Gulf Coast Disaster Recovery: Community Development Block Grant Program Guidance to States Needs to Be Improved
Published: 2009-06-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Almost 4 years after the 2005 Gulf Coast hurricanes, the region continues to face daunting rebuilding challenges. To date, $19.7 billion in Community Development Block Grant (CDBG) funds have been appropriated for Gulf Coast rebuilding assistance--the largest amount in the history of the program. GAO was asked to report on (1) how Louisiana and Mississippi allocated their shares of CDBG funds, (2) what difficulties Louisiana faced in administering its housing recovery program, and (3) what human capital challenges Louisiana and Mississippi encountered and the efforts taken to address those challenges. GAO interviewed federal and state officials and reviewed budget data, federal regulations, and state policies and planning documents.
section_title: What GAO Found
paragraphs: Louisiana and Mississippi received the largest shares of CDBG disaster funds and targeted the majority toward homeowner assistance, allocating the rest to economic development, infrastructure, and other projects. Between 2006 and 2008, Louisiana's total allocation devoted to housing increased from 77 to 86 percent while Mississippi's decreased from 63 to 52 percent as the state focused on economic development. With homeowners as the primary focus, Louisiana initially adopted a plan that linked federal funds to home reconstruction and controlled the flow of funds to homeowners, while Mississippi paid homeowners for their losses regardless of their intentions to rebuild. This helped Mississippi avoid challenges that Louisiana would encounter, but with fewer assurances that people would actually rebuild. Louisiana's approach to housing recovery created a program that incorporated certain elements from two different models--compensation and rehabilitation--funded with multiple federal funding streams. While there is no written guidance that distinguishes between the two models, Housing and Urban Development (HUD) explained the major differences. In a rehabilitation model, funds are used explicitly for repairs or reconstruction, requiring site-specific environmental reviews. In contrast, a compensation program disburses funds directly to homeowners for damages suffered regardless of whether they intend to rebuild and does not trigger site-specific environmental reviews. Federal guidance was insufficient to address Louisiana's program and funding designs. Two major problems stemmed from the state's approach. First, HUD and the state disagreed as to whether the incremental disbursement of funds subjected homeowners' properties to environmental reviews. Despite many iterations of the program, HUD ordered a cease and desist of the program, leading the state to abandon its original plans and issue lump-sum payments to recipients. Continual revision and re-submittal of the design contributed to a 12-month evolution of the program. Second, conflicting federal determinations hindered coordination of CDBG and the Federal Emergency Management Agency's (FEMA) Hazard Mitigation Grant Program (HMGP) funds. According to state officials, the Federal Coordinator for Gulf Coast Rebuilding advised them to use most of the HMGP funds to acquire properties through their housing recovery program. FEMA rejected this plan, in part, because it determined that the program gave preference to the elderly. However, HUD is subject to similar legal requirements and did not find the program discriminatory. Louisiana changed its plans and used HMGP funds for a home elevation program. In sum, it took FEMA and the state over a year to reach agreement, delaying assistance to homeowners. In the immediate aftermath of the 2005 hurricanes, Louisiana and Mississippi lacked sufficient capacity to suddenly administer and manage CDBG programs of such unprecedented size. Both states created new offices to direct disaster recovery efforts and hired additional state agency staff and private contractors to implement homeowner assistance programs.

section_title: Letter
paragraphs: Almost 4 years after Hurricanes Katrina, Rita and Wilma brought death and  destruction along the Gulf Coast, the region and the nation continue to  face daunting rebuilding challenges. For perspective on the magnitude of  the damage, some estimates put capital losses at a range of $70 billion to  more than $150 billion. Wide swaths of housing, infrastructure, and  businesses were destroyed, leaving more than 1,500 people dead and  hundreds of thousands of others displaced without shelter or employment.  Over the coming years, perhaps decades, many neighborhoods and  communities will need to be rebuilt—some from the ground up. The size  and scope of the devastation caused by the 2005 Gulf Coast hurricanes  presents the nation with unprecedented rebuilding challenges, as well as  opportunities to reexamine shared responsibility among all levels of  government.
In the interest of providing funds to the Gulf Coast states quickly and  affording states as much discretion as possible in the aftermath of the 2005  Gulf Coast hurricanes, Congress chose the Community Development  Block Grant (CDBG) program as the vehicle to provide the largest share of  disaster relief and recovery funds. The CDBG program’s primary objective  is not specifically to provide disaster relief to states, but rather to develop  viable urban communities by providing decent housing, a suitable living  environment, and expanded economic opportunities for low and moderate  income persons. However, CDBG has often been relied upon as a  convenient source of flexible funding that can easily be applied to federal  disaster situations to help states rebuild and revitalize their communities.  This is consistent with past practice: over the last two decades, Congress  has repeatedly turned to CDBG to assist states in recovering from federal  disasters. For example, Congress directed CDBG funds toward recovery  and rebuilding efforts in Texas and Louisiana after Hurricanes Gustav and  Ike in 2008, New York after the September 11th terrorist attacks in 2001,  the Midwest after the floods in 1997, Oklahoma City after the 1995  bombing of the Alfred Murrah Building, Southern California after the 1994  Northridge earthquake, and Florida after Hurricane Andrew in 1992.
To date, $19.7 billion in supplemental appropriations have gone to Gulf  Coast states through CDBG—the largest amount of CDBG disaster relief  provided to one area in the history of the program. You requested that we  review the CDBG funding that has been allocated for rebuilding the Gulf  Coast and determine what challenges, if any, the states encountered in  administering and managing the funds. In response to your request, we  report on: (1) Louisiana’s and Mississippi’s allocations of CDBG funds, (2)  difficulties Louisiana faced in administering its housing recovery program,  and (3) the human capital challenges Louisiana and Mississippi  encountered and their efforts to address those challenges. This report  builds upon GAO’s prior work on rebuilding efforts in the Gulf Coast  region.
Our work focused on Louisiana and Mississippi—the two states most  directly affected by the 2005 Gulf Coast hurricanes. To conduct our review  we obtained and reviewed the supplemental appropriations acts outlining  the purpose and availability of CDBG disaster funds. We collected and  analyzed information on the Department of Housing and Urban  Development’s (HUD) role in the allocation and distribution of the funds,  how Louisiana and Mississippi prioritized and developed allocations for  their shares of disaster funding, and how those allocations changed over  time. In our examination of the challenges the two states encountered  when administering their housing recovery programs, we focused on  Louisiana because of its specific approach, which led to significant  program challenges. We interviewed various federal officials from HUD,  the Federal Emergency Management Agency (FEMA), and the Office of  the Federal Coordinator for Gulf Coast Rebuilding within the Department  of Homeland Security (DHS). We also interviewed various state officials  and contractors hired by the states and coordinated our work with HUD’s  Office of Inspector General and state audit offices. We analyzed federal  regulations, various state policies and planning documents, and federal  and state budget data. For more information on our scope and  methodology see appendix I. We conducted our work from June 2007  through April 2009 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The Community Development Block Grant (CDBG) program, created in  1974 and administered by the Department of Housing and Urban  Development (HUD), is the most widely available source of federal  funding assistance to state and local governments for neighborhood  revitalization, housing rehabilitation activities, and economic  development. Eligible activities include housing assistance, historic  preservation, real property acquisitions, mitigation, demolition, and  economic development. Because of the funding mechanism that the CDBG  program already has in place to provide federal funds to states and  localities, the program is widely viewed as a convenient, ready-made  solution for disbursing large amounts of federal funds to address  emergency situations. Eligible activities that grantees have undertaken  with CDBG disaster recovery funds include public services, relocation  payments to displaced residents, acquisition of damaged properties,  rehabilitation of damaged homes, and rehabilitation of public facilities  such as neighborhood centers and roads. Over the past two decades,  CDBG has repeatedly been adapted as a vehicle to respond to federal  disasters such as floods, hurricanes, and terrorist attacks. For example,  Congress provided CDBG disaster relief funds to aid long-term recovery  efforts after the Midwest floods in 1993 and for economic revitalization  after the 1995 bombing of the Murrah Federal Building in Oklahoma City.  CDBG funds were also provided to New York City in the aftermath of the  September 11, 2001, terrorist attacks to aid in the redevelopment of Lower  Manhattan. When the CDBG program is used to provide disaster relief  funds, many of the statutory and regulatory provisions governing the use  of CDBG funds are waived or modified, thereby providing states with even  greater flexibility and discretion.
