Capacity Building: Section 4 Program Has Expanded and Evolved
Published: 2003-09-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Congress recognized the importance of building the capacity of community development organizations by passing Section 4 of the HUD Demonstration Act of 1993. The act authorized the Department of Housing and Urban Development (HUD) to partner with several national nonprofit organizations that provide funding to these community groups for such things as training, staff salaries, office equipment and supplies, and management information systems. In 2002, HUD provided $31 million for capacitybuilding activities. To help Congress with its oversight of Section 4, we reviewed the evolution and use of Section 4 funding, the importance of Section 4 funding to private sector involvement, and the management controls and measurements that are in place to assess Section 4.
section_title: What GAO Found
paragraphs: We found that Section 4 has evolved from a narrowly targeted initiative that focused on providing funding for capacity building in 23 urban areas to a broader program that funds groups and activities in urban, rural, and tribal areas nationwide. The four organizations (grantees) use Section 4 funding to provide a variety of capacity-building support to their subrecipients. These subrecipients are nonprofit organizations that undertake locally targeted initiatives in areas such as economic development, low-income housing construction, and job training. The Section 4 funds that the grantees receive help leverage private sector funding and in-kind contributions such as land and equipment, pro bono legal services, office space, and voluntary labor. Since the four grantees became eligible for Section 4 funding, they have leveraged nearly $800 million in cash and in-kind contributions from the private sector. HUD is responsible for ensuring that Section 4 funds are used according to federal law and regulations and that grantees are utilizing funds efficiently and effectively. However, HUD relies on grantees to oversee their subrecipients. The grantees had far-reaching organizational structures and processes in place to monitor and control their subrecipients. But we found that one of the seven subrecipients we tested for monitoring and control procedures had reimbursed a subrecipient for an item that was prohibited by the Office of Management and Budget (OMB). While HUD has the overall responsibility to prevent such internal control failures, the cost-effectiveness of adding additional federal controls must be weighed against the amount of the federal dollars involved. We believe that as long as HUD and the grantees remain vigilant, additional controls are not necessary at this time. HUD is taking steps to develop a framework for assessing the effectiveness of its technical assistance programs and will take part in an OMB Program Assessment Rating Tool review.

section_title: Letter
paragraphs: For fiscal years 1997 through 2002, the Department of Housing and Urban  Development’s (HUD) budget for 20 capacity-building and technical  assistance programs was over $860 million. Of these funds, almost  $150 million was specifically designated to build the capacity of local  community development and affordable housing organizations through the  Section 4 program. Since its inception in 1993, the program has provided  capacity-building funds and services to over 1,590 local organizations in  more than 783 cities nationwide, either through direct grants or substantial  technical assistance activities.
To assist you with your oversight of the Section 4 capacity-building  program, you asked us to describe how funding under Section 4 of the HUD Demonstration Act of  1993 has evolved and expanded over the years, how grantees use Section 4  funding, and what other federal funding is available for capacity building; determine the importance of Section 4 funding to private sector  involvement in community development initiatives; and determine how HUD and Section 4 grantees control the management and  measure the impact of Section 4 programs.
To address these objectives, we reviewed public laws, federal regulations,  HUD directives, budget documents, and other materials that describe the  Section 4 program and authorized/appropriated funding amounts. We  interviewed HUD headquarters officials and grantee and subrecipient  officials at both the national headquarters and local office levels. We  visited subrecipients in eight cities, and at several we conducted file  reviews to evaluate grantee internal controls. Finally, we interviewed  private funders that provided grants or loans to the grantees and  subrecipients. We conducted our work in accordance with generally  accepted government auditing standards in Baltimore, MD; Boston, MA;  Cleveland, OH; Frederick, MD; Hughesville, MD; Kingston, RI; Americus,  GA; and Washington, D.C. Our scope and methodology are discussed in  greater detail at the end of this letter.
subsections: section_title: Background
paragraphs: In 1991, a group of for-profit and nonprofit public and private funders  started NCDI, currently known as Living Cities, to revitalize urban  communities. NCDI is composed of 17 major corporations, foundations,  and the federal government—HUD and the Office of Community Services  of the Department of Health and Human Services. In its first decade of  operation, NCDI assembled a community development system composed  of two of the largest national community-building organizations to administer  the initiative—LISC and Enterprise;
300 CDCs in 23 cities; and  local operating support collaboratives, which include local foundations,  banks, corporations, and local governments, that identify and draw on  local technical expertise and governmental and economic resources and  use them to sustain and enhance the capacity of CDCs.
