United States General Accounting Office 

GAO Report to Congressional Requesters


September 2003 CAPACITY BUILDING 

Section 4 Program Has 

Expanded and 

Evolved 

GAO-03-975 

We found that Section 4 has evolved from a narrowly targeted initiative that 

focused on providing funding for capacity building in 23 urban areas to a 

broader program that funds groups and activities in urban, rural, and tribal 

areas nationwide. (grantees) use Section 4 funding to 

provide a variety of capacity-building support to their subrecipients. 

subrecipients are nonprofit organizations that undertake locally targeted 

initiatives in areas such as economic development, low-income housing 

construction, and job training. e Section 4 funds that the grantees receive 

help leverage private sector funding and in-kind contributions such as land 

and equipment, pro bono legal services, office space, and voluntary labor. 

Since the four grantees became eligible for Section 4 funding, they have 

leveraged nearly $800 million in cash and in-kind contributions from the 

private sector. 

HUD is responsible for ensuring that Section 4 funds are used according to 

federal law and regulations and that grantees are utilizing funds efficiently 

and effectively. However, HUD relies on grantees to oversee their 

subrecipients. grantees had far-reaching organizational structures and 

processes in place to monitor and control their subrecipients. But we found 

that one of the seven subrecipients we tested for monitoring and control 

procedures had reimbursed a subrecipient for an item that was prohibited by 

the Office of Management and Budget (OMB). 

responsibility to prevent such internal control failures, the cost-effectiveness 

of adding additional federal controls must be weighed against the amount of 

the federal dollars involved. lieve that as long as HUD and the 

grantees remain vigilant, additional controls are not necessary at this time. 

HUD is taking steps to develop a framework for assessing the effectiveness 

of its technical assistance programs and will take part in an OMB Program

Assessment Rating Tool review. 

Section 4 Geographical Expansion from 1994 to 2002 

1994: Cities that received Section 4 funding 1997-2002: Cities that received Section 4 funding

Source: GAO analysis of NCDI, LISC, Enterprise, HFHI, YBUSA data.

Congress recognized the 

importance of building the capacity

of community development 

organizations by passing Section 4 

of the HUD Demonstration Act of 

1993. The act authorized the 

Department of Housing and Urban 

Development (HUD) to partner 

with several national nonprofit 

organizations that provide funding

to these community groups for

such things as training, staff 

salaries, office equipment and 

supplies, and management 

information systems. In 2002, HUD

provided $31 million for capacitybuilding activities. To help

Congress with its oversight of 

Section 4, we reviewed the 

evolution and use of Section 4 

funding, the importance of Section 

4 funding to private sector 

involvement, and the management 

controls and measurements that

are in place to assess Section 4. 

GAO recommends that HUD take 

steps to recover the grant funds 

one Section 4 grantee used to cover 

a bad debt.

www.gao.gov/cgi-bin/getrpt?GAO-03-975.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Thomas 

McCool at (202) 512-8678 or 

mccoolt@gao.gov. 

Highlights of GAO-03-975, a report to 

Chairs, House Subcommittee on

Oversight and Investigations; House 

Subcommittee on Housing and 

Community Opportunity, Committee on 

Financial Services

September 2003

CAPACITY BUILDING 

Section 4 Program Has Expanded and 

Evolved

The four organizations

These 

Th

The

While HUD has the overall 

We be
Contents 


Letter 

Results in Brief 


Background


Section 4 of the HUD Demonstration Act of 1993 Has Evolved and 


Expanded Over the Years 

Federal Funding Has Encouraged Private Sector Involvement in 

the Section 4 Grantees’ Community Development Initiatives 

HUD’s Grantee Monitoring and Oversight Is Limited 

Conclusions 

Recommendation for Executive Action 

Agency Comments 

Scope and Methodology 

1 

2 

6 

10 

19 

22 

26 

27 

27 

27 

Appendix I Contact and Staff Acknowledgments 30 

GAO Contact 30 

Acknowledgments 30 

Tables 

Table 1: NCDI Funding, 1991-2004 (in millions of dollars) 12 

Table 2: Section 4 Funding, 1994-2003 (in millions of dollars) 13 

Table 3: Additional Federal Funding for Capacity-Building and 

Technical Assistance (in millions of dollars) 18 

Table 4: Private Sector Funding (in millions of dollars) 21 

Figures 

Figure 1: The Organizational Structure of Section 4 4 

Figure 2: Locations of HFHI Affiliates Receiving Section 4 Funds 

between 1997 and 2001 8 

Figure 3: Cities Where YouthBuild USA Affiliates Received Section 

4 Funds between 1997 and 2001 10 

Figure 4: Effect of Funding for CHAPA, an Enterprise Subrecipient, 

for Technology Improvements 15 

Figure 5: Enterprise and LISC Subrecipient Rural County Coverage 17 

Page i GAO-03-975 Capacity Building 
Abbreviations 

CDC Community Development Corporation 


CDBG Community Development Block Grant 


CHAPA Citizen’s Housing and Planning Association 


Enterprise The Enterprise Foundation 


GED General Equivalency Diploma 


HFHI Habitat for Humanity International


HOME Home Investment Partnerships Program 


HOPWA Housing Opportunities for Persons with AIDS 


HUD U.S. Department of Housing and Urban Development 


GIS Geographical Information Software 


LISC Local Initiatives Support Corporation 


NCDI National Community Development Initiative 


OMB Office of Management and Budget 


PART Program Assessment Rating Tool 


YBUSA YouthBuild USA 


This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page ii GAO-03-975 Capacity Building 
United States General Accounting Office 

Washington, DC 20548 

September 15, 2003 


The Honorable Sue W. Kelly 


Chairman, Subcommittee on Oversight and Investigations 


Committee on Financial Services 


House of Representatives 


The Honorable Bob Ney 


Chairman, Subcommittee on Housing and 


Community Opportunity 


Committee on Financial Services 


House of Representatives 


For fiscal years 1997 through 2002, the Department of Housing and Urban 


Development’s (HUD) budget for 20 capacity-building and technical 


assistance programs was over $860 million.1

 Of these funds, almost 


$150 million was specifically designated to build the capacity of local 


community development and affordable housing organizations through the 


Section 4 program. Since its inception in 1993, the program has provided 


capacity-building funds and services to over 1,590 local organizations in 


more than 783 cities nationwide, either through direct grants or substantial 


technical assistance activities. 


To assist you with your oversight of the Section 4 capacity-building 


program, you asked us to


• 	 describe how funding under Section 4 of the HUD Demonstration Act of 

1993 has evolved and expanded over the years, how grantees use Section 4 

funding, and what other federal funding is available for capacity building; 

• 	 determine the importance of Section 4 funding to private sector 

involvement in community development initiatives; and 

1

Capacity building can generally be defined as strengthening the capabilities of program 

recipients or providers—typically housing or community development organizations—to 

build institutional knowledge within those organizations. Among other things, capacitybuilding assistance can include funding for training, hiring staff, purchasing software, 

obtaining expertise from outside sources, and developing accounting systems and strategic 

plans. Technical assistance can generally be defined as training designed to improve 

performance or management. Congress and HUD sometimes use the terms 

interchangeably. 