Following the 2005 Gulf Coast hurricanes, $19.7 billion in disaster CDBG  funds were provided to the most affected states—Louisiana, Mississippi,  Alabama, Florida, and Texas—through three supplemental appropriations  enacted between December 2005 and November 2007. The first CDBG  supplemental appropriation, passed on December 30, 2005, provided $11.5  billion in CDBG funding and included, among others, a provision that  prohibited any state from receiving more than 54 percent of that total  appropriation. The second supplemental appropriation, passed on June  15, 2006, provided an additional $5.2 billion in CDBG funds and required  that no state receive more than $4.2 billion of that appropriation. HUD  was responsible for allocating the funds from these two supplemental  appropriations among the five states in accordance with these and other  statutory requirements. A third supplemental appropriation passed on  November 13, 2007, and provided an additional $3 billion exclusively for  Louisiana.
According to HUD’s estimates, a total of 305,109 housing units suffered  major or severe damage or were completely destroyed along the coast of  Louisiana, Mississippi, Alabama, Florida and Texas. For perspective, figure  1 shows the states’ total damages in terms of housing units. Louisiana  suffered the greatest amount of devastation compared to any other Gulf  Coast state with an estimated 204,737 damaged housing units—equal to 67  percent of the total estimated damage in the Gulf Coast region. Mississippi  had the second highest degree of destruction with an estimated 61,386  damaged housing units—20 percent of the total estimated damage in the  region. The remaining damage—an estimated 38,986 housing units or  approximately 13 percent of the total damage—was combined across  Alabama, Florida, and Texas.
Based on HUD’s analysis of housing damage estimates for each of the five  Gulf Coast states and in accordance with specific congressional  provisions, the department distributed the $19.7 billion in CDBG funds  that were appropriated for recovery efforts in the region. Louisiana  received the greatest amount—68 percent of the total CDBG funding or  $13.4 billion. Mississippi received 28 percent of the total funding—$5.5  billion. The remaining 4 percent—almost $800 million—was allocated  across Alabama, Florida, and Texas. Figure 2 shows a breakdown of the  total amount of CDBG disaster recovery funds that HUD allocated to each  state.
Traditionally, grantees are afforded broad discretion as they decide how to  allocate CDBG funds to specific projects and programs. In the aftermath of  the 2005 Gulf Coast hurricanes and in an action similar to past disaster  recovery situations, Congress provided additional flexibility to the states’  use of CDBG funds. For example, lawmakers permitted HUD to waive  certain regulations and statutes that would otherwise be applicable  including income targeting provisions and public service expenditure  caps. Specifically, HUD was allowed to waive the threshold outlined in  statute that 70 percent of total funds must be allocated to activities that  primarily benefit low and moderate income persons. Instead, only 50  percent of the total funds had to be targeted on this basis unless the  Secretary found a compelling need to waive the targeting provision  altogether. In addition, HUD suspended statutory requirements that limit  the amount of CDBG money that can be used to provide public services to  the affected communities. In conjunction with these increased  flexibilities, Congress prohibited HUD from waiving four specific program  requirements—nondiscrimination, environmental review, labor standards,  and fair housing.
Once HUD allocated CDBG funds to the affected states, the state-level  development agencies were responsible for the administration and  management of these funds. In Louisiana and Mississippi, the two states  that incurred the most damage, the authorities in charge of disaster  recovery efforts were the Office of Community Development (OCD) and  the Mississippi Development Authority (MDA), respectively. In Louisiana,  OCD has managed the state CDBG program over the past two decades.  After the 2005 Gulf Coast hurricanes, the Louisiana Commissioner of  Administration created the Disaster Recovery Unit within OCD to  administer the state’s share of CDBG disaster relief funds. Similarly,  MDA’s Disaster Recovery Division was responsible for managing  Mississippi’s share of CDBG disaster relief funds.
Federal funding sources other than CDBG were available to states after  the 2005 Gulf Coast hurricanes, but CDBG supplemental appropriations  provided the largest amount of money. Other sources included the Public  Assistance (PA) grant program and Hazard Mitigation Grant Program  (HMGP), both administered by the Federal Emergency Management  Agency (FEMA). In contrast to the PA grant program—which provides  funds to support infrastructure recovery such as rebuilding schools, roads,  and utilities—HMGP provides funds to states and local governments to  implement long-term, cost-effective hazard mitigation measures after a  major disaster. For example, HMGP funds may be used for projects such  as flood-proofing properties, acquiring the property of willing sellers in  hazard-prone areas and transforming it into open space, and retrofitting  structures against earthquakes or hurricane-force winds. After the  Midwest floods in 1993, CDBG and HMGP funds from HUD and FEMA  respectively, were used to acquire privately held property within flood  plain areas in the affected states and convert the land to public uses, such  as recreation or green space.
section_title: Louisiana and Mississippi Targeted Majority of Funds to Homeowner Assistance
paragraphs: HUD allocations of CDBG disaster funds to the Gulf Coast states were  designated for necessary expenses related to disaster relief, long-term  recovery, and restoration of infrastructure in the most affected and  distressed areas. States had great flexibility in choosing the types of  recovery activities to initiate with their CDBG funds. Specific language in  the supplemental appropriations acts required states to develop and  submit action plans to HUD detailing the proposed use of all funds. Upon  submission, HUD reviewed the action plans for acceptance. These action  plans served as state proposals for how states would use their share of  CDBG disaster funds and included descriptions of eligibility criteria and  how the funds would be used to address both urgent needs and long-term  recovery and infrastructure restoration. Any substantial program  changes—presented as amendments to a state’s action plan for its use of  CDBG disaster recovery funds—had to be submitted to HUD for review  and acceptance.
Recovery activities in Louisiana and Mississippi fell into four main  categories: housing, infrastructure, economic development, and other  projects. Both Louisiana and Mississippi devoted most of their allocations  toward housing assistance, with a majority directed toward homeowners.  For example, in November 2006, Louisiana allocated nearly 77 percent of  its CDBG funds for housing assistance. Of that amount, approximately 80  percent was directed toward homeowners. In December 2006, Mississippi  allocated 63 percent of its CDBG funds for housing assistance, of which  approximately 98 percent was directed toward homeowners.
Between 2006 and 2008 Louisiana and Mississippi modified the level of  funding allocated for different recovery projects as shown in figures 3 and  4 below. For example, as permitted by CDBG guidelines, Louisiana  increased the percentage of its total CDBG allocation for housing while  Mississippi reallocated a percentage of its housing funds for economic  development needs.
Louisiana’s increased focus on housing largely resulted from the additional  supplemental appropriations that Congress provided amid concerns that  the state’s housing recovery program needed additional funds. As of  November 2006, Louisiana received $10.4 billion in CDBG disaster relief  funds. After Congress granted an additional $3 billion in CDBG funds  exclusively for Louisiana, in November 2007, the state’s total increased to  $13.4 billion. Mississippi’s reprogramming of funds was largely attributed  to the state’s decision to repair one of its storm-damaged ports.