As of September 1, 2001, NCDI had provided $234.8 million to its 23 cities.  Of this amount, about three-quarters was for project funding and the  balance, about $60 million, supported capacity building with operating  grants and training.
LISC, founded in 1979 and headquartered in New York City, is the largest  community-building organization. LISC’s mission, involving hundreds of  CDCs, is to rebuild whole communities by supporting these groups. LISC  operates local programs in 38 urban program areas and 70 rural  communities. According to LISC, it has raised more than $4 billion from  over 2,200 investors, lenders, and donors, which has leveraged an  additional $6 billion in public and private sector funds. In addition,  according to LISC, it has helped 2,200 CDCs build or rehabilitate more  than 110,000 affordable homes, created over 14 million square feet of  commercial and community space, and helped generate 40,000 jobs.
Enterprise was founded in 1982 as a vehicle for helping low-income people  revitalize their communities. Headquartered in Columbia, Maryland,  Enterprise has offices in 18 communities across the nation. Enterprise  works with a network of 2,200 nonprofit organizations, public housing  authorities, and Native American tribes in 800 locations, including more  than 100 CDCs. The Enterprise Foundation provides these organizations  with technical assistance, training, short and long-term loans, equity  investments, and grants. According to Enterprise, it has raised nearly $430  million to support community-based development that has helped produce  17,000 affordable homes and assisted 20,000 low-income individuals in  finding employment.
HFHI, founded in 1976 and headquartered in Americus, Georgia, is a  nonprofit ecumenical Christian housing ministry (faith-based  organization) seeking to eliminate substandard housing. HFHI builds and  rehabilitates houses with the help of homeowner (partner) families,  volunteer labor, and donations of money and materials. Work is done at  the local community level by affiliates that coordinate all aspects of home  building, including fund-raising, building site selection, partner family  selection and support, construction, and mortgage servicing. HFHI  provides its affiliates with information, training, and a variety of other  support services. Affiliates are primarily volunteer driven, though some  have their own staff. Affiliates are monitored and supported by HFHI staff  across the country. HFHI currently has over 1,669 affiliates, and in 27  years has built over 150,000 houses worldwide, including more than 40,000  homes in the United States. Figure 2 shows the 526 cities where HFHI  affiliates have directly received Section 4 funds.
YBUSA was founded in 1990 and is headquartered in Somerville,  Massachusetts. It is a national nonprofit organization that provides  capacity-building grants on a competitive basis to support the efforts of  organizations that are planning to or are operating Youthbuild programs in  their communities, many of which are funded by the HUD Youthbuild  grant program.  A Youthbuild program is a comprehensive youth and  community development program as well as an alternative school.  Youthbuild programs, which offer job training, education, counseling, and  leadership development opportunities through the construction and  rehabilitation of affordable housing, serve young adults ages 16 to 24 in  their own communities. Participants split their time between the  construction site and the classroom, where they earn GEDs or high school  diplomas and prepare for jobs or college. The buildings that are  constructed or rehabilitated during the program are primarily low-income  housing. YouthBuild USA serves as the national intermediary and support  center for over 200 Youthbuild programs. Over half of the Youthbuild  programs are members of YBUSA’s affiliated network. As shown in figure  3, YBUSA affiliates located in 106 cities have received Section 4 funds  from 1997 to 2001.
section_title: Section 4 of the HUD Demonstration Act of 1993 Has Evolved and Expanded Over the Years
paragraphs: The scope of eligible activities funded by Section 4 of the HUD  Demonstration Act of 1993 has changed over the years. Originally the act  focused on providing funding for capacity building in 23 urban areas.  Currently, it provides funding to groups and activities in urban, rural, and  tribal areas nationwide. Section 4 authorized HUD to join other  corporations and foundations as an equal partner in NCDI to develop the  capacity and ability of CDCs in 23 cities. In 1997, Section 4 was expanded  to include two more grantees, HFHI and YBUSA as well as more cities, and  rural and tribal areas. The grantees’ organizational structures and missions  vary, as do their strategies for awarding Section 4 funds and the types of  activities they authorize. Each grantee has initiatives in rural and tribal  areas. Additional federal funding, such as Community Development Block  Grants, is also available to grantees for capacity building and technical  assistance.
