Title
Discuss Community Development Block Grant Program-Year 2026 Funding Proposal Approach
Recommended Action
Committee Recommendation:
Not referred to a committee.
City Manager Recommendation:
Discuss the Community Development Block Grant Program (CDBG) Program-Year 2026 funding proposal approach.
Report
Issue:
Whether to Discuss the Community Development Block Grant Program (CDBG) Program-Year 2026 funding proposal approach.
Staff Contact:
Jacinda Steltjes, Housing Manager, Community Planning & Economic Development, 360.790.5224
Presenter(s):
Jacinda Steltjes, Housing Manager, Community Planning & Economic Development
Background and Analysis:
The City of Olympia is an entitlement community for the U.S. Department of Housing and Urban Development’s (HUD) CDBG Program. As an entitlement community, the City receives a direct award from HUD annually that must be used to benefit Olympians within the City limits. The CDBG Program is a formula award that supports community development activities to build stronger and more resilient communities. The program is a tool for the City to meet strategic goals outlined in plans such as the One Community Plan, Housing Action Plan and Olympia Strong. CDBG also is leveraged to meet Olympia’s climate goals.
CDBG is a flexible grant that can be used for a variety of activities that primarily support low-income households. Eligible activities include the acquisition of real property, public facilities and improvements, public services, homeowner and rental rehabilitation, code enforcement, special economic development activities, microenterprise assistance, planning and capacity building, and program administrative costs, among others. The authorizing statute of the CDBG program requires that each activity funded, except for program administration and planning activities, must meet one of three national objectives established by HUD:
• Benefit to low- and moderate-income (LMI) persons;
• Aid in the prevention or elimination of slums or blight; and
• Meet a need having a particular urgency (referred to as urgent need).
Federal CDBG regulations require entitlement communities use at least 70% of non-administrative funds to meet the benefit to low- and moderate-income persons national objective (LMI). The requirements for meeting the LMI national objective for this program is that a beneficiary’s income must not exceed 80% of the area median income. The 2025 HUD area median income for the Olympia-Lacey-Tumwater metropolitan service area is $116,700.
The City of Olympia has received an annual CDBG allocation since 1982. Olympia’s allocation rose steadily from 1998 to 2003, peaking at $482,000. Due to declining federal allocations and the addition of more entitlement communities, the City’s funding has been trending in a decline over the past several years. The Program Year 2025 allocation was $341,583. Staff anticipate the program-year 2026 allocation will be similar, if not slightly less than the current allocation.
Every year the City must complete an Annual Action Plan (AAP) in accordance with the City’s public participation plan outlining how CDBG funds will be used during the upcoming Program-Year. The City’s Program-Year begins September 1st and ends August 31 of the following year. Each AAP must reflect the priorities set in the Consolidated Plan which is updated in partnership with Thurston County every five years and outlines the priority needs in the region. Preparation of the Consolidated Plan includes extensive stakeholder and public engagement to set goals and objectives. In Program-Year 2023, the City adopted its most recent Consolidated Plan update which was approved by HUD and will be implemented until Program-Year 2027. The Consolidated Plan prioritizes activities that support affordable housing and economic development.
Typical CDBG Program-Year
The typical CDBG program-year begins in late winter when staff release a Request for Proposals (RFP). Local service providers respond to the RFP with their project proposals and accompanying funding request for consideration for inclusion in the upcoming AAP. Proposals are screened for compliance with the CDBG program and then scored. HUD makes the City aware of its upcoming program-year’s funding allocation in Spring. Preparation of the AAP follows. Staff bring forward AAP recommendations to the Community Livability and Safety Committee in late spring as well as hold a public hearing on the recommendations. The AAP is submitted to HUD by mid-July. HUD reviews and approves the City’s AAP before providing the City its Grantee Agreement. The Grantee Agreement is traditionally executed by early September to coincide with the start of the City’s program-year. The City then executes sub-grantee agreements with service providers by which the providers carry out their proposals. Service providers begin drawing their CDBG funds shortly after their sub-grantee agreement is executed. This typically starts around October. The program-year then ends August 31.