The different approaches that Louisiana and Mississippi took for designing  and developing their own homeowner assistance programs led to  substantially different experiences. The specific goals and details of  Louisiana’s and Mississippi’s initial designs differed significantly.  Louisiana started with a program design that included incentives to  promote home rebuilding and ensure retention of the state population. The  primary concern for Louisiana state officials was to bring residents back  to their communities to begin the process of rebuilding. On the other hand,  Mississippi adopted a much simpler design, which awarded one-time,  lump-sum payments to homeowners to compensate them for their losses,  independent of their choice to rebuild. This helped Mississippi to avoid  many of the challenges and delays that Louisiana would experience as  discussed in the next section of this report.
section_title: Federal Guidance Was Insufficient to Address Louisiana’s Approach to Housing Recovery
paragraphs: As Louisiana and Mississippi planned their housing recovery efforts,  Louisiana designed different solutions than Mississippi did. Louisiana  initially adopted a plan that tied federal funds to home reconstruction and  controlled the flow of funds to homeowners while Mississippi paid  homeowners for their losses regardless of their intentions to rebuild.  Specifically, Louisiana initially created a program that incorporated  certain elements from two different housing recovery program models:  compensation and rehabilitation. Although there is no written guidance  distinguishing between the two models, HUD officials explained to us  what the major differences are between the two programs. Generally, in a  rehabilitation program, funds are used explicitly for repairs or  reconstruction projects. In contrast, a compensation program disburses  grant payments directly to homeowners for the damages they suffered  regardless of whether they intend to repair or rebuild.
Furthermore, rehabilitation and compensation programs are subject to  different legal and financial requirements in terms of HUD’s oversight  responsibilities. HUD officials explained that under a rehabilitation model,  binding federal funds to reconstruction triggers several federal  requirements, including site-specific environmental reviews of each  property. Federal and state officials said these environmental reviews can  be costly and time consuming, taking perhaps several months to years to  complete. Officials in both states said this was a key factor considered  when deciding whether or not to adopt the rehabilitation model. Under a  compensation model, environmental reviews are not required because  recipients are not required to spend their grant proceeds on home repair  and reconstruction. Senior HUD officials said that historically, CDBG  funds have not been used for compensation programs, but rather  rehabilitation, reconstruction, and rebuilding programs. According to  senior HUD officials involved with administering CDBG disaster  assistance, CDBG is not often used for compensation programs because it  is difficult to know what recipients will do with the money.
Louisiana’s other solution was to try to use multiple federal funding  streams for its housing recovery program. Specifically, the state planned to  finance the purchase of properties with CDBG funds and essentially pay  itself back with FEMA funds. Mississippi, on the other hand, chose not to  combine federal funds together in this way. Existing guidance was not  sufficient to address Louisiana’s approach, and failures in communication  hindered full understanding of the problems with the state’s particular  program and funding designs. As a result, Louisiana encountered many  challenges to implementing its recovery efforts that Mississippi did not.
In Louisiana, there were two major problems stemming from its particular  program and funding designs. The first was a misunderstanding between  Louisiana officials and HUD staff as to whether the design for their  housing recovery program could be considered a compensation program,  as opposed to a rehabilitation program. The two types of programs have  different regulatory requirements as noted above. In particular,  rehabilitation programs require costly and time-consuming site-by-site  environmental reviews, whereas compensation programs do not.  Louisiana’s program design was labeled as compensation, even though it  contained elements of a rehabilitation program. This led to more  misunderstandings with HUD and delays in program implementation.
The second problem came up when, on the advice of the Federal  Coordinator for Gulf Coast Rebuilding (Federal Coordinator) according to  state officials, Louisiana tried to use multiple federal funding sources for  its housing recovery program. Louisiana state officials planned to use  FEMA and HUD funds together for purposes allowable under the  requirements for each funding source. However, the manner in which the  state planned to use the funds to finance the state’s purchase of residential  properties led the state to run afoul of certain programmatic and legal  requirements governing the FEMA funds. All of these problems led to  more delays in funding and program implementation.
subsections: section_title: Misunderstandings between Louisiana and HUD Led to Multiple Iterations of the Road Home Program
paragraphs: Louisiana state officials developed and started to implement the Road  Home program, which evolved over the course of approximately 12  months between May 2006 and May 2007. Throughout, HUD staff provided  technical assistance to state officials and conducted scheduled monitoring  visits for oversight purposes. To explain the evolution of the Road Home  program, we identified three key phases and their associated milestones:  the original design (approved May 2006), the revision (accepted July 2006),  and HUD’s cease and desist order (issued March 2007). Table 1 below  highlights the time line of events surrounding the evolution of the Road  Home program.
This first phase began after HUD announced Louisiana’s first CDBG  disaster funding allocation in February 2006. In the following months,  Louisiana state officials established the goals of the Road Home program,  which were aimed at encouraging residents to return to their  neighborhoods and rebuild their storm-damaged homes. To meet the  program goals, Louisiana state authorities developed the main housing  assistance components of the program and offered homeowners three  specific options through the program. Homeowners could: (1) rebuild  homes on their own properties, (2) sell their properties and relocate  within the state, or (3) sell their homes and relocate outside of the state.  Those homeowners who chose to stay in Louisiana were eligible to receive  a larger grant award than those who chose to leave the state. As noted  above, in contrast to Louisiana’s home recovery plan, Mississippi chose  early on to adopt a homeowner assistance program that was clearly within  the terms of a compensation model. Once Louisiana homeowners applied  for Road Home assistance, they had to select their preferred benefit  option. Among the three choices available to homeowners, rebuilding  was the most popular selection. Of the 143,580 homeowners who returned  their benefit preference to state officials, almost 88 percent chose to stay  and rebuild their storm-damaged homes.
By April 2006, Louisiana officials completed the state’s action plan. The  action plan outlined the different types and amounts of assistance  available to homeowners, eligibility criteria, formulas to calculate  recipient grant awards, and a general description of the disbursement  process to transfer funds to eligible recipients. Under the initial design of  the Road Home program, homeowners who chose to rebuild were required  to meet code and zoning requirements and comply with the latest available  FEMA guidance for base flood elevations. These homeowners were  required to use the home as their primary residence for at least 3 years  upon completion of repairs. Louisiana submitted the plan to HUD on May  12, 2006—3 months after HUD announced each state’s allocation of CDBG  funds. The HUD Secretary approved Louisiana’s action plan for the Road  Home program approximately 2 weeks later on May 30, 2006.
subsections: section_title: Action Plan Revision Attempted to Address Conflicting Interpretations; Program Development Proceeded
paragraphs: The second phase began in the months immediately following the HUD  Secretary’s approval of the Road Home action plan. Key HUD staff and  state officials had different interpretations and expectations of exactly  how the Road Home program would operate. Because HUD lacked written  program guidance, there were no concrete federal definitions that HUD or  the state could refer to. According to HUD officials who were involved in  reviewing Louisiana’s action plan, their understanding was that Road  Home would operate as a rehabilitation program—thereby requiring site- specific environmental reviews. In contrast, Louisiana state officials  thought CDBG program rules provided sufficient flexibility so that the  program they proposed qualified as a compensation model and would not  require the environmental reviews. As a result, Louisiana officials revised  the action plan in an attempt to resolve the conflicting interpretations and  re-submitted the plan for HUD review. HUD officials said that they worked  with state officials to revise the language in the action plan to reflect more  of a compensation-type program so as to not trigger the site-specific  environmental requirements. On July 12, 2006, HUD officials accepted the  revised plan for Road Home as a compensation program.
Upon HUD’s acceptance of the action plan, the state continued to develop  the operational and payment structures to implement Road Home and  initiated a pilot of the program. On August 11, 2006, the state provided  HUD with additional Road Home program clarifications that further  explained the formulas used to calculate grant award payments to  homeowners and the covenants that would be placed upon the homes of  those who chose to stay in their homes and rebuild. The covenants  required that Louisiana homeowners rebuild and elevate their homes in  accordance with applicable codes and local ordinances and that the home  be owner-occupied for at least 3 years after receiving compensation and  be covered by the appropriate insurance. The purpose of these covenants  was to ensure that homeowners returned to their neighborhoods and  helped to rebuild the community. The state also clarified that homeowners  who did not fulfill the terms of their covenants may not receive benefits or  may have to repay all or some of the compensation they received. In  addition, homeowners would receive grant proceeds incrementally to  ensure covenant compliance, but were not required to use the money for  repairs and rebuilding costs. To meet the requirements for a compensation  program, the action plan amendment explicitly stated that homeowners  had complete discretion as to the use of the compensation they received.  HUD approved the clarifications in the amendment on August 22, 2006.  Another step forward for the program involved state officials establishing  agreements with local financial institutions and defining their roles and  responsibilities in the disbursement process, transferring funds from the  state to eligible recipients. Agreements were also established between  individual homeowners, the state, and the financial institutions and  included specific provisions and requirements that outlined the terms of  grant award disbursement.
