Community Development Block Grants: Program Offers Recipients Flexibility but Oversight Can Be Improved
Published: 2006-07-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Community Development Block Grant (CDBG) program provides funding for housing, economic development, and other community development activities. In fiscal year 2006, Congress appropriated about $4.2 billion for the program. Administered by the Department of Housing and Urban Development (HUD), the CDBG program provides funding to metropolitan cities and urban counties, known as entitlement communities, and to states for distribution to nonentitlement communities. This report discusses (1) how recipients use CDBG funds, including the extent to which they comply with spending limits, (2) how HUD monitors recipients' use of CDBG funds, and (3) how HUD holds recipients that have not complied with CDBG program requirements accountable. To address these objectives, we visited 20 recipients, analyzed HUD data, and interviewed HUD staff.
section_title: What GAO Found
paragraphs: HUD data show that CDBG recipients spend the largest percentage of their grants on public improvements (such as water lines and streets) and housing, but HUD does not centrally maintain the data needed to determine compliance with statutory spending limits. Due to the lack of centralized data, GAO was not able to determine the extent to which all recipients have complied with statutory spending limits on public services (such as health and senior services) and administration and planning. However, data provided by HUD for the 100 most populous entitlement communities, which received about one-third of the CDBG funds allocated in fiscal year 2006, showed that not all of these entitlement communities complied with the limits. Of the 100 communities, 3 exceeded their public service spending limit, and 1 exceeded the administration and planning spending limit. Given that entitlement communities collectively spend at or close to the limits, it is important for HUD to be able to report on the extent of their individual compliance with these limits. HUD uses a risk-based approach to monitor CDBG recipients; however, it has not developed a plan to replace monitoring staff or fully involved its field staff in plans to redesign an information system they use to monitor recipients. HUD's monitoring strategy calls for its field offices to consider various risk factors when determining which recipients to review because it has limited monitoring resources, and its workload has increased as its staffing levels have decreased. For example, 13 of the 42 field offices that oversee CDBG recipients do not have a financial specialist to evaluate the financial operations of each recipient, and 39 percent of CDBG monitoring staff is eligible to retire within the next 3 years. Despite these statistics, HUD has not developed a plan to hire staff with needed skills or manage upcoming retirements. Finally, although the Integrated Disbursement and Information System (IDIS) is a tool that HUD field staff use to monitor, HUD headquarters has solicited little input from them on efforts to redesign IDIS. Although it has issued a clear policy stating what actions it will take when entitlement communities fail to meet the statutory requirement that funds be spent in a timely manner, HUD has not developed similar guidance establishing a consistent framework for holding CDBG recipients accountable for deficiencies identified during monitoring. For deficiencies other than being slow to expend funds, HUD has the flexibility to institute sanctions ranging from issuing a warning letter to advising the recipient to return funds. Although its field offices have great flexibility when taking sanctions, HUD has not issued guidance establishing a framework to ensure that they are treating recipients that commit similar infractions equitably. We found instances in fiscal year 2005 where treatment seemed inconsistent. For example, several field offices found that recipients had not documented that a funded activity met any one of the program's three national objectives, but took different actions. In the continued absence of guidance, HUD lacks a means to better ensure consistency in the sanctioning process.

section_title: Letter
paragraphs: The Community Development Block Grant (CDBG) program is the federal  government’s principal community development program. It provides  funding for housing, economic development, neighborhood revitalization,  and other community development activities. In fiscal year 2006, Congress  appropriated approximately $4.2 billion for the program. Administered by  the Department of Housing and Urban Development (HUD), the CDBG  program provides funding to metropolitan cities and urban counties,  known as entitlement communities, and to states for distribution to  nonentitlement communities. The program provides annual grants on a  formula basis that takes into account population, poverty, housing  overcrowding, the age of the housing, and any change in an area’s growth in  comparison with that of other areas. The activities undertaken with  program funds must (1) principally benefit low- and moderate-income  persons, (2) aid in the prevention or elimination of slums or blight, or (3)  meet urgent community development needs.
The CDBG program has undergone few fundamental changes since  Congress created it in 1974. However, the administration’s fiscal year 2006  budget proposed consolidating the program with other community and  economic development programs in the Department of Commerce and  reducing overall funding. Congress did not act on this proposal, but the  administration proposed additional program reforms and a 27 percent  funding reduction in its fiscal year 2007 budget. Because of these proposed  changes, you requested that we review the use of CDBG funds and how  HUD oversees the program. Specifically, this report discusses (1) how  recipients have used CDBG funds, including the extent to which they have  funded activities that meet national program objectives, complied with  spending limits, and reported accomplishments achieved with funds; (2)  how HUD has monitored recipients’ use of CDBG funds; and (3) how HUD  has held recipients that have not complied with CDBG program  requirements accountable for their actions.
To address these objectives, we visited 20 recipients—4 states, 2 urban  counties, and 14 cities. We selected these recipients based on factors such  as geographic dispersion, funding level, and need. During these visits, we  interviewed staff, toured funded projects, and reviewed 144 recipient files.  We also visited four nonentitlement communities. We analyzed Integrated  Disbursement and Information System (IDIS) data on expenditures and  Grants Management Process (GMP) System data on the extent of HUD  monitoring. We determined that the data were sufficiently reliable for the  purposes of this report. Finally, we reviewed HUD’s program regulations  and guidance and interviewed headquarters and field staff. We performed  our work from July 2005 to July 2006 in accordance with generally  accepted government auditing standards. Appendix I provides additional  details on our scope and methodology.
subsections: section_title: Background
paragraphs: The Housing and Community Development Act of 1974 combined seven  categorical programs to form the CDBG program. The objective of the  program is to develop viable urban communities by providing decent  housing and a suitable living environment and expanding economic  opportunities, principally for persons of low and moderate income.  Program funds can be used on housing, economic development,  neighborhood revitalization, and other community development activities.  As shown in figure 1, CDBG appropriations have fluctuated over time.
After funds are set aside for special purposes such as the Indian CDBG  program and allocated to insular areas, the annual appropriation for CDBG  formula funding is split so that 70 percent is allocated among eligible  metropolitan cities and counties (referred to as entitlement communities)  and 30 percent among the states to serve nonentitlement communities.  Entitlement communities are (1) principal cities of metropolitan areas, (2)  other metropolitan cities with populations of at least 50,000; and (3)  qualified urban counties with populations of at least 200,000 (excluding the population of entitled cities). Currently, 1,128 entitlement communities  receive CDBG funds, which is up from 866 entitlement communities in  fiscal year 1990; 50 states also receive CDBG funds. HUD distributes funds  to entitlement communities and states based on the higher yield from one  of two weighted formulas that consider factors such as population, poverty,  housing overcrowding, the age of the housing, and any change in an area’s  growth in comparison with that of other areas. HUD ensures that the total  amount awarded is within the available appropriation by reducing the  individual grants on a pro rata basis.
Entitlement communities may carry out activities directly or may award  funds to subrecipients to carry out agreed-upon activities. Subrecipients  can be governmental agencies such as public housing authorities or park  districts; private nonprofits such as private social service agencies,  community development corporations, or operators of homeless shelters;  and certain private, for-profit entities that facilitate economic development.  Whenever an entitlement community uses a subrecipient, it must enter into  a signed, written agreement with that subrecipient that includes a  statement of work—which describes the work to be performed, the  schedule for completing the work, and the budget—and the recipient’s  recordkeeping and reporting requirements.
Every activity funded by entitlement communities and states must meet  one of three national program objectives. Activities undertaken must (1)  principally benefit low- and moderate-income persons, (2) aid in the  prevention or elimination of slums or blight, or (3) meet urgent community  development needs. Recipients must use at least 70 percent of their funds  for activities that principally benefit low- and moderate-income people over  a period of 1, 2, or 3 years, as specified by the recipient. Generally, an  activity is considered to principally benefit low- and moderate-income  people if 51 percent or more of those benefiting meet the definition.  However, the CDBG statute includes an exception that enables certain  entitlement communities to utilize CDBG funds for “area benefit activities”  in census tracts having a low- and moderate-income population of less than  51 percent. Area benefit activities are activities that benefit all of the  residents in a particular geographic area, such as a park, community center,  or streets. Entitlement communities that may utilize this exception are  those that have a limited number of census tracts with a majority low- and  moderate-income population, and the exception extends to the 25 percent  of census tracts within the entitlement community’s boundaries having the  highest percentages of low- and moderate-income persons.
Recipients can only use their CDBG funds on 26 eligible activities. For  reporting purposes, HUD classifies these eligible activities into eight broad  categories, as defined in table 1. Some of the activities that can be funded,  such as loans for housing rehabilitation, generate program income for  recipients that must be used to fund additional activities. There are  statutory limitations on the amounts that recipients may spend in two  specific areas. Pursuant to provisions in annual appropriations laws,  recipients may only use up to 20 percent of their annual grant plus program  income on planning and administrative activities. Recipients may also only  use up to 15 percent of their annual grant plus program income on public  service activities. Entitlement communities comply with these  requirements by limiting the amount of funds they obligate for these  activities during the program year, while states limit the amount they spend  on these activities over the life of the grant.
