Community Development in St. Louis: Potential for More Crony Capitalism?

Published June 21, 2013

To amend or eliminate — that is the question that should be facing the Department of Housing and Urban Development as it tries to rein in the crony capitalism of Community Development Block Grants in St. Louis, Mo.

Each year the federal government typically distributes approximately $3 billion in federal subsidies through the Community Development Block Grants (CDBG) program, which aims to relieve blight, support low-income households, and provide immediate project funds where local money is not available. HUD requires that at least 70 percent of CDBG funds go to projects that benefit low-income households, or address immediate community needs.

That hasn’t been modus operandi in St. Louis though.

Clout in St. Louis

Since 1984, St. Louis has split its CDBG funds by ward — a process that gives individual aldermen substantial power in determining what projects get funded. The process has drawn the ire of HUD officials, who say city’s disbursement method doesn’t comply with federal regulations and opens the program up to corruption, nepotism, and other forms of local political favoritism. University of Missouri-St. Louis public policy professor Todd Swanstrom notes the current system “essentially requires community development organizations to stay in the good graces of their aldermen.”

City officials looking to respond to HUD’s complaints have only to look across the river to see how corruption in CDBGs can spin out of control when improperly managed. In 2005, an East St. Louis, Ill. city employee was convicted of mail fraud and income tax evasion after directing $158,000 in CDBG funds into her personal bank account. In 2011, the Director of Community Development for East St. Louis, Arthur M. Johnson, was sentenced to three years in federal prison after he was caught accepting bribes from a developer to funnel taxpayer funds to a $5.6 million housing project.

Cronyism at Its Core

The goal of cleaning up the corruption in CDBG money distribution is certainly noble, but neither leaders of St. Louis nor HUD officials working on the CDBG program seem to have realized that even if the corruption is wiped away, the best alternatives still have crony capitalism baked into them.

One suggested reform has been to leverage a wider network of non-profits and community development organization to plan and implement the distribution of funds. The idea is that these organizations conduct better market analysis, can effectively evaluate applications for funding, and are better incentivized to make the most of CDBG money.

But in many other cities and states the track records for these kinds of public-private community development organizations are not very good. As we discuss in a recent Reason Foundation report, the Community Redevelopment Agency of Los Angeles (CRA/LA) provides a valuable cautionary tale for St. Louis.

CRA/LA was an independent agency in charge of allocating federal CDBG grants and state property tax revenue from the city of Los Angeles to private developers to create affordable housing and improve blighted areas. However, the CRA/LA strayed from its core mission, and instead was funding pet projects for those with influence, hiring the relatives of state government officials, and selecting projects based on their expected ability to generate tax revenue for the city rather than actually develop the low-income communities. In 2011 the California Supreme Court eliminated the agency and other similar ones.

Another example of an independent organization mismanaging CDBG funds is Enterprise Florida, an agency similar to the CRA/LA, that is tasked with providing grants, loans, tax incentives and subsidies to businesses it believes will spur economic development in Florida. Seventy-six percent of Enterprise Florida’s budget comes from either state or federal funds, which are then allocated to the specific businesses and projects, but not before 35 percent of the funds are skimmed off the top for administrative costs.

Appearance of Impropriety

Watchdog group Integrity Florida claims Enterprise Florida has not only failed to meet its job creation objectives and obtain the required level of private sector support, but also has the appearance of pay-to-play, apparent conflicts of interest, and clear favoritism toward certain companies and industries. For example, Enterprise Florida gave taxpayer money to corporations with ties to its Board of Directors. Staff members who disburse the organization’s CDBG money gave it to the friends of people who control their bonuses and salaries.

These problems will be prevalent whether the system is more tightly managed or not. More importantly, even the most efficiently managed CDBG system will be distributing government subsidies and economic benefits to narrow private interests, thus giving those projects an advantage in the marketplace that would not otherwise exist. Consider that in the last few years, CDBG funds have gone to projects like expanding a brewery in Michigan and building a marina for a few fishermen in Louisiana.

This is the definition of crony capitalism.

The kinds of projects that end up being funded through CDBG benefit a limited scope of selectively chosen private interests. These agencies and local governments are essentially picking winners and losers when they choose to fund certain projects.

This cronyism, along with the inefficiency of the current system, suggests HUD would be better off suspending CDBG funds for both St. Louis and East St. Louis — and ultimately, for the whole country – rather than trying to find a better grant allocation method. No matter the fix that local or federal officials come up with, community development block grants will always be plagued by crony capitalism.

Victor Nava ([email protected]) is a policy analyst at Reason Foundation, where Anthony Randazzo ([email protected]) is director of economic research.

Internet Info

“Crony Capitalism and Community Development Subsidies,” Victor Nava and Anthony Randazzo, Reason Foundation: