Homelessness: Information on Administrative Costs for HUD's Emergency Shelter Grants Program
Published: 2010-05-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Homeless Emergency Assistance and Rapid Transition to Housing Act of 2009 (HEARTH Act) directed GAO to study the appropriate administrative costs of the U.S. Department of Housing and Urban Development (HUD) Emergency Shelter Grants Program (ESG)--a widely used, formula-based program that supports services to persons experiencing homelessness. This report discusses (1) for selected recipients, the types of administrative activities performed and administrative costs incurred under the ESG program, and the extent to which grant proceeds cover these administrative costs; (2) how the ESG program's allowance for administrative costs compares with administrative cost allowances for selected other targeted federal homeless grant programs, plus selected other HUD formula-based grant programs; and (3) how the nature or amount of administrative costs might be different under changes Congress made to the ESG program in the HEARTH Act that expand the types of activities that may be funded. To address these issues, GAO reviewed relevant policies and documents, interviewed officials of HUD and other agencies, made site visits in four states, reviewed HUD and other available standards on eligible administrative costs for federal grants, and reviewed cost allowances for homeless programs of the Departments of Education, Labor, and Health and Human Services. GAO makes no recommendations in this report.
section_title: What GAO Found
paragraphs: ESG grantees and subgrantees we visited in four states performed a range of administrative activities, but the ESG program's allowance for administrative costs--currently 5 percent--did not fully cover the cost of these activities. Grantees generally focused their administrative activities on awarding subgrants and monitoring subgrantee performance, while subgrantees focused their administrative activities on operating their programs and reporting results to their respective grantees. To cover unfunded ESG administrative costs, grantees and subgrantees told us they used other sources, such as other grants or private donations. They added that these estimated unfunded administrative costs, which averaged 13.2 percent and ranged from amounts equal to 2.5 percent to 56 percent of their ESG grant proceeds, diminished their ability to support other program activities. In addition, we found minimal standards available for evaluating the appropriateness of ESG administrative costs, and grantees and subgrantees in the states we visited monitored ESG administrative costs in varying levels of detail. The funding and treatment of administrative costs varied across other targeted federal homeless grant programs we reviewed. For example, the maximum administrative allowance for grantees ranged from 4 percent to 50 percent for programs with such a provision; the ESG program's current 5 percent allowance is thus one of the lower amounts provided. Programs with similar funding structures varied in their requirements for grantees to share their administrative allowance with subgrantees; the ESG program generally does not require grantees to share their allowance. In addition, none of the programs we reviewed offered comprehensive direction on eligible and ineligible administrative activities. Overall, these and other varying program features make it difficult to make direct comparisons between the administrative cost provisions of the ESG program and those of other targeted federal homeless grant programs. A number of ESG grantees and subgrantees we visited told us they expect the new ESG activities authorized by the HEARTH Act will result in different kinds of administrative activities that in many cases will be more costly. They cited client screening and eligibility verification, technical assistance to subgrantees, number of grant applicants, and facility management and collaboration with third parties as among areas where administrative costs may increase. Although the HEARTH Act makes significant changes, including increasing the administrative cost allowance to 7.5 percent, it remains unclear when new program activities might be implemented. Uncertainty over how and when the new ESG program might be implemented, plus variation in administrative activities under the current program, complicate any attempt to determine the appropriate size of the ESG administrative allowance. HUD told us in comments on a draft of this report that some subgrantees appear to be confusing program and administrative costs, thus potentially overstating any need for a larger administrative allowance.

section_title: Letter
paragraphs: Against a backdrop of economic recession, an estimated 1.2 million to 2  million people used an emergency shelter or transitional housing program  during the 12-month period ending September 30, 2008, according to a July  2009 report to Congress on homelessness. That report also provided some  early indications of how the sheltered homeless population might be  changing as a result of the recent economic downturn. For example, the  report noted that family homelessness, considered to be more sensitive to  economic conditions than homelessness among individuals, has increased.  In addition, the report noted that the number of those who reported living  with family or friends the night before entering a homeless residential  facility has increased, which could also reflect the economic downturn,  because people tend to use all alternative housing options before resorting  to the shelter system. Finally, the report noted that a larger percentage of  sheltered homeless persons have come from stable accommodations prior  to entering a facility.