Recipients must submit a strategic plan that addresses the housing,  homeless, and community development needs in their jurisdictions at least  once every 5 years. The plan covers CDBG and three other formula grant  programs administered by HUD—the HOME Investment Partnerships  (HOME) Program, the Emergency Shelter Grants (ESG) Program, and the  Housing Opportunities for Persons with AIDS (HOPWA) Program.  Annually, recipients must submit an action plan that identifies the activities  they will undertake to meet the objectives in their strategic plans. At the  end of each year, recipients must submit to HUD an annual performance  report detailing progress they have made in meeting the goals and  objectives outlined in their strategic and action plans. HUD staff use  detailed checklists to review recipients’ strategic and annual actions plans  as well as their annual performance reports.
HUD’s Office of Community Planning and Development (CPD) administers  the CDBG program through program offices at HUD headquarters and 42  field offices located throughout the United States. The headquarters offices  set program policy, while staff in the 42 field offices monitor recipients.  Each field office is headed by a CPD director. CPD has a total authorized  staff of approximately 800—about 200 at headquarters and 600 in the field.  CPD field offices are responsible for a broad range of grant management  activities that include annual review and approval of entitlement grantee  action plans, preparation and execution of grant agreements, review of  entitlement grantee annual performance reports, managing homeless  program competition to include reviewing over 4,500 applications;  preparing conditional award letters; reviewing and approving technical  submission for conditionally approved grants; setting up budgets for each  grant in Line of Credit Control System; executing grant agreements and  grant closeout activities, providing technical assistance to entitlement and  competitive grantees, and recapturing unobligated/unexpended grant  funds, as well as monitoring activities.
In September 2005, CPD issued a new monitoring handbook. The handbook  states that monitoring is an integral management control technique and  that the goal of monitoring is to determine compliance, prevent/identify  deficiencies, and design corrective actions to improve or reinforce program  participant performance. It contains two chapters on monitoring the CDBG  program, and these chapters include 29 exhibits for field office staff to use  when monitoring CDBG recipients.
HUD staff use two major information systems to monitor the use of CDBG  funds—IDIS and GMP. Developed in fiscal year 1996, IDIS is a management  information system that consolidates planning and reporting processes  across HUD’s four formula grant programs. The recipients use this system  to enter information on their plans, establish projects and activities to draw  down funds, and report accomplishments. The GMP system, created in  fiscal year 1997, records information such as HUD’s monitoring of  recipients, provision of technical assistance, and review of recipients’ plans  and performance reports. The system is designed for use by HUD staff to  ensure that funds are being expended properly and to provide information  on recipient progress.
In April 1999, we issued a report on HUD’s oversight of CDBG and CPD’s  three other formula grant programs. At that time, we found that HUD’s  monitoring did not ensure that the programs’ objectives were being met or  that recipients were managing their funds appropriately. We also noted that  IDIS did not provide the information necessary to accurately assess  recipients’ performance and thus did not compensate for HUD’s  breakdowns in monitoring. Specifically, we reported that IDIS (1) provided  ample opportunity for major problems with data entry and did not allow  such problems to be corrected easily, (2) did not provide timely and  accurate information, and (3) had difficulty producing reports. Because of  the actions HUD took in response to our recommendations in this report,  we removed CPD’s programs from our high-risk list in 2001.
We have issued standards for internal control in government that agencies  should follow. Internal control helps government program managers  achieve desired results through effective stewardship of public resources.  Internal control standards provide the overall framework for establishing  and maintaining internal control and for identifying and addressing major  performance and management challenges and areas at greatest risk of  fraud, waste, abuse, and mismanagement. Two of the standards are (1) risk  assessment, where risks are identified and analyzed for their possible  effect and (2) monitoring, which assesses the quality of performance over  time and ensures that findings are promptly resolved. Another standard is  control activities that help ensure that management’s directives are carried  out. Examples of such activities include managing an organization’s  workforce and establishing and reviewing performance measures and  indicators.
section_title: Recipients Fund a Variety of Activities, but HUD Lacks Centralized Data Showing Compliance with Statutory Spending Limits
paragraphs: While the data that HUD collects on CDBG expenditures show that CDBG  recipients fund a variety of activities, HUD does not centrally maintain the  data needed to determine if recipients are complying with statutory  spending limits. According to HUD’s data, CDBG recipients spend the  largest percentage of their funding on public improvements and housing  activities. Further, recipients report that the vast majority of activities they  fund meet the national objective of principally benefiting low- and  moderate-income persons; however, 359 recipients are currently eligible  for an exception that allows them to expand the definition of low- and  moderate-income areas. There are statutory spending limits on public  services and administration and planning, but HUD’s information systems  do not maintain all the data needed to determine the extent of compliance  with these limits. Finally, HUD has implemented a new performance  measurement system to improve its ability to obtain consistent data on  accomplishments attained with CDBG funds.
subsections: section_title: CDBG Recipients Use the Majority of Their Grants to Fund Public Improvements and Housing Activities
paragraphs: CDBG recipients spend the largest percentage of their funding on public  improvements and housing activities. In fiscal year 2005, recipients spent  about $4.8 billion in CDBG funds to address a wide range of local needs.  Approximately $508 million (or 10 percent) of these total expenditures  were from program income generated by previous CDBG activities. As  shown in figure 2, CDBG recipients spent 32 percent of their total funds on  public improvements and 25 percent on housing in fiscal year 2005. Within  the category of public improvements, recipients spent the largest  percentage of their funds on water and sewer improvements. Under the  housing category, the single activity that received the most funding was  single-unit residential rehabilitation.
Although both entitlement communities and states devote large amounts of  funding to public improvements, figure 3 shows some differences in how  they use their CDBG funds. Entitlement communities spend the largest  percentage of their CDBG funds on housing activities. In fiscal year 2005,  entitlement communities spent 27 percent of their CDBG allocations on  housing activities, followed by 24 percent on public improvements, and 17  percent on administration and planning activities. In contrast, states  distribute over half of their CDBG funds to public improvements. In fiscal  year 2005, states distributed 54 percent of their funds to public  improvements, 17 percent to housing activities, and 15 percent to economic  development. States and entitlement communities use a similar process to  identify CDBG needs, but states also have to determine how they will  distribute their funds to nonentitlement communities. How states choose  to distribute their funds varies from state to state. For example, Georgia  distributes most of its CDBG funding through a competitive process that  funds the best projects regardless of activity type. Colorado also uses a  competitive process, but it distributes a third of its CDBG funding to  housing, a third to business financing, and a third to public facilities and  community development. Pennsylvania distributes most of its CDBG  funding using a formula method. For examples of how selected states  distribute their CDBG funds, see appendix II.
As a result of the flexibility inherent in the CDBG program, the types of  activities that entitlement communities and states fund within each broad  category vary considerably. During our site visits, many of the recipients  we interviewed stated that the flexibility afforded by CDBG was one of the  program’s strengths. Figure 4 illustrates the variety of activities funded by  the recipients we visited. More detailed descriptions of various activities  funded by the recipients we visited can be found in appendix III.
section_title: Almost All Funded Activities Benefit Low- and Moderate-Income People, but the Criteria for Defining Target Areas Are Allowed to Vary
paragraphs: Of the three national program objectives, recipients report that the vast  majority of activities they fund under the CDBG program meet the  objective of principally benefiting low- and moderate-income persons.  However, some recipients can use different criteria when defining low- and  moderate-income areas. As shown in figure 5, entitlement communities  reported that 91 percent of the activities they funded in fiscal year 2005  principally benefited low- and moderate-income persons; states reported  that 96 percent of their activities met this national objective. The remaining  activities funded, excluding activities coded for administration and  planning, sought to eliminate slums or blight, addressed urgent needs, or  were missing a national objective code. For the small percentage of  activities missing a code, we could not determine which national objective  was met. According to a HUD official, activities missing a national  objective code were also administration and planning activities, however,  we could not verify this statement based on our analysis of HUD’s IDIS  data.
A special statutory exception allows certain entitlement communities to  count activities that benefit fewer than 51 percent low- and  moderate-income people as meeting the corresponding national objective.  This exception allows the recipient to use the first 25 percent of all census  tracts in its jurisdiction to qualify as meeting the national objective. For  example, if a city or county consists of 40 census tracts, only 4 of which  contain 51 percent or more low- and moderate-income persons, that  recipient can also consider the 6 census tracts with the next highest  percentages of low- and moderate-income persons as low- and  moderate-income census tracts.
Currently, 359 of the 1,128 cities and urban counties that receive CDBG  funds are eligible to use this exception. These recipients’ exception  percentages range from a high of 50.9 percent to a low of 18.5 percent. The  exception percentage indicates the minimum percentage of low- and  moderate-income people that must live in an area for an activity funded in  that area to meet the low- and moderate-income national objective. As  shown in figure 6, the majority of recipients eligible for the exception had  an exception percentage higher than 40 percent; 39 CDBG recipients had a  percentage less than 30 percent. Although a recipient is eligible to use this  exception, it may not take advantage of it for all of the activities it funds.  First, the exception only applies when the activity—such as a park,  community center, or streets—serves an identified geographic area. Many  activities, such as public services, benefit low- and moderate-income  people, not an area. Also, in cases where the recipient has both areas that  contain a majority of low- and moderate-income people and areas that  qualify for the exception, it may choose to fund only activities that are in its  areas with a majority of low- and moderate-income people.
section_title: HUD Does Not Centrally Maintain the Data Needed to Determine Compliance with Statutory Spending Limits on Public Service Activities and Administration and Planning
paragraphs: HUD does not centrally maintain the data needed to determine if  entitlement communities and states are complying with the statutory  spending limits on public services and administration and planning.  Information on manual adjustments needed to determine compliance can  be obtained from the field offices but is not readily available. By law, CDBG  recipients may only use up to 15 percent of their funds on public service  activities and up to 20 percent on administration and planning. We  attempted to use the data in IDIS to assess each entitlement community’s  compliance with these spending limits but determined that certain manual  adjustments that are needed to complete the calculations are not saved in  IDIS. Entitlement communities enter these manual adjustments into IDIS  at the end of each program year for the sole purpose of creating financial  summary reports that show, among other things, the two spending limit  calculations. Entitlement communities include these reports in the annual  performance reports that they submit to HUD’s 42 field offices for review.  After they are prepared, the reports are saved in HUD’s mainframe  computer for only 5 days due to limited system capacity.
