oversight

Management Challenges: GAO's Responses to HUD's Comments

Published by the Government Accountability Office on 1999-07-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                       United States General Accounting Office

GAO                    Report to Congressional Requesters



July 1999              MANAGEMENT
                       CHALLENGES
                       GAO's Responses to
                       HUD's Comments




                           GAO
                        :,,~     Accountability * Integrity * Reliability

GAO/RCED/AIMD-99-189
United States
General Accounting Office
Washington, D.C. 20548

Resources, Community, and
Economic Development Division

B-282678

July 14, 1999

The Honorable Wayne Allard
Chairman, Subcommittee on Housing
  and Transportation
Committee on Banking, Housing,
  and Urban Affairs
United States Senate

The Honorable John F. Kerry
Ranking Minority Member
Subcommittee on Housing
  and Transportation
Committee on Banking, Housing,
  and Urban Affairs
United States Senate

As part of the work in producing our January 1999 report Major
Management Challenges and Program Risks: Department of Housing and
Urban Development (GAO/OCG-99-8), on December 15, 1998, we provided the
Department with a statement of facts for its review and comment. In
response, in a letter dated December 28, 1998, the Department of Housing
and Urban Development's (HUD) Deputy Secretary stated that he was
disappointed with the conclusion we reached regarding HUD'S risk status
(that the integrity and accountability of HUD'S programs remain at high
risk) and raised several concerns about our statement of facts.
Specifically, the Deputy Secretary raised concerns about (1) our
designation of HUD'S programs as a high-risk area and the criteria we use in
designating an area as high-risk and in removing that designation; (2) HUD'S
belief that we had not fully addressed the impact and significance of
reforms that the Department has recently instituted; (3) HIUD' belief that
our December 18, 1998, report on HUD'S information systems was not
accurate and complete;- and (4) HUD'S belief that there were inaccuracies
in our statement of facts.

You asked that we provide you with our response to the issues raised by
the Deputy Secretary. This report responds specifically to the issues HUD
raised. Appendix I includes HUD'S letter; and appendix II, our
point-by-point evaluation of HUD'S comments.



'HUD Information Systems: Improved Management Practices Needed to Control Integration Cost and
Schedule (GAO/AIMD-99-25, Dec. 18,1998).



Page 1                               GAO/RCED/AIMD-99-189 HUD's Management Challenges
                       B-282678




GAO's Designation of   In      on the our
                          summary,
                       based              conclusion
                                      status          that HUD'S
                                             of four serious,
                                                                 programs are
                                                              long-standing   a high-risk area is
                                                                            Department-wide
HUD's Programs as a    management deficiencies that, taken together, have placed the integrity
High-Risk Area         and accountability of HUD'S programs at high risk since 1994. We and
                       others (i.e., HUD'S Inspector General and external auditors) have observed
                       these significant management deficiencies that cut across HUD'S program
                       areas, and we have issued numerous reports about them over the past 15
                       years. 2

                       We designated HUD'S programs as a high-risk area in 1994 because of
                       (1) internal control weaknesses, such as a lack of necessary data and
                       management processes that were a major factor leading to the HUD
                       scandals of the late 1980s; (2) poorly integrated, ineffective, and generally
                       unreliable information and financial management systems that did not
                       meet the needs of program managers; (3) organizational deficiencies, such
                       as overlapping and ill-defined responsibilities; and (4) an insufficient mix
                       of staff with the proper skills, which hampered the effective monitoring
                       and oversight of HUD'S programs.

                       As pointed out in our January 1999 report on HUD'S major management
                       challenges and program risks, our recent work indicates that, while HUD
                       has made credible progress in laying the framework for improving its
                       management, internal control weaknesses and problems with information
                       and financial management systems persist at the Department.
                       Furthermore, recent reforms to address the Department's organizational
                       and staffing problems are in the early stages of implementation, and it is
                       too soon to tell whether or not they will resolve the major deficiencies that
                       we and others have identified. Consequently, as we reported in 1995 and
                       1997,3 these deficiencies, taken together, continue to place the integrity
                       and accountability of HUD'S programs at high risk.

                       Our criteria for designating a program or agency high-risk and removing
                       that designation have been discussed with HUD officials on several
                       occasions. In addition, our criteria were included in our 1997 High-Risk
                       Series report and in our written response to HUD'S then Acting Deputy
                       Secretary's June 23, 1998, letter on this subject. We have pointed out that
                       our criteria for designating programs or agencies as high-risk areas stem
                       directly from our professional and objective judgment about patterns of

                       2
                        App. III provides a list of major GAO reports on HUD's management, issued from 1984 through
                       April 1999.
                       3
                        High-Risk Series: Department of Housing and Urban Development (GAO/HR-95-11, Feb. 1995) and
                       High-Risk Series: Department of Housing and Urban Development (GAO/HR-97-12, Feb. 1997).


                       Page 2                                 GAO/RCED/AIMD-99-189 HUD's Management Challenges
B-282678




significant management deficiencies uncovered over time in our audits, as
well as those of inspectors general and others, that remain largely
unresolved. We stated in our response to HUD'S June 23, 1998, letter that
programs and agencies for which we have removed our high-risk
designation are those that have demonstrated results in overcoming
management deficiencies. We further stated that it is important to note
that while reform initiatives are important, plans for reform are not
sufficient in and of themselves. Rather, it is the results of such reform
initiatives-demonstrating that management problems have been
corrected-that count.

We have also pointed out to HUD officials our consistent application of our
criteria for high-risk designations. Specifically, we reached our conclusion
about HUD and all of our determinations of which government operations
are considered to be high-risk in our January 1999 Performance and
Accountability Series reports 4 using the same methodology and criteria,
which were the same as those used for our February 1997 High-Risk Series
reports.


We disagree with the Deputy Secretary's statements that the impact and
significance of reforms that HUD has recently instituted were not fully
addressed in our statement of facts. In the statement of facts we provided
to HUD and in our January 1999 report on HUD's major management
challenges and program risks that followed, we described the major
actions the Department has taken and the achievements it has realized
since it launched its 2020 Management Reform Plan in June 1997. In
addition, we discussed HUD'S goals under the plan for the areas where we
identified management deficiencies: internal controls, systems,
organization, and staffing. We also stated that HUD's reforms should help to
address internal control weaknesses facing the agency and described HUD's
establishment and implementation of risk assessments for programs that
were established or substantially revised; the Department's development
and deployment of certain information and financial management systems;
and the establishment and operation of various HUD offices, including the
Department's specialized and nationwide centers that consolidate
processes and functions within and across program areas. Beyond the
statement of facts provided to HUD, in our final report on HUD'S
management challenges and program risks, our "Overview" included a
summary of HUD'S achievements since its 2020 plan was announced and

4Major Management Challenges and Program Risks: A Governmentwide Perspective (GAO/OCG-99-1,
Jan. 1999).



Page 3                              GAO/RCED/AIMD-99-189 HUD's Management Challenges
                      B-282678




                      our conclusion that HUD has made credible progress in laying the
                      framework for improving its management.

                      In other recent reports and testimonies, we have recognized HUD's
                      continued emphasis on, and progress toward, addressing its long-standing
                      management deficiencies. HUD's Secretary and leadership team have given
                      top priority to addressing the Department's management deficiencies. This
                      attention by top management is critical and must be sustained in order to
                      achieve real and lasting change. Importantly, given the nature and extent
                      of the challenges facing the Department, it will take time to implement and
                      assess the impact of any related reforms.


GA 's Report on       Many of the Deputy Secretary's comments on our statement of facts
                      related to a draft of our December 18, 1998, report on HUD's information
HUD's Information     systems. The final report contained our responses to those comments as
Systems               well as clarifications we made to the report as a result of HUD'S comments.
                      For example, the Deputy Secretary stated that the draft of our December
                      1998 report was not accurate about the amount to be spent to develop
                      financial systems and that a more accurate estimate for the effort is
                      $250 million. In our December 1998 report and statement of facts, we had
                      stated the Department expects to spend about $239 million for
                      development costs plus $132 million for maintenance costs. We also
                      reported that HUD had not yet finalized the plans, costs, and a schedule to
                      complete its current financial systems integration strategy, so systems
                      costs continue to be uncertain. Accordingly, HUD'S estimates have
                      fluctuated considerably, as reflected in various documents received from
                      the Chief Financial Officer and his staff. We reported, for example, that
                      cost estimates have changed from the $540 million reported by HUD in
                      June 1998; to the $255 million cited in the Department's November 12,
                      1998, comments on our draft report on information systems; to the
                      $239 million that HUD reported a week later. However, we found that the
                      $255 million and the $239 million estimates did not include at least
                      $132 million associated with maintaining the systems. As pointed out in
                      our December 1998 report, HUD'S continuing uncertainty as to what the
                      total cost estimate is for its financial systems integration demonstrates the
                      Department's need to develop and use well-defined cost-estimating
                      processes to prepare reliable cost estimates.


The Accuracy of Our   We also disagree with the Deputy Secretary's statements that there were
                      inaccuracies in our statement of facts. Many of the statements identified as
Statnagement
         of Facts

                      Page 4                        GAO/RCED/AIMD-99-189 HUD's Management Challenges
B-282678




inaccurate related to statements that clearly described HUD'S past
problems, and not current problems as construed by the Deputy Secretary.
For example, HUD asserted that the statement, "Managers were not actively
assessing risks in their programs as required under the management
control program," was totally false. The statement HUD quoted was in a
paragraph in our statement of facts that began "In February 1997 we
reported .... " This paragraph summarized the information we had
reported in our 1997 High-Risk Series report regarding internal controls.
Our January 1999 report on HUD'S major management challenges and
program risks reiterated the phrase "we reported in 1997" to make it
clearer that this statement referred to past problems at HUD.

Lastly, in taking the Deputy Secretary's concerns into account, we added
information he provided to update our final report on HUD'S management
challenges and program risks, including the completion of inspections for
over 4,200 multifamily properties by HUD's real estate assessment center;
the referral of 200 cases involving multifamily properties to the
enforcement center; the increase in debarments of multifamily housing
landlords; and the progress made by HUD in implementing reforms, as
reported by HUD'S consultants. We also added further details on the
number of financial management systems or components of these systems
developed or deployed by HUD under its systems integration efforts and the
number of HUD managers that have completed risk management training.
Where appropriate, we incorporated other clarifications to our final report
on the basis of the Deputy Secretary's comments.


We are sending copies of this report to the appropriate Senate and House
committees; the Honorable Andrew Cuomo, Secretary of Housing and
Urban Development; and the Honorable Jacob Lew, Director, Office
Management and Budget. We will make copies available to others upon
request.




Page 5                        GAO/RCED/AIMD-99-189 HUD's Management Challenges
B-282678




If you or your staff have any questions, please call me at (202) 512-7631.
Other GAO contacts for and key contributors to this report are listed in
appendix IV.

Sincerely yours,




Judy A. England-Joseph
Director, Housing and Community
  Development Issues




Page 6                        GAO/RCED/AIMD-99-189 HUD's Management Challenges
Page 7   GAO/RCED/AIMD-99-189 HUD's Management Challenges
Contents


Letter                                                                         1
Appendix I                                                                    lo
The Department of
Housing and Urban
Development's
Comments on the
Major Challenges and
Program Risks
Identified in GAO's
Statement of Facts
Appendix II                                                                   82
GAO's Responses to
HUD's Comments on
the Major Challenges
and Program Risks
Identified in GAO's
Statement of Facts
Appendix III                                                                 128
Major GAO Reports on
HUD's Management
Appendix IV                                                                  130
GAO Contacts and
Staff
Acknowledgments




                       Page 8   GAO/RCED/AIMD-99-189 HUD's Management Challenges
Contents




Abbreviations

CFo        Chief Financial Officer
DOD        Department of Defense
FHA        Federal Housing Administration
FMFLA      Federal Managers Financial Integrity Act
FsI        financial systems integration
GAO        General Accounting Office
HUD        Department of Housing and Urban Development
HUDCAPS    HUD's Centralized Accounting and Program System
IG         Inspector General
I-TIPS     Information Technology Investment Portfolio System
JFMIP      Joint Financial Management Improvement Project
OIG        Office of the Inspector General
OMB        Office of Management and Budget
REAC       real estate assessment center
SFFAs      Statement of Federal Financial Accounting Standards


Page 9                    GAO/RCED/AIMD-99-189 HUD's Management Challenges
Appendix I

The Department of Housing and Urban
Development's Comments on the Major
Challenges and Program Risks Identified in
GAO's Statement of Facts
Note: GAO's responses                                     .     ;%
appear in app. II.                                       '< i~"
                                     U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
The page nos. cited in                             THE DEPUTY SECRETARY
                                                  WASHINGTON. D.C. 20410o050
HUD's letter refer to
GAO's Dec. 15, 1998,
statement of facts
provided to HUD.         The Honorable David Walker
                         Comptroller General

                         Mr. James Hinchman
                         Principal Assistant Comptroller General

                         U.S. General Accounting Office.
                         Washington, DC 20548

                         Dear Messrs. Walker and Hinchman:

                              The purpose of this letter is to formally respond to
                         the draft report "Government at Risk Series - Department of
                          ~HousI~nU andran UV)elPnmnr-._SPr" rr A) lry Int11mnwJrt Tio
                         both of you because of the depth and breadth of our concerns
                         about the GAO draft. These concerns merit the attention of
                         the highest officials in the GAO.

                              We are very disappointed that the General Accounting
                         Office (GAO) did not reach a more accurate conclusion
                         regarding the Department's "risk" status and the impact and
                         significance of the major reforms that HUD has instituted
                         during the past few years.  Instead, though the report does
                         mention some accomplishments and improvements in passing, it
                         strongly and clearly implies that some as yet undefined
                         measure of success has not been achieved, and leaves it
                         ambiguous as to whether operations at HUD remain "high
                         risk."