See CDBG Program-Year Cycle attachment for a visual representation of the AAP process.
Program-Year 2025
The 2025 program-year has not transpired as usual or expected. In late spring 2025 as staff was drafting the AAP, we were made aware that HUD would not approve AAPs that included language supportive of diversity, equity and inclusion. Staff were also made aware that the AAP would be reviewed for consistency with federal Executive Orders by HUD Headquarters. The City amended language referencing diversity, equity and inclusion practices in its AAP and submitted the plan to HUD on time. Our local field office HUD representative confirmed receipt and approval, but the City, among many other entitlement jurisdictions across the nation, did not receive its Grantee Agreement or its funding from HUD by the start of the 2025 program-year in September. When the Grantee Agreement was provided by HUD in late fall 2025, the Agreement featured never-before included language referencing Executive Orders as new policy requirements. The policy requirements, among other things, require CDBG Grantees to track immigration status of CDBG beneficiaries and prohibit the City from directing CDBG funds to activities supporting diversity, equity, or inclusion.
The City, and several other communities across the nation, found the requirements unlawful and petitioned the courts to become party to an injunction in the King County et al v. Turner et al lawsuit. The Courts accepted the motion and the City formerly became a party to the lawsuit in late January 2026. This action permitted staff to strike out the new policy requirements included in the Grantee Agreement and execute the agreement with HUD on January 29, five months after the start of the City’s program-year. Staff is now working to execute sub-grantee agreements with service providers to allow them to begin drawing their CDBG awards. Because the City typically gives sub-grantees a full year to draw their awarded funds and because this was committed to during the RFP process, sub-grantee agreements include a February 2026 through February 2027 period of performance. The delay in executing the Grantee Agreement with HUD has caused challenges for service providers and is prompting staff’s program-year 2026 CDBG funding proposal.
Program-year 2026 Funding Proposal
Staff anticipate the 2026 AAP process will be similar to that experienced in 2025. For this reason, staff propose taking a more risk-adverse approach to the 2026 program-year.
Staff recommends:
• Not issuing an RFP;
• Directly awarding program-year 2026 funds to program-year 2025 sub-grantees, including contingency projects, which meet the Benefit to Low/Mod Income- Housing and Benefit to Low/Mod Income- Job Creation national objectives;
• Not funding public services activities, which are subject to a regulatory funding cap and generally meet the Limited Clientele national objective; and
• Identifying specific funding levels for proposed sub-grantees in Spring when the City has been notified of our program-year 2026 allocation.
Proposed recipients of 2026 CDBG funds are as follows:
• Rebuilding Together Thurston County, Critical Home Repair program
• South Puget Sound Habitat for Humanity, Critical Home Repair program
• South Puget Sound Habitat for Humanity, Energize Thurston
• Enterprise for Equity, Microbusiness Development
• City of Olympia, Administration
These recommendations consider historic CDBG sub-grantee performance; funding-level projections, to include projected program income that will be received from existing single-family and rental rehabilitation revolving loan fund payments during the 2026 program-year; and the fact that federal regulations do not require funds to be issued through a competitive process. The City began the practice of issuing an RFP in 2021 to increase access and equity.
Compliance with CDBG Regulations
Staff’s recommendation best positions the City to remain compliant with CDBG regulations, specifically an annual timeliness test and a cap on the amount of CDBG funds that can be used for public services, while also balancing what we anticipate will be another challenging program-year.
In early July of each program-year, HUD evaluates the City’s line of credit and determines if the City is drawing its CDBG funds in a timely manner. The City is compliant with the timeliness test if the fund balance does not exceed 1.5 times the current program-year’s award. Staff are confident we can meet the timeliness test that will occur this July for the current program-year; however, meeting the July 2027 timeliness test for program-year 2026 funds will be challenging.
Awarding funds to organizations which are more familiar with the CDBG program and have a successful history of spending CDBG funds will best position the City to pass this test. Failure to meet the timeliness test will very likely impact staff’s capacity to complete other important Housing division workplan items and result in reduced CDBG funding in future years. Failing the test results in a mandatory corrective action plan, frequent reporting to HUD, and reduced funding received in subsequent years. Failure can also cause the City’s risk-rating to increase. An elevated risk rating negatively impacts the City’s ability to successfully compete for any non-entitlement grants that may be issued by HUD in future years. Such grants may be necessary to complete high priority City and Council goals related to affordable housing and homeless response.