With respect to determining state compliance, data are even more limited.  IDIS does not currently generate reports that show the spending limit  calculations for states. The calculations that are used to determine an  entitlement community’s compliance do not work for states because a  state’s compliance is determined based on the percentage of each grant  that is spent on public services and administration and planning instead of  the percentage of each program year’s obligations, as is the case for  entitlement communities. Therefore, according to the HUD official that  heads the state CDBG program, field staff currently determine compliance  with the spending limits during on-site monitoring and when grants are  fully spent. However, the official noted that future design enhancements to  IDIS will allow HUD to more easily generate information on state  compliance with these spending limits.
Without a record of data adjustments needed to calculate entitlement  community compliance and data on state compliance, HUD cannot provide  timely assurance that recipients are adhering to the spending limits. For  example, when information on compliance with the administrative and  planning spending limit was recently requested from HUD for a House  report, HUD could not provide data that directly addressed the request.  The agency provided the data that were readily available but noted that the  data could not be used to determine compliance with the spending limit.  HUD stated that it would have to collect additional information on certain  manual adjustments to give the committee a more accurate picture of  compliance with the limit.
In the absence of centralized data on all recipients, we requested that HUD  contact its field offices to provide data on the extent to which the 100 most  populous entitlement communities had complied with the statutory  spending limits in program year 2004. These entitlement communities  received about one-third of the CDBG funds allocated in fiscal year 2006.  Our analysis of the limited data showed that not all of these entitlement  communities complied with the statutory spending limits. Of the 100  entitlement communities, 3 exceeded their public service spending limit,  and 1 exceeded the administration and planning spending limit. HUD could  not provide similar data on the extent to which individual states have  complied with the spending limits because, as described earlier, IDIS does  not generate reports that track state compliance with the limits. According  to the head of the state CDBG program, compliance with the limits has  never really been a concern for states because they collectively spend well  below the statutory maximums.
subsections: section_title: Congress Has Provided Some Exceptions to the Public Service Spending Limit
paragraphs: Some recipients are allowed, due to a special provision, to use more than  15 percent of their funds for public services. By law, entitlement  communities that used in excess of 15 percent of CDBG funds received for  public service activities in fiscal year 1982 or 1983 are allowed to continue  to use the higher of the actual dollar amount or percentage of assistance in  either of those years. Due to this provision, a total of 41 entitlement  communities are allowed to use more than the 15 percent they would have  been allowed if they were subject to the cap. For example, the city of  Chicago, Illinois is allowed to use $41 million (48 percent of its fiscal year  2006 allocation) for public services. The city of Seattle, Washington is  allowed to use about 36 percent of its CDBG funds for public services.  Congress has also authorized temporary exceptions to the spending limit  when warranted by events affecting a specific community. These  temporary exceptions are for a limited period of time, such as 5 years, and  a limited amount, such as up to 25 percent of their grant amount, unless  extended by law. For instance, the city and county of Los Angeles were  allowed to exceed the limit for a set period of time in the aftermath of the  1992 Los Angeles civil unrest. Also, in September 2005, HUD issued a  suspension of the limit to enable CDBG recipients to utilize CDBG funds to  address emergency expenses associated with the needs of Hurricane  Katrina evacuees.
section_title: Not All Staff and Overhead Costs Funded with CDBG Are Subject to the Planning and Administration Spending Limit
paragraphs: The expenses subject to the spending limit on administration and planning  do not reflect all of the staff and overhead costs being funded with CDBG.  CDBG recipients are allowed by regulation to incorporate into individual  activity budgets delivery costs such as architectural and engineering  expenses, legal expenses, insurance, permit fees, taxes, and similar  expenses if such expenses are directly attributable or integral to carrying  out an eligible activity. These expenses are not counted toward the 20  percent administrative and planning spending limit. With the exception of  housing rehabilitation administration and code enforcement, HUD does not  track staff costs charged to various eligible activities. In fiscal year 2005,  CDBG recipients spent $153 million on housing rehabilitation  administration and $133 million on code enforcement—about 6 percent of  total expenditures. While funds charged to planning and administration are  presumed to meet the program’s national objectives, HUD requires  recipients to document that any staff or overhead costs charged to other  eligible activities meet a national objective.
section_title: HUD Has Established a New Performance Measurement System to Track Program Accomplishments
paragraphs: HUD has established a new performance measurement system to better  track accomplishments achieved with CDBG funds. IDIS currently contains  data on CDBG-funded accomplishments, but the data are incomplete and  inconsistent. First, HUD has not always required recipients to enter  accomplishment data; therefore, data on the older projects are incomplete.
Second, recipients report data differently. For example, some CDBG  recipients report the number of persons served by a CDBG funded activity,  while other recipients report the number of times a service is provided. In  an effort to address these problems, HUD began verifying the accuracy of  CDBG accomplishment data in 2004. To ensure complete and accurate  data, HUD periodically reviews the data that recipients enter into IDIS for  inconsistencies, inaccuracies, and omissions. HUD then gives the  recipients feedback by placing spreadsheets on the Web for each recipient  that indicate the fields in IDIS that need correction.
To further track program accomplishments, HUD has developed a new  performance measurement system for the CDBG program. In March 2006,  HUD published performance measures developed in conjunction with a  working group comprised of community development organizations. They  undertook this effort in reaction to an OMB finding that the CDBG program  was unable to demonstrate results at the national level. HUD’s new  outcome performance measurement system has three objectives: (1)  creating suitable living environments, (2) providing decent affordable  housing, and (3) creating economic opportunities. Under these broad  objectives, there are three outcomes: (1) availability and accessibility, (2)  affordability, and (3) sustainability. The specific outcome indicators that  HUD will track include the number of persons assisted by a public service  activity, number of housing units rehabilitated, and number and types of  jobs created. Recipients could start entering the new performance  measurement data in May 2006.
To help recipients implement the new performance measurement system,  HUD has scheduled 15 regional training sessions that will provide  information to recipients on performance measurement principles and the  new outcome framework. The first session was held in May 2006, and the  last session is scheduled for August 2006. According to HUD, the training  sessions will (1) provide information about how recipients can implement  the outcome indicators through their local and state procedures for data  collection and reporting and (2) discuss entry of the performance data into  IDIS. The agenda topics include data quality and how to measure the  outcome of various activities such as housing and economic development.  For this training, HUD has developed a training manual and guidebook that  contains information on measuring outcomes achieved with CDBG funds.  The department has made these materials available to all recipients on its  Web site. At the close of our review, these activities were too new to assess  their effectiveness.
section_title: Although HUD Uses a Risk-Based Approach to Monitor CDBG Recipients, It Lacks a Plan to Replace Monitoring Staff and Has Not Fully Involved Field Staff in Its Plans to Redesign IDIS
paragraphs: While HUD has implemented a risk-based monitoring strategy for the  CDBG program, it has not developed a plan to ensure that it has enough  staff with the skills needed to conduct monitoring or fully involved its field  staff in plans to redesign IDIS, an information system they use to monitor  recipients. Consistent with our internal control standards, HUD has  established a risk assessment process to identify CDBG recipients for  review. HUD’s monitoring strategy calls for its field offices to consider  various risk factors when determining which recipients to review because  it has limited monitoring resources, and its workload has increased as its  staffing levels have decreased. For example, 13 of the 42 field offices  overseeing CDBG recipients do not have a financial specialist, and 39  percent of its field staff is eligible to retire within the next 3 years. Despite  these statistics, HUD has not developed a plan to hire staff with needed  skills or help manage upcoming retirements. Finally, although IDIS is one  of the tools that HUD field staff use to monitor recipients, HUD  headquarters has solicited little input from them on efforts to redesign  IDIS.
subsections: section_title: HUD’s Monitoring Strategy Focuses on High-Risk Recipients
paragraphs: HUD’s monitoring of the CDBG program focuses on high-risk recipients.  Each year, CPD sets a formal monitoring goal. Its goal in fiscal year 2005  was for CPD as a whole and each of its field offices to monitor a minimum  of 20 percent of their formula and competitive recipients. According to  the HUD official who set the goal, he set it at 20 percent based on the need  to balance government stewardship with available resources, including  staff and travel funds. With a 20 percent goal, he noted that it would be  conceivable that every recipient would be monitored over a period of 5  years. Overall, CPD met its monitoring goal for fiscal year 2005. CPD’s goal  was to review 942 recipients, and it completed 977 reviews. Of the 977  reviews, 349 were CDBG reviews. However, two individual field offices did  not monitor 20 percent of their recipients. As shown in table 2, CPD has  monitored more than 20 percent of its CDBG recipients in recent years.
