Detailed Information on the
Section 108 Community Development Loan Guarantee Program Assessment

Program Code 10009066
Program Title Section 108 Community Development Loan Guarantee Program
Department Name Dept of Housing & Urban Develp
Agency/Bureau Name Policy Development and Research
Program Type(s) Credit Program
Assessment Year 2007
Assessment Rating Results Not Demonstrated
Assessment Section Scores
Section Score
Program Purpose & Design 60%
Strategic Planning 59%
Program Management 89%
Program Results/Accountability 23%
Program Funding Level
(in millions)
FY2007 $11
FY2008 $9
FY2009 $0

Ongoing Program Improvement Plans

Year Began Improvement Plan Status Comments

Develop annual and long-term performance measures and will implement procedures to collect accomplishment data from program participants.

Action taken, but not completed HUD intends to incorporate Section 108 into the CDBG program's performance measurement system. HUD has identified the elements of the Integrated Disbursement and Information System (IDIS) that require modification. The required modifications must be implemented as part of the currently ongoing modernization of IDIS. Pending the completion of this process, HUD will collect information from manually prepared to performance reports generated through IDIS.

Complete an evaluation of the Section 108 program to assess the program's effectiveness and to identify areas for improvement.

Action taken, but not completed Evaluation is to be undertaken by HUD's Office of Policy Development and Research.

Completed Program Improvement Plans

Year Began Improvement Plan Status Comments

Program Performance Measures

Term Type  
Annual Output

Measure: Number of jobs newly created or retained (e.g., protected from elimination) as a result of the activity financed with the Section 108 guaranteed loan

Explanation:This measure addresses the strategic goal of strengthening communities and the strategic objective of providing capital and resources to improve economic conditions in distressed communities. Since no funding is proposed for FY 2008, the target for that year reflects only the budget authority carried over from the previous year. {Note: no target was established for 2005 due to termination proposal}

Year Target Actual
2003 15,000 11,730
2004 15,000 10,250
2005 - 9,611
2006 11,000 10,166
2007 5,500 4,108
2008 4,100 -
2009 3,500
Annual Efficiency

Measure: Subsidy cost per job newly created or retained (e.g., protected from elimination).

Explanation:2006 is the baseline for this efficiency measure; targets are set for 2007 as the program is proposed for termination. 2008 targets are based on projected carry-over funds.

Year Target Actual
2006 359 359
2007 345 652
2008 327
2009 325

Questions/Answers (Detailed Assessment)

Section 1 - Program Purpose & Design
Number Question Answer Score

Is the program purpose clear?

Explanation: Section 108 is the loan guarantee provision of the Community Development Block Grant (CDBG) program and thus shares that program's mission of developing viable urban communities. Section 101(c) of P.L. 93-383 defines the primary objective of the act to be "...the development of viable urban communities, by providing decent housing and a suitable living environment and expanding economic opportunities, principally for persons of low and moderate income." Section 108 of the Act is more narrowly focused. It allows communities to leverage their CDBG funds into federally guaranteed loans large enough to finance physical and economic revitalization projects that can renew entire neighborhoods or provide affordable housing to low- and moderate-income persons. This provision authorizes HUD to guarantee loans in an aggregate amount of up to five times an entitlement community's most recent grant or five times the grant of a state that assists a non-entitlement community in applying for a loan guarantee.

Evidence: The Section 108 program's mission and its role in achieving that mission are described in sections 101(c) and 108 of P.L. 93-383. Section 108 authorizes the Secretary of HUD to guarantee loans for the purposes of financing (1) the acquisition of real property or the rehabilitation of real property (including related expenses), (2) housing rehabilitation, (3) economic development activities, (4) public facilities and improvements, and (5) public works and site improvements carried out in colonias.

YES 20%

Does the program address a specific and existing problem, interest, or need?