Page 1 GAO-03-975 Capacity Building 
• determine how HUD and Section 4 grantees control the management and 

measure the impact of Section 4 programs. 

To address these objectives, we reviewed public laws, federal regulations, 

HUD directives, budget documents, and other materials that describe the 

Section 4 program and authorized/appropriated funding amounts. We 

interviewed HUD headquarters officials and grantee and subrecipient 

officials at both the national headquarters and local office levels. We 

visited subrecipients in eight cities, and at several we conducted file 

reviews to evaluate grantee internal controls. Finally, we interviewed 

private funders that provided grants or loans to the grantees and 

subrecipients. We conducted our work in accordance with generally 

accepted government auditing standards in Baltimore, MD; Boston, MA; 

Cleveland, OH; Frederick, MD; Hughesville, MD; Kingston, RI; Americus, 

GA; and Washington, D.C. Our scope and methodology are discussed in 

greater detail at the end of this letter. 

Section 4 of the HUD Demonstration Act of 1993 has evolved from a 

narrowly targeted initiative that focused on providing funding for capacity 

building in 23 urban areas to a broader program that funds groups and 

activities in urban, rural, and tribal areas nationwide. Section 4 authorized 

HUD to become an equal partner with several private foundations and 

financial institutions in the already existing National Community 

Development Initiative (NCDI). NCDI, currently known as Living Cities, 

began in 1991 as a partnership of public and private, for-profit and 

nonprofit funders committed to revitalizing urban communities. NCDI 

enlisted the assistance of two nationally recognized community building 

organizations, the Local Initiatives Support Corporation (LISC) and the 

Enterprise Foundation (Enterprise) to work with local community 

development corporations (CDC) in 23 cities.2

 In 1997, eligibility for 

Section 4 funding was expanded to include Habitat for Humanity 

International (HFHI), YouthBuild USA (YBUSA) and activities in cities 

where NCDI was not active and in rural and tribal areas (fig. 1). Since 

then, the four designated grantees have delivered Section 4 funds and 

2

Community development corporations are neighborhood-based nonprofit organizations 

that are involved in initiatives that focus on improving the economic, social, and physical 

condition of their communities. 

Results in Brief 

Page 2 GAO-03-975 Capacity Building 
services as operating support to their subrecipients (CDCs and affiliates).3 

The grantees determine their individual approaches and administer their 

funds in a variety of ways. Grantees can also tap into other federal funding 

sources such as Community Development Block Grant (CDBG) funding 

for capacity-building and technical assistance. 

3

Affiliates are independent, locally run nonprofit organizations joined to national 

organizations by an agreement. HFHI affiliates agree to build low-income housing, while 

YBUSA affiliates agree to provide job training, education, counseling, and leadership 

development opportunities through the construction and rehabilitation of affordable 

housing. 

Page 3 GAO-03-975 Capacity Building 
Page 4 GAO-03-975 Capacity Building

Figure 1: The Organizational Structure of Section 4 

While external factors such as economic trends and private sector 

interests made it difficult to demonstrate empirically that Section 4 

Source: GAO analysis of NCDI, LISC, Enterprise, HFHI, and YBUSA data.

1994 1997

NCDI (23 cities) NCDI/

Living Cities

(23 cities)

Non-NCDI (783 cities)

HUD HUD Private foundations

and financial institutions

Enterprise LISC

Local offices

CDCs

Local

offices

CDCs CDCs Affiliates Affiliates

Local offices

CDCs

Local

offices

YouthBuild

USA

Habitat for

Humanity

International

Non-NCDI cities (760)

NCDI cities (23 in total; starting in 1997, non-NCDI also impacts these 23 cities)

Enterprise LISC
funding directly influenced private sector involvement in community 

development initiatives, all four grantees and most of the private 

foundations and lenders we contacted stressed the importance of federal 

funding in leveraging funds from the private sector. For example, one 

senior executive from a major lending institution indicated that federal 

participation in NCDI provides funders with both a symbolic and a 

financial incentive to join the NCDI consortium. Symbolically, federal 

funding provides a sense of credibility to NCDI, as funders see federal 

participation as a sign of good housekeeping and reduced risk. Financially, 

federal participation adds more money to NCDI capacity-building 

initiatives, in turn enabling subrecipients to raise more private funding. In 

addition, Section 4 calls for significant private sector participation because 

every dollar that is provided to grantees must be matched with three 

dollars from private sources. Since federal regulations permit 

contributions in the form of cash or verifiable third party in-kind services, 

private sector involvement comes in the form of grants, loans, donated 

land and equipment, pro bono legal services, donated office space, and 

voluntary labor.4

 Although all four grantees are able to raise these required 

matching funds, each grantee has its own policies and may raise funds 

nationally, locally, or both. Since the four grantees became eligible for 

Section 4 funding, they have raised nearly $800 million in cash and in-kind 

contributions from private foundations and businesses. 

HUD uses desk audits and other document reviews to assess grantees’ use 

of funds and relies on grantees to monitor their subrecipients. However, 

HUD does not measure the impact of its grants. HUD is responsible for 

ensuring that Section 4 funds are used according to federal law and 

regulations and that grantees are utilizing funds efficiently and effectively. 

HUD carries out this responsibility through limited desk reviews of work 

plans that outline proposed activities and expected outcomes; quarterly 

and annual progress reports that determine whether grantees are 

achieving their stated goals; and payment vouchers and supporting 

documentation, which help ensure that federal funds are used only for 

eligible activities. HUD receives the same reports and follows the same 

processes for both NCDI and non-NCDI activities but reviews NCDI work 

plans in consort with other NCDI funders and non-NCDI activities on its 

own. HUD depends on grantees to provide oversight of their subrecipients. 

4

Federal regulation 24 CFR 84.23 specifies what constitutes a matching contribution and 

how it is counted and reported. These contributions cannot be included to meet the 

matching requirements of any other federally assisted program and cannot be paid by the 

federal government under another award. 

Page 5 GAO-03-975 Capacity Building 
While it appeared that grantees maintained far-reaching organizational 

structures and processes to monitor and control their subrecipients, we 

found that one grantee had reimbursed a subrecipient for a bad debt, an 

activity that is prohibited by the Office of Management and Budget 

(OMB).5

 HUD does not currently measure the impact of Section 4 funding 

but relies on its grantees to measure the impact of their individual 

programs. However, HUD is taking steps to develop a framework for 

assessing the effectiveness of its technical assistance programs and will 

take part in an OMB Program Assessment Rating Tool review (PART) 

designed to help in making informed budget decisions, supporting 

management, identifying program design problems, and promoting 

performance measurement and accountability.6 

Background 
 In 1991, a group of for-profit and nonprofit public and private funders 

started NCDI, currently known as Living Cities, to revitalize urban 

communities.7

 NCDI is composed of 17 major corporations, foundations, 

and the federal government—HUD and the Office of Community Services 

of the Department of Health and Human Services. In its first decade of 

operation, NCDI assembled a community development system composed 

of 

• 	 two of the largest national community-building organizations to administer 

the initiative—LISC and Enterprise; 

• 300 CDCs in 23 cities; and 

• 	 local operating support collaboratives, which include local foundations, 

banks, corporations, and local governments, that identify and draw on 

local technical expertise and governmental and economic resources and 

use them to sustain and enhance the capacity of CDCs. 