HUD’s monitoring policy calls for HUD staff to focus on high-risk recipients  when selecting CDBG recipients for review. Consistent with our internal  control standards, HUD has developed a formal risk analysis process for its  field offices to use when determining which recipients to review. Field  office staff rate recipients on various factors that fall under the following  four categories: financial, management, satisfaction, and services. The  staff total the scores from each factor and assign recipients a final score on  a 100-point scale. At each field office, a CPD management representative  then conducts a review to ensure the validity and consistency of the scores.  HUD considers recipients that receive a score of 51 or greater to be high  risk; it considers those with a score of 30 to 50 to be medium risk; and  those with less than 30 it considers to be low risk. Recipients that receive a  high-risk rating are subject to monitoring, unless a management  representative approves an exception. CPD management representatives  can approve an exception if (1) the HUD Office of Inspector General is  auditing the recipient; (2) they determine that monitoring is  administratively infeasible in the current year, given other monitoring  actions; or (3) they have other reasons—such as HUD recently monitored  the recipient or it monitored another program administered by the  recipient. Field office staff must review high-risk recipients on site unless  they reviewed them on site in the last 2 years, and the purpose of the  monitoring is to validate the implementation of corrective actions.  Medium- and low-risk recipients can be reviewed using remote, or off-site,  monitoring.
Our review of data from GMP—the system that field staff use to record the  results of the risk analysis process and any monitoring  performed—showed that HUD’s field offices followed the risk analysis  process in all but 16 cases in fiscal year 2005. For fiscal year 2005, HUD  designated 164 recipients as high risk. Out of these 164 recipients, GMP  data showed that 107 were monitored, 41 were granted an exception, and  16 were not monitored or provided an exception. The risk scores assigned  to the 16 high-risk recipients that HUD did not monitor or provide an  exception ranged from a low of 51 to a high of 80. These 16 recipients  received allocations totaling about $145 million in fiscal year 2005. They  included Detroit, Michigan ($43 million), Oregon ($16 million), and  Honolulu, Hawaii ($11 million). According to HUD, these recipients were  not monitored or granted an exception either because its field staff  misunderstood the exception requirements or the field office responsible  for monitoring the recipient experienced a staffing shortfall. However,  despite not monitoring these 16 high-risk recipients, 8 of the 12 responsible  field offices monitored recipients that they did not consider high risk.
Further, we found that HUD reviewed most, but not all, CDBG recipients at  least once in the 5-year period from fiscal year 2001 through fiscal year  2005. As shown in table 3, our analysis of GMP data showed that HUD  monitored all but 255 recipients in fiscal years 2003 through 2005. These  255 recipients received about $525 million in fiscal year 2005 funding. When  we expanded our analysis to 4 years (fiscal years 2002 through 2005), we  determined that HUD had monitored all but 140 recipients that received a  total of about $239 million in fiscal year 2005. During the 5-year period from  fiscal year 2001 through 2005, HUD did not monitor 84 recipients that  received a total of about $132 million in fiscal year 2005.
Monitoring recipients is critical because it often results in findings. During  our site visits, we reviewed 144 recipient files and found documentation problems. For example, 24 of the 144 files we reviewed did not contain  sufficient documentation to show that the activity met one of the three  national objectives, as required by the program. Another 14 files did not  note which national objective the activity was supposed to meet.  Additionally, 46 files we reviewed showed no evidence of monitoring by the  recipient. In contrast, recipients we visited tended to have signed  agreements with their subrecipients as required by program regulations. Of  the 90 cases that involved a subrecipient, 87 files contained a signed  subrecipient agreement, and 76 of the 87 agreements contained the five  required elements we tested. When HUD reviews files during its  monitoring, it finds similar occurrences. Fifty-seven percent of HUD’s fiscal  year 2005 reviews resulted in at least one finding. In total, HUD’s fiscal year  2005 monitoring resulted in 581 findings and 447 concerns. Examples of  cited findings included not documenting a national objective, funding an  ineligible activity, poor recordkeeping, and incomplete subrecipient  requirements.
section_title: HUD Has Limited Staff and Travel Funds to Devote to CDBG Monitoring
paragraphs: HUD employs a risk-based monitoring approach because it has limited staff  and travel funds to devote to CDBG monitoring. CPD’s staffing levels have  decreased nationwide, as its CDBG workload has increased. From fiscal  year 1993 to the beginning of fiscal year 2006, the number of CPD field  office staff decreased from 751 to 599, a decline of 20 percent. During the  same time period, the number of entitlement communities grew from 889  to 1,128, an increase of 27 percent. This increase in workload has had a  greater effect on certain CPD field offices. As of February 2006, the average  number of CDBG recipients per program representative was nearly four.  The number of recipients per representative exceeded this average at 20 of  the 42 CPD field offices and was six or more at three offices. The HUD  official responsible for CPD field office staff told us he would like to have  more staff but has to get the work done with what he has. Additionally,  CPD program representatives in their role as program monitors oversee  other HUD programs, including three other formula grant programs,  homeless programs, and a number of smaller competitive grant programs.  For example, at the Chicago CPD office, each representative monitors four  to six formula grants, as well as approximately 100 competitive grants.  Although they represent fewer dollars than the formula grant programs, the  competitive grant programs require more monitoring, according to CPD  program managers. The programs are generally administered by small  nonprofit organizations that experience a large amount of staff turnover.  Further, there were 9,705 active competitive grants in fiscal year 2005.
A number of CPD field offices also do not have a financial analyst.  Financial analysts are important because they evaluate the financial  operations of each recipient and ensure that CPD’s monitoring activities  adequately address any financial vulnerabilities in CPD programs and  related capacity concerns. They help field offices review budget  submissions, financial report submissions, independent audit reports, and  drawdown requests. As of late April 2006, 13 of the 42 CPD field offices did  not have a financial analyst. These 13 field offices averaged a CDBG  portfolio of $60 million. In offices we visited that did not have a financial  analyst, other staff assumed some of the responsibilities of a financial  analyst, but these staff had other responsibilities as well and lacked the  specialized skills of a financial analyst.
Staffing shortages may worsen in the future because many current CPD  field staff are eligible to retire. As of February 2006, 39 percent of CPD field  staff was eligible to retire within the next 3 years. If we include those  eligible for early retirement, the percentage increases to 59 percent within the next 3 years. For example, the four officials we interviewed in the  Milwaukee field office told us that they were all currently eligible to retire,  including the CPD Director. Denver field office officials told us that the  office could lose all but one of its program representatives to retirement in  the next 5 years.
HUD has not developed a plan to hire staff with needed skills, such as  financial analysts, or to help CPD manage upcoming retirements. Our  internal control standards state that agencies, as part of their human  capital planning, should consider how to retain valuable employees, plan  for their eventual succession, and ensure continuity of needed skills and  abilities. According to a HUD official, HUD has taken a number of steps to  manage its CPD workforce, such as hiring interns and implementing a  leadership development program. However, these efforts do not  specifically address the need to hire financial analysts and replace the staff  that will become eligible for retirement in the next few years. According to  internal control standards, an agency should have a specific and explicit  workforce planning strategy that allows for identification of current and  future human capital needs and a formal recruiting and hiring plan with  explicit links to skill needs the agency has identified.
HUD internal reviews and the HUD Inspector General have also noted that  limited staffing has negatively impacted CPD’s monitoring. In fiscal year  2004, 11 of the 12 internal management reviews, known as Quality  Management Reviews, performed at CPD field offices noted staffing  issues. For example, the reports noted that one office might not meet its  monitoring goals due to significant loss of staff and that staff at two offices  had an unbalanced workload. Also, one report noted that the field office  needed a financial analyst for oversight of $113 million in CPD program  funds. Furthermore, in a June 2004 report on CPD management controls,  the HUD Inspector General observed that reductions in field office staffing levels had impacted CPD’s monitoring capabilities. The report noted that,  between 1993 and 2003, CPD had been negatively impacted by staffing  challenges that had plagued all of HUD.
Further, according to HUD field office staff, limited travel budgets have  affected their ability to monitor CDBG recipients. For fiscal year 2005, the  travel budget for all 42 CPD field offices was about $392,000. The travel  budgets for the six field offices we visited ranged from $2,528 in Baltimore  (11 CDBG recipients) to $20,691 in Los Angeles (105 CDBG recipients).  Some field office staff told us their travel budgets affect which recipients  they select for on-site monitoring during the risk assessment process. For  example, they will limit their monitoring of recipients that require a high  cost of travel. They will either conduct off-site monitoring or document an  exception, which allows them to monitor these recipients less often despite  their risk analysis score. Additionally, when monitoring recipients, field  office staff sometimes shorten their visit to fit within their travel budget. In  its June 2004 report, the HUD Inspector General reported similar findings  and added that field offices will also reduce the amount of staff  participating in a monitoring visit in order to reduce travel costs. According  to the headquarters official that manages CPD’s field offices, he has to  balance the travel needs of all 42 field offices when allocating limited travel  funds. To help the field offices better plan their travel, he has begun  providing them with quarterly, rather than monthly, allocations of funds.
section_title: HUD Has Made Little Effort to Involve Field Staff in Plans to Redesign IDIS
paragraphs: HUD is currently redesigning IDIS but has solicited limited input from its  field staff. IDIS, a tool that HUD field staff use to conduct on-site and  off-site monitoring, has shortcomings that limit its usefulness as a  monitoring tool. IDIS was designed to be a real-time information system  providing financial disbursement, tracking, and reporting functions for  CPD. In our April 1999 report, we noted that the system was not providing  needed information, and our current work indicates that, despite HUD  improvements to the system, it still is not providing all the information  needed to monitor recipients’ performance. During our site visits, field  office staff noted that (1) the data in IDIS are not always current because  some recipients do not update it quarterly, as HUD recommends and (2) the  accomplishment data in IDIS are not as reliable as the financial data. As  previously noted, HUD is currently working with recipients to improve the  quality of the accomplishment data. Also, a HUD headquarters official  noted that HUD plans to add reports that will better assist field staff with  their monitoring. Similarly, in a report on how to incorporate performance  measures into IDIS, the National Academy of Public Administration found  that (1) IDIS allows data input errors and omissions, (2) the ability to  manipulate data for reporting purposes is limited, and (3) HUD staff and  recipients have expressed frustration with using the system.