The CDBG program caps the amount of funding that can be spent within a program-year on public services activities to 15% of the most recent funding award. While staff recognize the immense need for public services funding in our community, the proposal to not award funds to public service activities in the upcoming program-year is driven by the five-month delay in making program-year 2025 funds available for public services, staff’s desire to stay accountable to our promise that funds would be available to draw for a full 12-month period made to service providers when the 2025 RFP was issued, and the need to remain compliant with public services funding cap regulation. Funding public services in program-year 2026 would cause the City to exceed the 15% public services cap and would require the City to repay any funds above and beyond that 15% limit.
Climate Analysis:
CDBG is a flexible grant that can be used to support the City’s climate goals. Typical energy efficiency activities funded by CDBG nationally include design features to public facilities improvements promoting energy efficiency. Activities may also include public energy conservation services, assistance to neighborhood-based organizations undertaking energy conservation projects, and the development of energy use strategies to achieve maximum energy efficiency.
The City’s CDBG program can be used to reduce our community’s greenhouse gas emissions and build our climate resilience. The City of Olympia has invested a significant amount of CDBG funding into energy efficiency projects in the past several years. Examples of prior projects include solar installation, home weatherization, home electrification and energy-efficient heat pump installation. The program-year 2026 proposal includes funding to support the Energize Olympia campaign to install fully subsidized electric heat pumps to low- and moderate-income homeowners in Olympia.
Equity Analysis:
CDBG funds must primarily benefit 80% or under Area Median Income (AMI) persons. There are statistically major disparities in income that are tied to marginalized groups in our community. Poverty is more prevalent in some races and ethnicities in Thurston County. 15.5% of Black or African American residents are below the poverty level, compared to 9.1% white residents, according to the City’s Assessment of Fair Housing.
CDBG funding can be used in a variety of activities to improve accessibility for residents with disabilities in our community. Eligible activities include reconstruction of sidewalks to install ramps and rehabilitation of homes or public facilities to include the removal of architectural barriers to accessibility. Examples of projects funded in prior program years and recommended for funding in program-year 2026 include critical home repair by our subrecipients, Rebuilding Together Thurston County and South Puget Sound Habitat for Humanity.
CDBG funds can also be used to provide energy efficiency upgrades to low- and moderate-income persons in the community, which for many years have been inaccessible to many families as the cost of energy improvements can be significantly higher than what is affordable. This use of funds helps close the disparity in who can benefit from high efficiency heat pumps or solar installation. Energy efficiency upgrades also often lower the cost of electricity for the homeowner or tenant, which reduces the utility burden on households.
Neighborhood/Community Interests (if known):
The community has an acute interest in housing and economic development related activities. CDBG is one of few flexible funding sources made available on a regular basis in our community. Public service providers will likely be disappointed by the lack of CDBG funds should the Committee approve the proposal. Similarly, organizations which do not have history of receiving CDBG funds in Olympia may be concerned that they will have the opportunity to compete for funds in 2026 and will have to wait until spring 2027 to submit a proposal for inclusion in the program-year 2027 AAP.
Financial Impact:
There are no direct financial impacts to the City at this time. However, if the City is not able to successfully pass the program-year 2026 timeliness test it risks a decrease in our CDBG funding award in future years. Multiple failures to meet the test can result in the City’s funding being denied until corrective action measures have been completed.
Options:
1. Discuss the Community Development Block Grant Program (CDBG) Program-Year 2026 funding proposal approach.
2. Modify the CDBG program-year 2026 funding proposal approach. This could result in the City being uncompliant with CDBG regulations and could result in a decrease in future funding awards. Should the Committee wish for staff to issue an RFP, that would have a negative impact on staff capacity and the RFP would program-year 2026 AAP process would be severely condensed to account for an RFP.
3. Take other action.
Attachments:
CDBG Program-year Cycle