5

OMB Circular A-122 indicates that, among other things, bad debts are ineligible for federal 

funding. 

6

PART is a series of questions designed to provide a consistent approach to rating 

programs across the federal government. 

7

Prior to becoming Living Cities, NCDI was a virtual organization handled by consultants. 

NCDI did not have staff or occupy office space. Living Cities now has staff and oversees 

NCDI’s operations. 

Page 6 GAO-03-975 Capacity Building 
As of September 1, 2001, NCDI had provided $234.8 million to its 23 cities. 

Of this amount, about three-quarters was for project funding and the 

balance, about $60 million, supported capacity building with operating 

grants and training. 

LISC, founded in 1979 and headquartered in New York City, is the largest 

community-building organization. LISC’s mission, involving hundreds of 

CDCs, is to rebuild whole communities by supporting these groups. LISC 

operates local programs in 38 urban program areas and 70 rural 

communities. According to LISC, it has raised more than $4 billion from 

over 2,200 investors, lenders, and donors, which has leveraged an 

additional $6 billion in public and private sector funds. In addition, 

according to LISC, it has helped 2,200 CDCs build or rehabilitate more 

than 110,000 affordable homes, created over 14 million square feet of 

commercial and community space, and helped generate 40,000 jobs. 

Enterprise was founded in 1982 as a vehicle for helping low-income people 

revitalize their communities. Headquartered in Columbia, Maryland, 

Enterprise has offices in 18 communities across the nation. Enterprise 

works with a network of 2,200 nonprofit organizations, public housing 

authorities, and Native American tribes in 800 locations, including more 

than 100 CDCs. The Enterprise Foundation provides these organizations 

with technical assistance, training, short and long-term loans, equity 

investments, and grants. According to Enterprise, it has raised nearly $430 

million to support community-based development that has helped produce 

17,000 affordable homes and assisted 20,000 low-income individuals in 

finding employment. 

HFHI, founded in 1976 and headquartered in Americus, Georgia, is a 

nonprofit ecumenical Christian housing ministry (faith-based 

organization) seeking to eliminate substandard housing. HFHI builds and 

rehabilitates houses with the help of homeowner (partner) families, 

volunteer labor, and donations of money and materials. Work is done at 

the local community level by affiliates that coordinate all aspects of home 

building, including fund-raising, building site selection, partner family 

selection and support, construction, and mortgage servicing. HFHI 

provides its affiliates with information, training, and a variety of other 

support services. Affiliates are primarily volunteer driven, though some 

have their own staff. Affiliates are monitored and supported by HFHI staff 

across the country. HFHI currently has over 1,669 affiliates, and in 27 

years has built over 150,000 houses worldwide, including more than 40,000 

homes in the United States. Figure 2 shows the 526 cities where HFHI 

affiliates have directly received Section 4 funds. 

Page 7 GAO-03-975 Capacity Building 
Page 8 GAO-03-975 Capacity Building

Figure 2: Locations of HFHI Affiliates Receiving Section 4 Funds between 1997 and 2001 

YBUSA was founded in 1990 and is headquartered in Somerville, 

Massachusetts. It is a national nonprofit organization that provides 

capacity-building grants on a competitive basis to support the efforts of 

organizations that are planning to or are operating Youthbuild programs in 

their communities, many of which are funded by the HUD Youthbuild 

grant program. 8

 A Youthbuild program is a comprehensive youth and 

community development program as well as an alternative school. 

Youthbuild programs, which offer job training, education, counseling, and 

 8

Under the Housing and Community Development Act of 1992, “Hope for Youth: 

Youthbuild,” HUD awarded Youthbuild programs grants and contracts totaling $403 million 

for fiscal years 1993 to 2002. In addition to capacity-building funds, YBUSA has received 

funds from HUD to provide technical assistance to Youthbuild program recipients. 

Source: GAO analysis of HFHI data.

HFHI cities (526)
leadership development opportunities through the construction and 

rehabilitation of affordable housing, serve young adults ages 16 to 24 in 

their own communities. Participants split their time between the 

construction site and the classroom, where they earn GEDs or high school 

diplomas and prepare for jobs or college. The buildings that are 

constructed or rehabilitated during the program are primarily low-income 

housing. YouthBuild USA serves as the national intermediary and support 

center for over 200 Youthbuild programs. Over half of the Youthbuild 

programs are members of YBUSA’s affiliated network. As shown in figure 

3, YBUSA affiliates located in 106 cities have received Section 4 funds 

from 1997 to 2001. 

Page 9 GAO-03-975 Capacity Building 
Page 10 GAO-03-975 Capacity Building

Figure 3: Cities Where YouthBuild USA Affiliates Received Section 4 Funds between 1997 and 2001 

The scope of eligible activities funded by Section 4 of the HUD 

Demonstration Act of 1993 has changed over the years. Originally the act

focused on providing funding for capacity building in 23 urban areas. 

Currently, it provides funding to groups and activities in urban, rural, and 

tribal areas nationwide. Section 4 authorized HUD to join other 

corporations and foundations as an equal partner in NCDI to develop the 

capacity and ability of CDCs in 23 cities. In 1997, Section 4 was expanded 

to include two more grantees, HFHI and YBUSA as well as more cities, and 

rural and tribal areas. The grantees’ organizational structures and missions 

vary, as do their strategies for awarding Section 4 funds and the types of 

Section 4 of the HUD 

Demonstration Act of 

1993 Has Evolved and 

Expanded Over the 

Years

Source: GAO analysis of YouthBuild USA data.

YouthBuild USA cities (106)
activities they authorize. Each grantee has initiatives in rural and tribal 

areas.9

 Additional federal funding, such as Community Development Block 

Grants, is also available to grantees for capacity building and technical 

assistance. 

Section 4 Provides 

Capacity-Building Funding 

to Four Organizations 

NCDI in 1991 started with seven large national foundations and a major 

insurance company and was administered by LISC and Enterprise. This 

consortium of funders believed CDCs could achieve greater and more 

lasting success if they could count on a significant reliable commitment of 

multiyear operating support, project financing, technical assistance, and 

training. To date, NCDI has had four phases (rounds) of funding. In the 

first phase (1991-93), NCDI funders pledged $62.9 million (see table 1). 

With the enactment of Section 4, HUD joined phase II of NCDI, which also 

included 12 private foundations and financial institutions, as an equal 

partner.10 Congress’ goal in authorizing HUD to participate in NCDI was to 

develop the capacity and ability of CDCs to undertake community 

development and affordable housing projects and programs. HUD’s 

involvement resulted in some changes to the way funds were disbursed. 