To improve the usefulness of IDIS, HUD is currently reengineering the  system. The department has obligated $9.4 million for development of the  new system. One problem with the initial development of IDIS was that  HUD did not adequately consider input from end users. HUD has attempted  to address this problem in the statement of work for the new system by  stating that the contractor should gather requirements from HUD  stakeholders and recipients. Specifically, the contractor was to work with  HUD’s field offices to identify issues with the current accomplishment  reporting, hold sessions with both field office staff and recipients to solicit  user requirements pertaining to reports, and develop a draft prototype to  solicit HUD stakeholder and recipient feedback on proposed navigation  approaches. Soliciting input from end users on their requirements is  consistent with best practices for system development. Our guidance on  information technology investment management states that (1) investment  control processes should ensure that key customers and business needs for  each project are identified and that the users are engaged in this process  and (2) users should participate in project management throughout a  project’s or system’s life cycle to ensure that it supports the organization’s  business needs and meets users’ needs.
Contrary to the IDIS statement of work and our guidance on information  technology investment management, HUD headquarters and its contractor  have solicited little input from field staff. As the HUD staff tasked with  monitoring CDBG recipients, field staff are the users that rely most heavily  on IDIS as a monitoring tool. Although HUD headquarters and the  contractor have held only one session with field staff, they have already  drafted a document outlining the system’s functional requirements.  According to the HUD official that is overseeing development of the new  system, the one session held with field staff was unproductive; therefore,  they plan to wait until they are making decisions regarding the standard  reports that the system will generate to solicit additional input from field  office staff. If HUD’s plans to involve its field staff in efforts to improve  IDIS are limited to soliciting input regarding the new system’s reporting  capabilities, the other factors that have limited IDIS’ effectiveness as a  monitoring tool may not be addressed.
section_title: HUD Has Implemented a Clear Timeliness Policy, but Has Not Issued Similar Guidance on Other Enforcement Actions
paragraphs: Although HUD has issued a clear policy stating what actions it will take  when entitlement communities fail to meet the statutory requirement that  funds be spent in a timely manner, it has not developed similar guidance  establishing a consistent framework for holding CDBG recipients  accountable for deficiencies identified during monitoring. Because federal  law requires HUD to ensure timely expenditure of entitlement funds, HUD  has set a timeliness standard for entitlement communities and established  a grant reduction policy for recipients that exceed the standard. As it  monitors CDBG recipients, however, HUD has the flexibility to assess other  sanctions ranging from issuing a warning letter to advising the recipient to  pay back CDBG funds. HUD headquarters has not issued guidance that  describes the conditions under which each type of sanction should be  taken, and we found instances in fiscal year 2005 where findings that  appeared to be similar were associated with different enforcement actions.
subsections: section_title: HUD’s Timeliness Policy Has Reduced the Number of Entitlement Communities That Are Slow to Expend Funds
paragraphs: By implementing a timeliness standard, HUD has reduced the number of  entitlement communities that are slow to expend funds. Federal law  requires HUD to review CDBG entitlement communities to determine if  they have carried out their CDBG-assisted activities in a timely manner. It  considers an entitlement community to be timely if, 60 days prior to the end  of the recipient’s current program year, the amount of entitlement grant  funds available under grant agreements but undisbursed by the U.S.  Treasury was not more than 1.5 times the entitlement grant amount for its  current program year. To ensure that entitlement communities comply with  this standard, HUD established a grant reduction policy for untimely  recipients in November 2001. The new policy stated that an untimely  recipient had 1 year to become timely. If it still did not meet the 1.5  standard at the end of its next program year, HUD would reduce its next  grant by how much it exceeded the standard, unless HUD determined that  the lack of timely spending was due to factors beyond the recipient’s  control. For example, if a recipient’s annual grant was $1 million and its  60-day ratio was 1.57, the maximum amount of the reduction would be  $70,000 (0.07 times $1 million).
Since the implementation of this grant reduction policy, the number of  untimely entitlement communities has gone down from 140 in November  2001 to 65 as of April 2006. Of the 65 recipients that were untimely as of  April 2006, 8 had a 60-day ratio above 2.0. The remaining recipients had  60-day ratios between 1.51 and 2.0. Although HUD could not provide a list  showing the total number of recipients that have been untimely for only a  year since the inception of the standard, it has tracked the total number  that were untimely for 2 consecutive years and, therefore, subject to grant  reduction. As of April 2006, 14 recipients had been subject to grant  reduction. Of these 14, HUD only reduced three recipients’ funding. It  granted exceptions to six recipients due to factors such as natural disasters  that triggered Presidential disaster designations and did not take action  against three because HUD failed to provide proper notice to the recipient  when it first became untimely. The remaining two had moved under the 1.5  standard quickly, and HUD decided not to reduce their grants.
section_title: Guidance Could Help Ensure Sanctions Are Appropriate
paragraphs: When they identify deficiencies other than failing to meet the timeliness  standard, HUD’s field offices have the flexibility to determine which  sanctions are warranted based on the conditions identified. As shown in  table 4, HUD’s monitoring of CDBG recipients during fiscal years 2003 to  2005 resulted in approximately 1,900 findings and about 350 sanctions. In  fiscal year 2005, HUD assessed 95 sanctions, including about $1.6 million in  financial sanctions.
The sanctions that HUD may take against recipients range from issuing a  letter of warning to advising recipients to reimburse their lines of credit.  Beyond the program regulations that describe the purpose of taking  corrective actions and the various actions that can be taken, HUD has  issued no guidance to its field offices describing what conditions its field  staff should consider when taking corrective actions and what specific  conditions warrant different types of corrective actions. Instead, its 42  field offices have the flexibility to determine the types of sanctions for  findings that they identify. According to HUD headquarters officials, field  offices may call HUD headquarters for advice before taking sanctions  against a recipient. Figure 7 shows that the action taken the most often  during fiscal year 2005 was that of advising the recipient to alter or end an  activity.
Our internal control standards state that agencies should implement  control activities, which are policies and procedures that enforce  management’s directives and ensure accountability. One such strategy is  to document the steps taken to implement internal controls. Such  documentation should be clear and readily available. Contrary to these  standards, HUD has not clearly documented the steps that its field offices  take to determine the appropriate sanctions when deficiencies are  identified during monitoring. Such guidance could establish the parameters  within which field office should operate, while still allowing for  consideration of individual situations. By establishing a framework within  which field offices should operate, HUD headquarters could instill  accountability as well as allow field staff to make individual judgments  based on factors such as a recipient’s past performance and the frequency  and severity of findings.
In the absence of guidance, HUD’s field offices have treated recipients that  committed similar infractions differently. In our meetings with several  national organizations that represent CDBG recipients, representatives  noted that their members have observed inconsistent interpretation of  program regulations across HUD field offices. Further, we found instances  where deficiencies identified in fiscal year 2005 seemed similar to us but  different corrective actions were taken.
Inability to support meeting a national objective: When one field office  found that a recipient could not support that an activity met a national  objective, it asked the recipient to provide either more documentation  or a written assurance that it would not fund that type of activity in the  future. In contrast, another field office advised a recipient that could not  document that an activity met a national objective to reimburse its line  of credit. In another instance, a field office stated that it might disallow  expenditures if the recipient could not document that an activity met a  national objective.
Documenting environmental reviews: When one field office determined  that a recipient had not documented any follow-up compliance actions  for projects where mitigating measures for environmental compliance  were identified, even after the office had previously identified the lack  of follow up as a concern, it advised the recipient to submit  documentation showing that follow-up actions had been taken. In  another case where a field office determined that a recipient had failed  to fully document its environmental reviews, that field office advised the  recipient to suspend disbursement of funds for all activities until it put  in place revised environmental review procedures and the appropriate  level of environmental review had been carried out.
Guidance providing HUD’s 42 field offices with a range of appropriate  actions for identified deficiencies could help to provide greater  transparency and accountability, and it could better ensure consistency of  sanctions for similar infractions.
section_title: Conclusions
paragraphs: Many communities use their CDBG funds to benefit their residents and  increase the economic health of the community. One of the cited strengths  of the program is its flexibility, which allows communities to make  decisions locally about the best use of the funds in their community. Given  the program’s flexibility, it is critical that HUD ensure that recipients use  funds in a manner that is consistent with the purposes of the program.  While there are statutory spending limits on public services and planning  and administration, HUD does not centrally maintain the data needed to  determine compliance with these spending limits in a timely manner.
