecipients. As

noted previously, the term ``subrecipient'' is not defined in the State

CDBG program. Section 570.489(e) of the State rule (which comprises

program income requirements) has been revised to exclude from the

definition of program income amounts generated by Sec. 105(a)(15)

activities. States are expected to ensure that any such activities are

indeed carried out by an entity pursuant to Sec. 105(a)(15).

It should be noted that this exclusion does not cover situations in

which a grantee provides CDBG assistance to one of these entities in

the form of a loan. Any repayments of principal or interest from the

entity to the grantee for such a loan would be considered to be CDBG

program income, regardless of the source of the funds used for

repayment.

Issue. Numerous commenters noted that HUD needs to provide

additional training for grantees and HUD Field Office staff to ensure

uniform understanding, interpretation and implementation of the revised

regulations. HUD should also go beyond formal training to provide other

mechanisms (such as national conferences, development of model

programs, resource guidebooks and computer bulletin boards) for sharing

information on economic development activities. Areas in which certain

commenters were particularly interested in seeing greater information-

sharing included: related federal initiatives such as welfare reform

and Empowerment Zones/Enterprise Communities; sharing of model

programs; microenterprise assistance programs; use of ``first source''

agreements for job creation activities; and combining CDBG with other

federal economic development resources.

Response. The Department acknowledges the importance of training on

new regulations, and is planning to provide training to both grantees

and HUD Field Office staff once these regulations are effective. HUD is

also developing a CDBG economic development reference manual which will

include model programs. The Department's Consolidated Technical

Assistance initiative, which is already being implemented, should also

result in additional training opportunities on economic development

issues.

The Department plans to develop guidelines by which those

communities [[Page 1943]] demonstrating the best performance in the

area of economic development may be identified. These guidelines will

be distributed to both grantees and HUD Field Office staff. The

Department will also identify administrative mechanisms through which

additional relief may be provided to communities with the best economic

development performance records.

Relationship to Section 3 Economic Opportunity Requirements

Recipients of CDBG funds must also comply with the requirements of

Section 3 of the Housing and Urban Development Act of 1968 (Section 3),

as amended by Section 915 of the 1992 Act. Section 3 requires that, to

the greatest extent feasible, and consistent with existing Federal,

State and local laws and regulations, employment and other economic

opportunities arising in connection with CDBG assistance to any Section

3 covered project are given to low- and very low-income persons

residing within the metropolitan area (or nonmetropolitan county) in

which the project is located. For the CDBG program, Section 3 covered

projects include housing rehabilitation, housing construction, and

other public construction. The Section 3 requirements apply to

training, employment and contracting opportunities arising in

connection with a covered project, as well as job (or other

opportunities) which may be retained or created as a result of the

project. An interim rule implementing the 1992 amendments to Section 3

was published by the Department in the Federal Register on June 30,

1994, and it became effective August 1, 1994.

Other Matters

Executive Order 12612, Federalism

The General Counsel, as the Designated Official under section 6(a)

of Executive Order 12612, Federalism, has determined that the policies

in this rule do not have Federalism implications when implemented and,

thus, are not subject to review under the Order. Nothing in the rule

implies any preemption of State or local law, nor does any provision of

the rule disturb the existing relationship between the Federal

Government and State and local governments.

Executive Order 12606, the Family

The General Counsel, as the designated Official under Executive

Order 12606, has determined that this rule does not have potential

significant impact on family formation, maintenance, and general well-

being, and, thus, is not subject to review under the Order.

Environmental Finding

A Finding of No Significant Impact with regard to the environment

has been made in accordance with HUD regulations in 24 CFR part 50,

which implement section 102(2)(C) of the National Environmental Policy

Act of 1969, 42 U.S.C. 4321. The Finding of No Significant Impact is

available for public inspection between 7:30 a.m. and 5:30 p.m.

weekdays in the Office of the Rules Docket Clerk, Room 10276, 451

Seventh Street, SW., Washington, DC 20410.

Regulatory Flexibility

Under the Regulatory Flexibility Act (5 U.S.C. 605(b)), the

Secretary by his approval of publication of this rule hereby certifies

that this rule does not have a significant economic impact on a

substantial number of small entities. The rule does not affect the

amount of funds provided in the CDBG program, but rather modifies and

updates program administration and procedural requirements to comport

with recently enacted legislation.

Semiannual Agenda

This rule was listed as item 1848 in the Department's Semiannual

Agenda of Regulations published on November 14, 1994 (59 FR 57632,

57664) under Executive Order 12866 and the Regulatory Flexibility Act.

Catalog of Federal Domestic Assistance

The Community Development Block Grant Program is listed in the

Catalog of Federal Domesti

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