                              Comprehensive reorganization, major system developments
                         and deployment, carefully crafted staffing reforms, and the
                         hallmark achievement of HUD's first ever audited financial
                         statements are all glossed over by GAO as minor advances and
HUD's comment 1.         are presented as interesting interim movements toward some
                         unknown mark on an undefined measuring stick. While HUD has
                         changed significantly in the past few years, GAO continues
                         to view the Agency as it was in the late 1980's and early
                         1990's, disregarding the scope and impact of the 2020
                         reforms. It appears that GAO is waiting for operational
                         perfection to be achieved before HUD will be permitted to
                         shed its high risk label.  Put in the plainest language
                         possible, GAO continues to see HUD as it was five to ten
                         years ago and not as it is today.




                           Page 10                            GAO/RCED/AIMD-99-189 HUD's Management Challenges
                   Appendix I
                   The Department of Housing and Urban
                   Development's Comments on the Maor
                   Challenges and Program Risks Identified in
                   GAO's Statement of Facts




                        In the February, 1997 High Risk Report (GAO/HR-97-12),
                   four long-standing, department-wide management problems were
                   identified:  internal controls, information and financial
                   management systems, organizational structure, and staff
                   skill mix and allocation. In his January 22, 1998, Senate
                   confirmation hearings, Secretary Cuomo stated that "HUD's
                   mission cannot be carried out in the future unless HUD's own
                   house is in good order, and there must be effective
                   management and financial accountability." These words still
                   hold true today, and yet, GAO's report fails to recognize
                   the sea change of managerial improvement and accountability
                   that HUD has undergone since February 1997.

                        It has been well documented by GAO and others that
                   HUD's problems did not occur overnight and that the short-
                   term fixes attempted in the past did not produce lasting
                   results.  Under HUD's 2020 Management Reform Plan, the
                   Department implemented a bold initiative to fundamentally
                   ro-desin re manner-in which HUD delrvers ½rs programs.
                   These necessary actions were well planned and did not
                   represent change for the sake of change, but were designed,
                   in large part, to directly address the four long-standing
                   management deficiencies within a new paradigm for HUD.

                        The profound significance of HUD's major achievements
                   and accomplishments is missing in the report, as well as a
                   corresponding description of reduced risk at the agency.
HUD's comment 2.   The Department has developed and implemented a detailed plan
                   for reform - - a plan that has reduced the risk of waste,
                   fraud, and abuse. Yet, the tenor of the draft report leaves
                   the reader to conclude that, since there are not absolute
                   measurable results in all areas, little that is positive has
                   happened at HUD during the past two years.

                        On June 23, 1998, in a letter to Mr. Hinchman when he
                   was Acting Comptroller, HUD requested that 'GAO present
                   established and objective criteria that have been and will
                   be used to determine what programs in an agency constitute
HUD's comment 3.   high risk, and, what makes an entire federal agency high
                   risk." Although GAO responded to the June 23- letter, GAO
                   still did not provide the specific criteria to be met in
                   order for HUD to be removed from the 'high risk"
                   designation.  In that same response, GAO provided a list of
                   "reports and testimonies over the past 14 years.. pointing to
                   patterns of significant management deficiencies at HUD."
                   Unfortunately, neither that letter nor the current draft
                   report acknowledge the fact that comprehensive management
                   solutions and actions have been applied to these problems,
                   steps that merit HUD's removal from the 'high risk" list.


                                                        2Page CED/AIMD-99-189HUD's Management Challenges




                   Page 11                            GAO/RCED/AIMD-99-189 BUD's Management Challenges
                      Appendix !
                      The Department of Housing and Urban
                      Development's Comments on the Major
                      Challenges and Program Risks Identified in
                      GAO's Stat:ement of Facts




                           This issue was further amplified in a December 22
                     meeting that we convened with senior GAO and HUD staff to
                     discuss tiis draft report, and despite point blank
HUD's comment   4.   questions, GAO was unable to articulate what constitutes
                     "high risk" at HUD and for all agencies; in fact, GAO
                     acknowledged that no such government-wide "high risk" test
                     existed. This is unacceptable to us and should be to you,
                     as well. It is critical, before you finalize and publish
                     this report, that the GAO send HUD the specific criteria
                     used to determine whether an Agency is high risk, the data
                     showing how other agencies stood when the GAO applied that
                     objective, standardized " high risk" test, and the analysis
                     used by GAO in this report of the data versus the "high
                     risk" criteria. Absent these criteria, it is very difficult
                     for HUOD to respond to this draft report, and it would be
                     misleading for GAO to maintain such an undefined and
                     indefensible label for HUD.

                          A--    are--aware,    GA O
                                                de    ated the cntiro-4epa-t-men--
                     as a "high-risk" area in 1994 because of four long-standing,
                     department-wide management problems. HUD has been the only
                     federal cabinet-level agency so characterized by GAO.
                     Despite comments from your staff, the (incomplete) draft
                     report is, in fact, silent regarding this label, and
                     consequently, it is important that GAO state in the clear
                     affirmative, if this is the case, that HUD is no longer a
                     high-risk agency. If GAO maintains that HUD is still "high
                     risk," we note the following concerns:

                                NO HIGH RISK CRITERIA; NO HIQH RISK TEST APPLIED
                                CONSISTENTLY OR TO ALL AGENCIES. GAO came to HUD
                                six months or more ago to conduct a biennial
                                review of the Department's programs. At that
HUD's comment 5.                time, the agency asked for the set of objective,
                                standardized criteria that had been applied in the
                                past, and would be applied comprehensively and
                                consistently to all federal agencies in this
                                review, to determine if they merited the high risk
                                label. We have still not received a document
                                setting out these criteria. Worse still, senior
                                GAO staff have indicated to me and other senior
                                HUD officials, on repeated occasions, that no such
                                list exists and that no high risk test was being
                                applied to all federal agencies. Most recently,
                                we were given two additional explanations for this
                                troubling situation.  First, that there were no
                                criteria but the label of high risk was applied
                                based on the "professional judgment" of GAO staff.
                                Second, that because HUD has four agency-wide


                                                         3




                     Page 12                            GAO/RCED/AIMD-99-189 HUD's Management Challenges
                   Appendix I
                   The Department of Housing and Urban
                   Development's Comments on the Major
                   Challenges and Program Risks Identified in
                   GAO's Statement of Facts




                             long-standing problems, it was and would remain a
                             high risk agency. When asked if this high-risk
                             "test" of four or more agency-wide problems had
                             been applied to all or for that matter any other
                             federal agency, the answer, supported by all
                             senior GAO staff present, was no, it had not been
                             applied anywhere else.

                             A SHIFTING STANDARD FOR DETERMINING IF HUD IS HIGH
HUD's comment 6.             RISK. As the review began, rather than providing
                             the agency with the high risk criteria, senior GAO
                             staff indicated that they would be fair and
                             reasonable in their review - not holding the
                             agency to an impossible standard of perfection but
                             rather applying a standard for removing HUD from
                             the high risk list if "reasonable progress" was
                             achieved in implementing our 2020 reforms.   At
                             other times, and again most recently, staff has
                             said the standard would be "results", a
                             demonstratlon that ~UD's problemahavo-e-ee fxed
                             completely and that there was substantial, long-
                             term results that bore out the success and
                             sustainability of the reforms.  Which standard is
                             it? The difference is significant. One sets a
                             bar that is passable in two years and on which all
                             objective observers would agree that HUD had
                             passed; the other would certainly take years, as
                             by definition, long-term results are just that,
                             "long-term."

                                  We would ask that you clarify the standard
                             and would hope that you maintain the one
                             originally laid out of "reasonable progress" as
                             you redraft your report.  Moreover, if you do
                             continue to single out HUD as high risk, we ask
                             that you state clearly that HUD is no longer the
                             highest risk agency in the government. There is
                             substantial evidence which shows that HUD is on
                             par in terms of risk with many other agencies.
                             That must be stated clearly for your report to be
                             accurate, even using such an ill-defined standard.

                             A PRE-DETERMINATION THAT IT WAS NOT POSSIBLE FOR
                             HUD TO BE REMOVED FROM THE HIGH-RISK LIST IN THIS
                             REVIEW.  We have maintained from the beginning
                             that if GAO had determined up-front that HUD could
                             not have taken actions in the past two years
                             sufficient to remove it from the high-risk list,
                             that fact must be stated prominently and clearly



                                                     4




                   Page 13                            GAO/RCED/AIMD-99-189 HUD's Management Challenges
                     Appendix :[
                     The Department of Housing and Urban
                     Development's Comments on the Major
                     Challenges and Program Risks Identified in
                     GAO's Statement of Facts




                            at the beginning of the report.  In other words,
                            if GAO believed that it was not possible for HUD
                            to be removed from the list - because GAO required
HUD's comment 7.            long-term results to certify removal (as may be
                            the case based on repeated comment from senior GAO
                            staff who say that they are looking for results,
                            many of which could take 3-5 years or more to come
                            in completely), because GAO believes that the
                            long-standing nature of HUD's problems merit it
                            staying on the high-risk list so that GAO can see
                            three, five or ten years down the road if the 2020
                            reforms are sustained beyond one administration,
                            or for other reasons - that working assumption
                            must be stated explicitly or the report itself is
                            deeply misleading to Congress and the Department.

                                If GAO maintains that it is possible for HUD
                          to have taken actions in the past two years that
                          would have removed it from the "high risk" list,
                   ------ (-"high risk" here defined not as reasonable
                          progress but as proof of long-term results), we
                          ask prior to the final drafting of this report
                          that those suggested actions be enumerated in
                          detail and provided to us. We simply ask you:
                          what else could HUD have reasonably done in the
                          past two years to reform the agency and address
                          GAO's concerns? A test of reasonableness - which
                          we believe would be the more accurate and fair one
                          for GAO to apply - would clearly show that HUD has
                          reduced risk sufficient to remove it from the
                          "high" risk category, placing it with numerous
                          other agencies that do pose an ongoing risk of
                          fraud and abuse.

                                At a minimum, it should be clearly stated
                           that HUD did everything it could to reduce risk
                           over the past two years.  In meetings with senior
                           GAO staff, those staff have indicated that they
                           were not sure if it was humanely or reasonably
                           possible to reduce risk at HUD any more than we
                           had. Moreover, they all agreed, as would any
                           objective source, that HUD has done more in two
                           years to reduce risk and reform itself than
                           virtually any public or private institution has
                           done in a similar timeframe in recent memory.

                           A FAILURE TO ADEQUATELY AND FULLY.DESCRIBE THE
                           SIGNIFICANT REDUCTION IN RISK TO HUD'S PROGRAMS
                           OVERt THE PAST TWO YEARS. To be accurate and




                     Page 14                            GAO/RCED/AIMD-99-189 HUD's Management Challenges
                     Appendix I
                     The Department of Housing and Urban
                     Development's Comments on the Major
                     Challenges and Program Risks Identified in
                     GAO's Statement of Facts




                        honest, the report, even if it does not remove the
                        high risk label because GAO acknowledges that such
                        removal was rejected up-front'because of GAO's
                        methodology and the long-standing nature of HUD's
                        structural problems, would need to indicate the
                        substantial and significant reduction of risk to
                        HUD's programs and portfolio since the last time
                        GAO conducted the biennial review. Senior GAO
                        staff, in repeated discussions, say they believe
                        that HUD has made substantial progress in reducing
HUD's comment   8.      risk - that the agency's risk profile is
                        significantly improved over the last time GAO
                        conducted a review. Yet this view, strongly
                        supported by an objective analysis of the reforms
                        currently implemented at HUD, is entirely absent
                        from the report. HUD has moved far from where it
                        used to be when the high risk label was first
                        applied and where it is at the end of 1998. You
                        would not know that after reading the GAO draft.
                        To be fair nrd ac-urate, GAO .ould ne..d t make a
                        clear statement about the reduction in risk to
                        HUD's programs since its last review and devote a
                        majority of the report to detailing those changes
                        and improvements.

                        A FAILURE TO UTILIZE AND CITE INDEPENDENT AND
                        OBJECTIVE STUDIES OF HUJD'S REFORMS BY MANMAGEMENT
                        HUD's
                            comment
                        EXPERTS.  While the GAO does quote extensively
                                  9.
                        from, and rely heavily upon, data collected and
                        conclusions drawn by the HUD Office of the
                        Inspector General, it ignores and/or dismisses as
                        inaccurate or unreliable the analysis and
                        conclusions of other independent, objective
                        management experts including Booz-Allen and
                        Hamilton, the Public Strategies Group and its
                        president David Osborne, the author of Reinventing
                        Government, and PriceWaterhouseCoopers.    Each of
                        these companies has done extensive analysis of the
                        HUD 2020 reform efforts and these reports were
                        provided to GAO at or near the beginning of its
                        review; the PricewaterhouseCoopers study was just
                        completed and provided to GAO. We ask that GAO
                        either cite as credible sources and quote as
                        extensively from those reports as it does from
                        other entities outside the GAO, or that it provide
                        us with a written explanation as to why GAO does
                        not find these reports, and their authors,
                        credible and reliable sources of expertise on
                        HUD's reforms.



                                                   6




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                     Appendix ]:
                     The Department of Housing and Urban
                     Development's Comments on the Major
                     Challenges and Program Risks Identified in
                     GAO's Statement of Facts




                                 EXTENSIVE OMISSIONS AND ERRORS OF FACT, LOGIC OR
                                 CHARACTERIZATION IN THE DRAFT REPORT. Finally, as
                                 described in the remainder of this letter, the
                                 report either omits significant pieces of HUD's
                                 reforms or describes them in such a cursory way as
                                 to deliberately minimize them (one major reform is
                                 given a sentence) and contains numerous errors of
                                 fact, faulty logic and mistaken assumptions, or
                                 misleading characterizations of HUD's work. We
                                 ask that these be corrected - and that when these
                                 omissions are added, and errors corrected, that
                                 GAO, in response to these changes and to the
                                 serious issues raised above - thoroughly rewrite
                                 and reconsider the conclusions about HUD's risk
                                 status.

