According to HUD, the ESG program was designed to be the first step in a continuum of assistance to prevent homelessness and to enable individuals and families experiencing homelessness to move toward independent living. More specifically, the program objectives were to increase the number and quality of emergency shelters for individuals and families experiencing homelessness, to operate these facilities and provide essential social services, and to help prevent homelessness. The ESG program is targeted at persons experiencing homelessness. It was originally established by the Homeless Housing Act of 1986, in response to the growing issue of homelessness among men, women, and children in the United States. In general, the ESG program uses the Community Development Block Grant (CDBG) formula as the basis for allocating funds to states, metropolitan cities, and urban counties. The CDBG formula uses factors reflecting community need, including poverty, population, housing overcrowding, and age of housing. According to HUD, in fiscal year 2009, there were 360 ESG grantees. For fiscal year 2009, HUD awarded $160 million in ESG funding to grantees. Figure 1 shows the total amount of ESG funds received by grantees, by state, for fiscal year 2009. The ESG program generally requires matching contributions by grantees, thus increasing the total funds used to provide services under the program. Metropolitan cities and urban counties must match the ESG funding dollar-for-dollar with cash or noncash resources from public or private sources. States are generally subject to the same requirement, with an exemption for the first $100,000 in funding. ESG funds may reach eligible projects through different routes, as shown in figure 2. First, HUD allocates ESG funds to grantees. Metropolitan cities, urban counties, and territories may carry out the program directly or subgrant all or part of their ESG funds to nonprofit organizations. States cannot carry out program activities directly, and must subgrant ESG funds (but may retain up to 5 percent for administration, as discussed below) to local governments or nonprofit organizations. Local governments receiving ESG funds as a subgrant from the state may carry out the program themselves or further subgrant funds to nonprofit organizations. HUD allows ESG grantees flexibility to determine how to award funds to subgrantees. For example, many grantees conduct a competitive process for awarding funds to subgrantees. Other grantees offer repeat funding to organizations that have demonstrated success with ESG-funded homeless assistance programs in the past, or they alternate funding each year among multiple agencies with ongoing homeless assistance programs. Grantees also might make relatively few, but relatively larger, subgrants, or award relatively smaller grants to a greater number of subgrantees. Subgrantees and grantees that are not states may use ESG funding to conduct a range of eligible activities which, as previously noted, include the rehabilitation or remodeling of buildings to be used as shelters, operation of the facilities, essential supportive services, and homeless prevention. Under current law, ESG program grantees may use up to 5 percent of their grant award for administrative purposes, which can include staff to administer the grant, the preparation of progress reports and audits, or the monitoring of subgrantees. Grantees are not required to share any of their ESG administrative allowance with subgrantees, except in one instance—when a state awards a subgrant to a unit of local government. According to HUD, the department does not track the extent to which grantees share their ESG administrative allowance with subgrantees. The HEARTH Act made major changes to the ESG program, while renaming it the Emergency Solutions Grants Program. As noted earlier, the HEARTH Act changed the amount of ESG funds that grantees may use to cover administrative costs, increasing it from 5 percent to a maximum of 7.5 percent of the total grant amount. Programmatically, the HEARTH Act also made the following changes: The act authorized new eligible homeless assistance activities: short-term rental assistance, medium-term rental assistance, security deposits, utility deposits and payments, and moving costs. It established housing relocation and stabilization services as a major focus area for both homeless assistance and homeless prevention, including outreach, housing search, legal services, and credit repair. It established rapid re-housing as a major focus area for homeless assistance. The aim of rapid re-housing is to help people experiencing homelessness return to permanent housing as soon as possible. According to a national homeless advocacy group, these efforts reduce the length of time people remain in homeless shelters, which in turn opens beds for others who need them and reduces the public and personal costs of homelessness. HUD expects to implement the HEARTH Act changes, including increasing the allowance for administrative costs, with the program’s fiscal year 2011 allocation. We found that ESG grantees and subgrantees in the states we visited performed a range of administrative activities, but the program’s allowance for administrative costs generally did not fully cover