Entitlement communities collectively spend at or close to the limits on  public services and planning and administration. Therefore, it is important  for HUD to be able to report on the extent of entitlement community  compliance with these limits. Without these data readily available, HUD  cannot provide timely assurance that recipients are adhering to these  limits.
With program funding being cut as the number of grant recipients  increases, it is essential for HUD to ensure that recipients use funds  properly. Because it has limited monitoring resources, HUD has  implemented a risk-based process to identify recipients for review.  However, HUD faces challenges as it carries out these responsibilities.  First, a large percentage of the field staff responsible for monitoring CDBG  recipients will be eligible for retirement within the next 3 years. HUD has  not developed a plan for replacing this vital program expertise. HUD has  established an internship program and other initiatives to develop senior  leaders, but such activities will not, in themselves, replace experienced  professionals. Without such a plan, HUD has no way to ensure continuity of  needed skills and abilities. Second, HUD is reengineering IDIS—the system  that it relies on to monitor recipients it cannot review on-site—to address a  number of shortcomings in the system, but its plans to involve HUD field  staff in these efforts are limited to soliciting input regarding the new  system’s reporting capabilities. If it does not fully involve all of the system’s  stakeholders in the reengineering process, as it failed to do when initially  developing the system, HUD runs the danger of repeating past development  mistakes and having to live with a flawed system that limits its monitoring  abilities. Developing a system that better meets the monitoring needs of  HUD field staff has increased in importance in an environment where the  number of monitoring staff is declining as the workload is increasing.
While allowing for judgment and flexibility, an effective monitoring  program should also make it transparent to recipients what actions may be  taken if deficiencies are found. HUD has established a clear policy stating  that it will reduce an entitlement community’s grant funds if it fails to spend  its funds in a timely manner, and, as a result, the number of untimely  recipients has dropped. However, HUD has not developed similar guidance  laying out a framework of enforcement actions that may be taken when  certain deficiencies are identified during monitoring, and we found  instances where findings that appeared to be similar were associated with  different enforcement actions. Such guidance could establish the  parameters within which field offices should operate, while still allowing  for flexibility to address individual situations. Issuing guidance could also  help HUD’s management provide greater transparency and accountability  to the sanctioning process.
section_title: Recommendations for Executive Action
paragraphs: In order to improve HUD’s oversight of the CDBG program, we recommend  that the Secretary of Housing and Urban Development direct the Assistant  Secretary for Community Planning and Development to take the following  four actions:  Maintain in IDIS the data needed to determine compliance with the  statutory limitations on expenditures for public service activities and  administration and planning.
Develop a plan for ensuring the proper mix of skills and abilities and  replacing an aging CPD workforce.
Look for additional opportunities to solicit field staff input on IDIS user  requirements.
Consider developing guidance for the CDBG program that details what  conditions should be considered when taking corrective actions and  what specific conditions warrant different types of corrective actions.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided HUD with a draft of this report for review and comment. We  received oral comments from the Office of Community Planning and  Development’s Comptroller on July 12, 2006, addressing our key findings,  conclusions, and recommendations. He stated that, overall, HUD agrees  with our findings, conclusions, and recommendations. In addition, HUD  provided a letter from the General Deputy Assistant Secretary for  Community Planning and Development with comments that were technical  in nature. This letter and our response to each of the comments appear in  appendix IV. HUD also provided other oral technical comments that were  incorporated where appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  date of this letter. At that time, we will send copies of this report to the  Ranking Minority Member, Subcommittee on Housing and Community  Opportunity, House Committee on Financial Services; Ranking Minority  Member, Subcommittee on Federalism and the Census, House Committee  on Government Reform; Ranking Minority Member, Subcommittee on  Federal Financial Management, Government Information, and  International Security, Senate Committee on Homeland Security and  Governmental Affairs; and the Chairman and Ranking Minority Member,  Subcommittee on Housing and Transportation, Senate Committee on  Banking, Housing, and Urban Affairs. We will also send copies to the  Secretary of Housing and Urban Development. Copies of this report will  also be available to other interested parties upon request. In addition, the  report will be made available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-8678 or shearw@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix V.
section_title: Objectives, Scope, and Methodology
paragraphs: The Chairman of the Subcommittee on Housing and Community  Opportunity, House Committee on Financial Services; the Chairman of the  Subcommittee on Federalism and the Census, House Committee on  Government Reform; and the Chairman, Subcommittee on Federal  Financial Management, Government Information, and International  Security, Senate Committee on Homeland Security and Governmental  Affairs requested that we review the use of Community Development Block  Grant (CDBG) funds and how the Department of Housing and Urban  Development (HUD) oversees the program. In particular, we examined (1)  how recipients have used CDBG funds, including the extent to which they  have funded activities that meet national program objectives, complied  with spending limits, and reported accomplishments achieved with funds;  (2) how HUD has monitored recipients’ use of CDBG funds; and (3) how  HUD has held recipients that have not complied with CDBG program  requirements accountable for their actions.
To accomplish these objectives, we analyzed fiscal year 2005 data from  HUD’s Integrated Disbursement and Information System (IDIS) and fiscal  year 2001 through 2005 data from the Grants Management Process (GMP)  System on all CDBG recipients. We assessed the reliability of the HUD data  we used by reviewing information about the systems, performing  electronic data testing to detect errors in completeness and  reasonableness, and discussing the data with knowledgeable agency  officials. We determined that the data were sufficiently reliable for the  purposes of this report. In addition to analyzing HUD data on all CDBG  recipients, we visited 20 recipients. As shown in table 5, we visited 17  recipients in six large metropolitan areas as well as 3 smaller recipients  outside large metropolitan areas. In selecting the recipients located in  large metropolitan areas, we considered geographic dispersion, funding  level, need, and proximity to a HUD field office and state capital. We  selected the smaller recipients outside large metropolitan areas based on  their population and location. Of the 20 recipients we visited, 4 were states,  2 were urban counties, and 14 were cities. We also visited four  nonentitlement communities funded by the states of Georgia and  Maryland. We interviewed the eight HUD field offices that monitor the  grantees we visited and interviewed staff at HUD headquarters. Finally, we  interviewed representatives of four national organizations that represent  CDBG recipients—the Council of State Community Development Agencies,  the National Association for County Community and Economic  Development, the National Association of Housing and Redevelopment  Officials, and the National Community Development Association—to  obtain their views on the use of CDBG funds and HUD’s oversight of the  program.
To determine how the communities that receive CDBG funds use those  funds, we reviewed CDBG program regulations to determine how  recipients are allowed to use their funds. We then analyzed IDIS data on  activities funded as of September 30, 2005, to determine (1) the activities  most often funded by recipients in fiscal year 2005, (2) any differences  between the activities most often funded by entitlement and state  recipients in fiscal year 2005, and (3) the percentage of activities funded in  fiscal year 2005 that met each of the three national program objectives. For  examples of how communities use their funds, we relied on documentation  provided by the 20 recipients we visited and pictures we took during our  site visits. We had planned to use IDIS data to examine the extent to which  CDBG recipients were complying with the statutory spending limits on  public services and planning and administration but determined that (1)  IDIS did not save some of the data needed to determine compliance by  entitlement communities and (2) IDIS data cannot be used to determine  states’ compliance with the limits. Therefore, we requested data from HUD  showing the percentage of funds spent by selected recipients on public  services as well as on planning and administration. We initially requested  data on the 200 entitlement communities that received the most funding,  but HUD could only provide data on the 100 most populous entitlement  communities within our time frames. We then analyzed that data to  determine how many had exceeded the two spending limits in program  year 2004. We also analyzed HUD data to determine the number of  recipients eligible for the special exception that allows certain recipients to  count activities that benefit fewer than 51 percent low- and moderate- income persons as meeting the low- and moderate-income national  objective in fiscal year 2006. To determine the status of HUD’s efforts to  implement a performance measurement system, we reviewed the notices  published in the Federal Register and guidance on HUD’s Web site as well  as interviewed HUD officials.
To identify how HUD monitors communities’ use of CDBG funds, we  reviewed HUD’s monitoring guidance to determine which tools it uses to  monitor recipients. To gain an understanding of HUD’s formal monitoring,  we reviewed documentation on its risk analysis process and interviewed  the HUD headquarters officials responsible for setting monitoring policy as  well as HUD field staff responsible for performing the monitoring. We  analyzed data from HUD’s Integrated Performance Reporting System  (HIPRS) to determine if the Office of Community Planning and  Development (CPD) met its monitoring goal in fiscal year 2005. We  interviewed a knowledgeable agency official regarding the data and  determined that they were sufficiently reliable for the purposes of this  report. We also analyzed GMP data to determine (1) if HUD’s field offices  complied with its risk analysis process in fiscal year 2005, (2) the extent to  which HUD monitored CDBG recipients in fiscal years 2001 to 2005, and (3)  what types of monitoring findings HUD had in fiscal year 2005. To  determine the adequacy of HUD’s monitoring resources, we reviewed  information on CPD staffing and travel budgets. To assess the usefulness of  IDIS as a monitoring tool, we reviewed reports on the system and  interviewed HUD field staff regarding their experiences with using the  system. We also reviewed HUD’s plans for reengineering IDIS and  discussed them with the responsible HUD official.