                          The balance of this letter is divided into three parts:
                     Part I: Significant issues of concern with GAO's draft
                     report.  Part II: A brief description of HUD's reform
                                                    e areas of risk. -AndPart --
                     efvrt-s-and- how then ddd-es GAO
                     III:  A list of specific items in the GAO draft report that
                     contain factual inaccuracies, misleading characterizations
                     and/or faulty assumptions and conclusions.

                         In addition, GAO has withheld the conclusion section of
                    the report from our review.  The absence of a written
HUD's comment 10.   conclusion, especially while senior staff are orally
                    characterizing the report as maintaining the "high risk"
                    label, and a national newspaper and a chairman of one of
                    HUD's congressional committees is citing this same
                    conclusion as well (see today's Washington Times),   has
                    severely compounded the difficulty in responding accurately
                    and appropriately to the specific text of the report,
                    because a review of the linkage between facts and
                    conclusions, which should be clear and unambiguous, cannot
                    be performed. Nonetheless, we have done our best to surmise
                    GAO's probable conclusions from the limited information that
                    was provided and tone in which it is presented, and offer
                    the following comments and observations.


                                     Part I:    Significant Issues of Concern

                         The draft report is primarily a recapitulation of past
                    GAO studies and reports and dwells in repetitive detail on
                    the problems of the 1980's and early 1990's.  Further, this
                    report fails to consider the global impact of the HUD 2020
                    Management Reform Plan on Departmental operations and falls
                    well short of recognizing the true significance of the
                    changes that have occurred in the last 24 months. The HUD




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                     Appendix I
                     The Department of Housing and Urban
                     Development's Comments on the Major
                     Challenges and Program Risks Identified in
                     GAO's Statement of Facts




                    of today is far different from the HUD of yesteryear or even
                    of February 1997. We will take this opportunity to
                    highlight a few examples of the significant issues that were
                    omitted, given short shrift, and/or overlooked by GAO, but
                    which need to be included when you revise this draft report,
                    if it is to be considered accurate and balanced.

                       1.        Financial Management Systems.   This area is
                                 characterized inaccurately given the many
                                 comprehensive accomplishments in systems
HUD's comment 11.                improvements that have been made within the past
                                 few years.  The discussion is focused almost
                                 entirely on process improvements and is not
                                 properly balanced by GAO's brief summary of major
                                 system accomplishments.   For example:

                                 The report states that "according to its CFO, HUD
                                 continues to make progress addressing systems
                                 problems by deploying systems and/or system
                                 modules toUmIldrid ad
                                --                        Ti    he Dea
                                                               tmu   altmen.t'2s---
                                 programs." GAO spent more than one year reviewing
                                 the systems integration efforts at HUD, and it
                                 should be clear to any objective reviewer that
                                 when a large number of systems have been
                                 successfully developed and deployed, a substantial
                                 improvement in the systems environment has
                                 inevitably occurred. However, GAO refuses to
                                 attest to such facts despite its one-year review,
                                 and only attributes this information to "CFO"
                                 hearsay.

                                 GAO observed that HUD did not finalize the revised
                                 project plans for completing the core accounting
                                 system (HUDCAPS). This is wrong. During the
HUD's comment 12.                initial phase of the one-year review of systems at
                                 HUD, GAO was provided a completed first year plan
                                 and a final draft of the second year plan, and
                                 last month, we submitted the complete project
                                 plan.  So, in fact, all of the required
                                 information has been made available to GAO.
                                 Furthermore, the Department has recently installed
                                 a standard general ledger and chart of accounts
                                 that did not previously exist. This is a critical
HUD's comment 13.                accomplishment that was barely mentioned and is a
                                 key to the Department publishing integrated
                                 financial statements for the entire agency.

HUD's comment 14.           *    The report dwells on the Department's efforts to
                                 evaluate whether our systems conform to the
                                 requirements of FMFIA and of OMB Circular A-127.




                     Page 17                            GAO/RCED/AIMD-99-189 HUD's Management Challenges
                    Appendix I
                    The Department of Housing and Urban
                    Development's Comments on the Major
                    Challenges and Program Risks Identified in
                    GAO's Statement of Facts




                              First, HUD self-declared certain systems as non-
                              compliant based on our interpretation of the
                              general JFMIP criteria.   HUD chose to apply a
                              vigorous standard whereby if only one of the
                              twelve criteria was unmet, then the system was
                              labeled as'non-compliant.   We have yet to obtain
                              any clear guidance from GAO, despite repeated
                              inquiries, whether the Department is applying a
                              significantly higher standard for systems non-
                              compliance than other federal agencies.
                              Notwithstanding HUD's self-imposed rigorous
                              standards, all of our major accounting systems are
                              in compliance. These financial systems are the
                              systems of greatest relevance. More importantly,
                              HUD's financial statements are now considered
                              accurate (save for a single audit qualification
                              issue on credit reform), despite the fact that
                              just two years ago, HUD had a disclaimer of an
                              audit opinion for its consolidated financial
                              stat-ements.                                  -

                                    By any objective measure of performance,
                              these improvements must be viewed as both credible
                              and significant.   More importantly, none of these
                              systems existed at the time of the 1997 GAO high-
                              risk report (which relied on testing completed in
                              1996), yet GAO simply says that "much work remains
                              on HUD's information and financial management
                              systems." We strongly believe that it is very
                              important that these system accomplishments be
                              both highlighted and discussed in greater detail,
HUD's comment 15.             and that these changes are reflected in a changed
                              GAO analyses of HUD's systems.

                    2.        Organizational Struoture. GAO' s previous reports
                              stated that HUD's organizational structure was
                              dysfunctional. During the past two years, we have
                              implemented a new organizational structure, in
                              accordance with our 2020 reform plan. We have put
                              in place an organizational structure that
                              addresses previously identified management
                              deficiencies. The most significant organizational
                              changes are the creation of Centers that
                              consolidate back-office operations (e.g.
                              consolidate all single family processing from 81
                              offices to 4 centers) and/or addressed known
                              problems related to the assessment of the physical
                              and financial condition of real estate properties
                              and the enforcement of HUD's programs.
                              Responsibilities and authorities between


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The Department of Housing and Urban
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Challenges and Program Risks Identified in
GAO's Statement of Facts




      Headquarters and field operations have been
      clearly delineated, and fundamental management
      accountability and responsibility have been
      established. Protocols are in place that
      delineate clear lines of responsibility and cross-
      cutting functions like property assessment and
      enforcement are centralized, enabling HUD staff to
      focus more precisely on their program
      administration work. GAO cites that not every "i"
      has been dotted and 't" has been crossed, to which
      we acknowledge, but again it fails to recognize
      the monumental changes made in HUD's
      organizational structure and program delivery. For
      example:

      The Real Estate Assessment Center (REAC) assesses
      the overall physical and financial condition of
      HUD's housing portfolio and enables the Department
      to better target its monitoring and enforcement
      resources.
      -           The REAC ha s tandardized th~e wa HUD
      conducts assessments of its multifamily and public
      housing real estate portfolio.  The Center is
      generating an overall annual score for over 50,000
      properties and projects from over 89,000 separate
      inputs to determine what projects are being
      operated in accordance with established standards
      for physical and financial integrity.  The score
      also measures management performance and customer
      satisfaction.

           With respect to physical inspections of the
      33,400 housing entities supported by HUD mortgage
      insurance, rental subsidy or public housing
      programs, the REAC has successfully developed and
      pilot-tested uniform housing quality standards and
      an electronic data collection process to capture,
      score and report on physical inspection results,
      as a basis for official housing, public housing,
      and enforcement decision-making action.  In
      October 1998, the REAC initiated a national
      inspection process that is providing a physical
      inspection baseline on the entire HUD-supported
      housing portfolio. Through December 16 of this
      year, 11,934 inspections have been scheduled for
      the first two quarters of FY 1999, with 4,219
      completed. Of the inspections completed,
      approximately 18% received a failing grade for the
      entire physical inspection.  In addition to
      inspection results, the REAC's pilot and on-going
      inspections are updating and correcting property


                               10




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Appendix Il
The Department of Housing and Urban
Development's Comments on the Major
Challenges and Program Risks Identified in
GAO's Statement of Facts




   profile information in HUD's housing program data
   bases.

        With respect to financial assessment of the
    HUD supported housing portfolio, the REAC has
   successfully pilot tested the first release of a
   Financial Assessment Subsystem (FASS) that will
   enable the REAC to electronically receive annual
   financial statement and audit data for use in
   scoring and reporting on the financial health and
   compliance of housing entities receiving HUD
   program support.   In accordance with HUD's new
   rule on "Uniform Financial Reporting Standards for
   HUD Housing Programs," FASS is accepting
   multifamily project information beginning in
   January 1999.   The multifamily housing scoring
   portion of the REAC's FASS will be completed March
   31, 1999, and multifamily housing field staff will
   have systems access to the financial data received
   during the January to March 1999 pPrind

        IASS represents a substantial improvement in
  the completeness, timeliness, usefulness and
  quality of financial information on HUD's
  multifamily housing programs.   The REAC has also
  initiated a Multifamily Laboratory Project that is
  analyzing historical multifamily project financial
  data to provide support for 140 on-going and 210
  planned Enforcement Center cases, and to improve
  the quality and usefulness of that historical data
   for future trend analysis.

    Under HUD's 2020 Management Reform Plan, two
    Troubled Agency Recovery Centers (TARCs) were
    estab:Lished in Cleveland and Memphis.  Out-
    stationed TARC staff are also located in the
    Department's Hubs.   The TARCs are an important
    part of HUD's public housing reforms, since they
    develop and implement intervention strategies for
    "troubled" PHAs to help improve their operations -
    - a function never adequately performed at HUD.
    TARCs refer troubled PHAs that are not progressing
    satisfactorily to the Department's Enforcement
    Center for potential receivership action. At this
    time, 100% (approximately 50 HAs) of all confirmed
    troubled housing authorities are being
    admin:istered by the TARCs.

         The Troubled Agency Recovery Centers (TARCs)
    assist in the reduction of risk to the Department


                              11




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The Department of Housing and Urban
Development's Comments on the Major
Challenges and Program Risks Identified in
GAO's Statement of Facts




       by changing the way the Department approaches
       troubled recovery. The TARCs will remove all
       "troubled" designated public housing authorities
       from the local HUD offices. This will allow the
       local offices to concentrate on marginal and at-
       risk authorities thus reducing the possibility of
       future "troubled" public housing authorities,
       which reduces additional risk to the Department,
       that is, by using specialized teams of HUD
       employees in an intensive care type operation.

  * The 2020 Management Reform Plan established a
    cadre of 720 Community Builders, a new customer
    service position at HUD. Approximately 360 of
    these positions are career employees and another
    360 employees are temporary employees called
    Community Builder Fellows, who will serve two- to
    four-year terms. These Fellows have completed
    intensive training that provided them with a
       e              cr            tppr   hmigsing,   ereinoriOr   aRiM
       community development, neighborhood
       revitalization, job creation, and fair housing
       issues.

                Community Builders are serving as HUD's link
           to communities, and are responsible for assisting
           communities in identifying their needs and
           coordinating the development and implementation of
           Integrated Service Delivery Plans. More
           importantly, the establishment of Community
           Builders has allowed the Department, for the first
           time, to have a separation between customer
           service functions and program monitoring and
           enforcement functions. This separation allows the
           Department to clearly divide responsibilities
           between those staff who are relationship managers
           and those who are program managers and
           administrators with a more defined focus on
           oversight, and enforcement. Prior to HUD 2020,
           these responsibilities were inappropriately
           performed by the same person - an impossible task
           that too often left little focus on program
           monitoring.

   *       The Department has dramatically improved its
           procurement operations. HUD has hired a Chief
           Procurement Officer, who now reports directly to
           the Deputy Secretary. The Chief Procurement
           Officer and his staff have been working on



                               12




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Appendix I[
The Department of Housing and Urban
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Challenges and Program Risks Identified in
GAO's Statement of Facts




          numerous operational improvements.        Specific
          changes include:

          -   Establishing a Contract Management Review
              Board to review and approve each program
              office's procurement strategy for contracts
              exceeding $1 million.  The review of Fiscal
              Year 1999 plans has been completed. The Board
              is conducting periodic reviews of each program
              office's progress in implementing approved
              strategic plans and periodically samples
              active contracts to ensure quality and
              timeliness of performance.

      -        Legal reviews and input will be required on
               all contracts over $5 million.  The Office of
               General Counsel will establish a team of
               contract specialists to review contract terms
               and assist in negotiations to assure contract
              Jeality.    The Chi
                               e    Procurement Offucer hasn
                                    f
               issued instructions on obtaining legal
               reviews.

      -       A Government Technical Representative (GTR)
              Certification Program has been established and
              GTRs are being trained in cost and price
              analysis. This training will be completed by
              the end of Fiscal Year 1999.

      -       Interfaces between the HUD procurement system
              and the accounting system have been made, and
              now provide HUD the capability for
              comprehensive financial reporting by contract
              at the transaction level.

      The Enforcement Center has consolidated the bulk
      of HUD's enforcement efforts into one Department-
      wide entity. The FBI-headed Enforcement Center
      addresses monitoring and internal control problems
      by combining non-civil rights compliance and
      enforcement actions into one organization with
      responsibility for:

      -       Distressed multifamily properties that have
              failed physical and financial inspections and
              require corrective action by owners, lenders
              and management agents.




                               13




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Appendix I
The Department of Housing and Urban
Development's Comments on the Major
Challenges and Program Risks Identified in
GAO's Statement of Facts




              Instituting aggressive enforcement strategies;
              i.e., administrative and judicial receiver-
              ship, for PHAs that have received a failing
              score on their annual assessment and have been
              referred to the Enforcement Center by the
              TARC.

              Enforcing all administrative and regulatory
              business agreements to include debarring or
              suspending individuals in non-compliance.