During this second phase, the state worked out some of the details of its  original design. For example, homeowners who chose to rebuild their  storm-damaged homes would receive their CDBG grant awards in  incremental payments as they provided evidence to the state that  rebuilding efforts were under way. Under the Road Home program, a  homeowner would receive an initial portion of his or her grant proceeds  equal to either $7,500 or 10 percent of his or her total grant proceeds— whichever is less—upon execution of a contract for repairs. Subsequently,  the homeowner would receive a second portion of the grant proceeds  equal to no more than one-third of the total funds necessary to rebuild his  or her home upon completion of a commensurate amount of repairs.  Similarly, a third payment would be disbursed upon completion of two- thirds of the necessary repairs followed by a final disbursement of the  remaining grant proceeds. Final payment of the grant proceeds is withheld  until the state receives verification that the work is actually complete  thereby protecting the homeowner from potential fraudulent contractor  action. Louisiana state officials chose this type of incremental payment  system to provide assurance that federal funds were being spent as  intended, and to provide information that could be used to measure the  progress of homeowners’ rebuilding. Tying CDBG funds to home repairs in  this manner is consistent with a rehabilitation program; however, Road  Home had been labeled and approved as a compensation program.
One year after Hurricane Katrina made landfall, the Road Home program  was officially launched statewide in late August 2006 when the state began  accepting applications from homeowners and continued forward with  plans to disburse initial payments to those homeowners who participated  in the pilot. Throughout the subsequent months, state authorities mailed  out award letters to individual homeowners explaining the three options  available to them and giving them deadlines for their participation. In  addition, housing assistance centers, where eligible homeowners could  speak with trained housing advisors to help guide them through the  process and make informed decisions about their options, opened state- wide. Housing advisors also collected critical information from  homeowners regarding ownership, insurance, and mortgage balances— information that was required to process individual applications and  inform benefit calculation. In November 2006, Louisiana submitted  another action plan amendment that, among other changes, removed any  penalty for elderly homeowners who chose to relocate outside of  Louisiana. HUD did not consider the contents of the November 2006  amendment to be substantial enough to require formal review, allowing  state officials to continue forward with the Road Home program. By March  15, 2007, Louisiana had received more than 116,000 applications for Road  Home assistance and disbursed approximately $214.4 million to nearly  3,000 homeowners.
section_title: HUD’s Cease and Desist Order Prompted More Changes to Road Home Program
paragraphs: The third phase began on March 16, 2007, when HUD ordered Louisiana  officials to “cease and desist” Road Home, approximately 7 months after  the program was fully operational. According to HUD officials, they found  that the program was operating more like a rehabilitation program— meaning that CDBG funds were paying for home repairs and  reconstruction exclusively—and therefore, participating homes were  subject to site-by-site environmental reviews. While there is no written  documentation explaining HUD’s decision reversal nor any written federal  guidance outlining the specific terms of a compensation program, key  HUD officials provided us with a verbal explanation. Specifically, they said  that HUD staff conducted a scheduled monitoring visit to Louisiana and  reviewed the operating documents for the Road Home program, including  the grant disbursement agreements. According to an e-mail from the HUD  Assistant Secretary to key HUD staff involved in Gulf Coast recovery,  there was an “apparent inconsistency” between Road Home program  operations and the approved action plan. HUD would not allow the state  to move forward with the program until adjustments were made to the  disbursement process or until the state conducted the required site-by-site  environmental reviews.
According to Louisiana state officials, they were very surprised and  frustrated by HUD’s decision because of the department’s previous  acceptance of the Road Home program design. One top Louisiana official  testified on May 8, 2008, before the House Financial Services  Subcommittee on Housing and Community Opportunity that the  environmental assessments were the single biggest reason for the state  opting to implement a compensation model over a rehabilitation model.  During the early development of Road Home, Louisiana conducted a study  to estimate the costs, staff requirements, and time needed for full site-by- site property reviews. The state concluded that there was no practical way  to cost-effectively perform the environmental assessments on well over  100,000 homes and expect to get rebuilding money “on the street” in a  timely manner.
State officials met with key HUD staff in Washington, D.C., to discuss  HUD’s concerns and reconcile conflicting federal and state interpretations  of what qualifies as a compensation program versus a rehabilitation  program. However, as noted earlier, Louisiana officials believed that  CDBG regulations provided sufficient flexibility for its approach to  operate a compensation program. After these discussions, Louisiana state  officials decided to abandon their plans to disburse grant proceeds  incrementally and chose to provide funds to homeowners in lump-sum  payments. State officials submitted an action plan amendment to HUD in  early May 2007 to document this policy change. HUD approved the revised  action plan shortly thereafter and said in its approval letter to state  officials that the changes addressed the Department’s concerns that Road  Home “did not comply with the requirements of a true compensation  program.” Louisiana state authorities announced the policy change on  April 7, 2007, explaining that homeowners would receive a full payment of  their Road Home grant award in lump sum. They also recommended that  homeowners consult with financial advisors, lenders, and housing  counselors before beginning home repairs and encouraged homeowners to  establish voluntary disbursement accounts with lenders to help guard  against fraudulent contractor activity.
While the state continued to accept homeowner applications, individual  covenants had to be revised; homeowner grant awards had to be  recalculated; and scheduled house closings were postponed. Many  federal and state officials said that the original design of the Road Home  program with the incremental payment process was better aligned with  the state’s original priorities of ensuring long-term rebuilding and  incorporating front-end assurances that federal funds were spent as  intended than the lump-sum compensation program that was ultimately  implemented. Senior HUD officials told us that a compensation model  could disburse funds to homeowners incrementally rather than one-time,  lump-sum payments, but the officials were unable to provide any examples  where such an approach has been taken when disbursing CDBG disaster  recovery funds.
section_title: Conflicting Federal Determinations Hindered Coordination of Federal Funding Sources
paragraphs: While the CDBG program provided much of the federal assistance in the  aftermath of the 2005 Gulf Coast hurricanes, several other federal  programs provided assistance to Louisiana to support the state’s  comprehensive long-term recovery efforts, including among others,  FEMA’s Hazard Mitigation Grant Program (HMGP). Louisiana was eligible  to receive almost $1.5 billion from FEMA’s HMGP, which is part of a broad  framework of FEMA initiatives authorized by the Robert T. Stafford  Disaster Relief and Emergency Assistance Act. Similar to the evolution of  Louisiana’s Road Home program design discussed above, the state’s  proposal to use HMGP funds for homeowner assistance also evolved for  more than a year.
subsections: section_title: Key Federal and State Officials Agreed That HMGP Funding Could Be Used for Road Home
paragraphs: Soon after the first supplemental appropriation was enacted in late  December 2005, federal and state officials entered into negotiations for a  second appropriation of CDBG funding in light of concerns that the Road  Home program needed additional funds. State officials reported that as  part of these negotiations, the Office of the Federal Coordinator advised  them on how to incorporate HMGP funding into the Road Home  program. Doing so would have reduced the amount of additional CDBG  funds the state would request from Congress.
As part of their proposed funding design for the Road Home program,  Louisiana state officials planned to use approximately $1.1 billion in  HMGP funds in coordination with CDBG funds to purchase over 12,000  properties from homeowners who chose to relocate. The properties would  have initially been purchased with CDBG funds. At some point, but not  necessarily before their purchase, state officials and other stakeholders  would determine exactly which properties would be converted to open  space and which ones would be redeveloped. The cost of the properties  converted to open space would then be reimbursed with HMGP funds, as  converting properties to open space is an acceptable mitigation activity  under HMGP rules and regulations.