The U.S. Department of Housing and Urban Development (HUD)  Emergency Shelter Grants Program (ESG), a widely used federal program  to address homelessness, provides funds for emergency shelters to help  people achieve independent living. Under the program, HUD makes grants  to states, large cities, urban counties, and U.S. territories. With the  exception of states, these direct recipients, or “grantees,” may carry out  ESG projects through their own departments or agencies, or may make the  funds available in the form of subgrants to nonprofit organizations that  carry out ESG projects. State grantees, however, cannot use their ESG  grant funds to conduct their own program activities and instead must  subgrant funds to nonprofit organizations or local governments to carry  out ESG projects. Eligible ESG projects include the renovation,  rehabilitation, or construction of buildings to be used as emergency  shelters; operation of the facilities; essential supportive services (including  those related to employment, health, drug abuse, or education); and  homeless prevention.
The Homeless Emergency Assistance and Rapid Transition to Housing Act  of 2009 (HEARTH Act) made significant changes to the ESG program.  Among other things, the act, which renamed the program the Emergency  Solutions Grants Program, increased the range of eligible homeless  prevention and re-housing activities, including short- or medium-term  rental assistance and housing stabilization services. In general, according  to HUD, the act shifted program emphasis from providing shelter to  fostering housing stability. The act also increased the percentage of grant  funds that grantees may use for administrative purposes from 5 percent to  a maximum of 7.5 percent. Finally, the HEARTH Act directed GAO to  conduct a study of the appropriate administrative costs for the ESG  program.
In this report, we provide information about ESG program administrative  costs, based in significant part on our work at selected grantees and  subgrantees in four states. More specifically, this report discusses (1) for  selected recipients, the types of administrative activities performed and  administrative costs incurred under the ESG program, and the extent to  which grant proceeds cover these administrative costs; (2) how the ESG  program’s allowance for administrative costs compares with  administrative cost allowances for selected other targeted federal  homeless grant programs, plus selected other HUD formula-based grant  programs; and (3) how the nature or amount of administrative costs might  be different under the changes Congress made to the ESG program in the  HEARTH Act.
To address these issues, we reviewed the ESG program’s authorizing  legislation, objectives, and implementing regulations. In addition, we  interviewed HUD officials knowledgeable about the ESG program. We  made site visits to four states—California, Georgia, Michigan, and  Pennsylvania—where we interviewed selected ESG grantees and  subgrantees and obtained estimates of their ESG administrative costs. We  selected these states based on geographic balance and the total amount of  funding HUD provided to state grantees for fiscal year 2009. We also  reviewed available sources, including from HUD, regarding eligible  administrative costs for federal grants. Further, we reviewed the  administrative cost allowances for homeless grant programs administered  by the Departments of Labor, Education, and Health and Human Services,  and we interviewed officials from these departments knowledgeable about  the programs. Finally, we reviewed the HEARTH Act changes to the ESG  program and obtained the perspectives of HUD officials, 34 grantees and  subgrantees we visited, various nonprofit organizations that advocate for  people experiencing homelessness, and others regarding how these  changes might affect the nature or amount of administrative costs for the  ESG program. Appendix I provides a more detailed description of our  scope and methodology.
We conducted this performance audit from August 2009 to May 2010, 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: According to HUD, the ESG program was designed to be the first step in a  continuum of assistance to prevent homelessness and to enable  individuals and families experiencing homelessness to move toward  independent living. More specifically, the program objectives were to  increase the number and quality of emergency shelters for individuals and  families experiencing homelessness, to operate these facilities and provide  essential social services, and to help prevent homelessness. The ESG  program is targeted at persons experiencing homelessness.  It was  originally established by the Homeless Housing Act of 1986, in response to  the growing issue of homelessness among men, women, and children in  the United States. In general, the ESG program uses the Community  Development Block Grant (CDBG) formula as the basis for allocating  funds to states, metropolitan cities, and urban counties. The CDBG  formula uses factors reflecting community need, including poverty,  population, housing overcrowding, and age of housing. According to HUD,  in fiscal year 2009, there were 360 ESG grantees.
For fiscal year 2009, HUD awarded $160 million in ESG funding to  grantees. Figure 1 shows the total amount of ESG funds received by  grantees, by state, for fiscal year 2009.
The ESG program generally requires matching contributions by grantees,  thus increasing the total funds used to provide services under the  program. Metropolitan cities and urban counties must match the ESG  funding dollar-for-dollar with cash or noncash resources from public or  private sources. States are generally subject to the same requirement, with  an exemption for the first $100,000 in funding.
ESG funds may reach eligible projects through different routes, as shown  in figure 2. First, HUD allocates ESG funds to grantees. Metropolitan  cities, urban counties, and territories may carry out the program directly  or subgrant all or part of their ESG funds to nonprofit organizations. States  cannot carry out program activities directly, and must subgrant ESG funds  (but may retain up to 5 percent for administration, as discussed below) to  local governments or nonprofit organizations. Local governments  receiving ESG funds as a subgrant from the state may carry out the  program themselves or further subgrant funds to nonprofit organizations.  HUD allows ESG grantees flexibility to determine how to award funds to  subgrantees. For example, many grantees conduct a competitive process  for awarding funds to subgrantees. Other grantees offer repeat funding to  organizations that have demonstrated success with ESG-funded homeless  assistance programs in the past, or they alternate funding each year among  multiple agencies with ongoing homeless assistance programs. Grantees  also might make relatively few, but relatively larger, subgrants, or award  relatively smaller grants to a greater number of subgrantees.