              Referring criminal cases to the OIG and
              submitting civil cases to the Department of
              Justice.

          The Department established Processing Centers to
          centralize certain functions previously performed
          in field offices. Specifically: 18 Multi-family
          HUBs with 33 program centers; 4 Single Family Home
          Ownetrship  nt: a Fillnan  cal Oeratlin~ CenLe;
          and a Section 8 Financial Management Center.

               This new approach to organizing and managing
          the work of the Department, that is, consolidated
          processing and program administration via Hubs and
          centers, has already yielded major improvements.
          For example, multifamily project development now
          uses the Development Application Process (DAP) as
          a uniform and consistent method of the
          underwriting process. As a result, the Department
          has reduced the multifamily project development
          underwriting/application process from a high of
          three years to 3-6 months for endorsement.
          Moreover, we have created an underwriting
          committee in each Multifamily Hub which reviews
          and approves all deals emanating from field office
          communities within the jurisdiction. Again, we
          have instituted improved 'checks and balances" or
          internal management controls which assure the
          integrity of the underwriting process and improve
          our business practices.

               In the area of multifamily project
          management, the Department has already achieved
          demonstrable results which are directly related to
          the consolidation of major process functions.   Our
          program managers are no longer required to perform
          such ancillary functions as marketing major
          programs (e.g. community connections, resident
          initiatives, etc.) answering resident complaints,

                               14




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Appendix I
The Department of Housing and Urban
Development's Comments on the Major
Challenges and Program Risks Identified in
GAO's Statement of Facts




          and processing grant applications. More HUD field
          staff are able to devote their full time and
          attention to mainstream asset and development
          management functions. Additionally, the ratio of
          project managers to multifamily projects has now
          been reduced substantially from 1:100 to 1:60.

                In Fair Housing and Equal Opportunity, which
          has also instituted the consolidated Hub/Center
          approach, there is more evidence of significant
          productivity improvements, as well as better use
          of management information systems.   TEAPOTS, the
          Title 8 enforcement actions management information
          system, has been instrumental in helping the
          Department to reduce the backlog of cases; as well
          as, to move aggressively toward the goal of
          doubling fair housing enforcement actions by FY
          2000.

                      Of course. the GAO is aware of the dramatic
          *51s   y,     faZuily   sz.s   uyaye     nsu   ...   proel..ly
          improvements by the Homeownership Centers (HOCs),
          including reducing loan processing time from 4-6
          weeks to an average of 2 to 3 days, per
          application.

3.        Staffing and Skills Mix. In 1997, GAO reported
          that "HUD had made some progress since the
          previous report in addressing the problem with
          staff members' skills, resource management, and
          staff training, and had begun to implement a needs
          assessment process to plan future training."
          Without rehashing this assessment, we take strong
          exception to the current GAO conclusion that
          "because staffing reforms have not been fully
          implemented, their effectiveness in correcting
          management deficiencies cannot be demonstrated",
          and ergo, this remains a high risk area.

             Under 2020, we have created the best alignment
          between workforce and workload quite possibly in
          the history of the Agency. We focused on our
          known problem areas and developed an
          organizational matrix that consolidates like
          functions and redeploys staff to critical areas.
          We established centers for:  Enforcement; Troubled
          Agency Recovery; Real Estate Assessment; Section 8
          Financial Management Processing; Accounting;
          Multifamily Development; Home Ownership; Grants
          Management; Special Applications; Administrative


                                           15




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Appendix I
The Department of Housing and Urban
Development's Comments on the Major
Challenges and Program Risks Identified in
GAO's Statement of Facts




    Service; Employee Service; and Title I Financial
    Operations.

       The Department used an OPM approved model to
    develop the strategic approach to redeploy staff
    into critical needed areas through Super Postings
    and a Voluntary Reassignment Program.  We
    concentrated our reform efforts on the areas
    identified by the GAO and OIG.  We engaged "change
    agent" teams throughout the Department and all of
    our program areas did extensive analysis to
    determine how the improvements were to be made.
    We then went back and reexamined our decisions and
    staffing and, with the help of management
    consultants, reaffirmed the number of staff and
    the allocation of resources.

       In a review of HUD's workload and staffing
    analysis for the 2020 Reform Plan, Booz-Allen and
    Hamilton found that "the reform sets in place
    systLmtl    and operatlDnaiul      ilyae   at.   HUD   Lthat
    improve customer service and reduce staffing
    requirements." They also concluded that "HUD
    program offices used acceptable analytic
    techniques for establishing staffing levels."
    Also, a report conducted by The Public Strategies
    Group states "that HUD 2020 is a sound, well
    thought-out reform plan.  It is tailored
    specifically to solve long-standing structural
    problems, uses appropriate reinvention strategies
    for HUD's specific challenges, and addresses the
    agency's core problems."

       The implementation of HUD's Management Reforms
    has resulted in the creation of many new
    positions, many designed to specifically mitigate
    management deficiencies.  In addition to Community
    Builders, new positions have been created in the
    consolidated operations centers, such as
    multifamily project managers, single family
    housing specialists, assessment auditors and
    inspectors, enforcement specialists and other new
    occupational disciplines.  The Department has
    conducted extensive training for the employees who
    have been assigned to these positions.   This
    training has been specific to the program
    organizations and has included instruction on the
    new operating procedures and data systems
    developed under 2020.



                              16




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  Appendix I
  The Department of Housing and Urban
  Development's Comments on the Major
  Challenges and Program Risks Identified in
  GAO's Statement of Facts




                This training was designed to ensure that
           employees have the skills to perform in their new
           positions.  GAO's own interviews with HUD managers
           show that the Department training efforts have
           been effective and managers believe their staff
           are well trained for these jobs.

           Finally, by separating customer service and
      relations from program administration functions, the
      Department has sharpened its focus on management
      controls, financial operations, and compliance with
      statutory and regulatory requirements.    For example,
      while Community Builders now perform single family
      marketing and outreach function, Single Family
      Housing Specialists have been trained to provide
      better monitoring and program administration in local
      field offices. Managers in the program areas of
      Housing, Public and Indian Housing, and Community
      Planning and Development have been trained to
_ j eixdentify internal control risks, and to apply
      utfeT~ehl
      effecttve LUOLZIc......
                  curretivM IVc.
                              aLivns.     ..    ..

          The HUD 2020 training plan for FY 1998 consisted
       of a broad range of technical and professional
       courses covering program monitoring and
       administration skills, financial analysis, real
       estate management, contract administration,
       information management, and general management and
       supervision. The number one priority of the FY 1999
       training agenda is to train employees on what we
       call "core competency" skills, that is, to make sure
       that: housing specialists can perform housing work,
       that: enforcement specialists achieve acceptable
       levels of proficiency in their work requirements,
       and that all training develops skills, knowledge and
       abilities for achievement of performance
       expectations.

  4. Internal Controls. It seems that GAO intends to
     again conclude that HUD's overall general internal
     control environment is weak, or that we have not made.
     substantial advances in reducing risk, despite the
     significant control improvements made within the last
     two years. Specifically:

           *uring FY 1998, HUD trained over 1,100 field and
           Headquarters managers and supervisors in their
           internal control responsibilities for their
           programs. We used the GAO "Standards for
           Internal Control in the Federal Government", and


                                 17




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                    Challenges and Program Risks Identified in
                    GAO's Statement of Facts




                                   OMB Circular A-123 as guidelines for this one-day
                                   training in risk management. Furthermore, GAO
                                   field and Headquarters staff were invited and
                                   attended training sessions in Boston, Chicago,
                                   Ft. Worth and Washington with mostly very
                                   favorable feedback to HUD CFO staff. Follow-up
                                   FY 1999 training is focusing on one of the
                                   critical GAO standards--monitoring.   In the
                                   previous nationwide training, we established the
                                   link between agency goals and management
                                   accountability, and in this training, not only
                                   will the mechanics of monitoring be emphasized,
                                   but the roles of planning and reporting on
                                   integral parts of the monitoring process will be
                                   highlighted.

                                         The Department completed a "hard scrub" of
                                   the corrective action plans for its nine material
                                   weaknesses and the CFO has been charged by me to
                                   work with the program offices to ensure lonq-
                                   lastinlg fItest to c m e thres mterivleuassil ekessr.
                                   In fact, five of the outstanding material
                                   weaknesses are scheduled to be completed within
                                   Fiscal Year 1999.

                               *   During the past year, the Department has
                                   aggressively tackled the issue of computer
HUD's comment 16.                  matching and income verification and improved
                                   subsidy verification. HUD established a task
                                   force with staff from PIH, Housing, PD&R, the
                                   Assessment Center and the CFO's Office to expand
                                   existing capabilities for ensuring that subsidies
                                   are paid based on correct tenant income.


                               Part II:    Brief Descriptions of BUD'. Reforms

                          Throughout the report, GAO is remiss in not recognizing
                     the breadth and depth of the numerous reforms implemented at
                     the Department during the past two years - -advances that
                     reduce risk in many areas. This part of the letter
                     describes a sampling of these reforms. GAO has extensive
                     backup documentation and substantial reports that describe
                     these and other changes in detail. We refer you to these.
                     This is not meant to be exhaustive, but indicative of the
                     scope and status of the reforms we have put in place. It is
                     brief, since there is some repetition from other sections of
                     this letter and GAO already has extensive documentation that
                     it appears not to have yet used. We have structured this
                     section around the four GAO risk categories of

                                                          18




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 Appendix I
 The Department of Housing and Urban
 Development's Comments on the Major
 Challenges and Program Risks Identified in
 GAO's Statement of Facts




 organizational structure, staffing, internal controls and
 systems.

 1.   Orglnizational Structure

      SumoLary of GAO Problem Description

      GAO stated that our ineffective organizational
 structure has contributed to management problems throughout
 the Department. Such organizational problems have included
 overlapping and ill-defined responsibilities and authorities
 between HUD Headquarters and field organizations and a
 fundamental lack of management accountability and
 responsibility.

      Summary of HUD's Reforms

      Many of the HUD 2020 management reforms specifically
 addressed organizational structural problems previously
 cited in CGO reperts.

      Overall,    the most significant organizational changes
 include:

      *     The creation of Centers that consolidate our back-
            office (location neutral) work. The establishment
            of these Centers has increased the efficiency of
            the Department's operations due to economies of
            scale and reduction in the duplication of effort:
            and has increased the effectiveness of the
            Department's operations by moving resources to
            areas that have been identified as deficient.

      *     The creation of Community Builders -- who are the
            external face of the Department and connect
            clients and communities to the internal program
            resources and services they need: and the split
            between Community Builders and Public Trust
            Officers.

      *     Creation of the department-wide cross-cutting
            functions, such as assessment and enforcement,
            which gives the agency these critical capabilities
            for the first time in its history.

      As you re-review HUD's high risk status, please note
 these specific changes:




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Challenges and Program Risks Identified in
GAO's Statement of Facts




 *        Created the Real Estate Assessment Center which,
          for example, allows program staff to place more
          emphasis on early warning and loss prevention of
          insured multifamily mortgages. The REAC
          identifies the most serious financial and physical
          problems of real estate properties, and refers
          them directly to the Enforcement Center for
          immediate action.  In addition, we have initiated
          a national inspection process that is providing a
          physical inspection baseline on the entire HUD-
          supported portfolio, and is automating the
          submission of audited financial statements to the
          REAC.

 *        Created the Enforcement Center which consolidates
          all enforcement activities, that is, for Housing,
          Public and Indian Housing, Community Planning and
          Development, and FHEO, except civil rights, for
          the first time in the history of the Department.
          From thc standpeoint
          -                     f managemcnt controlt-.-te.           -
          entity gives the Department the tools, techniques,
          and independent authority to pursue instances of
          noncompliance and program violations. The
          Enforcement Center has already accepted and begun
          to process compliance and enforcement actions
          involving "troubled" multifamily projects; to
          revitalize the Mortgagee Review Board as part of
          the Department's crackdown on lenders and mortgage
          brokers; and, staffed up the debarment and
          suspension function.

  *       Established distinct, clear lines of authority
          between Headquarters and the field offices.
          Assistant Secretaries have the authority to
          establish and implement policies and procedures
          with their staff in Headquarters and the field
          offices.

  *       Established new or enhanced quality assurance and
          quality control systems for all major program and
          administrative operations. Examples include:
          division of customer relations and program
          administration functions between community
          builders and public trust officers; procurement
          and contract planning, management, oversight, and
          evaluation system; financial and information
          systems, data standardization and clean-up.

  *       Developed and instituted a new management planning
          system and process called the HUD 2020 Business

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Development's Comments on the Major
Challenges and Program Risks Identified in
GAO's Statement of Facts




          and Operating Plan (BOP).  The BOP is linked
          directly to the HUD Annual Performance Plan (and
          budget operations cycle) required by the
          Government Performance and Results Act (GPRA).
          BOP Goals and Guidance, which were developed
          jointly by Headquarters and the field have been
          issued to field managers who, under the leadership
          of Secretary's Representatives and Senior
          Community Builders, are coordinating and
          collaborating on internal planning requirements,
          as well as conducting external customer service
          needs assessments. A quarterly/monthly reporting
          system exists to review performance against
          planned goals and targets. Also, a new management
          and employee performance planning and
          accountability process was developed, and the
          first phase was implemented in FY 1998 with new
          "performance contracts" for senior executives
          which tied their ratings to HUD 2020 program and
          management operations

 *        Expanded the Department's Management Committee
          process to include field managers to ensure that
          changes in Headquarters and field roles and
          responsibilities are clearly communicated and
          understood.

 *        Established independent Centers to centralize non-
          core functions previously performed in the field
          offices such as:

          -       18 Multifamily Hubs with 33 program centers

          -       4 Single Family Homeownership Centers

          -       2 Multifamily Property Disposition Centers

              -    Section 8 Financial Management Center

 *        Established two Troubled Agency Recovery Centers
          (TARCs) in Cleveland and Memphis.  (See Section 1
          for more details).