In traditional HMGP projects, funding is typically passed through the state  government to a local sub-grant applicant to coordinate with property  owners. In this case, the state itself would have been coordinating directly  with property owners. According to FEMA officials, they first found out  that the state expected to use HMGP funds toward Road Home in July  2006, after the state had already published its action plans, which stated  this intention. FEMA also claimed that the agency was not included in the  initial negotiations between the state and the Federal Coordinator’s office.  However, Louisiana state officials reported that FEMA verbally committed  to allowing the state to use HMGP funds for acquisitions. Throughout the  second half of 2006 and much of 2007, state officials met regularly with  FEMA as well as HUD—who did not oppose the initial plan—to work out  an agreement for the use of HMGP funds. However, it still took over one  year for FEMA and the state to come to an agreement over how HMGP  funding could be used.
section_title: FEMA Rejected Louisiana’s Initial Application for HMGP Funds
paragraphs: In late September 2006, Louisiana submitted its application to FEMA for  HMGP funds in accordance with its planned property acquisition project.  In a December 13, 2006 letter to the Louisiana Governor’s Office for  Homeland Security and Emergency Preparedness (GOHSEP)—the entity  responsible for administering and managing the state’s HMGP funds— FEMA expressed its concerns with Louisiana’s application.
FEMA denied Louisiana’s application to use HMGP toward the Road Home  program in February 2007 because the agency asserted that the state’s  intended plan to use HMGP for property acquisition did not meet  statutory, regulatory, or programmatic requirements. Specifically, FEMA  cited three main aspects of the proposal that formed the basis for its  rejection:  the plan exempted senior citizens from a specific financial penalty  under the Road Home program, which violated FEMA’s statutory  requirement of non-discrimination based on age;  the plan did not adequately involve local jurisdictions; and the application itself was too general and did not contain project-level  data and specific budget information.
FEMA officials also indicated that the proposed project was inconsistent  with the overall purpose of HMGP; namely, they perceived the Road Home  proposal as more focused on redevelopment than long-term hazard  mitigation. As noted in FEMA’s letter to Louisiana, the state did not have a  plan to coordinate with local officials to identify which properties would  become part of the HMGP program before their acquisition. However,  state officials could not identify the total number of properties that would  be converted to open space or redeveloped until homeowners indicated to  the state their choice to either keep or sell their storm-damaged property  in accordance with the benefit options available under the Road Home  program. Subsequently, FEMA maintained that this arrangement would  not provide enough detail for the agency to determine project eligibility for  specific properties. It appeared that the Road Home program lacked  sufficient budgetary resources, and the state’s priority was to “backfill” the  CDBG account with proceeds from HMGP, according to one FEMA  official.
Louisiana state authorities submitted an appeal to FEMA on April 4, 2007.  In that letter, GOHSEP urged FEMA to reverse its decision and allow the  Road Home program to use HMGP funds to acquire property and  transform it into open space. GOHSEP argued that the combination of the  CDBG-funded Road Home program and the HMGP acquisition project had  the great potential to reduce future damages more than any other hazard  mitigation project ever funded. Table 2 below shows the time line of  events surrounding the state’s attempt to leverage HMGP funding.
FEMA denied the state’s appeal on July 16, 2007. According to FEMA  regulations, HMGP funds cannot be used as a substitute or replacement to  fund projects or programs that are available under other federal  authorities, except under limited circumstances in which there are  extraordinary threats to lives, public health or safety or improved  property.  HMGP funds may, however, be packaged or used in  combination with other federal, state, local, or private funding sources  when appropriate to develop a comprehensive mitigation solution. One  FEMA official testified that HMGP is not designed to compensate  individuals for disaster losses. Rather, HMGP provides communities with  resources to implement long-term solutions that reduce the risk to citizens  and public facilities from hazards. The Stafford Act permits HMGP funds  to be used in connection with flooding for property acquisition as long as  the property’s use is compatible with an open space, recreational, or  wetlands management practice, among other requirements. In  Louisiana’s case, the state’s planned use of HMGP funds was to transform  flood-prone properties into open space and relocate homeowners out of  harm’s way. In a May 24, 2007, hearing before the Senate Homeland  Security and Governmental Affairs Subcommittee on Disaster Recov FEMA’s Assistant Administrator for Mitigation testified that the agency  “agreed in concept to this approach and began developing the  legal and  programmatic framework to make it work.” However, FEMA later  determined that the state’s implementation approach did not allow for  compliance with HMGP requirements.
Although HUD and FEMA are bound by similar nondiscrimination statutes  and regulations to determine project eligibility for their respective disaster  recovery programs, the agencies reached different conclusions about their  ability to fund the Road Home program. FEMA’s determination that it  could not fund the program because of HMGP’s non-discrimination  requirements prevented HMGP funding from being used for property  acquisitions as initially intended by the state. Under the Road Home  program, homeowners who chose to sell their properties to the state and  relocate outside Louisiana or those who sold homes and remained in the  state without purchasing new properties incurred a financial penalty.  Specifically, homeowner grants were reduced by 40 percent. Elderly  homeowners (65 or older as of December 31, 2005), however, were exempt  from this penalty. HUD did not find this measure violated the non- discrimination requirements applicable to CDBG funds, which were used  to fund the Road Home program. However, citing the Stafford Act, FEMA  determined that such an exemption was discriminatory toward  homeowners under the specified age limit. From the states’ perspective, it  was not necessarily clear how two separate nondiscrimination provisions  would be applied to the Road Home program. In effect, different federal  determinations prohibited the state’s efforts to design and implement this  piece of its housing recovery program.
section_title: FEMA Accepted Revised HMGP Application, but Delays Continued
paragraphs: Louisiana successfully redesigned the program to use HMGP funding  primarily for elevation grants, but the vast majority of homeowners have  yet to receive funds. After FEMA denied the state’s appeal to use HMGP  funds for property acquisitions, state officials redesigned their request,  and submitted a new application to FEMA to use HMGP funding for  homeowner elevation grants and reconstruction projects. FEMA  approved the plan, and in October 2007 the agency approved a small batch  of test properties as eligible to receive HMGP funds. Although the state  administered the new elevation/reconstruction project through the Road  Home program, HMGP funds were not integrated with CDBG funds as they  would have been under Louisiana’s original acquisition proposal. Both  federal and state officials characterized the HMGP elevation project as  running on a separate but parallel track to the CDBG-funded homeowner  assistance program. Homeowner demand for the projects has been less  than expected, in part because of the length of time it has taken to develop  and implement the program. Consequently, the state has reallocated funds  from the state-run HMGP elevation/reconstruction program to community- led traditional HMGP projects.
Our past work found that the application process for HMGP funds can be  complex and time and resource intensive. Long delays can occur in  receiving funds, which can lead to additional obstacles for local  communities. For example, delays in receiving grant funds can prevent a  city from being more cost-effective in terms of mitigation. These types of  HMGP delays were only exacerbated in Louisiana when the state  attempted to use HMGP funds alongside CDBG funds. While FEMA has  taken several steps to streamline their review processes, every property  must still meet FEMA eligibility requirements, including environmental  and historical preservation requirements. In our prior work, one local  mitigation official said that it would be most effective to conduct  mitigation activities immediately after a storm event, when damages are  being repaired, rather than waiting for HMGP funds to become available.  According to FEMA, while states normally have up to one year from the  date of a disaster declaration to apply for HMGP funds, the approval  process can begin much earlier following a disaster if state and local  officials have previously identified viable mitigation projects that are  consistent with state and local mitigation plans. However, without  effective communication between federal agencies, states are challenged  to coordinate the multiple streams of federal funding typically needed to  address recovery from catastrophic disasters.
section_title: Louisiana and Mississippi Took Similar Approaches to Address Human Capital Needs for Unprecedented Program Size
paragraphs: In the immediate aftermath of such a catastrophic disaster, Louisiana and  Mississippi state development agencies lacked sufficient capacity to  effectively manage billions of dollars in federal assistance. This is most  evident in the human capital challenges state agencies faced as they  designed and developed state CDBG programs of unprecedented size. We  found that Louisiana and Mississippi employed similar approaches to build  organizational capacity and address human capital needs, including the  creation of new state entities, hiring private contractors, and hiring  additional state agency staff.