To assess the extent to which the recipients we visited have complied with  CDBG program regulations, we reviewed 144 project files. To identify  projects for review, we requested that each recipient provide a list of the  projects that they had awarded in calendar year 2003. We used the calendar  year because recipients’ fiscal years vary, and we chose 2003 because we  anticipated that projects would be well under way or complete by the time  of our review. From the list that each recipient provided, we selected a  stratified random sample of 6 to 10 projects; the number of files selected  depended on the funding level of the recipient—more files were selected  for recipients with larger grants. If we determined that a project selected  for review was terminated after it was awarded, we selected a replacement  project. When reviewing the files, we looked for (1) documentation  showing that the activity funded met a national objective, (2) a subrecipient  agreement that included the information required in the program  regulations (if applicable), and (3) evidence that the recipient had  monitored the activity.
To determine the extent to which HUD has held recipients that have not  complied with CDBG program requirements accountable for their actions,  we reviewed the CDBG program regulations to determine what sanctions  HUD can take against recipients. We reviewed HUD’s policy on timely  expenditure of funds and analyzed data on the number of untimely  recipients as of April 2006. We also analyzed GMP data to determine the  number of sanctions that HUD had taken in fiscal years 2003 to 2005 and  the specific types of sanctions it took in fiscal year 2005. In addition, we  interviewed HUD field and headquarters staff to determine how they  decide which sanctions to take against recipients.
We performed our work from July 2005 to July 2006 in accordance with  generally accepted government auditing standards.
section_title: Selected States’ Methods of Distributing Funds
paragraphs: The methods that states use to distribute CDBG funds vary. To demonstrate  the variety of methods used, we examined the approach that the following  10 states take when distributing their funds: Georgia, Colorado, Maryland,  Massachusetts, North Carolina, New York, Ohio, Pennsylvania, Puerto  Rico, and Texas. We selected these states because we visited the first four  and the remaining six received the largest funding allocations in federal  fiscal year 2005. To determine the method of distribution used, we  reviewed each state’s fiscal year 2005 action plan. Table 6 provides  information such as how each state allocates its funds among various  activities, the evaluation criteria used to select applications, and incentives  or application bonuses offered.
section_title: Activities Funded by the Recipients That GAO Visited
paragraphs: During our review of the CDBG program, we visited 16 entitlement  communities and four states. Additionally, we visited four nonentitlement  communities funded by two of the states we visited (Georgia and  Maryland). These recipients funded the following examples of public  improvement, housing, public service, economic development, and  acquisition activities.
subsections: section_title: Public Improvements
paragraphs: West Point, Georgia (a nonentitlement community) used $500,000 in CDBG  funds awarded by the state of Georgia to build a new Boys and Girls Club  (see fig. 8). According to the city’s application for funds, the old Boys and  Girls Club did not have an accessible entry, had several leaks in the roof  that could only be temporarily repaired, did not have load bearing walls,  and had a mechanical system that appeared to be well beyond its  reasonable life expectancy. The total budget for the project was $721,500,  including operating costs. According to the application, the club plans on  serving 200 children, 180 of which are from low- and moderate-income  families.
Poulan, Georgia (a nonentitlement community) utilized a $499,081 grant  from the state of Georgia to replace a portion of the city’s corroding  water pipes. At the time of the grant, the corroding water pipes  restricted the amount of water that flowed through the water lines and  caused the water to become discolored and rusty. According to local  officials, the water that was fed through these water lines was not  suitable for drinking, bathing, or cleaning clothes. In addition to the  money provided by the state, the city of Poulan provided $40,000. Over  70 percent of residents that benefited from the new water lines had low-  and moderate-incomes.
The state of Maryland awarded the town of Denton (a nonentitlement  community) $600,000 to make improvements to city streets. Specifically,  the funding was used to install a new storm water management system,  curbs, gutters, sidewalks, and paving. The CDBG grant provided  $431,913 for construction, $148,087 for project administration and  contingency, and $20,000 for general administration. The project was  matched with a $566,950 loan and a $4,920 grant from the U.S.  Department of Agriculture and $7,841 from the town of Denton.
Attleboro, Massachusetts used $222,267 in CDBG funds to finance, in  part, the reconstruction of the Fred E. Briggs Playground municipal pool  and bathhouse, which is located in a census tract where 59 percent of  the households are of low- and moderate-income. The city demolished  the old pool, the bathhouse, the building that housed the filtration  system, the walkways, and the fencing and constructed a brand new  municipal pool and bathhouse facility (see fig. 9). The capital project  was necessary to bring both the pool and bathhouse into compliance  with federal, state and local building and health codes and to provide  accessibility for persons with disabilities. The total project cost was  $537,849.
Kane County, Illinois used $28,592 in CDBG funds to finance the  rehabilitation of the Corron Farm Park (see fig. 10), located in and  owned by Campton Township. The structure was listed in the Kane  County Register of Historic Places and was vacant and badly  deteriorated when rehabilitation work began. The building will house a  local history museum upon completion. Additionally, local officials told  us that the investment of CDBG funds helped reinforce local efforts to  protect open space in an area facing rapid growth and development. The  overall funding for the project was $64,936, with Campton Township  investing $36,344 in the project.
section_title: Housing
paragraphs: Greeley, Colorado spent $236,000 in 2003 CDBG funds to continue its  single-family housing rehabilitation program and provide emergency  assistance to the elderly and persons with disabilities. Efforts were  concentrated in areas targeted for urban renewal. Activities included in the  housing rehabilitation were housing rehabilitation and weatherization,  housing replacement, property acquisition, ramps for persons with  disabilities and elderly, first-time home buyer’s program, and urban renewal  (see fig. 11).
In 2003, Atlanta, Georgia provided $350,000 in CDBG funds to Southeast  Energy Assistance (SEA) for energy-related repairs to 225 homes owned  by low-income residents. These repairs eliminate air leaks to make  homes more energy efficient and reduce heating and cooling costs. SEA  is a nonprofit organization that is a service provider for the federally  funded Weatherization Assistance Program (WAP). WAP services  include adding insulation to floors, walls, and attics; replacing or  repairing damaged exterior doors and windows; and installing weather- stripping and caulking.
In fiscal year 2003, the Commonwealth of Massachusetts awarded  $1,118,125 in funding to the town of Oak Bluffs to rehabilitate 40 units of  substandard housing in the towns of Oak Bluffs, Aquinnah, Chilmark,  Edgartown, Tisbury, and West Tisbury. Low- and moderate-income  persons residing in substandard housing were eligible to participate.  Upon completion of the grant, a total of 47 units had been rehabilitated.  The project utilized three loan options: a deferred payment loan, a  deferral agreement loan, and a direct reduction loan. Ten loans were  issued at or under $30,000, 23 loans were issued at or under $25,000, and  14 loans were issued at or under $20,000.
Chicago, Illinois provided $5.9 million in CDBG funds to build  Wentworth Commons. Wentworth Commons provides affordable  housing to families and individuals that were formerly homeless or at  risk of homelessness. To qualify to live at Wentworth, applicants must  make 60 percent or less of the area median income. Overall, there are 51  units at the site: 24 efficiency apartments, 15 three-bedroom apartments,  9 two- bedroom apartments, and 3 four-bedroom apartments. The site  also features supportive services such as case management,  employment training, and leadership development. The building is  environmentally friendly and energy efficient. It uses solar energy to  generate electricity into the building’s electrical distribution system,  which offsets electrical use. The total cost of the project was $13  million.
Los Angeles, California runs a “Handyworker” Program that provides  minor home repair services to low-income senior citizens or  homeowners with disabilities. The program helps keep housing from  deteriorating by funding repairs that homeowners could not otherwise  afford. In program year 2004, the city budgeted $2,000,000 in CDBG  funds for the program. Grants of up to $5,000 per client were available  for repairs or home improvements that address home safety,  accessibility, and security issues. Improvements include exterior and  interior painting, minor finish work, the installation of disability grab  bars and accesiblity ramps, minor plumbing, and other repairs. Through  this program, the city is working to preserve the existing stock of  affordable housing. The city’s goal for program year 2004 was to provide  1,552 households “Handyworker” services.
Caroline County, Maryland (a nonentitlement community) began  receiving state of Maryland CDBG funds in 2002 to rehabilitate housing  for low- and moderate-income households. Since 2002, the county has  received $575,000 in CDBG funds to rehabilitate 51 homes. Additionally,  the county also received $17,250 in CDBG funds in 2003 to complete a  housing study. The county told us that the CDBG funds have also helped  the county leverage $10,250 from the U.S. Department of Agriculture for  housing rehabilitation.
Baltimore County, Maryland conducts a Single Family Rehabilitation  and Emergency Repair Program. Since the inception of the program, the  county has assisted nearly 1,850 income eligible households. In fiscal  year 2005, the county spent $1 million in CDBG funds to assist 93  households. The program provides loans of up to $25,000 per home. The  loans are then deferred until the sale, refinance, or transfer of property.  During ownership, the county allows homeowners to make certain  repairs and home improvements.
section_title: Public Services
paragraphs: Naperville, Illinois provided $19,223 in program year 2005 funding for the  Loaves and Fishes Community Food Pantry (see fig. 12). The food pantry  provides groceries that ensure a healthy diet to Naperville’s low-income  and homeless clients. According to Loaves and Fishes, 3,000 Naperville  residents live in poverty. On a weekly basis, the food pantry provides 250  families with the equivalent of three bags of groceries to last for a 2-week  period. In 2005, the food pantry provided: services to over 1,500 families,  home delivery to over 100 seniors and individuals with disabilities, and  over 1,800 holiday food distributions.