subsections: section_title: Section 4 Provides Capacity-Building Funding to Four Organizations
paragraphs: NCDI in 1991 started with seven large national foundations and a major  insurance company and was administered by LISC and Enterprise. This  consortium of funders believed CDCs could achieve greater and more  lasting success if they could count on a significant reliable commitment of  multiyear operating support, project financing, technical assistance, and  training. To date, NCDI has had four phases (rounds) of funding. In the  first phase (1991-93), NCDI funders pledged $62.9 million (see table 1).  With the enactment of Section 4, HUD joined phase II of NCDI, which also  included 12 private foundations and financial institutions, as an equal  partner. Congress’ goal in authorizing HUD to participate in NCDI was to  develop the capacity and ability of CDCs to undertake community  development and affordable housing projects and programs. HUD’s  involvement resulted in some changes to the way funds were disbursed.  While the foundations provided funding through Living Cities (NCDI),  which in turn distributed grant funds to LISC and Enterprise, HUD  distributed its funding directly to LISC and Enterprise. In addition, unlike  other NCDI funders, HUD provided funding only after expenses were  incurred, monitored funding more closely, and restricted uses to capacity- building activities. In 2001, 17 foundations and corporations committed  another 10 years to the initiative.
Congress did not appropriate funds for HFHI and YBUSA until 1997 (see  table 2). At that time, LISC and Enterprise were given the option of using  Section 4 funding to continue NCDI activities in the original 23 cities or to  undertake new non-NCDI activities in other cities, which expanded the  geographical dispersion of Section 4 funding. In addition, Congress  required the grantees to set aside a portion of Section 4 funding for rural  and tribal areas. Unlike the NCDI activities, whose funding objectives were  determined by the responsible funders, LISC and Enterprise worked  directly with HUD in creating the objectives for non-NCDI cities.
section_title: Grantees Use a Variety of Methods to Help Build Capacity
paragraphs: LISC and Enterprise are national organizations that use local program  offices to provide financial and technical support to CDCs. The staff at the  local program offices work with CDCs to achieve community-driven goals.  For example, through its Boston local office, LISC provided several  Section 4 grants to the Madison Park Development Corporation. A $78,000  grant was used to help the CDC improve the Dudley Square Business  district in the Roxbury neighborhood of Boston. The Cleveland Enterprise  office provided Section 4 funds to the Cleveland Neighborhood  Partnership Program, a local support collaborative that provides  organizational and real estate development and neighborhood planning for  Cleveland CDCs.
According to HFHI and YBUSA officials, these organizations provide  direct grants to affiliates but operate somewhat differently. HFHI has  provided grants to affiliates on a 3-year diminishing basis to hire new staff  or establish warehouse facilities, with an expectation of increasing house  production by at least 15 percent. In addition, HFHI has established  regional support centers to bring technical assistance closer to affiliates.  YBUSA uses Section 4 funds to provide a variety of grants to its affiliated  network, such as operating grants, program enhancement grants, special  assistance grants, and scholarships to staff and students. In addition,  YBUSA has used Section 4 funds to build its capacity to serve as a national  support center and to provide technical assistance and training.
LISC and Enterprise consider the subrecipient’s stage of development  when making Section 4 funding decisions. For example, a new  organization might receive Section 4 funds to pay for a portion of the  salary of the executive director, whereas more established CDCs might  receive funding to upgrade their financial management software. All  grantees stressed that because capacity building takes time, they provide  multiyear support to subrecipients. However, three of the four grantees  indicated that they generally fund subrecipients in ways that encourage  the organizations to become financially independent. Officials from LISC  and Enterprise explained that although some subrecipients receive  multiple grants for several years, the grants are small enough to keep  subrecipients from becoming dependent on Section 4 funds for daily  operations. As noted earlier, HFHI’s grants, which are provided to hire  new staff, diminish over a 3-year period. According to HFHI, the affiliates’  gradual absorption of staff costs leads to independence from—rather than  dependence on—federal funding. YBUSA, however, has provided Section 4  funding to affiliates to pay for general operations during years when they  had not received funding under HUD’s Youthbuild program.
Generally, Section 4 funds are used to pay for staff salaries, training,  technology, and office supplies and equipment and to fund the operating  support collaboratives. For example, with its 1997 funds HFHI provided  direct grants to 60 affiliates to pay for staff salaries (usually an executive  director). The YouthBuild Boston affiliate used Section 4 funds to hire an  administrative coordinator and enhance its technological capabilities. The  Washington, D.C., LISC office provided Section 4 funding to a local CDC to  pay for some staff training and to purchase equipment and other supplies  to outfit a homebuyer’s training center. Enterprise has used Section 4  funds to develop on-line tools, such as a best practices database, and to  bring current technology to CDCs. For example, Enterprise awarded one  nonprofit organization, Citizen’s Housing and Planning Association  (CHAPA) in Boston, Section 4 funds to administer the NET-Works  program, a program to enhance the technological capacity of CDCs in the  New England region. As a result, 36 CDCs received computer equipment,  Internet access, and assistance in developing websites. Figure 4 illustrates  the broad impact that Section 4 funding had for this nonprofit organization  on other CDCs.