Prior to the 2005 Gulf Coast hurricanes, state community development  agencies in both states had experience managing CDBG program budgets  of similar size to one another. For example, between fiscal years 2002 and  2005, the average annual CDBG program administered at the state level  was budgeted at approximately $34.6 million and $35.6 million for  Louisiana and Mississippi respectively. Funding allocations for state  CDBG programs have been generally declining in recent years.  Specifically, Louisiana’s state CDBG program budget decreased to $27.6  million in 2008 while Mississippi’s budget decreased to $29.8 million. The  amount of CDBG disaster recovery funds Congress provided after the Gulf  Coast hurricanes translated into enormous increases in both states’ CDBG  budgets. Table 3 shows the annual state CDBG budgets for Louisiana and  Mississippi compared to the amount of CDBG disaster funds provided to  each state for Gulf Coast hurricanes recovery and rebuilding efforts.
Both states were suddenly responsible for managing and administering  multibillion dollar programs that were substantially larger than their more  typical multimillion dollar programs.
subsections: section_title: Both States Created New Offices to Direct Disaster Recovery Efforts
paragraphs: Both states created new entities to coordinate and oversee rebuilding  efforts and to serve as policymaking bodies responsible for planning and  coordinating efforts throughout the state. In Louisiana, the governor  created the Louisiana Recovery Authority (LRA) within the state’s  executive branch in October 2005. As part of its responsibilities, LRA was  charged with establishing spending priorities and plans for the state’s  share of CDBG funds, subject to approval of Louisiana’s state legislature.  LRA’s primary goals included securing funding for recovery and  rebuilding, identifying and addressing critical short-term recovery issues,  and providing oversight and accountability. While LRA was responsible for  developing and issuing policies on the state’s recovery, the Office of  Community Development (OCD) was responsible for administering the  Road Home program and managing the day-to-day implementation of  LRA’s policies. In 2008, under the leadership of a newly elected governor,  OCD merged with LRA creating a more centralized structure for authority  and oversight of the state’s recovery activities. Moreover, the executive  director of the recently combined LRA and OCD now serves as the  governor’s authorized representative to the President for disaster recovery  in Louisiana. According to one state official we spoke with, this  consolidated leadership structure has improved the operation of the Road  Home program.
Similarly, in Mississippi, the governor created the Governor’s Office of  Recovery and Renewal in January 2006, which served as a policy-oriented  body and had the primary responsibility for designing the state’s various  recovery programs and shaping the state’s overall approach to rebuilding.  Among its responsibilities, the office coordinated relief efforts among  federal and state agencies and other public and private entities. Its primary  objectives included, obtaining the maximum amount of federal funds and  maximizing the use of credit in lieu of cash, providing policy advice and  formulation to the governor and state agencies, providing technical  assistance and outreach to local governments, and facilitate the  implementation of recommendations made by the Governor’s  Commission. While the Governor’s Office of Recovery and Renewal is  responsible for setting policies for long-term recovery plans, Mississippi  Development Authority (MDA) is responsible for the implementation of  these policies and administering the state’s CDBG disaster recovery  programs.
section_title: Both States Hired Additional State Agency Staff and Private Contractors
paragraphs: Officials from the state development agencies—OCD and MDA— recognized the need to build the states’ organizational capacities to  address the enormous task of developing and managing massive housing  recovery programs. In response, both Louisiana and Mississippi hired  additional state agency staff; however, Mississippi lagged behind Louisiana  in this effort. Specifically, Louisiana OCD made use of state civil service  provisions that allowed the agency to recruit higher-salaried, term- appointment managers who were well-qualified disaster recovery experts.  According to the former Executive Director of OCD, despite most of the  key staff in the agency having more than 20 years of experience working  with the CDBG program, the agency needed additional help. OCD hired  staff from other states who had experience implementing federal housing  programs and with CDBG disaster program funding. These individuals  came from various states including Kentucky, New York, North Dakota,  and Pennsylvania and were placed in top management positions within the  agency.
In Mississippi, top agency officials also acknowledged that the state and  local governments were overwhelmed by the scale of destruction left by  the 2005 Gulf Coast hurricanes. One top MDA official said the agency did  not have a sufficient number of staff in place—particularly staff with  expertise in CDBG-funded disaster recovery programs—to administer a  wide range of new programs. Top MDA officials said that they had  approximately 20 people assigned to disaster recovery positions in the  aftermath of the 2005 Gulf Coast hurricanes. Eventually, MDA increased  its disaster recovery staffing level in 2008 after receiving an evaluation and  recommendations from HUD. For example, an audit conducted by the  HUD Inspector General found that MDA did not have adequate staff to  monitor implementation of the state’s Homeowner Assistance Program  and had not established the required monitoring processes. The  supplemental appropriations act that provided CDBG funds for recovery  from the 2005 Gulf Coast hurricanes, coupled with the state’s HUD- approved action plan, required that MDA establish and implement  monitoring processes to ensure that program requirements were met and  to provide continuous quality assurance.
In addition, HUD’s Office of Community Planning and Development, which  was the office responsible for administering and overseeing CDBG  disaster recovery funds, found that MDA had insufficient separation of  duties, thereby negatively affecting the state’s fiscal controls and  accounting procedures for billions of federal CDBG dollars. Specifically,  HUD found that one individual had multiple roles of authority as a  program and financial manager and monitor as well as an invoice approval  and reconciliation manager. In response to HUD’s findings, MDA  restructured the agency and created a separate bureau to handle all  reporting and monitoring responsibilities. The agency also hired 30 people,  for a total of approximately 50 employees assigned to administering and  managing the state’s disaster recovery work.
In addition to hiring additional agency staff, both states contracted with  private firms to help state development agencies implement and manage  their housing assistance programs. Both states hired contractors to set up  customer service centers, process applications, determine and verify  eligibility and calculate damage compensation amounts, develop tracking  procedures, prevent duplication of benefits, and develop cost estimates.  Louisiana officials recognized that even with the additional agency staff,  the agency still did not have the capacity to manage all of those  operations. When reviewing potential contractors to implement the Road  Home program, state officials included multiple stakeholders in an  inclusive and transparent process. For example, the top OCD official at the  time brought in experts from other states to score and rank the various  proposals. ICF International’s proposal was unanimously chosen by the  selection team with the support of the state legislature and state attorney  general’s office. The initial contract between OCD and ICF International  cost approximately $756 million, but the cost increased to $912 million in  December 2007 when the number of homeowners estimated to receive  assistance increased from 100,000 to 160,000. Similarly, MDA recognized  its need to build capacity and contracted with Reznick Group to  implement its Homeowners Assistance Program. One top MDA official  said the agency relied heavily on Reznick to manage program operations  on the ground. Mississippi’s contract with the firm cost an estimated $88  million.
section_title: Both States Said They Needed HUD Staff on the Ground
paragraphs: According to state officials in both Louisiana and Mississippi, the state  development agencies responsible for designing and administering CDBG- funded housing recovery programs needed regular, on-site technical  assistance from HUD staff. While HUD staff did conduct four to five on- site monitoring and technical assistance visits per year as part of its  oversight responsibilities, a number of state officials pointed to a need for  clarification and further explanation of various federal regulations,  environmental requirements, and waivers related to the states’ use of  CDBG funds in disaster recovery activities. HUD has field offices in both  states; however, the CDBG disaster recovery program for the Gulf Coast  was managed out of the agency’s Washington, D.C. headquarters office. In  Mississippi, MDA officials asserted that some of their agency’s capacity  challenges and frustration interacting with HUD could have been  alleviated if one HUD official had been assigned to work in their office.  Specifically, they identified two ways that on-site HUD assistance would  have benefited the state. First, a HUD representative would have brought  extensive CDBG expertise and helped to fill the knowledge gap at the state  level. Second, a HUD representative with sufficient decision-making  authority could have reduced bureaucratic delays and led to quicker  program implementation. According to MDA officials, HUD’s first visit to  Mississippi was in the fall of 2007, almost 2 years after Hurricane Katrina’s  landfall.