Subgrantees and grantees that are not states may use ESG funding to  conduct a range of eligible activities which, as previously noted, include  the rehabilitation or remodeling of buildings to be used as shelters,  operation of the facilities, essential supportive services, and homeless  prevention.
Under current law, ESG program grantees may use up to 5 percent of their  grant award for administrative purposes, which can include staff to  administer the grant, the preparation of progress reports and audits, or the  monitoring of subgrantees. Grantees are not required to share any of  their ESG administrative allowance with subgrantees, except in one  instance—when a state awards a subgrant to a unit of local government.  According to HUD, the department does not track the extent to which  grantees share their ESG administrative allowance with subgrantees.
The HEARTH Act made major changes to the ESG program, while  renaming it the Emergency Solutions Grants Program. As noted earlier, the  HEARTH Act changed the amount of ESG funds that grantees may use to  cover administrative costs, increasing it from 5 percent to a maximum of  7.5 percent of the total grant amount. Programmatically, the HEARTH Act  also made the following changes:    The act authorized new eligible homeless assistance activities: short-term  rental assistance, medium-term rental assistance, security deposits, utility  deposits and payments, and moving costs.
It established housing relocation and stabilization services as a major  focus area for both homeless assistance and homeless prevention,  including outreach, housing search, legal services, and credit repair.
It established rapid re-housing as a major focus area for homeless  assistance. The aim of rapid re-housing is to help people experiencing  homelessness return to permanent housing as soon as possible. According  to a national homeless advocacy group, these efforts reduce the length of  time people remain in homeless shelters, which in turn opens beds for  others who need them and reduces the public and personal costs of  homelessness.
HUD expects to implement the HEARTH Act changes, including increasing  the allowance for administrative costs, with the program’s fiscal year 2011  allocation.
section_title: Grantees and Subgrantees We Visited Reported a Range of Administrative Activities Whose Costs Generally Were Not Fully Covered by the ESG Allowance
paragraphs: We found that ESG grantees and subgrantees in the states we visited  performed a range of administrative activities, but the program’s  allowance for administrative costs generally did not fully cover the cost of  these activities. As a result, grantees and subgrantees told us they must  cover any shortfalls with funds from other sources, which diminishes their  ability to support other activities. In addition, there are minimal standards  that can be used as guidance for evaluating the appropriateness of ESG  administrative costs, and we found that grantees and subgrantees in the  states we visited monitored ESG administrative costs at varying levels of  detail.
subsections: section_title: Grantees’ Administrative Activities Focus on Awarding and Monitoring Subgrants, while Subgrantee Administrative Activity Centers on Operating Programs and Reporting Outcomes
paragraphs: Grantees in the states we visited told us they conducted various activities  to administer their ESG allocations. As figure 3 shows, these activities  generally fell into five categories: application/approval, financial,  reporting, monitoring/oversight, and other. Our review found these  grantees’ ESG administrative activities generally focused on awarding  subgrants and monitoring subgrantee performance. For example, City of  Philadelphia officials told us they awarded a total of $2.2 million through  five ESG grants for fiscal year 2009 and their administrative activities  included, among other things, approval and tracking of subgrantee budgets  and program monitoring.
Similarly, City and County of San Francisco officials reported they  awarded $944,900 in ESG grants to 19 local service providers for fiscal  year 2009 and their administrative activities included site visits and audit  reviews.
Among grantees we reviewed, current practice in retaining the 5 percent  administrative allowance varied, as shown in table 1. Where grantees kept  all or most of the administrative allowance, officials told us this was to  cover, at least in part, their administration costs. Where they kept none of  the allowance, officials said this was to maximize funds available to local  service providers. Table 1 also shows what grantees told us they expect to  retain under the higher administrative allowance provided under the  HEARTH Act.
Subgrantees in the states we visited also reported a range of  administrative activity. As figure 4 shows, these activities generally fell  into six categories: application/approval, financial, reporting, management,  monitoring/oversight, and other. Our review found that their ESG  administrative activities generally focused on operating programs and  reporting outcomes. For example, one Georgia subgrantee told us its ESG  administrative activities included a portion of the executive director’s  time, for program oversight; preparing monthly reimbursement requests;  coordinating maintenance; and training and coordinating volunteers.