While the foundations provided funding through Living Cities (NCDI), 

which in turn distributed grant funds to LISC and Enterprise, HUD 

distributed its funding directly to LISC and Enterprise. In addition, unlike 

other NCDI funders, HUD provided funding only after expenses were 

incurred, monitored funding more closely, and restricted uses to capacitybuilding activities. In 2001, 17 foundations and corporations committed 

another 10 years to the initiative. 

9

None of the grantees distinguish between rural and tribal programs. 

10NCDI’s goals coincided with HUD’s program goals in the Community Development Block 

Grant Program and the Home Investment Partnerships Program (HOME). Both programs 

emphasize the use of neighborhood-based, nonprofit community development 

organizations to provide affordable housing and economic development in low-income 

neighborhoods. 

Page 11 GAO-03-975 Capacity Building 
Table 1: NCDI Funding, 1991-2004 

Dollars in millions 

Living Cities 

Living Cities NCDI I NCDI II NCDI III (Second Decade) 

Initiative 1991-1993 1994-1997 1998-2001 2001- 2004 Total 

Private funder $62.86 $67.85 $87 $93.7 $311.41 

HUD 0 20 16 20 

Total $62.86 $87.85 $103 $113.7 $367.41 

Source: NCDI. 

Congress did not appropriate funds for HFHI and YBUSA until 1997 (see 

table 2).11 At that time, LISC and Enterprise were given the option of using 

Section 4 funding to continue NCDI activities in the original 23 cities or to 

undertake new non-NCDI activities in other cities, which expanded the 

geographical dispersion of Section 4 funding. In addition, Congress 

required the grantees to set aside a portion of Section 4 funding for rural 

and tribal areas. Unlike the NCDI activities, whose funding objectives were 

determined by the responsible funders, LISC and Enterprise worked 

directly with HUD in creating the objectives for non-NCDI cities. 

11Section 4 grants cover a 4-year period. We are only providing information on the FY 1997 

grant for HFHI and YBUSA because it was the only grant that had been completed at the 

time of our review. 

Page 12 GAO-03-975 Capacity Building 

56 
Table 2: Section 4 Funding, 1994-2003 

Dollars in millions 

Total $ allocated for 

Fiscal year Enterprise LISC YBUSA HFHI Section 4 

NCDI non-NCDI NCDI non-NCDI 

1994 $10 $0 $10 $0 $0 $0 $20 

1995 0 0 0 0 0 0 

1996 5 0 5 0 0 0 

1997 3 4.6 3 4.6 7.6 7.6 

1998 0 7.5 2 5.5 0 0 

1999 0 7.5 2 6 0 0 

2000 0 10 2 8.2 2.5 3.8 

2001 10 2.5 10 2.5 4 3.5 

2002 0 12.5 1.4 11 2 4 

2003 0 14 3 11 2 4.2 

Total $28 $58.6 $37.7 $48.8 $18.1 $23.1 $214.3 

Source: HUD. 

Grantees Use a Variety of 

Methods to Help Build 

Capacity 

LISC and Enterprise are national organizations that use local program 

offices to provide financial and technical support to CDCs. The staff at the 

local program offices work with CDCs to achieve community-driven goals. 

For example, through its Boston local office, LISC provided several 

Section 4 grants to the Madison Park Development Corporation. A $78,000 

grant was used to help the CDC improve the Dudley Square Business 

district in the Roxbury neighborhood of Boston. The Cleveland Enterprise 

office provided Section 4 funds to the Cleveland Neighborhood 

Partnership Program, a local support collaborative that provides 

organizational and real estate development and neighborhood planning for 

Cleveland CDCs. 

According to HFHI and YBUSA officials, these organizations provide 

direct grants to affiliates but operate somewhat differently. HFHI has 

provided grants to affiliates on a 3-year diminishing basis to hire new staff 

or establish warehouse facilities, with an expectation of increasing house 

production by at least 15 percent. In addition, HFHI has established 

regional support centers to bring technical assistance closer to affiliates. 

YBUSA uses Section 4 funds to provide a variety of grants to its affiliated 

network, such as operating grants, program enhancement grants, special 

assistance grants, and scholarships to staff and students. In addition, 

Page 13 GAO-03-975 Capacity Building 

0 

10 

30.4 

15 

15 

26.3 

32.5 

30.9 

34.2 
YBUSA has used Section 4 funds to build its capacity to serve as a national 

support center and to provide technical assistance and training. 

LISC and Enterprise consider the subrecipient’s stage of development 

when making Section 4 funding decisions. For example, a new 

organization might receive Section 4 funds to pay for a portion of the 

salary of the executive director, whereas more established CDCs might 

receive funding to upgrade their financial management software. All 

grantees stressed that because capacity building takes time, they provide 

multiyear support to subrecipients. However, three of the four grantees 

indicated that they generally fund subrecipients in ways that encourage 

the organizations to become financially independent. Officials from LISC 

and Enterprise explained that although some subrecipients receive 

multiple grants for several years, the grants are small enough to keep 

subrecipients from becoming dependent on Section 4 funds for daily 

operations. As noted earlier, HFHI’s grants, which are provided to hire 

new staff, diminish over a 3-year period. According to HFHI, the affiliates’ 

gradual absorption of staff costs leads to independence from—rather than 

dependence on—federal funding. YBUSA, however, has provided Section 4 

funding to affiliates to pay for general operations during years when they 

had not received funding under HUD’s Youthbuild program. 

Generally, Section 4 funds are used to pay for staff salaries, training, 

technology, and office supplies and equipment and to fund the operating 

support collaboratives. For example, with its 1997 funds HFHI provided 

direct grants to 60 affiliates to pay for staff salaries (usually an executive 

director). The YouthBuild Boston affiliate used Section 4 funds to hire an 

administrative coordinator and enhance its technological capabilities. The 

Washington, D.C., LISC office provided Section 4 funding to a local CDC to 

pay for some staff training and to purchase equipment and other supplies 

to outfit a homebuyer’s training center. Enterprise has used Section 4 

funds to develop on-line tools, such as a best practices database, and to 

bring current technology to CDCs. For example, Enterprise awarded one 

nonprofit organization, Citizen’s Housing and Planning Association 

(CHAPA) in Boston, Section 4 funds to administer the NET-Works 

program, a program to enhance the technological capacity of CDCs in the 

New England region. As a result, 36 CDCs received computer equipment, 

Internet access, and assistance in developing websites. Figure 4 illustrates 

the broad impact that Section 4 funding had for this nonprofit organization 

on other CDCs. 

Page 14 GAO-03-975 Capacity Building 
Figure 4: Effect of Funding for CHAPA, an Enterprise Subrecipient, for Technology 

Improvements 

City with 1 CHAPA subgrantee 

City with 2 CHAPA subgrantees 

City with 3 CHAPA subgrantees 

City with 5 CHAPA subgrantees 

Maine 

Vt. N.H.