Similarly, top officials in LRA and OCD also highlighted the state’s need  for on-site technical assistance, adding that such an arrangement could  have helped Louisiana avoid some of the challenges it encountered with  the Road Home program. For example, one top state official said that  HUD’s on-site presence would have strengthened the state’s ability to  evaluate its options during program design, particularly when choosing to  implement a compensation model versus a rehabilitation model. Another  top state official in Louisiana expressed frustration that HUD encouraged  the state to be creative only to get “stuck” in trying to do so because of  insufficient guidance from HUD on the nuances related to CDBG disaster  funds. In that official’s opinion, it would have been more helpful if HUD’s  role was less prescriptive but still provided a clear sense of direction to  the states. Louisiana officials suggested that HUD representatives could  work in state agencies for a couple months at a time, rather than providing  technical assistance by phone—which was typically the case after the 2005  Gulf Coast hurricanes. The former top OCD official said that they never  had HUD on the ground with them in that capacity.
Officials in both states expressed frustration with CDBG as a funding  delivery mechanism, and were critical of its effectiveness in disaster  recovery programs. According to one key state official, CDBG is a totally  inappropriate source for funding disaster recovery efforts and it is not  well-designed to meet the immediate needs of residents. Other top state  officials were critical of HUD’s assistance to the state because of HUD’s  approach of force-fitting the program rules and regulations applicable to  traditional CDBG programs to state disaster recovery programs. In the  states’ view, the magnitude of the 2005 Gulf Coast hurricanes made many  of the traditional CDBG rules that were not already waived or modified  impractical and slowed the process. Additionally, state officials noted that  in some instances there appeared to be disagreements between the stated  policies of top HUD management and the technical assistance provided by  mid-level HUD staff during program implementation.
section_title: Conclusions
paragraphs: Although CDBG has been widely viewed as a convenient, expedient, and  accessible off-the-shelf tool for distributing federal assistance funds to  states, it proved to be slower, less flexible, and more difficult to manage  than expected. The experiences in Louisiana and Mississippi provide  insights when considering the effectiveness of adapting an existing  funding delivery mechanism like CDBG when responding to catastrophic  disasters. For example, broad discretion was granted to the states to tailor  fit a CDBG program to their needs. However, when Louisiana took its  specific approach to provide compensation to homeowners and encourage  rebuilding, state officials encountered federal environmental requirements  that made such a housing recovery approach impractical. While the  environmental requirements were outlined in law and regulations, it was  unclear as to which cases the requirements would apply. The lump-sum  compensation design that both Louisiana and Mississippi ultimately chose  channeled CDBG funds to homeowners with fewer assurances to the  states that people would actually rebuild and contribute to community  development.
In Louisiana, state officials were challenged by the inconsistent and  conflicting guidance they received from different federal entities when  coordinating different federal funding streams. When states are faced with  navigating the numerous complexities of a funding delivery mechanism  like CDBG, along with other federal disaster recovery funds, it is critical  that federal guidance and assistance be clear, concise, and consistent to  help minimize misunderstandings, confusion, and program delays. This is  particularly important when states are developing their approaches to  disaster recovery. This is also true when states are managing other sources  of federal funds, some of which may or may not be combined for projects  of similar purpose. Louisiana’s experience with HMGP raises questions  about the need for federal regulations or operational guidance that clearly  outline the options and the limitations of coordinating different disaster- related funding streams in the aftermath of a catastrophic event. Valuable  opportunities also exist for the federal government—primarily HUD,  FEMA, and the Office of the Federal Coordinator—to reflect upon lessons  learned to improve federal assistance to states devastated by a  catastrophic disaster.
At the state level, any disaster that creates such catastrophic damage and  devastation will present state authorities with the immediate need and  challenge of building additional human capital capacity. The steps  Louisiana and Mississippi state officials took to address such challenges,  including the creation of a policy-making and coordinating entity to lead  recovery efforts and hiring experienced disaster recovery staff, provide  valuable lessons at both the federal and state level for future disaster  recovery efforts.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of the U.S. Department of Housing and  Urban Development take the following two actions:
Develop and issue written CDBG disaster assistance program  guidance for state and local governments to use as they begin to  develop plans for housing recovery efforts and disbursing federal  assistance to residents after natural and man-made disasters.  Specifically, this guidance should clearly articulate what  constitutes an acceptable rehabilitation program versus a  compensation program, including an explanation of the  implications of each program design; clarification of the legal and  financial requirements with which states must comply; and an  explanation of the types of program elements that may trigger  federal environmental and other requirements.
Coordinate with the Federal Emergency Management Agency to  ensure that the new guidance clarifies the potential options, and  limitations, available to states when using CDBG disaster  assistance funds alongside other disaster-related federal funding  streams.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Secretary of the Department of  Housing and Urban Development (HUD) and the Secretary of the  Department of Homeland Security (DHS) for comment. We received  written comments from HUD, which are provided in appendix II.
In a letter signed by the General Deputy Assistant Secretary for  Community Planning and Development, HUD partially agreed with our  recommendation that the department issue written disaster recovery  program guidance and improve coordination with FEMA to clarify the  appropriate uses of CDBG funds with other disaster-related federal funds,  such as HMGP funding. In short, HUD agreed to provide a report  describing the four housing compensation programs that have been  implemented in the past. The department also agreed to make its  forthcoming multiyear evaluation report of the housing compensation  programs in Louisiana and Mississippi publicly available. HUD did not  agree that providing further technical or binding guidance comparing  housing compensation and housing rehabilitation designs was the correct  action at this time. The department also feels that additional coordination  with FEMA will be far more useful if the role of the CDBG program in  disaster recovery is regularized.
While HUD stated that it had no issues with the general direction of the  recommendation, the department provided additional comments  expressing three main concerns. These concerns are outlined below along  with our response.
First, HUD stated that compensation programs are not an eligible CDBG  activity—except when acquiring property for a public purpose—unless the  Secretary grants a statutory waiver to allow it. While HUD has issued  guidance covering all aspects of housing rehabilitation programs, the  department stated that it has issued no formal guidance for compensation  programs because such programs have been seldom used and each  compensation design has been different. Furthermore, because the  requirements for compensation programs are tailored to the grantee’s  specific program design, HUD does not consider this to be a “fruitful area  for general guidance.” However, HUD agreed that it may be useful to  compare already implemented housing compensation programs to a  typical rehabilitation program to identify key areas where policies have  differed and examine the application of environmental reviews and other  requirements. As stated in our report, we note that compensation  programs have been rare. In our view, that fact helps highlight the  importance and need for the development of written CDBG disaster  assistance guidance for housing compensation program design. While each  compensation program may have its own unique design features, we  continue to believe that HUD could improve its assistance to states by  issuing guidance that clearly articulates the applicable legal and financial  requirements, as well as the types of program elements that may trigger  federal environmental and other requirements. We support HUD’s  suggestion to compare past compensation programs with a typical  rehabilitation design to identify differences in policies and the application  of environmental requirements. The results of such a comparative study  would contribute to the department’s development of new written  guidance.
Second, HUD stated that it is currently conducting a multiyear evaluation  of the housing compensation programs in Louisiana and Mississippi—the  results of which are expected to clarify whether HUD will support housing  compensation programs in the future. For this reason, the department  hesitated to develop guidance that would be “premature” if issued prior to  completion of the evaluation. Hopefully, the results of HUD’s evaluation  will provide valuable insights on the effectiveness of compensation  programs for disaster recovery. We agree that HUD should wait to develop  guidance until it completes its evaluation. However, if the department  chooses to continue to allow housing compensation programs, we  continue to stand by our recommendation that the department issue  written guidance. Similar to the comparative study discussed earlier, the  results of this multiyear evaluation would help to inform HUD’s efforts to  develop written guidance for housing compensation programs.