Similarly, a Michigan subgrantee told us its ESG administrative activities  included oversight and supervision of its program, financial reporting and  auditing, and reporting shelter statistics.
section_title: Neither Grantees Nor Subgrantees Fully Cover Administrative Costs with Amounts Designated for Administration and Rely on Other Sources to Cover Unfunded Costs
paragraphs: Grantees and subgrantees in the states we visited told us the ESG  administrative allowance generally did not fully cover their actual costs to  administer the grant award, and that as a result, they relied on other  sources to cover any unfunded costs. We found that grantees’ and  subgrantees’ actual ESG administrative costs depended on a number of  factors, such as the number of grant awards made, level of oversight  provided, number of staff involved in administrative tasks, and types of  ESG program activities funded. Figure 5 provides details on the estimated  unfunded ESG administrative costs and sources used to cover these costs  for grantees and subgrantees we visited. Overall, the unfunded  administrative costs reported to us across the eight grantees and 22  subgrantees we visited for which information was available averaged an  estimated 13.2 percent of the ESG allocation, with a range of 2.5 percent to  56 percent. However, HUD officials cautioned that some subgrantees we  visited appear to be confusing program activities with administrative  activities, which might have affected their estimates of actual  administrative costs.
For example, California ESG program officials estimated their unfunded  ESG administrative costs at 4 percent of the state’s ESG allocation (actual  administrative costs equal to 8 percent of ESG allocation, less 4 percent  retained for administrative costs). To cover these unfunded costs, the  officials said they rely on the state’s general fund revenues. Similarly, City  of Oakland (California) officials estimated their unfunded ESG  administrative costs at 25 percent of their ESG annual allocation (actual  administrative costs equal to 30 percent of ESG allocation, less 5 percent  retained for administrative costs). These officials also told us that they  used the city’s general and redevelopment funds to cover the unfunded  costs. In Pennsylvania, one subgrantee estimated its unfunded ESG  administrative costs at 2.5 percent of its grant award (based on actual  costs, with no administrative allowance from its grantee). This subgrantee,  which reported using ESG funds for a one-time building repair project,  told us that it used private donations, including from corporations and  foundations, to cover its unfunded costs. In Michigan, a subgrantee  estimated its uncovered ESG administrative costs at 14 percent (based on  actual costs with no administrative allowance), saying it also relied on  private donations to cover its unfunded costs. As previously noted,  grantees must match their ESG allocations, and subgrantees can provide  the match. These matching funds provide a potential source for covering  administrative costs.
Several subgrantees in the states we visited told us there has been a trend  toward more private donations being restricted—that is, made for specific  programs or purposes, rather than generally available for a subgrantee’s  operations, including administrative costs. Thus, reliance on private  donations to cover unfunded ESG administrative costs may become more  challenging. For example, one subgrantee told us that donors feel it is  more attractive to fund specific programs that have more tangible  outcomes compared with funding administrative costs. Another  subgrantee told us that business donors tend to target contributions to  address specific issues and achieve particular results. Finally, one  subgrantee told us that nonprofits themselves have contributed to this  trend by telling potential donors they will use donations to undertake  specific nonadministrative tasks.
Some grantees and subgrantees in the states we visited told us the need to  cover unfunded ESG administrative costs using other funding sources has  diminished their ability to fund other program activities. For example, one  grantee told us that amounts spent to cover unfunded ESG administrative  costs could otherwise be directed toward community and economic  development activities. Another grantee cited housing counseling and  home purchase down-payment assistance as areas that could receive  funding but for the need to cover unfunded ESG administrative costs. One  subgrantee also told us it could otherwise devote more resources to  programs aimed at adoption, single mothers, and family counseling if not  for unfunded ESG administrative costs.
Some grantees and subgrantees also told us that unfunded ESG  administrative costs can affect program administration, interest in  participating in the program, and program oversight. For example, one  grantee told us that it chooses to make fewer but larger ESG awards to  subgrantees, rather than make a greater number of smaller awards, in part  because it is less costly to oversee a smaller number of subgrantees. In  addition, two subgrantees told us that but for other mitigating factors, they  would consider not participating in the ESG program because of the  unfunded administrative costs. Some grantees also told us that if more  funds were available for administrative costs, there could be greater  monitoring of subgrantee activity. One grantee noted that it must stop  monitoring subgrantees during parts of the year and generally does not do  as much oversight as is desirable. Another grantee added it has difficulty  meeting its goal of making at least one site visit to subgrantees each year.