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Appendix I
The Department of Housing and Urban
Development's Comments on the Major
Challenges and Program Risks Identified in
GAO's Statement of Facts




2.   Resource Management/staff and Skills Mix

     Summary of GAO Problem Description

     GAO states that there are several concerns with HUD's
staffing patterns including:  assurance that HUD has the
right number of staff with the proper skills; significant
changes in workforce structure since the announcement of the
HUD 2020 Management Reform Plan; staffing targets under the
reform plan are uncertain; and a need to develop a process
for identifying and justifying its staff resource
requirements.

     Summary of HUD's Reforms

      Reforms include:

            Conducted a nation-wide merit staffing program
            using.an OPM- pproved m.odel to develop the
            strategic approach to redeploy staff into critical
            need areas through Super Postings and a Voluntary
            Reassignment Program. These efforts provided HUD
            the capacity to implement its planned reforms in a
            methodical and seamless process. We concentrated
            our reform efforts on the areas identified by the
            GAO and OIG. We engaged "change agent" teams
            throughout the Department and all of our program
            areas did extensive analysis to determine how the
            improvements were to be made. We then went back
            and reexamined our decisions and staffing and,
            with the help of nationally recognized management
            consultants, reaffirmed the number of staff and
            the allocation of resources.

      *     Restructured and realigned organizations to
            improve operational effectiveness through
            consolidations and economies of scale. This
            allowed the Department to institute 'back-room"
            operations for processing of documents and
            transactions; i.e., Homeownership Centers in 4
            locations rather than 81 field offices and
            accounting operations in one centralized location,
            in lieu of 10 former regional offices.

      *     Developed a proposed resource management
            methodology in conjunction with the National
            Academy of Public Administration.  Beginning in
            December 1998, two pilot studies are being


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GAO's Statement of Facts




           conducted to test this methodology. These pilot
           studies will each be eight-weeks in duration and
           will be completed by the end of February 1999.
           Following the successful completion of these pilot
           studies, this resource management methodology will
           be considered for implementation throughout the
           Department for resource requirement determination
           and allocation. No other federal agency has
           attempted such a model for cost estimation and
           allocation.

           Completed the assignment and allocation process.
           GAO visited our field offices over 6 months ago
           when we were in transition and interviewed a very
           small sample of managers - apparently not a
           statistically valid sample. It is not uncommon
           during periods of significant change, especially
           for a large Department with over 9,000 employees,
           to experience some growing pains during initial
           operatinn_     HWin   is   pnnt thag   nnasndt       ttadg   an   has
           the right people in placenn                      right locations
           to fulfill HUD's missions and reduce risk to our
           programs.

     *     Established Community Builders who are serving as
           HUD's link to communities and are responsible for
           assisting communities in identifying their needs
           and coordinating the development and
           implementation of Integrated Service Delivery
           Plans. More importantly, the establishment of
           Community Builders has allowed the Department for
           the first time to have a separation between
           Community Builder's functions and Public Trust
           Officer's functions. This separation means that
           Community Builders can concentrate on marketing,
           outreach, and technical assistance functions, and
           the Public Trust Officers can concentrate on
           monitoring and oversight, an area often overlooked
           at HUD.


3.   Internal Controls

     Summary of GAO Problem Description

          Internal control weaknesses that GAO identifies
     include a lack of staff and resources to manage and
     monitor its real estate inventory, inadequate warning.
     systems to prevent losses in its single-family and
     multifamily insurance programs, inadequate controls

                                      23




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The Department of Housing and Urban
Development's Comments on the Major
Challenges and Program Risks Identified in
GAO's Statement of Facts




      over rental assistance, inadequate automated systems
      and an inadequate management control system. In
      addition, GAO believes managers are not actively
      assessing risks in their programs and that monitoring
      of program participants continues to be problematic.
      Financial audits continue to reveal material weaknesses
      and nine material weaknesses remain open with 5 dating
      back to 1993 or earlier. Contract management is now a
      material weakness.

Summary of HUD's Reforms

     As mentioned earlier, it seems clear that GAO intends
to again conclude that HUD's overall general internal
control environment is weak, despite the significant control
environmental improvements made in the last two years.
During FY 1998, HUD trained over 1,100 field and
Headquarters managers and supervisors in their internal
control responsibilities for their programs, using GAO
"Standards for Internal Control in the Federal Government"
and OMB Circular A-123. Follow-up FY 1999 training will
focus on one of the critical GAO standards--monitoring. The
Department completed a "hard scrub" of the corrective action
plans for its nine material weaknesses and five of these
nine material weaknesses will be corrected in Fiscal Year
1999, including contract management.

     We have strengthened our control environment by
establishing a Risk Management Office within the CFO which
provides technical support and ensures risk assessments are
being performed by managers. All "big ticket" 2020 items,
i.e., all the new Centers, have been put through a detailed
FERA. In fact, more FERAs were performed at HUD in the past
two years than have been performed in the prior 10 years.
Managers are clearly assessing risks. We have also enhanced
our internal control environment by adding hundreds of
Community Builders. This allows our cadre of Public Trust
Officers to focus on monitoring and assessing program
performance and prevent the occurrence of fraud, waste,
abuse and mismanagement.

     The creation of the REAC, TARCs and Enforcement Center
with 5 fully functioning satellite field offices, will allow
HUD to focus its monitoring, technical assistance and
regulatory resources where they are needed most and where
they can be more effective. As the REAC increases its data
warehouse, opportunities for analyses will abound, and the
Department can expect an increase in the accuracy and
specificity of problem indicators/identifiers and more
sophisticated early warning mechanisms in the REAC's


                                    24




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                      The Department of Housing and Urban
                      Development's Comments on the Major
                      Challenges and Program Risks Identified in
                      GAO's Statement of Facts




                      systems. Concerning the Department's financial statements,
                      HUD received its first ever qualified audit opinion two
                      years ago (in prior years auditors issued disclaimers of
HUD's comment   17.   opinion) and we are on track to receive an unqualified
                      (clean) opinion for our FY 1998 consolidated financial
                      statement.  This is a keystone achievement and reflective of
                      the changing attitude of HUD managers in recognizing their
                      fiscal responsibilities and the vast improvement in HUD's
                      financial systems and financial data. This Department has
                      made significant strides in improving its overall control
                      environment. More details follow in the examples below and
                      in the many related areas throughout this response to GAO's
                      draft report.

                                 Established a Department-wide task force to
                                 address the issues necessary to facilitate large-
                                 scale implementation of computer matching and
                                 income verification and improved subsidy
                                 verification. Six teams comprise'the task force,
                                 each headed by a project managr    nd are assigned-
                                 tasks essential to expand existing capabilities
                                 for ensuring the subsidies are paid based on
                                 correct tenant income. Task force accomplishments
                                 include:

                                 -   Conducted pilot test of large-scale computer
                                     matching at five housing agencies,

                                 -   Conducted an analysis of four different income
                                     matching techniques, including the technique
                                     used for the pilot test mentioned above,

                                 -   Expanded the nationwide income matching
                                     program by 40,000 households,

                                 -   Conducted an extensive research effort to
                                     establish a complete and accurate count of
                                     units and families receiving rental assistance
                                     (for use in helping to ensure complete
                                     population of the tenant database),

                                 -   Identified and resolved problems concerning
                                     the transmission of tenant data to HUD,

                                     Developed plans for 'sending warning letters to
                                     major housing agencies that are not fully
                                     reporting tenant data to the MTCS,




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Challenges and Program Risks Identified in
GAO's Statement of Facts




      -   Developed sanction notices to housing agencies
          (effective 1/99) and owners/agents (effective
          4/99),

      -   Agreed on a standard Housing and PIH re-
          certification policy that will help reduce
          false positive matching results,

     -    Developed a proposed rule requiring housing
          agencies and owner/agents to penalize tenants
          who fail to report income es required and fail
          to sign repayment agreements, and

     -    Developed a detailed plan to initiate a 100%
          match of all clients who receive Section 8
          assistance.

     Creation of the Real Estate Assessment Center
     (REAC) has allowed staff to place more emphasis on
      alay wadrninl aAd. loss pAreention of insured
     Multifamily mortgages. The REAC has the ability
     to identify the most egregious financial and
     physical problems and refer them directly to the
     Enforcement Center for immediate action.
     Additional accomplishments include:

          Improved monitoring which will result in early
          identification of problems and accelerated
          referrals to either the Assessment Center for
          remedial review and/or Enforcement Center for
          appropriate action.

          Establishment of a Quality Assurance unit
          within REAC that is responsible for the
          program management and operational aspects of
          quality assurance and risk management.

     -    Electronic transmission of audited financial
          statements for submission to the Assessment
          Center.

     -    Initiating a national inspection process that
          will provide a physical inspection baseline on
          the entire HUD-supported housing portfolio
          before the year 2000.

     -    Establishing integrated automated systems
          (e.g., the Real Estate Management System and



                              26




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Challenges and Program Risks Identified in
GAO's Statement of Facts




              the Annual Financial Statement system) for
              tracking, targeting, monitoring and analysis.

              Consolidating Single Family loss mitigation
              functions in Oklahoma City, outstationed from
              the Denver HOC.

              Exploring the use of automated Single Family
              underwriting and loss mitigation indicators by
              staff in Oklahoma City.

          -   Expanding the functions of the Single Family
              Quality Assurance Division in each HOC.

          The Department has made significant progress in
          improving HUD's procurement operations and curing
          the contract management material weakness.   HUD
          has hired a Chief Procurement Officer.   The Chief
          Procurement Officer and his staff have been
          --u-kiin oun-umerous upedLtillal ipwvelments.
           (See Part I of this letter for details)

 *        Designated Public Trust Officers who will perform
          monitoring and ensure that federal funds are used
          appropriately for the purpose intended, with zero
          tolerance to fraud, waste, and abuse.

 *        Created two Troubled Agency Recovery Centers to
          assist troubled housing authorities across the
          nation.

 *        Established a Section 8 Financial Management
          Processing Center to improve rental assistance
          payment processing, safeguard funds and achieve
          efficiencies through centralization and economies
          of scale.

 *        Created an Office of Risk Assessment within the
          CFO organization. This office will ensure risk
          assessments are performed when needed, track the
          correction of material weaknesses, contract for
          both management control reviews and corrective
          action verification reviews and monitor progress
          under HUD's Management Integrity Plan.

 *        Integrated FERA's into HUD's Management Control
          Process and taken steps to assess risks in new
          programs, proposed programs, and modifications to
          existing programs.  FERAs have been completed for


                                 27




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                         The Department of Housing and Urban
                         Development's Comments on the Major
                         Challenges and Program Risks Identified in
                         GAO's Statement of Facts




                                  all seven new centers and 9 other FERAs within the
                                  various program organizations.

                            •     Strengthened oversight of the audit resolution
                                  process by consolidation of Audit Liaison Officer
                                  functions in both Headquarters and the field,
                                  adoption of an effective certification process
                                  making managers accountable for taking final
                                  actions, and initiation of a quality assurance
                                  process by the CFO.  Conducted a quality assurance
                                  review and issued a report on HUD's audit
                                  resolution process.

                            *     Credit Reform initiatives (FY 97 qualification
                                  issue) within the Department have made significant
                                  progress. SFFAS No. 2 requires that agencies
                                  estimate and report cash flows relating to loans
                                  and loan guarantee commitments made after
HUD's comment 18.                 September 30, 1991, and that such cash flows be
                                  accounted for on a pr-esent value basis   F,'s
                                  mortgage insurance programs are currently
                                  presented in accordance with private sector GAAP,
                                  which differs from SFFAS No. 2 reporting
                                  requirements. FHA has received an unqualified
                                  (clean) opinion on these statements since 1993
                                  from a major public sector accounting firm. HUD
                                  expects compliance with the requirements of credit
                                  reform in its FY 1998 Financial Statements, and
                                  significant work has already been accomplished.

                    4.     Financial Systems Integration

                           Sumary of GAO Problem Description

                         GAO says that systems are inadequate because they are
                    poorly integrated, ineffective and generally unreliable.
HUD's comment 19.   GAO believes that the systems do not satisfy the needs of
                    management nor provide adequate controls because they are
                    not in conformance with FMFIA.

                           S-mmry of HUD's Reforms

                         The problem as stated by GAO is outdated. Over 60% of
                    our systems are compliant, including all of our major
                    financial systems. Our financial statements are now
                    considered accurate (save for a single audit qualification
                    on credit reform) and thus, the underlying data is accurate-
                    this was not true two years ago. The GAO reviewers of HUD
                    downplay this accomplishment despite the significant


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                    The Department of Housing and Urban
                    Development's Comments on the Major
                    Challenges and Program Risks Identified in
                    GAO's Statement of Facts




                    attention focused on this goal by the Congress, OMB and GAO
                    management. Also, significant work has been done to develop
                    and promulgate both new accounting systems and new financial
HUD's comment 20.   management systems. We now have a new, standard, fully
                    compliant, HUD-wide general ledger. And, we have developed
                    and deployed 11 new financial management systems.   Finally,
                    new management information tools, such as the community
                    geographic information system can provide managers, the
                    Congress and the public with greater access to HUD's
                    databases. HUD's financial management systems are much more
                    effective than in the past, are generally reliable, and
                    plans are in place to make further improvements.   Please
                    note:

                          *     The Department has made significant improvements
                                in FMFIA compliance.

                                -   The Office of the CFO has established a
                                    coordinated and refined FMFIA review and
                                      ,alysis ~-uC wwhich hal cla.ified A 127
                                    requirements and definitions of terms (e.g.
                                    distinctions between "financial systems and
                                    mixed systems"). Moreover, affected program
                                    organizations have responded effectively to
                                    this technical assistance and identified
                                    system deficiencies, as well as remediation
                                    plans. These efforts have resulted in the
                                    appropriate reclassification of systems, that
                                    is, from non-conforming to conforming.

