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. 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. CDBG recipients spend the largest percentage of their funding on public improvements and housing activities.