According to HUD officials, the ESG program was established with a lower  administrative cost allowance based on the expectation that grantees  could obtain funds from other sources to cover unfunded ESG  administrative costs. The officials also told us that although they do not  have comprehensive information on the extent to which the ESG  administrative cost allowance is sufficient to cover grantees’ actual  administrative costs, the agency has received many informal comments  over time characterizing the allowance as insufficient.
section_title: Available Sources for Evaluating the Appropriateness of ESG Program Administrative Costs Offer Little Detail, and Monitoring of These Costs Varies
paragraphs: As GAO has noted previously, there is no government-wide definition of  what constitutes an administrative cost. For the ESG program in  particular, there are a number of sources that provide standards for  administrative costs, but we found they generally offer little detail for  evaluating the appropriateness of these costs.
For grantees, there are regulations and agency guidance that address  administrative costs.
HUD Regulations. HUD regulations for ESG administrative costs define  such costs by way of example only, to include costs associated with:  accounting for the use of grant funds, preparing reports for submission to  HUD, obtaining program audits, similar costs related to administering the  grant after the award, and staff salaries associated with these  administrative costs. Under the regulations, administrative costs do not  include the costs of carrying out eligible activities under the ESG  program.
HUD ESG Program Desk Guide. The desk guide provides an overview  of the ESG program, describes the funding process, and covers topics  including the initial application, grant administration, project  implementation, and performance monitoring. For administrative costs,  the desk guide also works on the basis of example, stating that eligible  administrative costs include staff to operate the program, preparation of  progress reports and audits, and monitoring of recipients. Ineligible  administrative costs include the preparation of the Consolidated Plan and  other application submissions, conferences or training in professional  fields, and salary of an organization’s executive director, except to the  extent they are involved in carrying out eligible administrative functions.
In addition to the regulations and the desk guide, HUD also publishes the  Guide for Review of ESG Cost Allowability and the Guide for Review of  ESG Financial Management as resources for grantees. These guides,  however, do not provide any additional details on the appropriateness of  administrative expenses. The guides refer to compliance with regulations  and circulars published by the Office of Management and Budget (OMB).  In particular, OMB Circular A-87, Cost Principles for State, Local, and  Indian Tribal Governments, details principles for determining allowable  costs incurred by state, local, and federally recognized Indian tribal  governments under grants and other agreements with the federal  government. These principles are not specific to the ESG program, and the  circular is not necessarily the final authority on such matters, as it requires  agencies administering programs to issue regulations implementing the  circular. HUD officials told us the agency’s ESG regulations incorporate  the provisions of OMB Circular A-87.
It is difficult to evaluate the appropriateness of grantees’ ESG  administrative costs because the available sources for doing so, as  described above, are brief and not exhaustive. For example, Pennsylvania  ESG program officials undertake a number of activities during the  preaward application stage, including providing technical assistance to  applicants and offering general training every several years, but it is not  explicitly clear under the federal guidance whether such activities are  eligible administrative costs based on available sources for evaluation. In  addition, San Francisco ESG program officials told us they included office  space rental, general overhead, and utility costs among their ESG  administrative costs, but the available sources do not address  nonpersonnel costs. As a result, it is not clear whether such specific  activities are eligible administrative costs. Further complicating the issue  of examining administrative costs is grantees’ self-funding of ESG  administrative costs. To the extent grantees use other funding sources to  cover unfunded ESG administrative costs, as discussed earlier, the ESG  program standards for administrative expenses do not apply.
For subgrantees we visited, we also found that ESG administrative cost  standards were varied and can offer little or no detail for evaluating the  appropriateness of these costs. Generally, grantees address subgrantee  administrative costs by providing rules or guidance through program  solicitation documents or contracts with subgrantees. The State of  California’s ESG Notice of Funding Availability, for example, states that  eligible administrative costs are “only those necessary to administer the   grant, not to administer or operate the shelter.” In addition, specific  allowable administrative expenses include staff costs to prepare ESG  reports, communications with ESG staff, payment for the ESG share of a  required audit, and staff costs associated with processing accounting  records and billings. The City of Atlanta takes a different approach, citing  administrative expenses as identified under OMB Circular A-122, Cost  Principles for Non-Profit Organizations, as acceptable. This circular  distinguishes administrative costs from other types of expenses, and  includes consideration of a number of different expense categories. The  state of Georgia took the least detailed approach among the states we  visited, as Georgia ESG program officials told us they do not provide  criteria for administrative costs because the state does not fund these  types of costs.