Explanation: Section 108 provides CDBG recipients with an additional resource to address specific housing and community/economic development needs of low and moderate income persons by providing financing for projects that would otherwise not be undertaken. Such public investment is often used to stimulate private investment by providing the initial resources or supply the confidence private firms and individuals may need to invest in economically distressed areas or in housing developments. Projects financed under Section 108 are either too large to carry out with annual CDBG grant allocations or they generate revenue that can be used to repay the guaranteed loan, or both. The use of Section 108 by communities to fund larger projects is supported by an analysis of commitments awarded to entitlement communities during the period FY 2002 - FY 2006. During this period, the average ratio of loan guarantee commitment to the applicant's CDBG allocation was 1.45:1. The median ratio during this period was 0.88:1. Seventy percent of the commitments equaled at least one-half of the communities' CDBG allocations. During the same period the actual CDBG funding decreased by 15 percent, thus making the availability of Section 108 financing even more important to communities. An example of the need for large scale funding is the East Baltimore BioTech Project that was approved in June 2003. The City of Baltimore received a $21.2 million loan guarantee to finance the acquisition of over 800 properties, relocation of 300 households, and demolition of over 500 structures. City officials have indicated that virtually no investment had occurred in the project area before the use of the Section 108 assistance and that the project would not have proceeded without the loan guarantee.

Evidence: The PD&R study, "The Impact of CDBG Spending on Urban Neighborhoods" found that more concentrated CDBG investments are linked to improvements in neighborhood quality. Section 108 is a financing resource available to CDBG recipients to make substantial concentrated investments in housing, infrastructure, and job creating activities. Communities also use Section 108 to a certain extent to finance revenue generating projects, resulting in a more optimum use of grant funds.

YES 20%

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: While Section 108 provides a mechanism for communities to finance physical and economic development projects to revitalize neighborhoods or create affordable housing for low- and moderate-income persons, there are other Federal programs and private financing that can serve a similar population and fund similar categories of activities. In the GAO report (00-220), "Multiple Federal Programs Fund Similar Economic Development Activities," it cites that Section 108, CDBG, Economic Development Administration, Rural Development Grants, and Empowerment Zones providing funding for the same categories of activities. Many other Federal programs (i.e., Small Business Administration, Community Service Block Grant) fund a subset of these categories, and therefore also overlap in their eligible activities, and target population. Localities can also issue bonds or obtain private finance for some of these economic and community development projects.

Evidence: GAO Report GAO/RCED/GGD-00-220.

NO 0%

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: While Federal credit loan guarantee programs are generally preferred over direct loan programs, the Section 108 Guarantee program has some inherent weaknesses relative to better designed credit loan guarantee programs. HUD found that a 100% loan guarantee level was necessary to attract financing for these community projects that would potentially not be undertaken. However, with this design, the Federal government bears 100% of any losses. In this case, the program pledges CDBG grant allocations which are still Federal dollars. Also, private lenders do not share the risks of loss from default and it generally encourages private lenders to exercise less caution than they otherwise would.

Evidence: OMB Circular-129 establishes principles for federal credit programs, inlcuding preferences for less than 100% guarantees.

NO 0%

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

Explanation: As noted in the response to question 1.1, Section 108 is administered as part of the Community Development Block Grant (CDBG) program and is thus subject to the program's targeting requirements. As a part of the CDBG program design, the Section 108 can be targeted in two ways -- 1) by the CDBG formula to States and localities and 2) by grantees to benefit neighborhoods or households. CDBG recipients must ensure that 70 percent of all CDBG funds, which includes the proceeds of loans guaranteed under Section 108 funds, are used for activities that principally benefit low and moderate income persons over a one, two, or three year period identified by the recipient. While Section 108 applicants have to be eligible CDBG non-entitlement and entitlement communities, it is a demand driven program and the communities that apply for the loan guarantees are a subset of the CDBG grantees. The Urban Institute Study (2003, v) found that when Section 108 was used for third party loans (18 percent of funding for all Section 108 activities during the period covered), 77% of the dollars spent created/retained low and moderate-income jobs within a community, 15% benefited low- and moderate income areas, and the remainder towards slum and blight. One half of the lending flowed to businesses in neighborhoods where 20% or more of the population lives below the federal poverty level and one-third of the Section 108 program loans were invested in business in neighborhoods with poverty rates of 40% or more. These businesses report that they would not have been able to obtain other financing if Section 108 did not provide the seed funds, which implies that the program did not provide unintended subsidies. HUD data indicates that Section 108 applications propose projects that are in relatively higher distressed communities compared to average CDBG grantees. Based on the FY 2006 CDBG appropriation, the average per capita grant for entitlement communities receiving Section 108 commitments during the period FY 2001 - FY 2006 was $19.20. This amount was 39 percent higher than the average for all CDBG recipients of $13.77. The average per capita grant in the State CDBG program for non-entitlement communities receiving Section 108 commitments was $13.02, versus an average for all states of $10.26, or 27 percent higher. The higher per capita grant amounts of Section 108 recipients indicate that Section 108 funding is better targeted to community development need.