Third, HUD stated that the CDBG program is not a formal part of the  federal government’s disaster recovery programs. The department  anticipates that upon a presidential review of disaster recovery programs,  the current administration may choose to either relieve the CDBG program  of any disaster recovery role or grant it a permanent place among the array  of federal assistance programs available to states for disaster recovery. If  the latter happens, HUD stated that it would issue permanent regulations  and supporting guidance. In addition, the department stated that it would  be better positioned to coordinate with FEMA in advance of an event,  rather than waiting for Congress to grant CDBG disaster assistance funds  in the aftermath of an event. As we noted in our report, Congress has  turned to the CDBG program to provide disaster assistance to states at  least 20 times over the past two decades. In response to HUD’s comment,  we recommend that the department continue to engage the presidential  administration on this issue. If the CDBG program continues to assume a  disaster recovery role, we reiterate our recommendation that HUD issue  written guidance for housing compensation programs, including, among  other things, an explanation of program elements that trigger federal  environmental reviews.
We continue to believe the issuance of written HUD guidance that clearly  articulates the differences between a compensation program and a  rehabilitation program—including an explanation of the types of program  elements that may trigger federal environmental reviews—will better aid  state and local governments as they develop their plans for housing  recovery efforts and disburse federal disaster assistance to residents. In  addition, as long as the CDBG program continues to be a primary vehicle  for distributing federal disaster assistance, we believe increased  coordination between HUD and FEMA to ensure that the new guidance  clarifies the potential options and limitations of using CDBG disaster  assistance funds alongside other disaster-related funds would further aid  state and local governments as they navigate the complexities of multiple  federal disaster recovery program resources. Together, the  implementation of these two recommendations should help to create  clear, concise, and consistent federal messages to state and local  governments and help to minimize the misunderstandings, confusion, and  program delays that Louisiana officials experienced after the 2005 Gulf  Coast hurricanes.
DHS provided only technical comments, which were incorporated as  appropriate. We also provided drafts of the relevant sections of this report  to Louisiana and Mississippi state officials involved in the specific  examples cited in this report. Both states provided technical comments,  which we incorporated as appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  date of this letter. We will then send copies of this report to the Secretary  for Housing and Urban Development, the Secretary of Homeland Security,  other interested congressional committees, and state officials affected by  the 2005 Gulf Coast hurricanes.  We will make copies available to others  upon request.  In addition, the report will be available at no charge on  GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-6806 or at czerwinskis@gao.gov.  Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report.  Individuals who made key contributions to this  report are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To examine how Gulf Coast states allocated their share of Community  Development Block Grant (CDBG) funds, we focused our review on the  states of Louisiana and Mississippi—the states most directly affected by  the 2005 Gulf Coast hurricanes. To determine how the two states  prioritized their rebuilding efforts and allocated their share of CDBG  funds, we first identified the amount of funds provided to each state by  reviewing Federal Register notices and the housing damage estimates that  were used to determine each state’s allocation. Housing damage estimates  were based on data from the Federal Emergency Management Agency  (FEMA) and the Small Business Administration and were compiled in  cooperation with the Office of the Federal Coordinator for Gulf Coast  Rebuilding within the Department of Homeland Security and the  Department of Housing and Urban Development (HUD). We also reviewed  federal statutes, regulations, and notices governing the use of CDBG funds  and interviewed officials in HUD’s Community Planning and Development  division regarding their roles and responsibilities in allocating and  distributing CDBG disaster funds to the states. To identify Louisiana’s and  Mississippi’s priorities and how those priorities changed over time, we  obtained and reviewed state planning documents and budget data from  April 2006 to September 2008 and interviewed state program and budget  officials responsible for administering and managing CDBG programs in  Louisiana and Mississippi. We assessed the reliability of the budget data by  reviewing the data for completeness and internal consistency, verified  totals, and interviewed state officials responsible for preparation of budget  reports. We observed changes in states’ budget data format and categories  over time. For example, each state categorized its unallocated amount of  CDBG funds differently and changed the reporting format between 2006  and 2008. To present the data from both states in a common set of budget  categories, we consolidated periodic reports to obtain cumulative values  and collapsed or disaggregated budget categories. We also consulted with  state officials to verify interpretation of budget categories and reporting  periods, to verify identification of instances where reporting formats  changed, and to obtain confirmation that our reformulation of categories  and amounts were acceptable. Note that periods covered are not exactly  the same, but the difference in periods covered does not exceed one  month. We determined that the data were sufficiently reliable for the  purposes of this report.
To determine what challenges states faced with their housing recovery  programs, we relied primarily on testimonial evidence from key federal  officials at HUD headquarters in Washington, D.C.; HUD field offices in  New Orleans, Louisiana and Jackson, Mississippi; the Office of the Federal  Coordinator for Gulf Coast Rebuilding; and FEMA, as well as key state  officials in Louisiana and Mississippi. We corroborated testimonial  evidence with documents and data that we received from key federal and  state officials including federal guidance and regulations related to HUD’s  CDBG program and FEMA’s Hazard Mitigation Grant Program (HMGP),  relevant environmental statutes and regulations, state planning  documents, state program and budget data, and intergovernmental  correspondence. We also interviewed staff from ICF International—the  contractor Louisiana hired to manage the state’s Road Home housing  program.
To examine the human capital challenges Louisiana and Mississippi  encountered and their efforts to address those challenges, we interviewed  state program and budget officials responsible for administering and  managing CDBG disaster funds. We obtained and analyzed information on  state agency CDBG budgets, staffing levels, and organizational changes  undertaken by the two states in the aftermath of the 2005 Gulf Coast  hurricanes. We reviewed reports completed by the HUD Inspector General  and HUD’s Community and Planning Development division and  interviewed key staff to capture their observations.
In addition, we reviewed relevant congressional statements and  testimonies and coordinated our work with the HUD Inspector General  and with state audit offices. We also drew upon previous work we have  conducted on Gulf Coast rebuilding efforts, emergency response, capacity  issues and CDBG-funded disaster programs.
In Louisiana at the state level, we spoke with officials at the Louisiana  Office of Community Development (OCD), which was the official grantee  of HUD CDBG disaster funds for the state. Within OCD, we met with  officials in the Disaster Recovery Unit, which was the agency division  responsible for administering and managing the state’s share of CDBG  disaster recovery funds. We met with officials at the Louisiana Recovery  Authority, which served as a policymaking and coordinating body for  recovery efforts throughout the state. We also met with officials in the  Governor’s Office of Homeland Security and Emergency Preparedness,  which was the agency responsible for administering FEMA HMGP funds  provided to the state for mitigation projects. In addition, we met with key  staff in the Office of the Louisiana Legislative Auditor to discuss their past  and ongoing work evaluating the state’s housing recovery program and  their observations on OCD’s human capital challenges.
In Mississippi at the state level, we spoke with officials at the Mississippi  Development Authority (MDA), which was the official grantee of HUD  CDBG disaster funds for the state. We met with key staff in the Governor’s  Office of Recovery and Renewal, which served as a policymaking and  coordinating body for recovery efforts throughout the state. Also, we met  with officials at the Mississippi Emergency Management Association,  which is the entity responsible for administering FEMA HMGP funds  provided to the state for mitigation projects. In addition, we met with the  Mississippi Office of the State Auditor to discuss their observations of the  state’s housing recovery program and their relationship with the HUD  Inspector General’s office on audits of MDA’s human capital capacity.
We conducted this performance audit from June 2007 through April 2009  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. We requested comments on a  draft of this report from the Department of Housing and Urban  Development and the Department of Homeland Security. We received  written comments from HUD, which are included in appendix II. DHS  provided only technical comments, which were incorporated as  appropriate. We also provided drafts of the relevant sections of this report  to state officials in Louisiana and Mississippi and incorporated their  technical comments as appropriate.
section_title: Appendix II: Comments from the Department of Housing and Urban Development
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Stanley J. Czerwinski, (202) 512-6806 or czerwinskis@gao.gov.
section_title: Staff Acknowledgments
paragraphs: Major contributors to this report were Michael Springer, Assistant Director;  David Lutter; Susan Mak; and Leah Q. Nash. Jessica Nierenberg, Melanie  Papasian, Brenda Rabinowitz, and A.J. Stephens also made key  contributions to this report.