The Housing and Community Development Act of 1974 created the CDBG program to develop viable urban communities by providing decent housing and a suitable living environment and by expanding economic opportunities, principally for low- and moderate-income persons. Program funds can be used for housing, economic development, neighborhood revitalization, and other community development activities. After funds are set aside for special statutory purposes, the annual CDBG appropriation is allocated to entitlement communities and states. Entitlement communities are principal cities of metropolitan statistical areas, other metropolitan cities with populations of at least 50,000, and qualified urban counties with a population of 200,000 or more (excluding the populations of entitlement cities). Entitlement communities may carry out activities directly or may award funds to subrecipients to carry out agreed-upon activities. States distribute CDBG funds to nonentitlement localities not qualified as entitlement communities. In fiscal year 2012, Congress appropriated about $3 billion for the CDBG program, $60 million of which was set aside for Native American tribes. The remainder (about $2.9 billion) was allocated to entitlement communities, states, and insular areas. Grantees can use CDBG funds for 28 eligible activities. For reporting purposes, HUD classifies the activities into eight broad categories— acquisition, administration and planning, economic development, housing, public improvements, public services, repayments of section 108 loans, and “other” (including capacity building for nonprofit organizations and assistance to institutions of higher learning). Some of the activities that can be funded, such as loans for housing rehabilitation, generate program income for grantees that must be used to fund additional activities. There are statutory limitations on the amounts that grantees may use in two specific areas. According to provisions in annual appropriations laws, grantees may use up to 20 percent of their annual grants plus program income on administration. Grantees may also use only up to 15 percent of their annual grant plus program income on public service activities such as job training and crime prevention 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. HUD has provided grantees with a variety of training classes, written guidance, and technical assistance to help them determine which activities are considered administrative and demonstrate compliance with the 20 percent administrative limit. For example, HUD has prepared a training manual that includes guidance on eligible administrative activities and instructions for showing compliance with the administrative limit. HUD has also developed video training modules on components of the CDBG program, including administrative planning and financial management. Within these materials, HUD has also provided links to relevant OMB guidance on determining program administrative costs, cost allocation, and indirect costs as well as links to relevant HUD regulations. The administrative activities subject to the 20 percent limit are separate from “activity delivery costs” that are related to carrying out specific CDBG activities. Activity delivery costs, such as staff and overhead costs linked directly to an eligible CDBG activity (e.g., economic development, housing rehabilitation), are not considered administration and are therefore not subject to the 20 percent limit. For example, if a grantee’s employees underwrite economic development loans that will be made with CDBG funds, the portion of their salaries spent on this function can be treated as costs of carrying out the economic development activity. Other costs that are considered activity delivery costs include the costs of printing brochures advertising the availability of housing rehabilitation loan funds and staff costs of housing rehabilitation specialists performing work write-ups and inspecting completed construction work. There is no statutory limit on the percentage of CDBG funds that may be used for eligible activity delivery costs, but they must be necessary and reasonable costs. Grantees must submit to HUD a strategic plan that addresses the housing, homeless, and community development needs in their jurisdictions every 3 to 5 years. This plan, known as the consolidated plan, covers CDBG and three other formula grants that the grantee may receive—the HOME Investment Partnerships (HOME) Program, the Emergency Solutions Grants (ESG) Program, and the Housing Opportunities for Persons with AIDS (HOPWA) Program. Annually, entitlement communities must submit an action plan that identifies the activities they plan to undertake to meet the objectives in their strategic plans. In their annual action plans, states describe their method for distributing funds. At the end of each program year, grantees 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 and their compliance with statutory limits. HUD staff use detailed checklists to review recipients’ strategic and annual action plans and annual performance reports. HUD’s Office of Community Planning and Development (CPD) administers the CDBG program through program offices at HUD headquarters and field offices located throughout the United States. Among other strategies, HUD field staff