Evidence: Section 104(b) of P.L. 93-383. "CDBG Formula Targeting to Community Development Need," PD&R, February 2005; "Public Sector Loans to Private Sector Businesses" Urban Institute, 2003.

YES 20%
Section 1 - Program Purpose & Design Score 60%
Section 2 - Strategic Planning
Number Question Answer Score

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: There are no agreed upon long-term outcome performance measures for Section 108.

Evidence: Not applicable

NO 0%

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: There are no agreed upon long-term outcome performance measures for Section 108.

Evidence: Not applicable

NO 0%

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: The Section 108 program has one annual performance output measure - the creation and retention of jobs. This output is a proxy for expanding economic opportunities in distressed communities, one of the main goals of the Community Development Block Grant and Section 108. While the program does not currently have long-term outcome measures for all the main categories of activities it encompasses, this annual output measure contributes to improving economic conditions. The projects that are approved to obtain Section 108 loan guarantees are required to propose both output and outcome measures, as appropriate. Because the program is demand-driven, these outputs and outcomes vary from project to project, except for the number of jobs that are created and/or retained. The program does not have a standard procedure for grantees to measure the extent of achievement, either across broad activity levels or in general. If Section 108 becomes incorporated into the IDIS system, the recent ability of formula block grantees to use HUD's Performance Measurement Framework may facilitate capturing more standardized output and outcome data elements.

Evidence: See the FY 2007 Annual Performance Report, Goal C: Strengthen Communities and Strategic Objective C.1: Provide capital and resources to improve economic conditions in distressed communities. See Performance Measures section.

YES 7%

Does the program have baselines and ambitious targets for its annual measures?

Explanation: The Section 108 program's target for its annual performance measure is based upon historical analysis of Section 108 economic development projects. In other words, the program office reviews the job creation trend under economic development activities included in Section 108 applications and projects, based on the estimated commitment level for the fiscal year, and what the job level will be if the trend continues. This is demonstrated by the goal set for FY 2006, which was higher than the previous year's estimate, even though the funding level was significantly lower. The targets are more ambitious in the context of the Administration's proposed termination of the program because the impact of the proposed termination creates a level of uncertainty for communities. Section 108 projects typically require extensive planning time because these projects have complicated financing packages that require negotiation with various stakeholders. The results have been a decrease in application submitted.

Evidence: See the HUD Performance and Accountability Reports for FY 2006 and FY 2005. Also see Performance Measures.

YES 7%

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: Section 108 partners commit to and work toward annual and project-term goals of the program. When communities submit applications for loan guarantee assistance, they must furnish information describing how each assisted activity will comply with national objectives and public benefit requirements, if applicable. This information includes projected jobs creation/retention information, where national objectives or public benefit compliance requires it. Communities must also report on the use of all CDBG funds, including the proceeds of Section 108 loans, in the Consolidated Annual Performance and Evaluation Report (CAPER) or, in the case of non-entitlement communities, the Performance and Evaluation Report (PER), including accomplishment data related to the activities. Communities are required to execute agreements with sub-recipients (including for-profit businesses) to collect and provide accomplishment and beneficiary information quarterly and annually with respect to project progress, including jobs data, financials, as well as the income characteristics of persons holding as a consequence of the assisted activity.

Evidence: The governing consolidated plan regulation is at 24 CFR 91.520, with specific guidance found at: http://www.hud.gov/offices/cpd/about/conplan/#reporting; Governing regulation with regard to agreements with sub-recipients is at 24 CFR 570.503, with specific guidance in October 20, 2002 Memo to Field Offices.

