Student Corner: Utilizing Program Income and Revolving Funds to Stretch CDBGs

Community and Economic Development – Blog by UNC School of Government

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Student Corner: Utilizing Program Income and Revolving Funds to Stretch CDBGs

By CED Program Interns & Students

Published April 12, 2018

One of the tools that local governments utilize in community revitalization efforts are Community Development Block Grants (CDBGs). This U.S. Department of Housing and Urban Development (HUD) program provides grants to local governments to fund projects such as affordable housing, infrastructure improvements, and natural disaster recovery. In the 2017 fiscal year, the state of North Carolina received approximately $44 million for the state’s CDBG program; most of the funding went towards economic development and infrastructure needs in the state. In addition, 30 North Carolina municipalities received CDBG funds that totaled to approximately $27 million. However, proposed legislative actions may result in severe reductions of CDBG funds for low and moderate income communities. While the future of the CDBG program is in question, state and municipal agencies have used program income and revolving funds to stretch out previously allocated CDBG funds to finance community projects.

Program income is defined as the ‘gross income received by grantee and sub-recipients directly generated from the use of CDBG funds’. This can come from a variety of sources, ranging from the proceeds of leased or sold property purchased from CDBG funds to principal and interest payments on loans from CDBG funds. Any program income that is accrued from CDBG activities can be placed in a separate revolving fund. These revolving funds are established to carry out specific activities which generate payments to the general fund to carry out a specific activity, such as affordable housing development or disaster recovery. The CED blog has covered the basics of revolving loan funds in the past; check out this post on loan funds for affordable housingand this post on loan funds for small businesses.

So, how would this work in practice? Let’s say that Town X receives an average annual CBDG grant of $1,000,000 for affordable housing development*. During the current CDBG year, additional program income in the form of a $100,000 loan repayment from a partner housing developer is received by Town X one months before the end of the program year. Based on the assumption that Town X spends $10,000 per week on CDBG programs, Town X now can allot $15,000 per week in CDBG related activities for the following budget year and increase administration funding by $20,000 for the current year.

While the additional program income is a gift for the municipality to fund CDBG activities, various considerations need to be noted. For example, Town X needs to use all of the program income before receiving additional CDBG funding from the Unites States Treasury. Additionally, changes to the municipality’s Annual Action Plan would need to be made, primarily with reallocating the additional funding. While the following consideration would not apply in this case, income totaling less than $25,000 would not be considered as program income, so long as the additional income meets the public benefit criteria and the income did not receive initial CDBG assistance. Other considerations for additional program income include ensuring that the difference between the new total of program income and administrative costs is less than one-twelfth of the initial CDBG amount. A difference that exceeds this threshold would result in remittance of program income for the following funding year.

Recent current events regarding program income and CDBG grants have highlighted the importance of fully grasping the program income rules. The City of Auburn, Alabama, recently came under fire for failing to spend enough funding in the 2016-2017 program year due to a last minute program income addition. CDBG guidelines requires that communities must have total CDBG funding that is less than 1.5 times the allotted amount for the current funding year; in fact, the city had 5.37 times the amount granted for the current fiscal year. The city had to make last minute adjustments for the 2017-2018 CDBG annual action plan in order to account for the sudden increase in program income, and to ensure that they would be able to receive CDBG funding in future budget years.

In all, it is crucial for communities to understand program income rules to be able to stretch CDBG funding for future community development projects. Ineffective management of program income will not only result in inefficient funding for communities to fund vital revitalization projects, but can also jeopardize future funding CDBG opportunities.

*Example modified from US HUD Smart Management of Program Income presentation.

Pasan Perera is a Master’s candidate at the University of North Carolina at Chapel Hill’s Department of City and Regional Planning, where he specializes in Land Use and Environmental Planning. He is also a Community Revitalization Fellow with the Development Finance Initiative.