the cost of these activities. As a result, grantees and subgrantees told us they must cover any shortfalls with funds from other sources, which diminishes their ability to support other activities. In addition, there are minimal standards that can be used as guidance for evaluating the appropriateness of ESG administrative costs, and we found that grantees and subgrantees in the states we visited monitored ESG administrative costs at varying levels of detail. Grantees in the states we visited told us they conducted various activities to administer their ESG allocations. As figure 3 shows, these activities generally fell into five categories: application/approval, financial, reporting, monitoring/oversight, and other. Our review found these grantees’ ESG administrative activities generally focused on awarding subgrants and monitoring subgrantee performance. For example, City of Philadelphia officials told us they awarded a total of $2.2 million through five ESG grants for fiscal year 2009 and their administrative activities included, among other things, approval and tracking of subgrantee budgets and program monitoring. Similarly, City and County of San Francisco officials reported they awarded $944,900 in ESG grants to 19 local service providers for fiscal year 2009 and their administrative activities included site visits and audit reviews. Among grantees we reviewed, current practice in retaining the 5 percent administrative allowance varied, as shown in table 1. Where grantees kept all or most of the administrative allowance, officials told us this was to cover, at least in part, their administration costs. Where they kept none of the allowance, officials said this was to maximize funds available to local service providers. Table 1 also shows what grantees told us they expect to retain under the higher administrative allowance provided under the HEARTH Act. Subgrantees in the states we visited also reported a range of administrative activity. As figure 4 shows, these activities generally fell into six categories: application/approval, financial, reporting, management, monitoring/oversight, and other. Our review found that their ESG administrative activities generally focused on operating programs and reporting outcomes. For example, one Georgia subgrantee told us its ESG administrative activities included a portion of the executive director’s time, for program oversight; preparing monthly reimbursement requests; coordinating maintenance; and training and coordinating volunteers. Similarly, a Michigan subgrantee told us its ESG administrative activities included oversight and supervision of its program, financial reporting and auditing, and reporting shelter statistics. Grantees and subgrantees in the states we visited told us the ESG administrative allowance generally did not fully cover their actual costs to administer the grant award, and that as a result, they relied on other sources to cover any unfunded costs. We found that grantees’ and subgrantees’ actual ESG administrative costs depended on a number of factors, such as the number of grant awards made, level of oversight provided, number of staff involved in administrative tasks, and types of ESG program activities funded. Figure 5 provides details on the estimated unfunded ESG administrative costs and sources used to cover these costs for grantees and subgrantees we visited. Overall, the unfunded administrative costs reported to us across the eight grantees and 22 subgrantees we visited for which information was available averaged an estimated 13.2 percent of the ESG allocation, with a range of 2.5 percent to 56 percent. However, HUD officials cautioned that some subgrantees we visited appear to be confusing program activities with administrative activities, which might have affected their estimates of actual administrative costs. For example, California ESG program officials estimated their unfunded ESG administrative costs at 4 percent of the state’s ESG allocation (actual administrative costs equal to 8 percent of ESG allocation, less 4 percent retained for administrative costs). To cover these unfunded costs, the officials said they rely on the state’s general fund revenues. Similarly, City of Oakland (California) officials estimated their unfunded ESG administrative costs at 25 percent of their ESG annual allocation (actual administrative costs equal to 30 percent of ESG allocation, less 5 percent retained for administrative costs). These officials also told us that they used the city’s general and redevelopment funds to cover the unfunded costs. In Pennsylvania, one subgrantee estimated its unfunded ESG administrative costs at 2.5 percent of its grant award (based on actual costs, with no administrative allowance from its grantee). This subgrantee, which reported using ESG funds for a one-time building repair project, told us that it used private donations, including from corporations and foundations, to cover its unfunded costs. In Michigan, a subgrantee estimated its uncovered ESG administrative costs at 14 percent (based on actual costs with no administrative allowance), saying it also relied on private donations to cover its unfunded costs. As previously noted, grantees must match their ESG allocations, and subgrantees can provide the match.