As with grantees, the level of detail in the various cost standards for  subgrantees’ administrative costs can make it difficult to assess the  appropriateness of spending. For example, as noted, California rules cite  expenses necessary to administer the ESG grant itself, not to administer or  operate a shelter. However, one California subgrantee reported to us that  its ESG administrative activities include those associated with client  intake, handling client case management forms, and technical support.  Similarly, as noted, the City of Atlanta relies on OMB Circular A-122, which  identifies administrative costs as a form of “indirect costs”—those  incurred for common or joint objectives—and defines “administration” as  “general administration and general expenses.” However, a subgrantee  also reported to us that its ESG administrative activities include those  associated with a range of client-focused dealings spanning intake to post- program follow-up. HUD officials told us that both client intake and case  management (including handling case management forms) activities are  not eligible administrative costs under the ESG program; rather, these  activities are eligible program costs under the shelter operations and  essential services categories. Moreover, as with grantees, a complicating  factor is subgrantees’ self-funding of ESG administrative costs.
To monitor the ESG program’s grantees, HUD field offices annually  conduct a risk analysis to determine which grant programs are higher risk  and thus warrant attention. According to HUD officials, the ESG program  usually is not identified for any heightened on-site monitoring. However,  HUD officials said that HUD field office staff conduct off-site monitoring  of many ESG grants annually. ESG grantees must submit a Consolidated  Annual Performance and Evaluation Report that contains qualitative and  quantitative information about ESG, including annual expenditures and  accomplishments. More broadly, grantees prepare an annual action plan  that describes, among other things, how they plan to use ESG funds. The  plan includes a brief description of activities, and it varies as to whether  the plan includes details on administrative expenses, HUD officials told  us. Overall, HUD officials told us they have not conducted any  comprehensive evaluation of ESG administrative costs for grant  recipients.
Grantees and subgrantees in the states we visited also monitored ESG  administrative costs at varying levels of detail. Grantees told us they  generally monitored subgrantee administrative costs through budget  reviews, either before or after grant award, or both, and also through in- office monitoring and subgrantee site visits. For example, San Francisco  ESG program officials told us they evaluate subgrantees’ audits, conduct  site visits, perform business and cost reviews, and provide technical  assistance. In addition, City of Detroit ESG program officials told us they  do not perform a specific check of ESG administrative spending but watch  for any obvious problems, such as whether a program’s total  administrative costs exceed 10 percent. Further, City of Atlanta officials  told us they review proposed budgets of subgrantees as part of the  application process, and applications with administrative costs deemed to  be too high (greater than 20 percent) are rated negatively. They added that  the city monitors its ESG subgrantees annually, but does not specifically  track the administrative costs of ESG-funded activities because the city  provides no funding for these administrative costs.
section_title: Funding and Treatment of Administrative Costs Varied Across Selected Federal Grant Programs
paragraphs: We found that the funding and treatment of administrative costs varied  across the other targeted federal homeless grant programs we reviewed.  We identified variations in areas such as the administrative allowance  provided to grantees, requirements for sharing any of that allowance with  subgrantees, and guidance on the appropriateness of administrative costs.  First, as shown in figure 6, the extent to which each program included a  maximum administrative allowance varied, and when a maximum  allowance was specified, the amount of that allowance varied widely.  Among programs with a maximum administrative allowance, the ESG  program’s current 5 percent maximum administrative allowance for  grantees is one of the lower allowances. The maximum administrative  allowance for the other programs that have specified a maximum  allowance ranges from 4 percent to 50 percent.
Second, we found that program rules for grantee sharing of administrative  allowances with subgrantees varied across homeless programs with  similar funding structures. For example, HUD’s Supportive Housing  Program requires grantees to share administrative allowances with  subgrantees, but does not specify the amount. The Department of Labor’s  Homeless Veterans’ Reintegration Program does not require sharing of  administrative allowances, but gives grantees discretion to share with  subgrantees. The ESG program combines mandatory and discretionary  sharing—it requires grantees that are state governments to share an  unspecified portion of their administrative allowance when passing funds  to local governments. Otherwise, sharing is optional but not mandated.  These specific programs and their particular rules notwithstanding, most  of the programs we reviewed do not provide administrative cost  allowances for when grantees pass along funds to subrecipients. In all,  there was considerable variation across programs in provision of  subgrantee administrative allowances.
Third, we found that program guidance on the appropriateness of  administrative costs differed across the targeted homeless programs we  reviewed, and that no program offered comprehensive direction on  eligible and ineligible administrative activities. As noted earlier, the ESG  program’s desk guide provides examples of both eligible and ineligible  administrative activities, albeit not exhaustively. By contrast, five of the  targeted programs’ rules—including programs of the Departments of  Education, Labor, and Health and Human Services—do not specifically  define eligible or ineligible administrative activities. Instead, some of these  programs’ rules reference OMB cost principles and note that  administrative costs must be reasonable and necessary, as defined by  OMB Circular A-87. HUD’s Supportive Housing Program follows an ESG- style example approach.