                                -   At the end of FY 1997, only thirty-eight of
                                    ninety-two HUD systems were classified as non-
                                    conforming, compared to 85 at the end of FY
                                    1996. Most of HUD's financial and mixed
                                    systems comply with FMFIA. Thus, 60% of our
                                    systems are compliant. This contradicts the
                                    GAO statement "that most of its systems did
                                    not comply with FMFIA and therefore could not
                                    be relied upon to provide timely, accurate,
                                    and reliable financial information and reports
                                    to management."

                                -   For FY 1998, we will report more systems in
                                    compliance and a reduction in the total number
                                    of financial and mixed systems. We will also
                                    show that of the non-compliant systems, five
                                    will not be material for timely, accurate, and
                                    reliable- financial information and reports to
                                    management. We will be providing assessments


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                      The Department of Housing and Urban
                      Development's Comments on the Major
                      Challenges and Program Risks Identified in
                      GAO's Statement of Facts




                                on all new systems determined to be conforming
                                by the program offices and for those non-
                                compliant systems reclassified as compliant
                                during FY 1998.

                           -    All our major accounting systems are in
                                compliance.  These financial systems are the
                                systems of greatest relevance. More
                                importantly, HUD's financial statements are
                                now considered accurate (save for a single
                                audit qualification issue on credit reform),
                                despite the fact that just two years ago, HUD
                                had a disclaimer of an audit opinion for its
                                consolidated financial statements.

                           -    Even with the CFO's Office working closely
                                with program offices to evaluate program
                                system conformance with A-127 requirements, we
                                recognize the need to conduct independent
                                audits to evaluate the adequacy of the FMFIA
                                assessments done by the program otlices.   we
                                have a contract in place to conduct such
                                audits. The first system review will be done
                                in January. We anticipate that audits for
                                about six more will be completed by the 3 rd
                                quarter of FY 1999.

                           There have been major, comprehensive
HUD's   comment 21.        accomplishments in financial systems integration.
                           The GAO should be able to state, based on the
                           documentation submitted, that the following
                           systems have been developed and deployed during
                           the past few years:

                                The Integrated Disbursement and Information
                                System was developed and deployed and is used
                                by the Office of Community Planning and
                                Development to monitor an estimated 950
                                community development grantees, and nine
                                states.

                                The Integrated Business System was developed
                                and deployed in seven modules and is used by
                                the Office of Public and Indian Housing, and
                                the Office of Native American programs to
                                monitor their programs, including information
                                related to all housing authorities in the
                                country.




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Appendix I
The Department of Housing and Urban
Development's Comments on the Major
Challenges and Program Risks Identified in
GAO's Statement of Facts




    -     "he HUD Procurement System was developed and
          deployed and is used by the Office of
          Administration to track and manage the
          Department's procurement activities.

    -     The Grants Evaluation Management System was
          developed and deployed and is used by the
          Office of Fair Housing and Equal Opportunity
          to monitor their two major grant programs.

    -     The HUDCAPS system was developed and deployed
          and is used by the CFO in several Departmental
          areas to handle the core accounting
          transactions and several key programs. The
          deployments to date include:    the Section 8
          tenant-based program, the S&E accounts, and
          the working capital account.     In addition, as
          of October 1998, a consolidated HUD-wide
          general ledger with a new chart of accounts
          Iare       FppnyP1
                        that wl 1 1 nr1IP-_ for  the fr-r
          time, summary transactions for all of HUD. A
          plan is in place to deploy fully and use
          HUDCAPS for all core accounting activities of
          the Department by October 1999.

    -     The Tenants Rental Assistance Certification
          System was developed and deployed and is used
          by the Office of Housing for tenant voucher
          processing, contract processing, and budget
          development and analyses.

    -     The Budget Formulation System was developed
          and deployed and is used by the CFO to
          formulate, prepare and monitor the annual
          budget.

    -     The Community 2020 Geographic Information
          System was developed and deployed and is used
          by the CFO, Community Builders, and Public
          Trust Officers to provide program and
          management information in a geo-coded format
          to users of HUD programs.  In addition, the
          first stage of the Department's Executive
          Information System was prototyped using
          selected data from program and financial
          systems.

    -     'The Budget Outlay Support System was developed
          and deployed and is used by the CFO to develop


                             31




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                    Development's Comments on the Major
                    Challenges and Program Risks Identified in
                    GAO's Statement of Facts




                                   better and more timely outlay estimates of
                                   Section 8 programs, both tenant-based and
                                   project-based.

                              -    The Single Family Premium Collection System
                                   was developed and deployed and is used by the
                                   Office of Housing to collect and account for
                                   premiums. The system improves internal
                                   controls, eliminates redundancies, improves
                                   service to lenders and streamlines
                                   reassessment of late fee refunds.

                              -    The REMS Management System was developed and
                                   deployed and is used by the Office of Housing
                                   to monitor multifamily projects and to perform
                                   a variety of routine administrative
                                   activities.

                              A data cleanup project was initiated during the
                              2nd qLarter of FY 980, as pzt of the Ui   -ncial
                              Systems Integration Project, under the management
                              of the HUD Chief Financial Officer.   The project
                              team developed HUD's Common Data Element Cleanup
                              Method, based on best practices in both the
                              federal and commercial sectors, in April 1998.
                              The team then selected, prioritized and grouped
                              data elements for FY 98, based on the initiatives
                              begun under the Secretary's HUD 2020 Reform Plan.

                                   When cleanup is completed, the Financial
                                   Systems Integration Project's Data Cleanup
                                   Team will conduct independent verification
                                   assessments on each major data set to ensure
                                   that they were not only cleaned, but were
                                   properly documented according to the HUD Data
                                   Cleanup Method. The Independent Verification
                                   Contractor has been selected and will begin
                                   verifications in early January 1999. At this
                                   time, the Department is ready to verify 3 of
                                   the 9 data sets. Two additional data sets
                                   will be ready for verification in February.

                     *        Improvements in HUD's information technology
                              capital planning.

                                  In GAO's December 18, 1998, report, HUD agreed
HUD's comment 22.                 with the principal findings that the Department
                                  must improve its Information Technology (IT)
                                  Capital Planning Process.  However, the report


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GAO's Statement of Facts




               did not take note of several major
               accomplishments.  In effect, it suggested that
               no process was in place. HUD has had in place
               a structured process for selecting IT
               investments since 1989 and has consistently
               made improvements to that process over the past
               decade. At the time of the passage of the
               Clinger-Cohen Act in 1996, HUD already had in
               place significant elements of sound IT Capital
               Planning practices that were compliant with the
               Act's requirements, in particular an executive
               level investment review board and a
               Departmental investment selection process.   In
               addition, the Department continually improves
               its Capital Planning. For example, in 1996 the
               Department replaced the former investment
               review board with the current Technology
               Investment Board Executive Committee (TIBEC),
               which meets monthly to review IT Investment
                rojects and inu.... under th.e personal
               leadership of the Secretary and Deputy
               Secretary. HUD considers this direct
               participation in and leadership of the TIBEC by
               the Secretary and Deputy Secretary to be an IT
               Capital Planning best practice among cabinet-
               level agencies.

     Over the past two years, and as indicated above, the
Department has made significant improvements in the area of
IT Capital Planning, and is currently underway with
ambitious plans to establish in FY 1999, a complete, robust,
and rigorous process to Control IT Investments.
Furthermore, HUD is in the process of building upon
established elements of a sound IT Investment selection
process to establish a full IT Capital Planning and
Investment Control process for the Department. This
process, which is entirely in keeping with the goals and
objectives of HUD 2020 Management Reform, will fully address
the GAO IT Capital Planning model process of selecting,
controlling, and evaluating the Department's IT Investments,
and will bring the Department into full compliance with the
Capital Planning and Budgeting requirements of Clinger-
Cohen.


          Part III: Examples Of Errors Of Fact, Logic And
              Characterization In The Draft GAO Report

     The purpose of this part of the letter is to bring to
GAO's attention instances of factual inaccuracies,

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                     inconsistencies of logic, faulty assumptions and
                     mischaracterizations that lead the reader to erroneous
                     inferences and conclusions. The following examples are
                     provided for review and correction. They are not intended
                     to be comprehensive but indicative of the depth of problems
                     with the draft report.

                     1.    GAO STATEMENT

                                Page 2, "Managers were not actively assessing
HUD's comment 23.          risks in their programs as required under the
                           management control Program."

                           HUD CORRECTION

                           This statement is totally false.        For example:

                           ·     The Office of Housing has aggressively implemented
                                 the Departmental requirements of the CFO-
                                  -pthliJhI d Rik Managermnt program as evidencLd
                                 by thne ront end risk assasimelta  (IElASI)that
                                 have either been completed or are in process. All
                                 FERAs are performed in accordance with HUD
                                 Handbook 1840.1 REV2, which mandates that the
                                 minimum threshold for conducting a FERA is any new
                                 program totaling $10 million or more and/or for a
                                 substantially revised or administrative function
                                 if the increase or loss is greater than $10
                                 million and/or if revision is equal to a change of
                                 5% in a budget line item. Procedures for
                                 assessing risk are incorporated in HUD Handbook
                                 1840.1 REV2, Chapter 8 and supplemental
                                 instructions from the CFO (February 12, 1997
                                 memorandum on Front End Risk Assessments) and the
                                 Housing Comptroller (October 16, 1996 memorandum
                                 on Front End Risk Assessments).

                                Since FY 1996, the Office of Housing has completed
                           five (5) FERAs which have an acceptable mitigation plan
                           approved by the CFO.  There are eight (8) others in
                           various stages of completion. For seven (7) of these,
                           FERAs have been received and mitigation plans have been
                           submitted for review and approval by the CFO. A
                           contract has been awarded (10/98) for another FERA and
                           the date of completion has not been established.

                           · CPD field offices routinely conduct risk assessments
                             in all program areas. Through the Annual
                             Comparative Review step of CPD's Grants Management
                             System process, each grantee is placed through

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                               complete risk analysis procedures. If it is
                               determined that the grantee is of a "high risk"
                               category, provisions are made to provide immediate
                               assistance to the grantee through technical
                               assistance or on-site monitoring.

                               The creation of the REAC is also serving to
                          provide HUD with project and portfolio level risk
                          assessment information across its public and
                          multifamily housing programs.
                               Moreover, we also question the validity of GAO's
                          conclusion because GAO did not talk to a statistically
                          significant number of managers.

                    2.    GAO STATEMENT
                                The subtitle on Page 2 reads "2020 Reform Plan
HUD's comment 24.         Directed Toward Internal Control Weaknesses".
                              uo CORREC7 ION

                               The subtitle on page 2 is a misleading statement
                          and needs revision to accurately reflect that the HUD
                          2020 Reform Plan was not solely directed toward
                          internal control weaknesses and to state that the 2020
                          plan effectively addressed those problems. Substitute
                          language should read something like: "Internal Control
                          Weaknesses Were Effectively Addressed by HUD's 2020
                          Reform Plan." Also, GAO should note that over 1100
                          field and Headquarters managers received internal
                          control training during FY 1998.

                    3.   GAO STATEMENT
                               Page 3 states that "REAC will not be fully
                          functional until 2000."

                          HOD CORRECTION
HUD's comment 25.
                              The new REAC organization is using a phased
                         systems and operational development process to assure
                         that basic housing portfolio assessment information is
                         available for use by HUD's multifamily and public
                         housing program staff, and the new Enforcement Center,
                         as quickly as possible. GAO's report should acknowledge
                         that significant aspects of REAC's housing assessment
                         operations are already functioning well beyond any.
                         systems ever used at HUD. For example, REAC's new
                         physical inspection data collection device and protocol


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                         are already in operational use, with over 4,200
                         inspections completed through mid-December 1998.   GAO
                         should further acknowledge that all critical components
                         of REAC's housing assessment processes are scheduled to
                         be functioning to improve HUD's housing monitoring and
                         enforcement activity before the year 2000. In January
                         1999,   Release 1.1 of REAC's Financial Assessment
                         Subsystem (FASS) will be placed into production to
                         collect and disseminate annual financial statement and
                         audit data on all of HUD's multifamily housing
                         portfolio.

                               In addition, while REAC is completing the initial
                         development of its new assessment systems, they are
                         operating various Laboratory Projects which are using
                         current or historical housing project data to provide
                         "advisory scores" and other useful information to
                         strengthen HUD's monitoring and enforcement activity.
                         For example, REAC is providing advisory Public Housing
                         Assessment System (PHAS) scores for all PHA's,

                         30, 1998. Initial PHA advisory scores have already
                         been completed for several hundred PHAs. REAC is also
                         assisting the new Enforcement Center with physical and
                         financial assessments of 200 enforcement case referrals
                         made by Multifamily Housing Program Center staff.

                    4.   GAO STATEMENT

HUD's comment 26.              Page 4 states that "Although the Enforcement
                         Center began operations on September 1, 1998, it is not
                         scheduled to perform all of its centralized functions
                         until around April 1999 when it is to begin receiving
                         referrals of troubled multifamily properties from the
                         Real Estate Assessment Center."

                         HUD CORRECTION

                              Since October, 1998, the Enforcement Center (EC)
                         has been receiving cases and performing all of its
                         centralized functions and is regularly receiving
                         additional cases from Housing and Real Estate
                         Assessment Center (REAC). To date, the Center has
                         received 200 referrals, which is considered significant
                         by any objective standards, and is performing all of
                         its centralized functions including:

                           - Obtaining, organizing and reviewing project files;
                             visiting properties; coordinating with the Offices
                             of Housing, Inspector General, and Department of


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                               Justice; generating enforcement recommendations;
                               preparing administrative records; updating
                               automated systems (REMS); beginning actions on
                               debarments; and providing legal counsel to all the
                               above actions as well as to the Mortgagee Review
                               Board (MRB), on 2530 clearances, and Civil Monetary
                               Penalties.