Mass. 

Conn. 

R.I. 

Congress did not require grantees to set aside Section 4 funding for rural 

and tribal areas until 1997.

12 All four grantees currently have initiatives that 

focus on these areas. For example, LISC has a rural office that supports 

both a national program and a program in the Mississippi River Delta 

Region of the United States covering 56 counties and parishes. In fiscal 

years 1997 through 2002, LISC awarded Section 4 grants totaling 

12For its rural and tribal programs, YBUSA generally follows the Rural Housing Service’s 

requirement that most households receiving assistance be located in rural communities 

with fewer than 20,000 residents. HFHI classifies rural counties as those with fewer than 

100,000 residents and rural cities as those with no more than 25,000 residents. LISC defines 

rural counties as those having no cities with 50,000 or more residents. Enterprise considers 

communities rural if they have fewer than 50,000 residents. 

Source: GAO analysis of CHAPA data. 

Rural Areas Now Have 

Access to Section 4 

Funding 

Page 15 GAO-03-975 Capacity Building 
approximately $9 million to rural CDCs. Enterprise has awarded $6.2 

million in Section 4 grants to rural CDCs. Unlike LISC, Enterprise does not 

have a rural office. Enterprise services its rural and tribal subrecipients 

through partnerships with other state and regional rural agencies and the 

Housing Assistance Council, which administers Enterprise’s Rural 

Capacity Building Initiative, and through its regional and local office 

structure.13 Although 218 of the 1,003 LISC and Enterprise CDCs provide 

services to rural and tribal areas, many of them cover large geographical 

areas. For example, 57 of the 72 rural CDCs that are funded by LISC, 

operate in more than one county, and 64 of the 146 rural CDCs that are 

funded by Enterprise operate in more than one county. Figure 5 shows the 

cities where LISC and Enterprise subrecipients who work in rural areas 

are located and the multiple counties they serve. 

13The Housing Assistance Council is a national nonprofit corporation created to increase 

the availability of decent and affordable housing for rural low-income people. 

Page 16 GAO-03-975 Capacity Building 
Page 17 GAO-03-975 Capacity Building

Figure 5: Enterprise and LISC Subrecipient City and Rural County Coverage 

HFHI makes an effort to reserve at least one-third of its Section 4 funding 

for its rural affiliates. HFHI awarded $4.6 million of its fiscal year 1997 

Section 4 funds to 60 affiliates of which 33 were rural. According to 

YBUSA officials, meeting the required set-aside has been a challenge. 

YBUSA’s outreach efforts have included encouraging rural affiliates to 

apply for planning, operating, and program enhancement grants and for 

specialized technical assistance. According to a YBUSA official, over the 

course of the 1997 grant, about $2.5 million of YBUSA’s $7.6 million 

allocation was focused on rural and tribal and partly rural and tribal 

programs. Of this amount, about $1.3 million was for direct grants to sites 

and about $1.2 million was for services to sites. A YBUSA official told us

Source: GAO analysis of LISC and Enterprise data.

Rural cities (201)

No Enterprise/LISC coverage (2,151)

Enterprise and LISC coverage (149)

Enterprise coverage (492)

LISC coverage (349)
that as of July 2003, 84 of the 203 operating Youthbuild programs were 

rural and partly rural. 

Grantees Receive 

Capacity-Building Funding 

from Other Federal 

Programs 

LISC, Enterprise, HFHI, and YBUSA also receive capacity-building and 

technical assistance funds from other HUD programs (table 3). The 

primary difference between Section 4 funding and other federal funding is 

that the other federal funding for capacity-building and technical 

assistance is generally awarded competitively, while Section 4 funding is 

noncompetitive. Several federal programs offer capacity-building funds: 

CDBG, HOME, and Housing Opportunities for Persons with AIDS 

(HOPWA). All grantees’ Section 4 capacity-building funds exceed those 

received from other federal programs. 

Table 3: Additional Federal Funding for Capacity-Building and Technical Assistance 

Dollars in millions 

Total other 

federal 

Intermediary funding Federal program 

LISC 8.6 CDBG Technical Assistance 

HOME Technical Assistance (1994-2002) 

Enterprise 13.1 	 CDBG Technical Assistance 

HOME Technical Assistance 

HUD Technical Assistance /Capacity Building 

HOPWA Technical Assistance (1995-2002) 

YBUSA 20.2 Youthbuild program (1997-2002) 

Corp. for National and Community Service for 

AmeriCorps (1997-2003) 

U.S. Dept. of Labor for Welfare to Work (1998-2001) 

HFHI 7.5 Self-help Homeownership Opportunity Program (1999) 

Source: LISC, Enterprise, YBUSA, and HFHI. 

Page 18 GAO-03-975 Capacity Building 
Federal Funding Has 

Encouraged Private 

Sector Involvement in 

the Section 4 

Grantees’ Community 

Development 

Initiatives 

While it was difficult to demonstrate empirically that Section 4 directly 

influenced private sector involvement in community development 

activities, funders and grantees said that federal involvement served as a 

catalyst for private fund-raising and provided credibility to subrecipients 

in terms of their ability to comply with the requirements that are 

associated with federal funding. Some local funders of CDCs and affiliates 

were not aware of the specific Section 4 funding the subrecipients 

received but indicated that both federal funding and diverse funding 

streams are important. Since matching funds can be raised either 

nationally, locally, or a combination of both, each grantee employs its own 

matching policy and raises funds from foundations, corporations, banks, 

individual donors, and nongovernmental sources. Since the creation of 

Section 4, grantees have raised nearly $800 million from the private sector, 

in matching and other cash and in-kind contributions. 

Grantees and Private 

Contributors Generally 

Believe that Federal 

Funding Is Important to 

Private Sector 

Participation 

The grantees and nearly all of the private lenders and foundations we 

contacted stressed the importance of federal funding in leveraging funds 

from the private sector. For example, officials from LISC, Enterprise, and 

Living Cities indicated that private funding and lending have increased 

since HUD’s involvement. In addition, Enterprise officials indicated that 

the private sector believes that federal funding provides an incentive to 

work in areas and projects that would be less likely to receive funding 

without federal involvement. HFHI officials said that federal funding is 

imperative because it is the only way for all-volunteer organizations to 

transition into staff-managed, volunteer-based organizations. YBUSA 

officials said that federal funding, especially funding that leverages private 

funding, has enabled YBUSA to be proactive in assisting Native American 

and rural programs. 

NCDI lenders and funders indicated that Section 4 funding had both a 

psychological and a real impact on private sector involvement in the 

initiative. For example, one senior executive from a major lending 

institution indicated that federal participation in NCDI provided funders 

with a symbolic and financial incentive to join the NCDI consortium. 