YES 15%

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: Over the years, several independent and thorough studies have evaluated different aspects of the Section 108 program. None have been ongoing. The Urban Institute (2003) performed an independent study of third party business loans made with Section 108 guaranteed loan funds, which accounted for 18 percent of funding for all Section 108 activities during the period covered. The study reviewed grantee profiles, conducted surveys/personal and phone interviews, reviewed financial and other administrative data from loan applications and approval files. Although mixed in some performance areas, the study indicated that third party lending to private businesses is predominantly justified as creating or retaining low- and moderate-income jobs within a community or by its benefits to low- and moderate-income areas. It has been the most in-depth study for an eligible activity under Section 108. Additional independent studies have been completed by the Government Accountability Office (GAO). In August 1997, GAO looked at the use and oversight of the Section 108 program. This study reviewed grantee information and loan commitment data, and conducted surveys/interviews. As a result of the study, HUD modified its data collection system to capture the tracking of CDBG dollars for repayment, as well as improved monitoring guidelines. GAO is currently undergoing a study that evaluates Section 108 and leveraging. Further, HUD's Office of Policy Development and Research has performed independent studies that are relevant and inform the Section 108 program. For example, the CDBG Formula Targeting study (2005) was broad in scope and concluded that the CDBG grantees, who are potential Section 108 applicants, are less targeted than 30 years ago due to changes in demographics and outdated formula factors that proxy for community need. As a result, HUD transmitted the CDBG Reform Act that proposes an improved formula, which would therefore help Section 108 better target funding to more economically distressed communities.

Evidence: See "Public-Sector Loans to Private-Sector Businesses: An Assessment of HUD-Supported Local Economic Development Lending Activities," PD&R.; "CDBG Formula Targeting to Community Development Need," PD&R, February 2005; GAO Report GAO/RCED-97-195, GAO Report GAO-04-306, GAO Report GAO/RCED/GGD-00-220.

YES 15%

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: Since FY 2003, funding for Section 108 has not been requested and the program has been proposed for termination by the Administration.

Evidence: See budgets requests for FY 2004 - FY 2007.

NA 0%

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: Currently, Section 108 activities are not reported in the Integrated Disbursement and Information System (IDIS). This has complicated HUD's ability to timely collect performance measures for the Section 108 program, and the data collection is relatively labor intensive. To address this problem, HUD has plans to modify IDIS to include Section 108. Until such time as that work is completed, HUD has implemented procedures for field offices to review CAPER and PER data, summarize Section 108 accomplishments and beneficiary data, and forward this information to the Section 108 office in Headquarters. As previously mentioned in 2.6, HUD responded to GAO's concerns and modified IDIS to require reporting on the planned and unplanned use of CDBG grant funds to make payments due on Section 108 loans. Also given that the program is being proposed to be terminated, HUD has attempted to address deficiencies to the extent reasonable.

Evidence: GAO Report GAO/RCED-97-195; Phase II of the IDIS re-engineering project provides for the inclusion of Section 108 in IDIS.

YES 15%
Section 2 - Strategic Planning Score 59%
Section 3 - Program Management
Number Question Answer Score

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: Section 108 recipients are required to include in their Consolidated Annual Performance and Evaluation Report (CAPER) or Performance and Evaluation Report (PER) a description of the use of "CDBG funds" (including the proceeds of loans guaranteed under Section 108) during the program year and an assessment by the jurisdiction of the relationship of that use to the priorities and specific objectives identified in its plan. As a result of an amendment to the Consolidated Plan regulations in February 2006, the report must include a comparison of the proposed versus actual outcomes for each outcome measure submitted with the consolidated plan. In order to have an interim solution before Section 108 is incorporated into IDIS (which would provide real time data), HUD has implemented procedures for field offices to review CAPER and PER data, summarize accomplishments information, and submit this information to the Section 108 office in Headquarters. Information collected from other parties is collected quarterly and used to make improvements where appropriate. For example, information collected on funds held in security accounts led to revision of the Section 108 repayment procedures that, in turn, improved the cash management practices of the borrower. Feedback from investors and lenders led to the replacement of a cumbersome serial note structure with a single note, resulting in cost savings for borrowers and HUD.