We also found that the ESG program’s maximum administrative allowance  for grantees was one of the lower allowances for HUD formula grant  programs offered through HUD’s Office of Community Planning and  Development. As table 2 shows, the ESG program’s administrative  allowance for grantees will also remain one of the lower of the group after  it increases to 7.5 percent. The ESG program is among four formula grant  programs offered through the Office of Community Planning and  Development, which seeks to develop communities by promoting decent  housing and expanded economic opportunities for low- and moderate- income persons. However, given the programs’ diverse missions, as also  shown in table 2, the nature and amount of administrative costs may vary  among them.
section_title: Some ESG Recipients Expect the Nature of Administrative Costs to Change and the Amount to Increase under New Activities Authorized by the HEARTH Act
paragraphs: A number of grantees and subgrantees in the states we visited and others  told us they expect that the newly allowable ESG activities authorized by  the HEARTH Act will result in different kinds of administrative activities  that in many cases will be more costly than before. As previously noted,  the act increased the range of eligible prevention and re-housing activities  to include short- or medium-term rental assistance and housing relocation  or stabilization services. Overall, grantees and subgrantees told us they  expect changes in areas including client screening and eligibility  verification, technical assistance to subgrantees, number of applicants for  grants, and facility management and collaboration with third parties,  which in turn could affect administrative costs. For example, City of San  Francisco and Pennsylvania state officials told us the new activities  authorized by the act might result in a greater number of applicants for  grant awards, or their agencies might have to provide more outreach and  technical assistance to subgrantees. In addition, one California subgrantee  told us that they expect an effort to have people leave shelters more  quickly under the new ESG activities. This subgrantee added that this  might increase the administrative costs associated with collecting and  reporting data on an increased number of people coming through the  program. This subgrantee also said it expects the new ESG activities to  have a secondary effect in shelters themselves, where a changing mix of  residents likely will mean higher administrative costs. This subgrantee said  that new HEARTH Act-style programs will likely enroll the best  functioning people, so those left in shelters will be relatively less  functioning—and hence more costly to manage. Another subgrantee, in  Michigan, told us it is already starting to see changes in administrative  costs with expansion of activities beyond traditional emergency shelter  services and into rapid re-housing. For example, new program activities  require more time for administration, both internally and externally, and  there have been organizational changes such as in handling of rent funds.  Finally, one California subgrantee estimated its administrative costs could  rise from about 3.5 percent to between 12 percent to 14 percent under the  new ESG activities. As noted previously, however, HUD officials told us  that some subgrantees we visited appear to be confusing program  activities with administrative activities, which might have affected their  estimates of actual administrative costs.
While a number of grantees and subgrantees told us they expect the nature  of administrative activities to change, and their costs to increase, not all  the recipients we visited agreed that higher administrative costs are likely.  For example, a Pennsylvania subgrantee told us it anticipates that the  administrative costs associated with a prevention program would probably  be equal to the costs of a shelter program, and it would not expect costs to  be higher unless program requirements become more onerous. California  state officials told us they do not expect the nature or amount of  administrative costs will change with new program activities, because  activities already change frequently today. Similarly, a Michigan  subgrantee told us that barring any increase in regulatory requirements, it  does not expect any added burden in areas such as reporting of program  activity, audit duties, or office space required for administration. Overall,  expectations about higher administrative costs are plainly prospective in  nature, because the new activities have not yet been implemented.
Although the HEARTH Act makes significant changes to allowable ESG  activities, it remains unclear when actual program changes might be  implemented. According to HUD officials, the total funds allocated to the  ESG program will determine the extent to which money is available for the  new services. HUD officials also told us that a significant increase in ESG  funding, along with significant program changes, could increase grantees’  costs of monitoring and reporting, because more money must be tracked  and monitored in conjunction with a wider array of program  requirements.
Uncertainty over how and when the new ESG program might be  implemented, as well as variation in the nature of administrative activities  seen in the current ESG program, complicate any attempt to determine the  appropriate size of the program’s administrative allowance. Providing such  an allowance helps ensure funds are spent properly and directed to their  appropriate purpose. But if the allowance is insufficient to allow adequate  administration and oversight, program efficiency and effectiveness could  be at risk. Grantees and subgrantees we spoke with reported that the  current ESG administrative allowance does not fully cover their  administrative costs. Moreover, our work indicates that even with the new  administrative allowance of 7.5 percent, the ESG program would still have  one of the lower allowances among similarly structured homeless grant  programs. If the new ESG program increases in complexity or scope of  services, its administrative cost allowance will take on even more  significance in the future.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Departments of Housing and  Urban Development, Education, Health and Human Services, and Labor  for their review and comment. HUD did not provide formal comments, but  noted by e-mail that some subgrantees we visited may not be making a  proper distinction between program costs and administrative costs, which  could have the effect of overstating any need for a larger ESG  administrative allowance. We reflected this sentiment throughout this  report as appropriate. HUD further indicated that the department would  examine what steps it could take to help grantees and subgrantees better  understand which administrative costs can be funded under the ESG  program and the extent to which administrative costs differ from activity  delivery costs. HUD added that these steps would include providing  greater clarity and detail on what costs are eligible under the different  ESG activity categories, including administrative costs, in a proposed new  rule the department is developing to implement the changes to the  McKinney-Vento Homeless Assistance Act provided in the HEARTH Act.