Symbolically, federal funding provides a sense of credibility to NCDI, as 

funders see federal participation as a sign of good housekeeping and 

reduced risk. Financially, federal participation adds more money to NCDI 

capacity-building initiatives, in turn enabling subrecipients to raise more 

private funding. Another lender said that HUD’s participation in a CDC 

through Section 4 funding served as an indication of good management 

and internal controls. An insurance company also noted that Section 4 

funding showed that the federal government was strongly committed to a 

Page 19 GAO-03-975 Capacity Building 
coordinated effort to build CDC capacity, and a foundation told us that the 

federal presence legitimized NCDI as the CDC capacity-building vehicle 

with the greatest payoff. Furthermore, nearly all of the YBUSA and HFHI 

private funders that we interviewed said that federal funding was an 

incentive for their participation in the program. For example, one funder 

said that federal support was like a “seal of approval.” Another funder said 

that Section 4 funding created a positive incentive because the availability 

of invaluable hard-to-get federal funding increased the viability of any 

project. 

Most funders and lenders that provide funding directly to CDCs and 

affiliates stressed that federal funding was beneficial, but some of those 

local funders were not aware that subrecipients received Section 4 funds. 

Some LISC and Enterprise subrecipient funders explained that federal 

funding and diverse funding streams were characteristics of a viable 

organization. One funder suggested that public funding was critical, since 

private philanthropy could only do so much. Another foundation indicated 

that it looked to organizations that had a diversified funding structure, 

since it could not provide sole support for an organization. 

The four funders we spoke with that provided funding directly to the 

YouthBuild Boston affiliate were split on whether federal participation 

was an incentive to their involvement. Two said that federal participation 

was an incentive; while the other two said their decision to provide 

funding was based solely on the affiliate’s mission. 

Officials from most of the five organizations we spoke with that provided 

funding to an HFHI affiliate in Rhode Island indicated that federal 

participation was not an incentive, but two said that having other sources 

of funding encouraged them to participate. An official from one 

organization indicated that while federal funding indirectly provides an 

incentive for participation, the organization provided funding primarily 

based on the affiliate’s reputation and mission. 

Cost Sharing Requirements 

Are Specified in Law and 

Grantee Policies 

Section 4 funding calls for significant private sector participation in 

community development initiatives because Section 4 requires that 

grantees match each dollar awarded with three dollars in cash or in-kind 

contributions from private sources. Matching funds are raised nationally 

and locally and come from nongovernmental sources including private 

foundations, corporations, banks, and individual donors. Each grantee has 

its own matching policy and procedures for complying with the matching 

requirement. 

Page 20 GAO-03-975 Capacity Building 
LISC and Enterprise generally meet their matching requirement at the 

national level but encourage CDCs to seek private contributions to aid in 

the match. However, LISC requires subrecipients in rural areas to raise at 

least $1 for each $1 they receive; the remainder of the match is raised 

nationally. Conversely, HFHI and YBUSA require their affiliates to raise at 

least $3 for every dollar of Section 4 funding they receive. While both 

HFHI and YBUSA impose this requirement on all of their affiliates, 

including those in rural and tribal areas, if YBUSA rural and tribal affiliates 

cannot raise the 3 to 1 match, the national organization will provide the 

difference. Officials from the four grantees told us that raising the private 

matching funds had not been a problem. For example, for the 1997 grant 

HFHI and its 60 affiliates that received Section 4 funding raised almost 

$155.6 million in private contributions. YBUSA and its affiliates raised 

$26.6 million in private contributions to match its $7.6 million grant. 

Grantees Have Raised Since the four grantees became eligible for Section 4 funding, they have 

Significant Amounts of raised nearly $800 million from the private sector in matching funds and 

Private Sector Funding and other cash and in-kind contributions. However, we could not demonstrate 

Other Resources empirically that Section 4 funding influenced the grantees’ fund-raising 

owing to external factors such as economic trends and private sector 

interests. Between 1994 and 2001, LISC and Enterprise raised $457 million, 

and from 1997 to 2002, HFHI and YBUSA raised $341 million (see table 4). 

Table 4: Private Sector Funding 

Dollars in millions 

Grantee Private sector funding Time period 

LISC $319.9a 1994-2001 

Enterprise 136.7 1994-2001 

YouthBuild USA 26.6b 1997-2001 

HFHI 314.5 1998-2002 

Total $797.7 

Source: LISC, Enterprise, YBUSA, and HFHI. 

a

LISC private sector grants for 1994 and 1995 contain government funding due to different accounting 

practices at that time. 

b

This number only includes YBUSA’s matching funds and not all private sector funding. 

In addition to providing funding, the private sector has contributed in-kind 

services to CDCs, including managerial skills, mentoring, and volunteer 

labor. For example, representatives from the private sector serve on 

Page 21 GAO-03-975 Capacity Building 
LISC’s local advisory boards to help local program offices make funding 

decisions and are members of operating support collaboratives in several 

cities. HFHI’s local affiliates use volunteers for office and construction 

work and for their boards of directors. 

HUD’s Grantee 

Monitoring and 

Oversight Is Limited 

HUD monitoring is limited to desk reviews of the grantees’ compliance 

with their grant agreements. In general, the grant agreements require 

several kinds of reporting information including work plans, semiannual 

or quarterly financial status reports, requests for grant payment vouchers, 

and final reports. However, HUD’s involvement in reviewing grantee work 

plans differs for NCDI and non-NCDI activities. Since HUD does not 

directly monitor the subrecipients’ capacity-building activities, it relies on 

the grantees to monitor and oversee them. The grantees have several 

mechanisms in place to ensure that subrecipients are complying with their 

individual grant agreements. However, in a subset of files we reviewed, we 

found that a grantee had funded an ineligible activity for one subrecipient. 

Also, HUD does not have specific impact measures in place for Section 4. 

HUD Monitors Grantees 

but Not Subrecipients 

HUD’s efforts to monitor the grantees include desk reviews of work plans, 

annual performance reports, semiannual financial status reports, requests 

for grant payment vouchers, and final performance reports. According to 

HUD, the four grantees sign grant agreements that obligate them to 

comply with HUD and OMB requirements. For example, grantees must 

submit work plans that identify when and how federal funds and 

nonfederal matching resources will be used and present performance 

goals and objectives in enough detail to allow for HUD monitoring. In 

addition, the grant agreements require grantees to submit annual reports 

showing actual progress made in relation to the work plans, plus 

semiannual financial status reports that show private sector matches and 

grant expenditures to a certain date. Grantees are not permitted to begin 

activities or to draw down funds until HUD approves the work plans. 

Furthermore, the grant provisions require that in order to receive 

payment, grantees must submit a payment voucher with supporting 

invoices that provide enough information to allow HUD to determine 

whether the costs are reasonable in relation to the work plan’s objectives. 

Finally, the grant agreement stipulates that within 90 days of completing 

the grant award, the grantee must submit a final report summarizing all the 

activities conducted under the award including any significant program 

achievements and problems reasons for the program’s success or failure. 