Evidence: See definition of "CDBG funds" at 24 CFR 570.3 and requirements governing Consolidated Plan performance reports at 24 CFR 91.520. Section 108 Contract for Loan Guarantee Assistance.

YES 11%

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: The Section 108 program is managed by the Office of Community Planning and Development in Washington DC. Section 108 program managers are held accountable in their annual performance evaluations for meeting one or more of the performance measures that contribute to program goals. Program partners (grantees) submit quarterly and annual reports to track progress towards project goals. Program managers and partners also monitor the progress of the loans in process and collect data required to track performance against loan agreements that include deliverables and targets. HUD headquarters and field office staff perform site visits, monitoring reviews, and follow-up with those state and local government grantees that evidence inadequate progress. They also help resolve any findings or concerns, and provide technical assistance to the grantees. The following are several examples of program partners held accountable to approved projects: A Section 108 recipient in a state was required to repay $1.475 million in disallowed costs for failure to comply with procurement requirements; Another community was required to repay all of the CDBG funds used for Section 108 loan repayment when it was unable to document compliance with national objectives requirements; Benchmarks were established for a community when it failed to make acceptable progress in carrying out a housing project and was subsequently required to repay disallowed costs.

Evidence: Refer to the HUD Integrated Human Resources and Training System Performance Management System instructions for linkages between performance and meeting Departmental goals. HUD's FY 2007 Management Plan outlines the process for developing, coordinating, and implementing strategies to achieve Departmental priorities and measure results. See CPD Monitoring Handbook 6509.2 Rev-5 for monitoring guidance.

YES 11%

Are funds (Federal and partners') obligated in a timely manner, spent for the intended purpose and accurately reported?

Explanation: While past funds (pre-2002) were not obligated in a timely manner because appropriations exceeded demand for the program, the full amount of loan guarantees and carry-over funds have been committed and obligated within the two year appropriations since FY 2002. HUD headquarters and field offices manage the loan program from application to tracking activity, performance benchmarks, and fund obligations. Grantees submit quarterly and annual reports (i.e., Consolidated Annual Performance and Evaluation Report or Performance end Evaluation Report) to program staff that detail obligations and disbursements based on the approved timetables in the loan agreements executed by HUD. Appropriate follow-up monitoring reviews and accountability measures are taken should the projects evidence inadequate progress or signs of financial risks.

Evidence: See HUD budgets for FY 2003 - FY 2007. See CPD Monitoring Handbook, 6509.2 Rev-5 (Chapter 5). Information on individual activities is contained in the communities' and states' CAPERS and PERS, respectively.

YES 11%

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: The IDIS support needed to manage the cost-effectiveness and efficiencies are planned and are not operational at the current time. HUD has established a new Section 108 efficiency performance measure for FY 2007. The program plans to measure Section 108's efficiency in using its credit subsidy in creating or retaining jobs. The new measure will measure the subsidy cost per job created or retained. Special economic development activities must meet public benefit standards that limit amount expended per job or low and moderate income person served, which will provide a benchmark.

Evidence: See Guidance for New CDBG Screens, IDIS Release 9.0; the program regulations at 24 CFR part 570; Performance Measures section.

NO 0%

Does the program collaborate and coordinate effectively with related programs?

Explanation: Section 108 is often used as "gap" financing for projects that involve other complementary funding sources. Local and state governments often use Section 108 in conjunction with Federal and state tax credit programs, including the New Markets Tax Credit, Low Income Housing Tax Credit, Historical Tax Credit, and various types of state tax credits (e.g., credits for jobs created). The program works in a similar complementary fashion with private investors and other HUD programs, such as the Community Development Block Grant, Brownfields Economic Development Initiative, HOPE VI, assisted housing, and homeless programs. Program data submitted to GAO for an upcoming leveraging report indicates that sixty percent of the projects involve other Federal funding sources.

Evidence: Collaboration most often occurs at the community level (including sub-recipients and other project participants, including third party beneficiaries). Information on sources and uses of funds for the proposed project are available in the project descriptions, organized by year and location: http://www.hud.gov/offices/cpd/communitydevelopment/programs/108/#loandetails; GAO engagement code 250324 (report number will be added when report is published).