                          -    The Enforcement Center coordinates with the Real
                               Estate Assessment Center on the physical and
                               financial review of the over 200 properties already
                               referred. The EC has continued to train all staff
                               in critical core competency, as well as in the
                               award of a major contract.  It should be noted,
                               that it was never intended that the Enforcement
                               Center would handle all troubled projects at the
                               time the EC became fully operational. We would ask
                               what centralized "functions" is it not now
                               performing that it will later perform? Moreover,
                          ____Gn   m-lJst   recognize that in thn   pat   1R mnnths:
                               prior to the "ortlclal" opening or the Enforcement
                               Center, HUD has dramatically improved enforcement
                               at the Agency, for example, increasing debarments
                               of bad landlords by 300% over prior years.

                    5.   GAO STATEMENT

                              Page 4 states "the FY 97 financial statements ...
HUD's comment 27.        found continued material internal control weaknesses in
                         the programs of HUD and FHA."

                         HUD CORRECTION

                              GAO is not satisfied to make a simple factual
                         statement without making leading inferences to the
                         reader that this phenomenon exists only at HUD. GAO
                         would be more accurate if it stated that material
                         weaknesses are found within the financial statements at
                         all (emphasis added) federal agencies and departments.
                         Most cabinet level agencies have on the average of 8-24
                         material weaknesses with DOD exceeding 50 open material
                         weaknesses. This matter is not isolated to HUD and GAO
                         needs to make this acknowledgment.

                    6.   GAO STATEMENT

                              Page 4 states that HOD has a qualified audit
                         opinion because of "its inability to account for its
                         credit programs in accordance with federal accounting
HUD's comment 28.        stancards."

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                           HUD CORRECTION

                                GAO fails to tell the entire story particularly as
                           HUD stacks up against other federal agencies regarding
                           compliance with the reporting requirements as required
                           under SFFAS No. 2. Approximately 60 % of the agencies
                           that credit reform affects have not achieved full
                           compliance.

                                However, FHA has achieved compliance for its
                           credit programs in accordance with private sector
                           accounting standards, referred to as Generally Accepted
                           Accounting Principles, (GAAP). FHA has received an
                           unqualified (clean) audit opinion under GAAP for its
                           financial statements since 1993.

                                As a result of the qualification in HUD's FY 1997
                           consolidated financial statement audit, FHA has
                           developed a plan to comply with the reporting
                           .reuirement. of SFFAS No. 2. FIA has developed an
                           action plan, and is on schedule to comply with the
                           credit reform requirements of SFFS No. 2.

                                HUD's work and accomplishments in this area have
                           been praised in another GAO report titled "Credit
                           Reform - Key Credit Agencies Had Difficulty Making
                           Reasonable Loan Program Cost Estimates." There appears
                           to be a tension, if not a direct contradiction, between
                           this earlier report and the current draft.

                                Also, in this section, GAO should emphasize the
                           accomplishment of receiving a qualified opinion. Two
                           years ago, the Department was not able to receive any
                           type of opinion on its financial statement.

                     7.    GAO STATEMENT

                                Page 7 states that 'Although HUD has reduced its
                           material weaknesses from 51 in Fiscal Year 1991 to the
                           9 remaining open as of Fiscal Year 1997, some of the
                           remaining weaknesses are long-standing -- one dates
                           back to 1983 while four others date back to 1993-and
HUD's comment 29.          some involve billions of dollars such as the weaknesses
                           relating to the $18 billion dollars rental assistance
                           program."




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                         HUD CORRECTION

                              GAO is very dismissive in its tone relating to the
                         significant decrease in material weaknesses from 51 in
                         FY 1991 to the 9 remaining for FY 1997.  A simple
                         deletion of the word "although" would be a more honest
                         description of the situation. A cleaner rewrite
                         without changing the GAO facts would be: HUD has
                         reduced its material weaknesses from 51 in FY 91 to the
                         9 remaining open as of FY 97.  Some of these remaining
                         weaknesses are long-standing -- one dates back to 1983
                         while four others date back to 1993 -- and some involve
                         billions of dollars such as the weaknesses relating to
                         the $18 billion rental assistance program. Finally,
                         such a sharp reduction in material weaknesses is rare
                         among agencies and positively significant for an agency
                         as long troubled as HUD. It represents real progress..

                    8.   GAO STATEMENT

HUD's comment 30.             On page 7, GAO cites its July 1997 report on
                         Housing Preservation: Policies and Administrative
                         Problems Increase Costs and Hinder Program Operations.

                         HUD CORRECTION

                              The July 1997 GAO report dealt mainly with funding
                         and targeting aspects of the Preservation program.
                         Since the program is no longer funded, the remaining
                         issues from that report relate to oversight of those
                         projects that were funded and their compliance with
                         affordability restrictions which owners agreed to in
                         exchange for financial incentives. Since the report
                         was issued in July 1997, the Department, and
                         Multifamily-Housing in particular, has taken
                         significant steps that will greatly enhance our ability
                         for project oversight to ensure compliance with program
                         requirements. They are as follows:

                          *    The Real Estate Management System (REMS) - This
                               brand new system and its related data quality
                               verification initiative, are the foundation that
                               will enable project managers in the field to
                               better oversee all multifamily projects, including
                               the Preservation portfolio which can now be
                               highlighted to increase the focus on continuing
                               affordability and owner compliance.

                          *    Training - As soon as the HUD 2020 Management
                               Reforms were implemented in October 1997,


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          transitional training for all Project Managers was
          provided nationwide in all 18 Multifamily Hubs.
          This training was critical in providing the broad
          overview of the more generalist perspective of the
          Project Manager. Additional satellite distance
          learning broadcasts were provided in Fiscal Year
          1998, providing a closer focus on the functions of
          the Project Manager's activity. These sessions
          included an overview, including participation by
          industry representatives, called Meet Housing
          1998. The series of training sessions covered
          such key areas as:  Review of Annual Financial
          Statements, REMS (Real Estate Management System -
          2 parts), Physical Inspections, Conducting
          Management Reviews, Business Agreements, Tenant
          Relations, Portfolio Monitoring, and Center
          Development and Implementation.

  *       The Real Estate Assessment Center (REAC) - REAC
          Was   creteu   d   t   pL21fUm
                                     0     ulJlfuVz,   ti,,liy   aZIOCOlehLts
          of multifamily projects; thereby, significantly
          reducing the workload burden on field staff so
          that more attention can be focused on compliance
          issues and regulatory oversight as well as
          increasing their ability to identify those
          projects needing attention.

  *       The Departmental Enforcement Center (EC) - will
          centralize many of the enforcement activities
          previously performed by Multifamily Housing Field
          Office personnel. The Enforcement Center will be
          dedicating resources with enforcement activities
          on the most troubled properties; thereby, freeing
          staff in the field offices from a significant
          portion of this demanding and time-consuming
          responsibility.


  *       The Office of Quality Assurance was implemented in
          May 1998 to ensure quality program delivery and
          oversight of the multifamily programs and
          portfolio. The Quality Assurance staff are
          responsible for the program management and
          operational aspects, including risk management for
          multifamily housing programs.  They will be
          testing cases and project managers' follow-up to
          ensure that HUD's field offices are addressing the
          affordability and compliance requirements under
          the Preservation program, as well as other


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                                critical program issues.

                               The combination of these enhanced management and
                          administrative improvements provides uniform, up-to-
                          date systems and organizational capability to ensure,
                          in the case of the Preservation portfolio, that owners
                          are in compliance with the agreements for continuing
                          affordability under the program. It is inexplicable
                          that GAO would rely on an outdated report and choose to
                          ignore major changes implemented since that report was
                          issued.

                    9.    GAO STATEMENT

                               Page 9 states that "HUD's inability to implement
                          plans under 2020 for handling properties on which
HUD's comment 31.         borrowers defaulted was due to a shortage of Single
                          Family staff because of downsizing."

                       -HVD-CORR-EeiON

                               This is false and reflects the consistent lack of
                          thorough research and analysis in this draft report.
                          FHA has not yet implemented scheduled staffing
                          reductions in Single Family Real Estate Owned (REO)
                          property disposition or asset management divisions.
                          Therefore, any GAO criticism of FHA performance in REO
                          property disposition cannot be linked to reductions in
                          single family staffing levels. Taken together, more
                          than 450 FHA field staff presently work on Single
                          Family REO property disposition. Many single family
                          REO staff will be re-assigned to other divisions
                          following implementation of the new Management and
                          Marketing (M&M) contracts nationwide. However, none of
                          these staff have been or will be released from their
                          REO division assignments until new private sector
                          property management and marketing contractors are fully
                          operational in March, 1999.

                               The single family Home ownership Centers (HOCs)
                          currently are at a combined 99 percent staffing level.
                          Out of 957 total positions, the four HOCs only have 10
                          vacancies at present, a very low 1% vacancy rate by
                          anyone's standard.

                               As further evidence of adequate staffing levels in
                          the HOCs, last year the Single Family field staff
                          endorsed more than one million new loans (the third
                          highest total in FHA's history) and the REO staff sold
                          more than 64,500 REO properties, an increase of more


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                           than 10 percent over FY 1997 when FHA sold
                           approximately 58,000 properties. These very impressive
                           performance numbers indicate that FHA is operating at
                           adequate staffing levels today. Documentation is
                           readily available-to attest to these facts.

                     10.   GAO STATEMENT

                                On page 9, GAO extensively restates the findings
HUD's comment 32.          of its May 1998 report on FHA single family loans in
                           New Jersey and Ohio, but makes a cursory reference to
                           the new home buyer protection plan HUD implemented in
                           June 1998.

                           HUD CORRECTION

                                 GAO gives only passing reference to the Home Buyer
                           Protection Plan, in fact, just one sentence. As GAO
                           staff have been informed, the Department is
                           - -raggreseive-y-i4-pement-ing-Secret-ary-Guomo'-s-4ome-Buyer-   -
                           Protection Plan, which was announced in June, 1998.
                           This comprehensive reform effort includes the following
                           elements:

                                      A comprehensive update of FHA appraisal
                                      guidelines and procedures, including reforms
                                      to the standard FHA appraisal forms and
                                      requirements.    IHAstaff are working with
                                      Arthur Andersen Consulting to streamline and
                                      condense dozens of mortgagee letters, field
                                      notices and HUD handbooks on appraisal
                                      requirements into one, up-dated appraisal
                                      handbook. In addition to compiling all FHA
                                      appraisal guidelines into one, more
                                      accessible handbook, this effort also
                                      includes many enhancements to FHA appraisal
                                      requirements. The FHA Valuation Conditions
                                      Form, for instance, is being enhanced to
                                      ensure that appraisers more thoroughly review
                                      the property physical condition, to better
                                      inform FHA borrowers of the potential for
                                      physical defects, and inform them of the
                                      potential need for further home inspections.
                                      Revisions to the Handbook also clarify
                                      appraisal requirements and responsibilities,
                                      the first step to facilitating easier
                                      enforcement of FHA appraisal requirements. A
                                      draft of the new appraisal handbook will be
                                      available on the HUD website for review and



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                                     comment by HUD's industry and consumer
                                     partners in January, 1999.

                                     FHA also has considerably stepped up
                                     monitoring and enforcement efforts
                                     concerning appraisers. Across the country,
                                     FHA conducted detailed field reviews of 10
                                     percent of all appraisals conducted for FHA
                                     loans. Taken together, this represents some
                                     147,956 appraisal field reviews. These
                                     reviews involve a re-appraisal of the subject
                                     property to determine if the appraisal
                                     methodology was accurate.

                               e     FHA also stepped-up enforcement efforts
                                     against appraisers.  In the last quarter of
                                     FY 1998 alone, FHA referred approximately 30
                                     appraisers to the Enforcement Center for
                                     appropriate action.

                               e     As part of Secretary Cuomo's Home Buyer
                                     Protection Plan, the revised appraisal
                                     handbook will include clear guidelines
                                     regarding appraiser enforcement standards.
                                     The handbook will include a matrix clearly
                                     showing the enforcement action, including
                                     civil money penalties, suspension and
                                     debarment, associated with various
                                     infractions.

                    11.   GAO STATEMENT

                               The concluding paragraph on pages 10-11 for
                          internal controls states that 'while HUD has initiated
HUD's comment 33.         actions under the 2020 Management Reform Plan that
                          could help to address its internal control weaknesses
                          such as improving the management and oversight of its
                          real estate inventory, the reforms are not fully
                          implemented, and it is too soon to assess their
                          effectiveness. #

                          HUD CORRECTION

                               Giving only one sentence for such a major HUD
                          reform is not only highly misleading to the reader but
                          indicates a bias on GAO's part against documenting how
                          substantially HUD has reduced risk. GAO takes the
                          approach that unless operational perfection is
                          attained, i.e., reforms are not fully implemented, then
                          the work and efforts to date remain unrecognized,

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                           unmeasureable and without impact on the HUD operations.
                           HUD has made significant strides in its internal
                           control environment in the past two years: Front-End
                           Risk Assessments (FERAs) have become a standard
                           management tool; FERAs have been completed for all of
                           the newly established centers, one-day training was
                           provided to 1,100 field and Headquarters managers on
                           internal control; there is significant high-level
                           management attention paid to corrective action plans
                           for material weaknesses; and demonstrable steps have
                           been taken toward resolving several open material
                           weaknesses. The recognition of these achievements and
                           accomplishments is missing from the GAO report.

                                In its March 1998 Evaluation Report, Booz-Allen
                           assessed the HUD 2020 Management Plan:

                                'As of February 1998, the HUD 2020 organization is
                                in place and being staffed. Considerable progress
                                h.as.be..d      -in-eienert-
                                                  .              th--
                                                                   e revise      d
                                organizations, structures, processes, new systems,
                                and staffing shifts needed for HUD's
                                transformation. In addition, HUD continues work
                                on other operational improvements including: 1)
                                redesigning budget and procurement processes; 2)
                                enhancing internal controls by developing a
                                program for financial systems integration; 3)
                                conducting front end risk assessments, and; 4)
                                developing revised protocols for assessing the
                                physical and financial conditions of its
                                portfolios."