are to use data and reports generated through IDIS to monitor CDBG funds. Implemented in fiscal year 1996, IDIS is a management information system that consolidates planning and reporting processes across HUD’s four formula grant programs. Grantees are to use this system to enter information on their plans, establish projects and activities to draw down funds, and report accomplishments. Although it contains data on reported expenditures, IDIS is a reporting system and not an accounting system. Grantees are expected to use their own accounting systems in addition to IDIS to ensure proper management of funds. Information that grantees enter in IDIS is used to generate financial summary reports, which contain information on the CDBG funds available and expenditures incurred, including the percentage of funds used for low- and moderate-income persons, public services, and administration. As previously noted, grantees may use no more than 20 percent of the CDBG grant and program income received for a range of activities related to program administration. Examples of eligible administrative activities include  managing, overseeing, and coordinating the CDBG program;  providing local officials and citizens with information about the CDBG conducting fair housing activities;  preparing reports and other HUD-required documents;  preparing comprehensive plans;  preparing community development plans;  developing functional plans for housing, land use, urban environmental design, and economic development; and  providing policy planning. IDIS has 10 broad categories, or matrix codes, for recording administrative expenses (see table 1). For example, grantees are to use the general program administration code to report overall program administration, including salaries, wages, and related costs of grantee staff or others engaged in program management, monitoring, and evaluation. IDIS expenditure data show that for each of the last 11 fiscal years, grantees have recorded more than 80 percent of CDBG administrative expenses under the general program administration matrix code, which captures salaries among other things (see fig. 1). Our analysis showed that the second most used matrix code (ranging from about 11 to 14 percent from fiscal years 2001 to 2011) was the planning code, which captures program planning activity costs such as the development of grantees’ consolidated plans. The amount charged under the remaining matrix codes ranged from about 5 percent to 9 percent. The matrix code used most often, general program administration, is broad. HUD’s guidance indicates that this category is to include salaries but allows other general expenses to be charged to it. Therefore, using HUD’s matrix code data to determine how much of the expenses were for salaries is not possible. However, officials from all 12 grantees we interviewed told us that they primarily used their CDBG administrative funds to pay the salaries of employees who oversaw and managed the grant. They also noted that they used some funds to pay for supplies, training, travel, and planning costs. As overall CDBG allocations have decreased, the funding available to states, entitlement communities, and insular areas for administrative expenses has also fallen. Specifically, total CDBG funding for these grantees decreased from about $4.4 billion in fiscal year 2001 to about $2.9 billion in fiscal year 2012 (a reduction of about 33 percent). As a result, the amount of funding available to grantees from CDBG grants for administrative costs decreased by 33 percent in nominal dollars from fiscal years 2001 through 2012. Once adjusted for inflation, the funds available for administrative costs decreased by 47 percent. Specifically, the aggregate amount available to CDBG grantees for administrative costs for fiscal year 2012 was $590 million, down from approximately $881 million in fiscal year 2001 nominal dollars (see fig. 2). This amount represents a reduction of about $292 million in nominal dollars, or $532 million in fiscal year 2012 constant dollars. The 12 grantees we interviewed reported that they had taken various steps to address this reduction in available funding, ranging from reducing staff to improving record keeping to better enable them to allocate expenses. Reducing staff. Three grantees we interviewed told us they had reduced the number of staff that administered the CDBG program. For example, officials from one grantee said that the organization had placed a moratorium on hiring CDBG staff, and representatives from another said that the organization had reduced its staff by half and hired a consultant to administer the program. Leveraging supplemental funding sources. Officials from two grantees told us they had begun paying the salaries of existing staff with non- CDBG funding. For example, one grantee used its local funds to supplement the salaries of CDBG staff. Limiting the number and types of projects. Three grantees told us that they had limited the number and types of projects they administered to address the reduction in funds. For example, officials from a grantee we contacted told us that they had revisited the consolidated plan to determine which CDBG activities the city could continue to fund and had determined that it could no longer administer its housing rehabilitation program.