YES 11%

Does the program use strong financial management practices?

Explanation: Section 108 employs sound financial management practices, both at the Federal level and the local level. The Section 108 program is reviewed by HUD's Office of Inspector General (OIG) as part of its audit of HUD's financial statements. No material weaknesses or reportable conditions have been identified with the Section 108 program. The program complies with the Federal Credit Reform Act of 1990 and applicable guidance under OMB Circular No. A-129, except where prohibited by statute (e.g., HUD is statutorily prohibited from allowing guaranteed loans to be made by the Federal Financing Bank). As one example of A-129 compliance, HUD has carefully structured loan terms to avoid subordination of the guaranteed loan to tax exempt financing. At the local level, all Section 108 recipients and their sub-recipients must comply with the financial management standards of the applicable common rules. The recipients and sub-recipients are also required to have regular audits performed in accordance with OMB Circular No. A-133. Field office staff monitor recipients in accordance with updated guidance in the CPD Monitoring Handbook, 6509.2 Rev-5.

Evidence: See the HUD Performance and Accountability Report for FY 2006. See the HUD common rules at 24 CFR part 84 and part 85 and CPD Monitoring Handbook, 6509.2 Rev-5 (Chapter 5).

YES 11%

Has the program taken meaningful steps to address its management deficiencies?

Explanation: As discussed, Section 108 activities are not currently included in the Integrated Disbursement and Information System (IDIS). This has complicated HUD's ability to apply the CPD performance measurement system to Section 108. To address this problem, HUD intends to incorporate Section 108 into IDIS. HUD has taken steps to replace the primary contractor working on the reengineering of IDIS with a more capable contractor. A new contractor will allow the Department to implement its plan to incorporate Section 108 into IDIS and thereby strengthen HUD's oversight of the program by providing real time information to Headquarters and field staff. Communities will benefit from the greater efficiency that can be achieved by following the same procedures in reporting accomplishment data on Section 108 activities as are followed in connection with grant assisted activities.

Evidence: Real time information on program accomplishments and indicators is not currently available with respect to Section 108 activities. Such data now is reported annually as part of the Consolidated Annual Performance Review and Evaluation Report (CAPER) and the Performance and Evaluation Report (PER).

YES 11%

Is the program managed on an ongoing basis to assure credit quality remains sound, collections and disbursements are timely, and reporting requirements are fulfilled?

Explanation: Since the inception of the Section 108 program, HUD has never been required to make a payment to the holder of a guaranteed obligation as a result of a default. No disbursements have been made from the Section 108 Financing Account. No loans are delinquent. Notwithstanding the absence of defaults, HUD underwrites each loan to ensure that the indebtedness can be repaid without reliance on future years' CDBG appropriations. In almost all cases, HUD requires the borrower to furnish collateral security, i.e., security arrangements in addition to the community's or state's pledge of its CDBG funds. Exceptions to the requirement for additional security are only made when HUD is satisfied that given the term of the loan, it can be repaid from existing grants (e.g., a short term loan whose amount is small in comparison to the community's CDBG allocation). In fact, many communities view HUD's requirements as resulting in over-collateralization, i.e., the community's existing grants plus the additional security significantly exceed the loan amount.

Evidence: HUD receives collection information quarterly for loans that are in interim financing status and semiannually for loans in permanent financing. Loan disbursements for interim financing are made as requested. Disbursements for permanent financing are made as public offerings of guaranteed obligations are conducted. See GAO Report GAO/RCED-97-195 for discussion of collateral issue.

YES 11%

Do the program's credit models adequately provide reliable, consistent, accurate and transparent estimates of costs and the risk to the Government?