section_title: Rural Areas Now Have Access to Section 4 Funding
paragraphs: Congress did not require grantees to set aside Section 4 funding for rural  and tribal areas until 1997. All four grantees currently have initiatives that  focus on these areas. For example, LISC has a rural office that supports  both a national program and a program in the Mississippi River Delta  Region of the United States covering 56 counties and parishes. In fiscal  years 1997 through 2002, LISC awarded Section 4 grants totaling  approximately $9 million to rural CDCs. Enterprise has awarded $6.2  million in Section 4 grants to rural CDCs. Unlike LISC, Enterprise does not  have a rural office. Enterprise services its rural and tribal subrecipients  through partnerships with other state and regional rural agencies and the  Housing Assistance Council, which administers Enterprise’s Rural  Capacity Building Initiative, and through its regional and local office  structure. Although 218 of the 1,003 LISC and Enterprise CDCs provide  services to rural and tribal areas, many of them cover large geographical  areas. For example, 57 of the 72 rural CDCs that are funded by LISC,  operate in more than one county, and 64 of the 146 rural CDCs that are  funded by Enterprise operate in more than one county. Figure 5 shows the  cities where LISC and Enterprise subrecipients who work in rural areas  are located and the multiple counties they serve.
HFHI makes an effort to reserve at least one-third of its Section 4 funding  for its rural affiliates. HFHI awarded $4.6 million of its fiscal year 1997  Section 4 funds to 60 affiliates of which 33 were rural. According to  YBUSA officials, meeting the required set-aside has been a challenge.  YBUSA’s outreach efforts have included encouraging rural affiliates to  apply for planning, operating, and program enhancement grants and for  specialized technical assistance. According to a YBUSA official, over the  course of the 1997 grant, about $2.5 million of YBUSA’s $7.6 million  allocation was focused on rural and tribal and partly rural and tribal  programs. Of this amount, about $1.3 million was for direct grants to sites  and about $1.2 million was for services to sites. A YBUSA official told us  that as of July 2003, 84 of the 203 operating Youthbuild programs were  rural and partly rural.
section_title: Grantees Receive Capacity-Building Funding from Other Federal Programs
paragraphs: LISC, Enterprise, HFHI, and YBUSA also receive capacity-building and  technical assistance funds from other HUD programs (table 3). The  primary difference between Section 4 funding and other federal funding is  that the other federal funding for capacity-building and technical  assistance is generally awarded competitively, while Section 4 funding is  noncompetitive. Several federal programs offer capacity-building funds:  CDBG, HOME, and Housing Opportunities for Persons with AIDS  (HOPWA). All grantees’ Section 4 capacity-building funds exceed those  received from other federal programs.
section_title: Federal Funding Has Encouraged Private Sector Involvement in the Section 4 Grantees’ Community Development Initiatives
paragraphs: While it was difficult to demonstrate empirically that Section 4 directly  influenced private sector involvement in community development  activities, funders and grantees said that federal involvement served as a  catalyst for private fund-raising and provided credibility to subrecipients  in terms of their ability to comply with the requirements that are  associated with federal funding. Some local funders of CDCs and affiliates  were not aware of the specific Section 4 funding the subrecipients  received but indicated that both federal funding and diverse funding  streams are important. Since matching funds can be raised either  nationally, locally, or a combination of both, each grantee employs its own  matching policy and raises funds from foundations, corporations, banks,  individual donors, and nongovernmental sources. Since the creation of  Section 4, grantees have raised nearly $800 million from the private sector,  in matching and other cash and in-kind contributions.
subsections: section_title: Grantees and Private Contributors Generally Believe that Federal Funding Is Important to Private Sector Participation
paragraphs: The grantees and nearly all of the private lenders and foundations we  contacted stressed the importance of federal funding in leveraging funds  from the private sector. For example, officials from LISC, Enterprise, and  Living Cities indicated that private funding and lending have increased  since HUD’s involvement. In addition, Enterprise officials indicated that  the private sector believes that federal funding provides an incentive to  work in areas and projects that would be less likely to receive funding  without federal involvement. HFHI officials said that federal funding is  imperative because it is the only way for all-volunteer organizations to  transition into staff-managed, volunteer-based organizations. YBUSA  officials said that federal funding, especially funding that leverages private  funding, has enabled YBUSA to be proactive in assisting Native American  and rural programs.