HUD also provided technical comments by e-mail, which we have  incorporated into the report as appropriate.
The Secretaries of Education, Health and Human Services, and Labor did  not provide comments.
We are sending copies of this report to interested congressional  committees and the Secretaries of the Departments of Housing and Urban  Development; Education; Health and Human Services; and Labor. This  report will also be available at no charge on GAO’s Web site at  http://www.gao.gov. Please contact me at (202) 512-8678 or  cackleya@gao.gov if you or members of your staffs have any questions  about this report. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  See appendix II for key contributors to this report.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine the types of administrative activities performed and costs  incurred under the Emergency Shelter Grants Program (ESG) of the U.S.  Department of Housing and Urban Development (HUD), and the extent to  which grant proceeds cover these administrative costs, we made site visits  to four states: California, Georgia, Michigan, and Pennsylvania. We  selected these states based on the amount of ESG funding distributed to  these grantees for fiscal year 2009 and their geographic location across the  country. We initially identified state-level grantees receiving more than  $1.5 million in ESG funding, in order to focus on states with relatively  more ESG activity. This criterion reduced our target group to 20 states. We  judgmentally selected the four states we visited by considering proximity  of the capital city, where state officials are located, to the location of other  grantees we could visit concurrently. Within the four states, we visited  nine grantees (four state governments and five local governments) and 25  subgrantees. This allowed us to obtain illustrative observations from state  officials, local government officials, and representatives of local homeless  service providers on the operation of the ESG program, with an emphasis  on type and level of spending to administer grants received under the  program. Table 3 provides details on grantees’ receipt of ESG funds in the  states we visited.
The states we visited collectively received 24.5 percent of the total ESG  funds HUD awarded to grantees in fiscal year 2009. Because we used a  nongeneralizable sample to select state grantees that had received larger  amounts of ESG funding in fiscal year 2009, our findings cannot be used to  make inferences about other grant recipients. Other grantees that we did  not visit may have different characteristics that are unknown to us.  However, we believe that our selection of the states and recipients was  appropriate for our design and objectives, and that the selection provides  valid and reliable evidence to support our work. We interviewed grantees  and subgrantees in the states we visited to obtain information on  administrative activities performed, the cost of performing those activities,  and related topics. We also interviewed HUD officials, plus  representatives of national organizations involved with homeless issues,  that are familiar with trends in charitable giving, or that represent local  governments. We also researched the legislative history of the ESG  program. We examined HUD guidance, federal regulations, and relevant  Office of Management and Budget (OMB) circulars on allowability of  administrative costs, including circulars A-87, Cost Principles for State,  Local, and Indian Tribal Governments, and A-122, Cost Principles for  Non-Profit Organizations. Further, we reviewed state and local  government ESG solicitation documents, such as Notices of Funding  Availability and Requests for Proposal.
To determine how the ESG program’s allowance for administrative costs  compares with administrative cost allowances for selected other targeted  federal homeless grant programs, plus selected other HUD formula-based  grant programs, we interviewed officials from HUD and the Departments  of Education, Labor, and Health and Human Services. We examined  relevant federal statutes and regulations, as well as relevant OMB  circulars. We also examined program guidance and documents, such as  desk guides, resource manuals, solicitations for grant applications, and  requests for applications, for the federal targeted homeless grant programs  and the other HUD formula grant programs that we reviewed.
To determine how the nature or amount of administrative costs might be  different under the changes Congress made to the ESG program in the  Homeless Emergency Assistance and Rapid Transition to Housing Act of  2009, we reviewed relevant provisions of the act detailing the newly  allowable activities. We also interviewed HUD officials, state and local  government officials, representatives of homeless organizations, and  homeless service providers to obtain their perspectives.
We conducted this performance audit from August 2009 to May 2010, 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.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Marshall Hamlett, Assistant  Director; William Chatlos; Meredith Graves; Kun-Fang Lee; Marc Molino;  Christopher Schmitt; Jennifer Schwartz; and Paul Thompson made major  contributions to this report.