Denver, Colorado provided $50,000 in 2003 funding to Brothers  Redevelopment Incorporated to provide the salaries and benefits for a  director and two part time counselors. The director and part time  counselors provided information, referrals and mortgage counseling for  low- and moderate-income households in the Denver community.
Santa Monica, California provided $242,442 in program year 2005 CDBG  funding toward the SAMOSHEL homeless shelter. SAMOSHEL provides  110 shelter beds to homeless adults, and expects to serve up to 500  persons annually with their emergency shelter. Additionally, the shelter  provides services such as access to medical and mental health services,  permanent and transitional housing programs, domestic violence  intervention, counseling and case management, and substance abuse  recovery support and employment services.
In fiscal year 2003, Warner Robins, Georgia provided $41,000 in CDBG  funds to the Gateway Cottage. The Gateway Cottage program targets  young homeless mothers recovering from substance abuse. The cottage  provides housing and resources for a time span of 1 year while providing  training in hygiene, personal finance, substance abuse, parenting, and  daily living skills. The program networks with other service providers to  link clients with job training, educational opportunities, and physical  and mental health services. Upon graduation from the program, clients  are eligible to apply for the aftercare component of the program, which  is supportive housing in conjunction with supportive services.
Beloit, Wisconsin provided $7,068 for the Beloit Chore Service Program  in 2005. The program provides senior citizens with screened, qualified  workers who will do home maintenance and repairs at affordable prices.  The program staff screen workers and verify that they are qualified to  perform the repair and maintenance work. The workers provide  inexpensive home repairs, which allow seniors to remain independent  and in their own homes.
Baltimore, Maryland provided $80,700 in 2003 CDBG funds to the Belair- Edison Neighborhoods Incorporated. The funds were used to undertake  several activities including prepurchasing, default and delinquency  counseling, fair housing counseling and education, homeownership  workshops, and public information and technical assistance to  businesses in the Belair-Edison area of Baltimore.
section_title: Economic Development
paragraphs: In fiscal year 2005, Boston, Massachusetts designated $856,697 in CDBG  funds for its Boston Main Streets program. The city of Boston provided  funding and technical assistance to 19 neighborhood-based Main Streets  districts throughout the city. The program helps the local districts  capitalize on their unique cultural and historical assets while focusing  on the community's economic development needs. Examples of  activities funded under the program include small business recruitment,  business retention, and addressing competition from shopping malls  and discount retailers. From 1995 to December 2005, the city created  540 new businesses and 3,643 new jobs, and leveraged $9,645,644 in  additional private investment through the program.
Dubuque, Iowa provided a $500,000 CDBG loan to Heartland Financial  in April 2003 as an incentive to select a downtown location for the  company's expansion of 47 new jobs (see fig. 13). The $4.5 million  project provided for the renovation of two downtown buildings both of  which are on the National Register of Historic Places. In addition, it  provided for reuse of the vacant buildings, retained a workforce in the  downtown, and created new jobs for low- and moderate-income  persons.
As of the 2003/2004 fiscal year, the city of Gardena, California had  expended $490,755 in CDBG funds revitalizing their Van Ness Corridor.  The goal of the revitalization was to strengthen the economic vitality of  the city, provide employment opportunities, stimulate quality retail  development, and create a sustainable economic base for the city. The  city provided funds to businesses along the corridor to eliminate slum  and blight. CDBG assistance has included financial assistance for facade  and exterior improvements, providing block wall and infrastructure  improvements along the corridor, conducting a business survey to  develop and implement a business outreach program, and providing an  on-going graffiti abatement and removal program.
section_title: Acquisition
paragraphs: The state of Colorado provided $250,000 in CDBG funds to help a health  clinic in Lafayette, Colorado acquire property to build a new facility.  Clinica Campesina is a community health center serving the needs of the  low-income, uninsured residents of Southeastern Boulder, Broomfield,  and Western Adams Counties. Ninety-six percent of the patients that the  clinic serves are at or below 200 percent of the federal poverty line. The  clinic’s patients are predominately children under the age of 13 (38  percent) and women of childbearing age (28 percent). The total project  budget was $1.3 million.
section_title: Comments from the Department of Housing and Urban Development
paragraphs: The following are GAO’s comments on the Department of Housing and  Urban Development’s letter dated July 11, 2006.
subsections: section_title: GAO Comments
paragraphs: 1. We agree that it is important to monitor compliance with  administration and planning and public service spending caps.  However, our report emphasizes HUD’s need to centrally maintain data  on compliance with statutory spending limits so that it can report on  the extent of compliance; therefore, we made no change to the report in  response to this comment. 2. The CPD staffing/hiring plan was approved in June 2006 and was  provided to us along with HUD’s written agency comments. Because  the plan was provided at the close of this engagement this report does  not evaluate the extent to which the plan addresses identified  workforce needs. 3. The guidance that HUD references was issued in the 1990s. When we  interviewed the Director of CPD’s Office of Field Management and field  office staff regarding the monitoring of CDBG recipients, they stated  that they were following the new CPD Monitoring Handbook, which  was issued in September 2005. The introduction to this handbook states  that it establishes standards and provides guidance for monitoring CPD  programs, including CDBG. Beyond referring field staff to various  sections of the program regulations, the new handbook does not  describe what conditions its field staff should consider when taking  corrective actions and what specific conditions warrant different types  of corrective actions. Because we believe that HUD needs a consistent  framework for holding CDBG recipients accountable for deficiencies  identified during monitoring, we made no change to the report. 4. Our report acknowledges that any additional guidance that HUD  develops for its field staff taking sanctions could allow for the  consideration of individual situations. Because individual situations  may vary, we stated that such guidance could establish a framework, or  parameters, within which field offices should operate. Although HUD  points to several forms of guidance in its comment, none of them  specifically addresses the concerns raised in this report. The regulatory  language in 24 C.F.R. 570.910(a) states that corrective actions should be  designed to (1) prevent a continuation of the performance deficiency;  (2) mitigate, to the extent possible, the adverse effects or consequences  of the deficiency; and (3) prevent a recurrence of the deficiency. While  this language establishes the purpose of taking sanctions, it does not  provide parameters that help field staff determine which specific  corrective sanction is appropriate to address the deficiency identified.   Section 2-8.B. of the CPD Monitoring Handbook describes HUD’s basis  for determining whether a deficiency should result in a finding or  concern, but it does not help field office staff determine which sanction  may be appropriate if the deficiency results in a finding. Finally, as we  mentioned in our response to the previous comment, the additional  handbook HUD referenced was issued in 1992, while the CPD  Monitoring Handbook was issued in 2005. Given the great flexibility  that exists when taking sanctions, we believe it would be useful to  provide field office staff further guidance to ensure they are treating  recipients that commit similar infractions equitably.   5. We revised the report to include the suggested text. 6. We revised the text to make it clear that the 29 exhibits we mention are  in the two handbook chapters that are specific to the CDBG program. 7. We agree that the meetings referenced by HUD can be helpful in  sharing information on current operational issues with IDIS. However,  the meetings that HUD has referenced are either regularly scheduled  management meetings or training on HUD’s new performance  measurement system. None of these meetings are the field office  sessions that are specifically mentioned in the statement of work for  the reengineered IDIS system. When we asked about the status of  sessions that the statement of work said would be held with field staff  regarding user requirements, accomplishment reporting, and proposed  navigation approaches, the HUD official that is overseeing development  of the new system stated that these sessions would not be held until  late summer 2006 at the earliest, although a functional requirements  document had already been drafted. Further, additional statements  made by that official and HUD’s written comments indicate that the  focus of future meetings with field staff will only be on reporting  requirements. We continue to believe that soliciting input from end  users on system requirements is consistent with best practices for  system development and recommend that field office staff should  participate in project management throughout the system’s life cycle to  ensure that the completed system supports both HUD’s business needs  and the end user field office needs. 8. We agree that monitoring low- or medium-risk grantees can serve a  useful and valid program purpose, especially considering the large  number of grantees designated as such. The report acknowledges that  HUD policy permits the monitoring of medium- and low-risk recipients  by noting that they can be reviewed using remote, or off-site,  monitoring. Therefore, we made no change to the report. 9. We agree that monitoring recipients is critical to fulfill statutory and  regulatory responsibilities to assess compliance as well as carry out  stewardship responsibilities. In our report, we are providing one reason  why monitoring is critical, not an all-inclusive list, so we did not change  the report.  10. We revised the text as suggested. 11. We agree that grant monitoring is a critical stewardship responsibility.  This section of our report is highlighting the fact that program funding  cuts are being made at the same time as the number of grant recipients  is increasing, which creates challenges as HUD carries out its  stewardship responsibilities. 12. We agree that it is easier to develop policies and procedures to address  timeliness deficiencies than it is to develop guidance that addresses the  myriad of deficiencies identified during monitoring. However, given the  importance of holding CDBG recipients accountable for how they use  their funds, we recommend that HUD consider issuing additional  guidance for field staff that establishes the parameters within which  field offices should operate and provides greater transparency to the  sanctioning process.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition, Paul Schmidt, Assistant Director; Nima Patel Edwards; Cynthia  Grant; Curtis Groves; Alison Martin; John McGrail; Marc Molino; David  Noguera; David Pittman; Nitin Rao; and Paige Smith made key  contributions to this report.