NCDI lenders and funders indicated that Section 4 funding had both a  psychological and a real impact on private sector involvement in the  initiative. For example, one senior executive from a major lending  institution indicated that federal participation in NCDI provided funders  with a symbolic and financial incentive to join the NCDI consortium.  Symbolically, federal funding provides a sense of credibility to NCDI, as  funders see federal participation as a sign of good housekeeping and  reduced risk. Financially, federal participation adds more money to NCDI  capacity-building initiatives, in turn enabling subrecipients to raise more  private funding. Another lender said that HUD’s participation in a CDC  through Section 4 funding served as an indication of good management  and internal controls. An insurance company also noted that Section 4  funding showed that the federal government was strongly committed to a  coordinated effort to build CDC capacity, and a foundation told us that the  federal presence legitimized NCDI as the CDC capacity-building vehicle  with the greatest payoff. Furthermore, nearly all of the YBUSA and HFHI  private funders that we interviewed said that federal funding was an  incentive for their participation in the program. For example, one funder  said that federal support was like a “seal of approval.” Another funder said  that Section 4 funding created a positive incentive because the availability  of invaluable hard-to-get federal funding increased the viability of any  project.
Most funders and lenders that provide funding directly to CDCs and  affiliates stressed that federal funding was beneficial, but some of those  local funders were not aware that subrecipients received Section 4 funds.  Some LISC and Enterprise subrecipient funders explained that federal  funding and diverse funding streams were characteristics of a viable  organization. One funder suggested that public funding was critical, since  private philanthropy could only do so much. Another foundation indicated  that it looked to organizations that had a diversified funding structure,  since it could not provide sole support for an organization.
The four funders we spoke with that provided funding directly to the  YouthBuild Boston affiliate were split on whether federal participation  was an incentive to their involvement. Two said that federal participation  was an incentive; while the other two said their decision to provide  funding was based solely on the affiliate’s mission.
Officials from most of the five organizations we spoke with that provided  funding to an HFHI affiliate in Rhode Island indicated that federal  participation was not an incentive, but two said that having other sources  of funding encouraged them to participate. An official from one  organization indicated that while federal funding indirectly provides an  incentive for participation, the organization provided funding primarily  based on the affiliate’s reputation and mission.
section_title: Cost Sharing Requirements Are Specified in Law and Grantee Policies
paragraphs: Section 4 funding calls for significant private sector participation in  community development initiatives because Section 4 requires that  grantees match each dollar awarded with three dollars in cash or in-kind  contributions from private sources. Matching funds are raised nationally  and locally and come from nongovernmental sources including private  foundations, corporations, banks, and individual donors. Each grantee has  its own matching policy and procedures for complying with the matching  requirement.
LISC and Enterprise generally meet their matching requirement at the  national level but encourage CDCs to seek private contributions to aid in  the match. However, LISC requires subrecipients in rural areas to raise at  least $1 for each $1 they receive; the remainder of the match is raised  nationally. Conversely, HFHI and YBUSA require their affiliates to raise at  least $3 for every dollar of Section 4 funding they receive. While both  HFHI and YBUSA impose this requirement on all of their affiliates,  including those in rural and tribal areas, if YBUSA rural and tribal affiliates  cannot raise the 3 to 1 match, the national organization will provide the  difference. Officials from the four grantees told us that raising the private  matching funds had not been a problem. For example, for the 1997 grant  HFHI and its 60 affiliates that received Section 4 funding raised almost  $155.6 million in private contributions. YBUSA and its affiliates raised  $26.6 million in private contributions to match its $7.6 million grant.
section_title: Grantees Have Raised Significant Amounts of Private Sector Funding and other cash and in-kind contributions. However, we could not demonstrate Other Resources
paragraphs: Since the four grantees became eligible for Section 4 funding, they have  raised nearly $800 million from the private sector in matching funds and  empirically that Section 4 funding influenced the grantees’ fund-raising  owing to external factors such as economic trends and private sector  interests. Between 1994 and 2001, LISC and Enterprise raised $457 million,  and from 1997 to 2002, HFHI and YBUSA raised $341 million (see table 4).