Page 22 GAO-03-975 Capacity Building 
HUD officials told us that staffing constraints caused the agency to focus 

mostly on grantee work plans and payment vouchers. HUD reviews how 

the grantees select subrecipients, set benchmarks, and plan to build 

capacity. HUD uses different processes to review NCDI and non-NCDI 

work plans. As an equal player, HUD reviews NCDI’s work plans together 

with other funders and meets twice a year to discuss NCDI initiatives and 

goals for each city. However, HUD reviews and approves non-NCDI work 

plans by itself. A HUD official told us that HUD staff focus most of their 

attention on the funding aspects of the work plans. HUD officials told us 

that they check the semiannual financial status reports and accompanying 

narratives to determine whether the expended amounts are in line with the 

amounts stated in the work plans. 

Section 4 grant funds are provided to grantees after costs are incurred, so 

grantees must periodically submit vouchers and supporting 

documentation that detail expenditures by city or project in order to 

receive payment. HUD staff review the vouchers and supporting 

documentation to ensure that funds are used for the eligible activities 

stated in the work plans and that expenditures such as travel and indirect 

costs are within HUD guidelines and do not exceed available funding. 

HUD has denied payments for activities not contained in approved work 

plans or not supported by the required documentation. For example, in 

March 2003, HUD withheld over $650,000 in Section 4 funding because one 

grantee did not submit a final report, several financial reports, a work 

plan, and two annual plans. In June 2003, however, the grantee provided 

the necessary documents and HUD released the funds. 

In addition, grantees must submit financial status reports that show 

whether the organizations are meeting their matching requirements. 

However, HUD relies on the grantees to ensure that they and their 

subrecipients are matching funds correctly. Both LISC and Enterprise 

have a formal matching policy. LISC’s policy explicitly states that counting 

the same funds as matching funds under more than one program is 

prohibited and requires its subrecipients to identify the sources and 

amounts of matching funding they have received twice a year. Enterprise’s 

matching requirements are tracked on an ongoing basis and are certified 

by an Enterprise official. YBUSA requires its affiliates to submit 

documentation that supports the sources and amounts of matching funds 

committed before it will release Section 4 funding, and HFHI requires 

affiliates to report matching funds data quarterly. 

Page 23 GAO-03-975 Capacity Building 
HUD Relies on Grantees to 

Monitor Subrecipients 

HUD does not directly monitor subrecipients’ and affiliates’ capacitybuilding activities but instead relies on the grantees for monitoring and 

oversight. Like HUD, grantees initiate grant agreements with their 

subrecipients and affiliates. These grant agreements generally include 

such things as the purpose of the grant, grant amount, time frame, 

disbursement conditions, causes for suspension and termination, 

restrictions on use of grant funds, and reporting and accounting 

requirements that describe how the grantee will monitor the grant. The 

grantees use the grant agreements as the basis for monitoring their 

subrecipients’ performance. 

The grantees use several mechanisms to ensure that subrecipients are 

complying with their grant agreements. For example, LISC and Enterprise 

officials indicated that throughout the grant period, local offices 

communicate with their subrecipients by telephone or email or in person 

in order to follow their progress. Similarly, YBUSA staff told us that they 

monitor affiliates by telephone as well as through on-site technical 

assistance. LISC, Enterprise, and YBUSA require each subrecipient to 

submit a monthly activity report, semiannual project reports and 

narratives, and final reports. However, the grantees have different 

procedures, forms, and checklists that guide their monitoring activities. 

Operating support collaboratives aid LISC and Enterprise in their 

oversight through proposal reviews, organizational assessments, work 

plan reviews, on-site reviews, quarterly report reviews, and annual and 3-

year evaluations. The LISC and Enterprise local offices use the 

collaboratives’ monitoring information when making their Section 4 

funding decisions.14 

HFHI and its regional office personnel evaluate all affiliates every 3 years 

based on a “Standards of Excellence” program. The program has three 

elements: best practices, acceptable practices, and minimum standards. 

According to HFHI officials, continued failure to meet minimum standards 

will lead to probationary status and eventually disaffiliation. The program 

provides clear guidelines for affiliate self-assessments and HFHI 

evaluations as well as a systematic process for ensuring that Habitat 

14The operating support collaboratives vary by city. The one in Cleveland, for example, 

distributes money competitively each year, while the one in Washington, D.C., has a 3-year 

funding cycle. They may be run by an independent nonprofit organization or as an entity of 

Enterprise or LISC. In some instances, subrecipients that received funds from the operating 

support collaboratives also received Section 4 grants directly from Enterprise or LISC. 

Page 24 GAO-03-975 Capacity Building 
affiliates are complying with the organization’s basic principles. If HFHI 

national or regional staff are aware of illegal activities or violations of 

HFHI’s minimum standards, immediate action can be taken to correct the 

problem. The evaluation covers internal controls and audits. All affiliates 

with an annual income of $250,000 or more, assets of $500,000 or more, or 

both are required to have an independent annual audit. Affiliates are also 

requested to submit their annual report to HFHI. 

Even with Comprehensive 

Controls, Problems May 

Still Occur 

While the grantees appear to have comprehensive processes to monitor 

and control their subrecipients, our review of seven subrecipients’ grant 

files identified a subrecipient that suffered from organizational and 

financial problems that eventually led to its demise. This subrecipient was 

the grantee’s second-largest in terms of Section 4 funding, receiving 10 

grants that totaled almost $1 million over a 7-year period. One grant for 

$143,000 paid for several activities, one of which was a bad debt—an 

ineligible expenditure according to OMB Circular A-122. Since HUD 

officials do not receive and review subrecipient grant agreements and 

payment vouchers, HUD was not aware of the ineligible cost. The grantee 

has since taken several steps to ensure that similar problems do not occur, 

including having a staff member perform increased subrecipient 

monitoring to verify that sufficient management controls are in place to 

ensure that grant funds are used appropriately and effectively. This 

monitoring includes a full review of the grant request and award 

documents, followed by a review of supporting documentation to verify 

compliance with allowable expenses and consistency with the work plan. 

In addition, site visits are made to subrecipients that have received large 

amounts of funding and a “watch report” is maintained to track all 

subrecipients that are late in responding to requests for information. 

HUD Does Not Measure 

the Impact of Section 4 

Funding 

HUD has not measured the impact of Section 4 funding on improving the 

capacity of its grantees and subrecipients. However, HUD requires its 

grantees to submit annual work plans that include specific details of how 

federal and private resources will be used and to identify performance 

goals and objectives that should be attained during the grant period. In 

addition, OMB is currently requiring HUD and the NCDI grantees to 

conduct a PART review. PART assessments are used for making budgeting 

decisions, supporting management, identifying design problems, and 

promoting performance measurement and accountability. The assessment 

includes questions on a program’s purpose and design, strategic planning, 

management, and results. Furthermore, in response to a GAO report 

recommendation that HUD require program offices to determine the 

Page 25 GAO-03-975 Capacity Building 
Conclusions 

practicability of measuring the impact of technical assistance and 

establishing objective, quantifiable, and measurable performance goals, 

HUD is working with a group of national technical assistance providers to 

develop a framework to assess the effectiveness of its technical assistance 

programs. 15 

Living Cities has also contracted with a consultant to develop impact 

measurements for the 23 NCDI cities. Other evaluations16 have resulted in 

measures that gauge the capacity-building system in NCDI cities and 

categorize organizational capabilities into five different stages of growth— 

initiation, demonstration, professionalization, instutionalization, and 

maturation.17 

While Section 4 funds must be used for capacity-building initiatives, 

grantees are afforded a great deal of discretion as to how they administer, 

use, and oversee these funds. HUD is responsible for ensuring that 

grantees are utilizing Section 4 funds according to federal law and 

regulations and has several controls in place to ensure that they do. 

