Directly or indirectly, HUD affects millions of Americans as it carries out the federal government’s missions, policies, and programs for housing and community development. These missions range from making housing affordable by insuring loans for multifamily rental housing properties and providing rental assistance for about 4.5 million low-income residents, to helping revitalize over 4,000 localities through community development programs, to encouraging homeownership by providing mortgage insurance to about 7 million homeowners who might not have been able to qualify for nonfederally supported loans. HUD is also one of the nation’s largest financial institutions, with significant commitments, obligations, and exposure. As of September 30, 1997, HUD was responsible for managing about $454 billion in insured mortgages and $531 billion in guarantees of mortgage-backed securities. For fiscal year 1999, it has $24.3 billion in budget authority. HUD initiated a number of reforms and downsizing efforts in the 1990s. In February 1993, then Secretary Cisneros initiated a “reinvention” process under which task forces were established to review and refocus HUD’s mission and identify improvements in the delivery of program services. HUD also took measures in response to the National Performance Review’s September 1993 report, which recommended that HUD eliminate its regional offices, realign and consolidate its field office structure, and reduce its field workforce. Following a July 1994 report by the National Academy of Public Administration that criticized HUD’s performance and capabilities, Secretary Cisneros issued a reinvention proposal in December 1994 that called for major reforms, including a consolidation and streamlining of HUD’s programs coupled with a reduction in staff. Building upon the earlier reinvention efforts, Secretary Cuomo initiated the 2020 planning process in early 1997 to address, among other things, HUD’s downsizing goals and management deficiencies. HUD has taken important steps to strengthen its internal controls and financial reporting, improve its information and financial management systems, consolidate its operations, and appropriately deploy and train its staff. Guiding many of these efforts has been its 2020 Management Reform Plan, introduced in June 1997. While it is still too soon to evaluate the effectiveness of some of these efforts, we believe that the Department has made credible progress in correcting many of the management deficiencies that we and others have identified. HUD has improved its financial reporting and has strengthened its internal controls by conducting risk assessments for some of its programs . HUD’s fiscal year 1996 and 1997 financial statements were audited by HUD’s Inspector General and HUD’s Federal Housing Administration’s (FHA) fiscal year 1997 and 1998 financial statements were audited by KPMG Peat Marwick LLP, a public accounting firm. For fiscal years 1996 and 1997, HUD’s Inspector General was able to provide qualified opinions on HUD’s financial statements, compared with no opinion on the reliability of its financial statements for fiscal year 1995. In addition, as the public accounting firm KPMG Peat Marwick LLP reported this month, FHA presented its fiscal year 1998 financial statements in accordance with federal accounting standards and received an unqualified opinion on those statements. In 1998, HUD’s Office of Chief Financial Officer (CFO) established a risk management division, which has continued efforts initiated by the CFO to work with the Department’s program offices and new nationwide centers to identify risks and develop action plans to reduce them. As of September 30, 1998, the risk assessment division had completed risk management training for over 1,100 headquarters and field managers. Efforts to integrate and replace HUD’s information systems, begun in 1991, received support and higher priority under HUD’s 2020 plan. As of December 1998, HUD reported, it had developed and deployed 11 new financial management systems or components of these systems. For example, in March 1998, the Office of Housing deployed the first phase of the real estate management system, a new system being developed to implement 2020 reforms. In addition, the Office of the CFO developed and deployed a consolidated general ledger for fiscal year 1999 that will include summary transactions for the entire Department. The Office of the CFO is also developing a risk evaluation database that will be used to identify programs needing special risk reviews. The database will include information on the programs’ funding, as well as findings reported by us, HUD’s Inspector General, and internal reviews. Further agencywide improvements include cleaning up certain data elements in the Department’s information systems and verifying the reliability of these and other data. Finally, HUD recently reported that it had completed all of its year 2000 renovations for both mission-critical and non-mission-critical systems and had finished certifying 100 percent of these systems and implementing 97 percent of them. Under its 2020 plan, HUD has significantly revised its organization and redeployed its staff in an effort to operate more efficiently and provide better service to its customers. Specifically, it has consolidated programs and centralized processes