In addition to providing funding, the private sector has contributed in-kind  services to CDCs, including managerial skills, mentoring, and volunteer  labor. For example, representatives from the private sector serve on  LISC’s local advisory boards to help local program offices make funding  decisions and are members of operating support collaboratives in several  cities. HFHI’s local affiliates use volunteers for office and construction  work and for their boards of directors.
section_title: HUD’s Grantee Monitoring and Oversight Is Limited
paragraphs: HUD monitoring is limited to desk reviews of the grantees’ compliance  with their grant agreements. In general, the grant agreements require  several kinds of reporting information including work plans, semiannual  or quarterly financial status reports, requests for grant payment vouchers,  and final reports. However, HUD’s involvement in reviewing grantee work  plans differs for NCDI and non-NCDI activities. Since HUD does not  directly monitor the subrecipients’ capacity-building activities, it relies on  the grantees to monitor and oversee them. The grantees have several  mechanisms in place to ensure that subrecipients are complying with their  individual grant agreements. However, in a subset of files we reviewed, we  found that a grantee had funded an ineligible activity for one subrecipient.  Also, HUD does not have specific impact measures in place for Section 4.
subsections: section_title: HUD Monitors Grantees but Not Subrecipients
paragraphs: HUD’s efforts to monitor the grantees include desk reviews of work plans,  annual performance reports, semiannual financial status reports, requests  for grant payment vouchers, and final performance reports. According to  HUD, the four grantees sign grant agreements that obligate them to  comply with HUD and OMB requirements. For example, grantees must  submit work plans that identify when and how federal funds and  nonfederal matching resources will be used and present performance  goals and objectives in enough detail to allow for HUD monitoring. In  addition, the grant agreements require grantees to submit annual reports  showing actual progress made in relation to the work plans, plus  semiannual financial status reports that show private sector matches and  grant expenditures to a certain date. Grantees are not permitted to begin  activities or to draw down funds until HUD approves the work plans.  Furthermore, the grant provisions require that in order to receive  payment, grantees must submit a payment voucher with supporting  invoices that provide enough information to allow HUD to determine  whether the costs are reasonable in relation to the work plan’s objectives.  Finally, the grant agreement stipulates that within 90 days of completing  the grant award, the grantee must submit a final report summarizing all the  activities conducted under the award including any significant program  achievements and problems reasons for the program’s success or failure.
HUD officials told us that staffing constraints caused the agency to focus  mostly on grantee work plans and payment vouchers. HUD reviews how  the grantees select subrecipients, set benchmarks, and plan to build  capacity. HUD uses different processes to review NCDI and non-NCDI  work plans. As an equal player, HUD reviews NCDI’s work plans together  with other funders and meets twice a year to discuss NCDI initiatives and  goals for each city. However, HUD reviews and approves non-NCDI work  plans by itself. A HUD official told us that HUD staff focus most of their  attention on the funding aspects of the work plans. HUD officials told us  that they check the semiannual financial status reports and accompanying  narratives to determine whether the expended amounts are in line with the  amounts stated in the work plans.
Section 4 grant funds are provided to grantees after costs are incurred, so  grantees must periodically submit vouchers and supporting  documentation that detail expenditures by city or project in order to  receive payment. HUD staff review the vouchers and supporting  documentation to ensure that funds are used for the eligible activities  stated in the work plans and that expenditures such as travel and indirect  costs are within HUD guidelines and do not exceed available funding.  HUD has denied payments for activities not contained in approved work  plans or not supported by the required documentation. For example, in  March 2003, HUD withheld over $650,000 in Section 4 funding because one  grantee did not submit a final report, several financial reports, a work  plan, and two annual plans. In June 2003, however, the grantee provided  the necessary documents and HUD released the funds.
In addition, grantees must submit financial status reports that show  whether the organizations are meeting their matching requirements.  However, HUD relies on the grantees to ensure that they and their  subrecipients are matching funds correctly. Both LISC and Enterprise  have a formal matching policy. LISC’s policy explicitly states that counting  the same funds as matching funds under more than one program is  prohibited and requires its subrecipients to identify the sources and  amounts of matching funding they have received twice a year. Enterprise’s  matching requirements are tracked on an ongoing basis and are certified  by an Enterprise official. YBUSA requires its affiliates to submit  documentation that supports the sources and amounts of matching funds  committed before it will release Section 4 funding, and HFHI requires  affiliates to report matching funds data quarterly.
section_title: HUD Relies on Grantees to Monitor Subrecipients
paragraphs: HUD does not directly monitor subrecipients’ and affiliates’ capacity- building activities but instead relies on the grantees for monitoring and  oversight. Like HUD, grantees initiate grant agreements with their  subrecipients and affiliates. These grant agreements generally include  such things as the purpose of the grant, grant amount, time frame,  disbursement conditions, causes for suspension and termination,  restrictions on use of grant funds, and reporting and accounting  requirements that describe how the grantee will monitor the grant. The  grantees use the grant agreements as the basis for monitoring their  subrecipients’ performance.