However, HUD relies primarily on its grantees to make certain that this 

responsibility is carried out at the subrecipient level. We found that 

grantees generally had good management systems and controls in place to 

monitor their subrecipients and to ensure that they carried out their work 

plans, met their objectives, and used federal funds legally and responsibly. 

However, even with good controls, problems can still occur, as we found 

15U.S. General Accounting Office, HUD MANAGEMENT: Impact Measurement Needed for 

Technical Assistance, GAO-03-12 (Washington, D.C.: Oct. 25, 2002). 

16Christopher Walker and Mark Weinheimer, “Community Development in the 1990s” 

(Washington, D.C.: The Urban Institute, September 1998); and Weinheimer and Associates, 

“HUD Section 4: Building the Capacity of CDCs,” (Washington, D.C.: Assessment Report, 

June 2001). 

17Initiation refers to the first stage of growth, when a civic or church group forms to 

provide a social service or advocate on an issue. The group lacks staff or at least lacks staff 

trained in development. Demonstration occurs when an existing group assumes an initial 

program in community development. The new CDC lacks staff and relies on volunteers. In 

the third stage, professionalization, the CDC takes on larger projects (20-30 units) or builds 

several homes and is able to secure funds for staff and more projects. When a CDC reaches 

the fourth stage, institutionalization, the staff has developed expertise and taps into public 

and private sources of support that is enabling it to do one large project after another. A 

CDC has reached maturation when it can maintain a consistent level of staff expertise, 

manage multiple projects simultaneously, and move into new programs that meet 

community needs. 

Page 26 GAO-03-975 Capacity Building 
at one CDC. While HUD has overarching responsibility for detecting such 

internal control failures, the cost-effectiveness of adding additional federal 

controls at the subrecipient level must be weighed against the size of the 

program and the amount of federal funding involved. Given the relative 

size of the Section 4 program and the fact that similar problems should not 

recur if HUD and the grantees remain vigilant, we do not believe that 

additional controls are necessary at this time. 

Recommendation for 	 We recommend that the Secretary of HUD take steps to recover the grant 

funds that one Section 4 grantee used to cover a bad debt. 

Executive Action 

Agency Comments 

Scope and 

Methodology 

In an e-mail dated August 7, 2003, HUD provided technical comments, 

which we incorporated into this report as appropriate. 

To accomplish our objectives, we reviewed public laws, federal 

regulations, HUD directives, budget documents and other material that 

described the Section 4 program, grantees’ missions and organizational 

structures, and authorized and appropriated funding. To determine how 

Section 4 funding has evolved and expanded over the years and how 

grantees use Section 4 funding, we interviewed HUD, Living Cities, LISC, 

Enterprise, YBUSA, and HFHI officials in national, local, and rural offices, 

and subrecipients in Americus, GA; Baltimore, MD; Boston, MA; 

Cleveland, OH; Frederick, MD; Hughesville, MD; Kingston, RI; and 

Washington, D.C. We collected data from LISC, Enterprise, and 

YouthBuild USA showing the number of multiple grants and amounts 

provided to CDCs or affiliates. We selected five CDCs/affiliates from three 

grantees. For LISC and Enterprise, we chose the CDCs that had received 

the greatest number of grants and analyzed the purpose of each grant. For 

YBUSA, we selected the affiliates that had received the highest dollar 

amounts.18 To create the maps of subrecipients and cities that received 

Section 4 funding, we obtained city data from NCDI, LISC, Enterprise, 

YBUSA, HFHI, and CHAPA and used geographical information software 

(GIS) to create the maps. We used the same software to create the rural 

18The criteria differed for YBUSA because of the shorter grant time frame. Habitat for 

Humanity was not included in this analysis because it does not allow affiliates to receive 

multiple grants in any Section 4 grant cycle. 

Page 27 GAO-03-975 Capacity Building 
county maps with data obtained from LISC and Enterprise that listed each 

CDC categorized as rural and the counties they served. 

To determine the importance of Section 4 funding to private sector 

involvement in community development initiatives, we reviewed public 

laws, federal regulations, HUD directives, budget documents, and other 

materials. We obtained 1994 through 2001 private contribution data from 

LISC and Enterprise and 1997 through 2001 data from YBUSA and HFHI. 

We obtained matching policy information from HUD and the grantees and 

interviewed private funders that had provided either grants or loans to 

each of the grantees and subrecipients we visited in Boston, MA; 

Baltimore, MD; Frederick, MD; and Kingston, RI. We based our selections 

on the subrecipients’ proximity to our offices in Washington D.C., and 

Boston, MA, and the amount of Section 4 funding they received. 

To determine how HUD and Section 4 grantees controlled the 

management and measured the impact of Section 4 programs, we 

reviewed and analyzed HUD and grantee criteria, processes and 

procedures for monitoring, controlling, and measuring performance and 

tested grantee monitoring and control procedures at seven subrecipients. 

In addition, we reviewed reports prepared by Living Cities and the Urban 

Institute that discussed NCDI’s history and accomplishments. 

We conducted our work from September 2002 through April 2003 in 

accordance with generally accepted government auditing standards. 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution of this report until 30 

days from the report date. At that time we will provide copies of this 

report to the Chairman and Ranking Minority Members, Senate Committee 

on Banking, Housing, and Urban Affairs; the Chairman and Ranking 

Minority Member, House Committee on Financial Services; and the 

Ranking Minority Members of its Subcommittees on Oversight and 

Investigations and Housing and Community Opportunity. We will also 

send copies to the Secretary of Housing and Urban Development and the 

Director of the Office of Management and Budget. In addition, the report 

will be available at no charge on GAO’s Web site at http//:www.gao.gov. 

Page 28 GAO-03-975 Capacity Building 
Please contact me at (202) 512-8678 if you have any questions about this 

report. Key contacts and contributors are listed in appendix I. 

Thomas J. McCool 

Managing Director, Financial Markets 

and Community Investment 

Page 29 GAO-03-975 Capacity Building 
Appendix I: Contact and Staff 

Acknowledgments 

GAO Contact Andy Finkel (202) 512-6765 

Acknowledgments 	 In addition, Emily Chalmers, Nadine Garrick, Diana Gilman, John McGrail, 

John Mingus, Frank J. Minore, and Marc Molino made key contributions to 

this report. 

(250102) Page 30 GAO-03-975 Capacity Building 
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