and functions within and across program areas, transferring much of its workload from its 81 field offices to several specialized national centers. As it completes these workload transfers, it is reassigning staff and retraining them to perform their new functions. HUD has also strengthened its management reform efforts by linking them to the strategic and annual plans it has developed under the Government Performance and Results Act of 1993. In 1994, we designated HUD programs as a high-risk area because of serious, long-standing departmentwide deficiencies in four management areas. These deficiencies, taken together, placed the integrity and accountability of HUD’s programs at high risk. First, internal control weaknesses, such as a lack of necessary data and management processes, were a major factor leading to the scandals. Second, poorly integrated, ineffective, and generally unreliable information and financial management systems did not meet the needs of program managers and weakened their ability to provide management control over housing and community development programs. Third, HUD had organizational problems, such as overlapping and ill-defined responsibilities and authorities between its headquarters and field organizations and a fundamental lack of management accountability and responsibility. Finally, an insufficient mix of staff with the proper skills hampered the effective monitoring and oversight of HUD’s programs and the timely updating of procedures. Our recent work indicates that these management deficiencies continue to exist or it is too soon to tell whether HUD’s reforms will resolve them. While HUD has initiated actions that should help to address its internal control weaknesses, material internal control weaknesses persist in its management of the Section 8 subsidy payment process, which provides $18 billion in rental assistance; control and management of staff resources; management of losses resulting from defaults in the single-family and multifamily insurance programs; implementation of automated systems to provide needed management information or reliable data; and monitoring of multifamily properties and of the single-family and multifamily notes inventories. In addition, we have reported recently that HUD has not adequately monitored, among other things, contractors’ management of the Department’s real estate assets; appraisals of properties purchased with FHA-insured loans; and its process for deobligating funds no longer needed for Section 8 project-based rental assistance contracts. The most recently issued financial statement audits, performed by HUD’s Inspector General and KPMG Peat Marwick, found continued material internal control weaknesses in both HUD and FHA’s programs. The Inspector General’s fiscal year 1997 financial statement audit continued to find material weaknesses in HUD’s internal controls, and the Inspector General reported that HUD continues to face major challenges in its efforts to correct long-standing material internal control weaknesses. For example, HUD reported that it spent about $18 billion to provide rent and operating subsidies through a variety of programs. On the basis of data for calendar year 1996, HUD estimated that it had provided over $900 million in overpayments. This high level of improper payments exists because HUD does not have adequate internal controls over the process of verifying tenants’ self-reported income—the primary factor in determining the amount of assistance HUD pays. In fiscal year 1998, HUD unveiled a multifaceted plan to identify households’ unreported and/or underreported income. In our January 1999 report, we pointed out that KPMG Peat Marwick’s audit of FHA’s financial statements for fiscal year 1997 continued to find material weaknesses in FHA’s internal controls. These weaknesses included insufficient staff and administrative resources for such tasks as performing loss mitigation functions, managing troubled assets, and implementing new automated systems; inadequate emphasis on providing early warning of, and preventing losses due to defaults on insured mortgages; and resolving remaining problems with accounting and financial management systems. The report added that because of the issues’ complexity, implementing sufficient changes to mitigate these internal control weaknesses will take several years. After we issued our January 1999 report, KPMG Peat Marwick LLP issued, on March 5, 1999, its unqualified opinion on FHA’s federal accounting-based financial statements for fiscal year 1998. However, the auditors did report a new material internal control weakness in addition to those described above related to the need for FHA to improve its process for preparing federal accounting-based financial statements. In addition to the issues disclosed by the audits of HUD’s and FHA’s financial statements, we and HUD’s Inspector General have identified weaknesses related to HUD’s contract management, including problems with the Department’s automated procurement systems, assessment and planning for contract needs, and oversight of contractors’ performance. Following the Inspector General’s 1997 review of HUD’s contracting practices, contracting departmentwide was added as a material internal control weakness in HUD’s Federal Managers’ Financial Integrity Act (FMFIA) assessment for fiscal year 1997.