The grantees use several mechanisms to ensure that subrecipients are  complying with their grant agreements. For example, LISC and Enterprise  officials indicated that throughout the grant period, local offices  communicate with their subrecipients by telephone or email or in person  in order to follow their progress. Similarly, YBUSA staff told us that they  monitor affiliates by telephone as well as through on-site technical  assistance. LISC, Enterprise, and YBUSA require each subrecipient to  submit a monthly activity report, semiannual project reports and  narratives, and final reports. However, the grantees have different  procedures, forms, and checklists that guide their monitoring activities.
Operating support collaboratives aid LISC and Enterprise in their  oversight through proposal reviews, organizational assessments, work  plan reviews, on-site reviews, quarterly report reviews, and annual and 3- year evaluations. The LISC and Enterprise local offices use the  collaboratives’ monitoring information when making their Section 4  funding decisions.
HFHI and its regional office personnel evaluate all affiliates every 3 years  based on a “Standards of Excellence” program. The program has three  elements: best practices, acceptable practices, and minimum standards.  According to HFHI officials, continued failure to meet minimum standards  will lead to probationary status and eventually disaffiliation. The program  provides clear guidelines for affiliate self-assessments and HFHI  evaluations as well as a systematic process for ensuring that Habitat  affiliates are complying with the organization’s basic principles. If HFHI  national or regional staff are aware of illegal activities or violations of  HFHI’s minimum standards, immediate action can be taken to correct the  problem. The evaluation covers internal controls and audits. All affiliates  with an annual income of $250,000 or more, assets of $500,000 or more, or  both are required to have an independent annual audit. Affiliates are also  requested to submit their annual report to HFHI.
section_title: Even with Comprehensive Controls, Problems May Still Occur
paragraphs: While the grantees appear to have comprehensive processes to monitor  and control their subrecipients, our review of seven subrecipients’ grant  files identified a subrecipient that suffered from organizational and  financial problems that eventually led to its demise. This subrecipient was  the grantee’s second-largest in terms of Section 4 funding, receiving 10  grants that totaled almost $1 million over a 7-year period. One grant for  $143,000 paid for several activities, one of which was a bad debt—an  ineligible expenditure according to OMB Circular A-122. Since HUD  officials do not receive and review subrecipient grant agreements and  payment vouchers, HUD was not aware of the ineligible cost. The grantee  has since taken several steps to ensure that similar problems do not occur,  including having a staff member perform increased subrecipient  monitoring to verify that sufficient management controls are in place to  ensure that grant funds are used appropriately and effectively. This  monitoring includes a full review of the grant request and award  documents, followed by a review of supporting documentation to verify  compliance with allowable expenses and consistency with the work plan.  In addition, site visits are made to subrecipients that have received large  amounts of funding and a “watch report” is maintained to track all  subrecipients that are late in responding to requests for information.
section_title: HUD Does Not Measure the Impact of Section 4 Funding
paragraphs: HUD has not measured the impact of Section 4 funding on improving the  capacity of its grantees and subrecipients. However, HUD requires its  grantees to submit annual work plans that include specific details of how  federal and private resources will be used and to identify performance  goals and objectives that should be attained during the grant period. In  addition, OMB is currently requiring HUD and the NCDI grantees to  conduct a PART review. PART assessments are used for making budgeting  decisions, supporting management, identifying design problems, and  promoting performance measurement and accountability. The assessment  includes questions on a program’s purpose and design, strategic planning,  management, and results. Furthermore, in response to a GAO report  recommendation that HUD require program offices to determine the  practicability of measuring the impact of technical assistance and  establishing objective, quantifiable, and measurable performance goals,  HUD is working with a group of national technical assistance providers to  develop a framework to assess the effectiveness of its technical assistance  programs.