Explanation: The development of a subsidy rate for Section 108 is greatly complicated by the lack of actual cost data, since no defaults have occurred and consequently no losses have been incurred. Given the absence of actual loss experience, HUD in collaboration with OMB, has developed a subsidy rate using default and recovery rates on similar municipal debt issues, as published in studies by the Fitch Ratings service. Fitch has published two studies of municipal default risk that are differentiated with respect to various sectors. The first study was published in September 1999 and an updated study was published in June 2003. Fitch found that replication of the 1999 analyses with 3.5 years of additional data revealed no meaningful changes in default risk in the sectors previously studied, except for environmental facilities. HUD has used the weighted average of the default and recovery rates for the development and general purpose sectors, selected for their similarities to purposes for which Section 108 has been used over the long-term. HUD has reviewed several approaches to develop a subsidy rate for Section 108 since credit reform was enacted, but found none of these acceptable. These approaches have included consideration of actual loss experience of communities in carrying out third party lending. However, as discussed above in the HUD Policy Development & Research study on public sector loans to private businesses, such loans accounted for only 18 percent of the Section 108 funding during the period studied and have markedly different characteristics than other guaranteed loans. Roughly 40 percent of loans are intended to be repaid with CDBG funds. While these loans have other security should future years' CDBG funds not be available, actual default/recovery/loss data would only be available if at some point in the future CDBG funding is unavailable. HUD will continue to focus on refining the Section 108 credit subsidy; however, under the current constraints HUD believes the methodology being used is better than any alternative considered.

Evidence: See the June 23, 2003 Special Report published by Fitch Ratings, "Municipal Default Risk Revisited."

YES 11%
Section 3 - Program Management Score 89%
Section 4 - Program Results/Accountability
Number Question Answer Score

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: Please see 2.1

Evidence: Not Applicable

NO 0%

Does the program (including program partners) achieve its annual performance goals?

Explanation: Considering the program has one established annual output measure, the Section 108 program achieves it to a sufficient extent. As discussed above, in FY 2006 the results were 834 jobs below the 11,000 goal. It should be noted that the FY 2006 goal was higher than FY 2005's estimate, even though the FY 2006 commitment level was $100 million less than FY 2005 level.

Evidence: See the HUD Performance and Accountability Reports for FY 2005 and FY 2006.


Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: A new efficiency measure has been proposed as discussed, and will use FY2006 data as its baseline. The program will report on this measure beginning in FY2007.

Evidence: Performance Measures section.

NO 0%

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: There exists insufficient evidence to draw a strong conclusion of how Section 108 compares to other similar programs. GAO's report (2000) on 73 Federal economic development programs that fund similar activities provides a review of the areas of overlap, but does not attempt to draw conclusions on effectiveness, coordination, or efficiencies. An Urban Institute (2003) study found mixed results as discussed in 4.5 that reviews Section 108 compared to other programs, as they relate to third-party lending. HUD has plans for a comprehensive study of Section 108 in the future.

Evidence: GAO/RCED/GD-00-220; "Public-Sector Loans to Private-Sector Businesses: An Assessment of HUD-Supported Local Economic Development Lending Activities" (Urban Institute, 2003)


Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: Several independent evaluations of Section 108 have been completed, each focusing on various aspects of the program (Question 2.6). However, there has not been a study to examine Section 108's impact and effectiveness on neighborhoods, mainly due to the magnitude and resources needed for such an extensive project. Further, the results of other types of eligible activities (i.e., affordable housing, public infrastructure) under Section 108 have not been studied and therefore the performance results are unknown. The most comprehensive evaluation of the Section 108 program in recent years was the more focused study by the Urban Institute of third party business loans made with Section 108 guaranteed loan funds. This activity constituted 18% of Section 108 loan guarantees in the period of time studied, and the results appear mixed. While many of the third partly lending to private businesses were justified as creating or retaining low- and moderate-income jobs within a community, the cost of jobs created and retained as a result of Section 108-funded loans were slightly higher than the upper bound of other federal economic development programs, and significantly higher than CDBG-funded loans in terms of the amount tied to the loan principle (vii). The default rate for Section 108 was unclear because of the types of loans that were still open in the portfolio (viii). In another case, preliminary results from a currently active study by the Government Accountability Office (GAO) appear to indicate that that the program may be effective in leveraging other sources of funding.

Evidence: See "Public-Sector Loans to Private-Sector Businesses: An Assessment of HUD-Supported Local Economic Development Lending Activities," Urban Institute 2003; GAO engagement code 250324 (report number will be added when report is published).

Section 4 - Program Results/Accountability Score 23%

Last updated: 09062008.2007SPR