Living Cities has also contracted with a consultant to develop impact  measurements for the 23 NCDI cities. Other evaluations have resulted in  measures that gauge the capacity-building system in NCDI cities and  categorize organizational capabilities into five different stages of growth—  initiation, demonstration, professionalization, instutionalization, and  maturation.
section_title: Conclusions
paragraphs: While Section 4 funds must be used for capacity-building initiatives,  grantees are afforded a great deal of discretion as to how they administer,  use, and oversee these funds. HUD is responsible for ensuring that  grantees are utilizing Section 4 funds according to federal law and  regulations and has several controls in place to ensure that they do.  However, HUD relies primarily on its grantees to make certain that this  responsibility is carried out at the subrecipient level. We found that  grantees generally had good management systems and controls in place to  monitor their subrecipients and to ensure that they carried out their work  plans, met their objectives, and used federal funds legally and responsibly.  However, even with good controls, problems can still occur, as we found  at one CDC. While HUD has overarching responsibility for detecting such  internal control failures, the cost-effectiveness of adding additional federal  controls at the subrecipient level must be weighed against the size of the  program and the amount of federal funding involved. Given the relative  size of the Section 4 program and the fact that similar problems should not  recur if HUD and the grantees remain vigilant, we do not believe that  additional controls are necessary at this time.
Recommendation for 	 We recommend that the Secretary of HUD take steps to recover the grant  Executive Action  funds that one Section 4 grantee used to cover a bad debt.
section_title: Agency Comments
paragraphs: In an e-mail dated August 7, 2003, HUD provided technical comments,  which we incorporated into this report as appropriate.
section_title: Scope and Methodology
paragraphs: To accomplish our objectives, we reviewed public laws, federal  regulations, HUD directives, budget documents and other material that  described the Section 4 program, grantees’ missions and organizational  structures, and authorized and appropriated funding. To determine how  Section 4 funding has evolved and expanded over the years and how  grantees use Section 4 funding, we interviewed HUD, Living Cities, LISC,  Enterprise, YBUSA, and HFHI officials in national, local, and rural offices,  and subrecipients in Americus, GA; Baltimore, MD; Boston, MA;  Cleveland, OH; Frederick, MD; Hughesville, MD; Kingston, RI; and  Washington, D.C. We collected data from LISC, Enterprise, and  YouthBuild USA showing the number of multiple grants and amounts  provided to CDCs or affiliates. We selected five CDCs/affiliates from three  grantees. For LISC and Enterprise, we chose the CDCs that had received  the greatest number of grants and analyzed the purpose of each grant. For  YBUSA, we selected the affiliates that had received the highest dollar  amounts. To create the maps of subrecipients and cities that received  Section 4 funding, we obtained city data from NCDI, LISC, Enterprise,  YBUSA, HFHI, and CHAPA and used geographical information software  (GIS) to create the maps. We used the same software to create the rural  county maps with data obtained from LISC and Enterprise that listed each  CDC categorized as rural and the counties they served.
To determine the importance of Section 4 funding to private sector  involvement in community development initiatives, we reviewed public  laws, federal regulations, HUD directives, budget documents, and other  materials. We obtained 1994 through 2001 private contribution data from  LISC and Enterprise and 1997 through 2001 data from YBUSA and HFHI.  We obtained matching policy information from HUD and the grantees and  interviewed private funders that had provided either grants or loans to  each of the grantees and subrecipients we visited in Boston, MA;  Baltimore, MD; Frederick, MD; and Kingston, RI. We based our selections  on the subrecipients’ proximity to our offices in Washington D.C., and  Boston, MA, and the amount of Section 4 funding they received.
To determine how HUD and Section 4 grantees controlled the  management and measured the impact of Section 4 programs, we  reviewed and analyzed HUD and grantee criteria, processes and  procedures for monitoring, controlling, and measuring performance and  tested grantee monitoring and control procedures at seven subrecipients.  In addition, we reviewed reports prepared by Living Cities and the Urban  Institute that discussed NCDI’s history and accomplishments.
We conducted our work from September 2002 through April 2003 in  accordance with generally accepted government auditing standards.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution of this report until 30  days from the report date. At that time we will provide copies of this  report to the Chairman and Ranking Minority Members, Senate Committee  on Banking, Housing, and Urban Affairs; the Chairman and Ranking  Minority Member, House Committee on Financial Services; and the  Ranking Minority Members of its Subcommittees on Oversight and  Investigations and Housing and Community Opportunity. We will also  send copies to the Secretary of Housing and Urban Development and the  Director of the Office of Management and Budget. In addition, the report  will be available at no charge on GAO’s Web site at http//:www.gao.gov.
Please contact me at (202) 512-8678 if you have any questions about this  report. Key contacts and contributors are listed in appendix I.
section_title: Appendix I: Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition, Emily Chalmers, Nadine Garrick, Diana Gilman, John McGrail,  John Mingus, Frank J. Minore, and Marc Molino made key contributions to  this report.