                     12.   GAO STATEMENT
                                On page 11, the section header reads that 'Much
                           Work Remains on HUD's Information and Financial
                           Management Systems."

HUD's comment 34.          HUD CORECTION
                                The section header mischaracterizes the work that
                           HUD has done in the past two years.  For example, we
                           have developed and implemented 11 new systems and all
                           of HUD's Accounting Systems are A-127 compliant. We
                           suggest that the header be revised to give the
                           appropriate inference: "Much Work Has Been Accomplished
                           Relating To HUD'a Information And Financial Management
                           Systems."  We can provide much greater detail if
                           needed. GAO has already received numerous documents
                           supporting this statement.

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                     13.      GAO STATEMENT

                                   Page 12 states that most of HUD's systems 'did not
HUD's comment 35.             comply with FMFIA and therefore could not be relied
                              upon to provide timely, accurate and reliable financial
                              information and reports to management."

                              HUD CORRECTION

                                   This is a misleading statement given the
                              documentation that has been previously provided to GAO
                              indicating that all of HUD's major accounting systems
                              are FMFIA compliant. The systems at HUD that affect
                              financial transactions and disbursements have withstood
                              the FMFIA standards for compliance; and HUD has had a
                              far more vigorous standard for compliance than any
                              other Federal agency. Some non-financial systems have
                              work remaining to be FMFIA compliant, but the systems
                              hainq--the-m    risk -expos    or
                                                              .I:UD arc-fully
                              compliant.

                     14.      GAO STATEMENT

                                   Page 13 negatively describes HUD's data clean-up
                              efforts.

                              HUD CORRECTION
HUD's comment 36.
                                   In the first full paragraph on page 13, GAO
                              describes HUD's data clean-up efforts. The description
                              has a dismissive tone that incorrectly ignores our work
                              to date. To our knowledge, HUD is unique within the
                              federal government in that we have developed a specific
                              plan with specific timetables and a quality assurance
                              plan to address cleaning up data elements in the
                              department. In fact, HUD may well have made more
                              progress in the last two years than in the last twenty
                              years.

                     15.       GAO STATEMENT

                                   Page 14 discusses issues raised in the December
                              1998 GAO report on HUD Information Systems.

                               HUD CORRECTION
HUD's comment 37.                  We agreed with the general recommendations in the
                              December, 1998 report entitled "HUD Information
                              Systems-Improved Management Practices Needed to Control

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                       Integration Cost and Schedule," but the thrust of the
                       report is not properly focused, and in some instances
HUD's comment 38.      is inaccurate. The report is not accurate concerning
                       the dollars expended on the development of financial
                       systems; the report does not properly compare like
                       systems when year to year comparisons are made;   and
HUD's comment 39.      most importantly, the report does not cite in its
                       conclusions the many system improvements that HUD has
                       accomplished.  In short, the conclusions and
                       recommendations are focused almost entirely on process
                       improvements and are not properly balanced by
                       summarizing the major system accomplishments of the
HUD's comment 40.      Department.

                            We agreed that the management and oversight of
                       financial system integration projects can be improved
                       by fully implementing and institutionalizing the
                       provisions of the Clinger-Cohen Act and the Paperwork
                       Reduction Act.  We agreed that we should prepare
                       olm-etef ±e    yce c stsr ad benefi-ts
                                                            -of-ouzr--systems------
                       strategy. And, we agreed that we should develop and
                       use defined processes for estimating costs,    such as
                       the requisites identified by the Carnegie Mellon
                       University's Software Engineering Institute. The
                       Department will implement these recommendations.
                       However, HUD was not given credit for the fact that we
                       were one of the first agencies to implement Information
                       Technology Investment Portfolio Systems (ITIPS), which
HUD's comment 41.      is the CIO Council's standard. HUD has implemented the
                       IT Investment Management Process and is currently
                       finalizing the control and evaluation elements of the
                       plan under the Technology Investment Board of HUD.

                            GAO also observed that HUD did not finalize the
                       revised project plans for completing the core
                       accounting system (HUDCAPS). We agreed that more work
                       needs to be done in this area so that a finished plan
                       is available to measure the costs and track milestones.
                       However, GAO staff was provided a completed first year
                       plan and a final draft of the second year plan.
                       Earlier this month the final plan was provided.
                       Furthermore, the Department has recently installed a
                       standard general ledger and chart of accounts that did
                       not previously exist-this accomplishment was barely
                       mentioned and is key to the Department publishing
                       integrated financial statements for the entire agency.

                            As the report is now written, accomplishments of
                       the Department are scattered throughout the report and
HUD's comment 43.      not properly brought together and highlighted;


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cumulatively they paint a very different picture of the
agency's progress. Let us summarize what has been
accomplished during the time frame reviewed in this
report:

      *      The Integrated Disbursement and Information
             System (IDIS) was developed and deployed and
             is used by the Office of Community Planning
             and Development to monitor an estimated 950
             community development grantees and nine
             states.

      *     The Integrated Business System was developed
            and deployed in seven modules and is used by
            the Office of Public and Indian Housing, and
            the Office of Native American Programs to
            monitor their programs, including information
            related to all housing authorities in the
            country.

            The HUD Procurement System was developed and
            deployed and is used by the Office of
            Administration to track and manage the
            Department's procurement activities.

      *      The Grants Evaluation Management System was
             developed and deployed and is used by the
             Office of Fair Housing and Equal Opportunity
             to monitor their two major grant programs.

      *      The HUDCAPS system was developed and deployed
             and is used by the Chief Financial Officer to
             handle the core accounting transactions and
             several key programs. The deployments to
             date include:   the Section 8 tenant-based
             program, the S&E accounts, and the working
             capital account.   In addition, as of October,
             1998 a consolidated HUD-wide general ledger
             with a new chart of accounts was deployed
             that will include for the first time summary
             transactions for all of the Department. A
             plan is in place to fully deploy and use
             HUDCAPS for all core accounting activities of
             the department.

      *     The Tenants Rental Assistance Certification
            System was developed and deployed and is used
            by the Office of Housing for tenant voucher
            processing, contract processing, and budget
            development and analyses.

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             ·    The Budget Formulation System was developed
                  and deployed and is used by the Chief
                  Financial Officer to' formulate, prepare and
                  monitor the annual budget.

            *     The Community 2020 Geographic Information
                  System was developed and deployed and is used
                  by the Chief Financial Officer to provide
                  program and management information in a geo-
                  coded format to users of HUD programs. In
                  addition, the first stage of the Department's
                  Executive Information System was prototyped
                  using selected data from program and
                  financial systems.

            ·     The Budget Outlay Support System was
                  developed and deployed and is used by the
                  Chief Financial Officer to develop better and
                  m.r   .i.m..y   l.rL.y     .. rtma.r..   of   .ectn   ..
                  programs, both tenant-based and project-
                  based.

             ·    The Single Family Premium Collection system
                  was developed and deployed and is used by the
                  Office of Housing 'to collect and account for
                  premiums. The system improves internal
                  controls, eliminates redundancies, improves
                  service to lenders and streamlines
                  reassessment of late fee refunds of money.

             ·    The Real Estate Management System was
                  developed and deployed and is used by the
                  Office of Housing to collect and monitor data
                  related to all multi-family structures in the
                  Department.

            By any measure of performance, these efforts are
       quite significant. None of these systems existed at
       the beginning of the time frame reviewed by GAO for
       this report. We think it very important that these
       accomplishments be highlighted.

            Additionally, the report indicates that the
       initial cost of the Department's financial system
       integration strategy was $103 million and that the
       number increased to $206 million with the 1993 strategy
       and that by the end of FY 1999 it will cost
       approximately $540 million. This interpretation is
       misleading and inaccurate because it does not compare

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                           like systems, and does not differentiate between
                           development costs, maintenance costs, and non-FSI
                           costs.

                                Specifically, the scope of the effort represented
                           by the $540 million is larger than just the financial
                           systems integration strategy.   For example, the initial
                           $103 :million includes development costs only. The $540
                           million includes development and maintenance.
                           Furthermore, the $540 million includes investment
                           dollars for systems related to the Enforcement Center,
                           the Assessment Center, Kiosks, technology for the HUD
                           storefronts, and a range of other systems not
                           associated with the FSI effort. A more accurate
                           estimate for the FSI effort is $250 million.   This is a
                           key point and the numbers and text should be corrected
                           and the accomplishments placed in the correct context.
HUD's comment 44.
                                GAO also cites that HUD was, at one time, behind
                          -rh-schedu-le - uA
                                          uvvati^ 20 of i-
                                                        t   30-misiui,-litii
                           systems. You made a very weak mention of the fact that
                           HUD completed renovation of ALL systems, both mission
                           critical, and non-critical ahead of schedule. You also
                           failed to mention that HUD is 93% complete with
                           certification and 86% complete with implementation as
                           of December 1998.

                    16.    GAO STATEMENT

                                Page 15 states that "other problems with
                           information and financial management systems continue
                           to limit HUD's ability to effectively manage its
                           programs."

                           HUD CORRECTION

                                GAO cites a budget authority issue with HUD,
                           dealing with the magnitude of estimated recaptures from
                           Project-Based Section 8, as an example of major system
                           problems. What GAO does not say is that there was no
                           dispute with any of the outlay estimates developed by
                           HUD systems for the FY 1999 budget--an amount totaling
HUD's comment 45.          over $15 billion--or for that matter, neither did the
                           Congressional Budget Office. Instead, the report which
                           suggests that Congress made budgetary decisions
                           totaling $2.9 billion based upon GAO findings that
                           there were HUD system errors is grossly misleading.
                           The real issue had to do with policy not systems.
                           Specifically, the policy question was:  how much of a
                           shortfall was there in budget authority over the


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                          duration of the Section 8 contracts, and whether it was
                          wise to use current year excess funds to support the FY
                          1999 budget even though there were shortfalls in the
                          out years? Ultimately, Congress decided to use the
                          $2.9 billion for the 1999 budget and defer the concern
                          for out year shortfalls. This was not a system--in
                          fact, the data to make this decision was developed from
                          HUD systems. More generally, GAO ignores the major
                          improvements in HUD's systems since the last report and
                          uses very subjective language to describe our current
                          systems.

                    17.   GAO STATEMENT
HUD's comment 46.              Page 15 paints an inaccurate picture of HUD's
                          oversight of the tenant-based and project-based Section
                          8 assistance programs.

                          HUD CORRECTION

                              No Housing Authority was ever double paid on the
                          Administrative Fees. In regard to tenant-based,
                          Section 8, the double counting was in the initial
                          submission of the Department!s budget. It was quickly
                          identified and adjusted. No one was given excess
                          funding.  It has not been repeated and checks and
                          balances between the Program and Budget Offices have
                          been established to ensure no reoccurrence.

                               The assertion that fees have been double-counted,
                          in regard to project based Section 8 has not yet been
                          agreed to by HUD. However, HUD disputes the reference
                          to $1 billion and believes $1,416,000 (annual cost)
                          would depict a more adequate accounting picture.
                          Disputes of this nature will continue to arise as long
                          as Congress forces HUD to submit budgets that have
                          Section 8 spikes in the out years above what was
                          expected in a level-funding scenario.

                               As with the above inaccurate linkage, the process
                          model was appropriate, however, the GAO and Congress
                          disagreed with the approach and assumptions which
                          provided for a level funding of Section 8 increases
                          over the budget period and application of current
                          excesses under that leveling approach. The budget
                          approach has therefore been revised to assume that all
                          available budget authority will be expended prior to
                          funding of increases and to identify and apply all
                          available recaptures.



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                    18. GAO STATEMENT

                                Page 12 GAO states that "In 1997_.we noted that HUD
                          had reported most of its systems did not comply with
                          FMFIA and therefore could not be relied upon to provide
                          timely, accurate, and reliable financial information and
                          reports to management."

                          HUD CORRECTION

HUD's comment 47.              This example is testimony to GAO's propensity to
                           make one finding and, then, to find different ways to
                           say the same thing over and over. In this instance, in
                           which GAO has now repeated itself for the fourth time,
                           the Department finds no fault with its own methodology
                           to determine FMFIA compliance. HUD has asked OMB and
                           GAO if the JFMIP and FMFIA guidance, in which it is
                           determined that when even one of the twelve listed
                           criteria fails the system is non-FMFIA compliant, is
                              -   i-crrocr   fme.rn1m I   ngy rbI   fng   pp 115l Otntn   a1   I--

                           Federal agencies. GAO has been silent on this issue,
                           and consequently, we believe GAO should seriously
                           consider rewriting this section in a more positive and
                           non-dismissive tone.

                    19.    GAO STATEMENT

                                 On page 18 GAO paints a negative picture of FHA's
HUD's comment 48.          compliance with the Credit Reform Act of 1990.

                           HUD CORRECTION

                                FHA, working with contractors, GAO, and the IG,
                           developed a plan with milestones and has expended a
                           tremendous amount of effort to bring HUD into
                           compliance with the reporting requirements of SFFAS No.
                           2. HUD anticipates compliance with its Fiscal Year
                           1998 financial statements. The paragraph should be
                           revised to reflect this significant effort and
                           accomplishment. In fact, we are only aware of two
                           other federal departments that received a clean opinion
                           regarding compliance with the requirements of SFFAS No.
                           2 for Fiscal Year 1997.

                                The loan information referred to in this report is
                           detailed credit reform data at the cohort and risk
                           category level. Only one of FHA's many cash systems
                           did not have this level of detailed data (Single Family
                           Periodic Premiums).  In October 1999, FHA took steps to
                           gather the detailed data required under credit reform


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   reporting. This data will be available for credit
   reform reporting/compliance in the second quarter of FY
   1999.

        The report states that FHA was unable to comply
   with reporting under federal accounting standards.   FHA
   has restated its FY 1997 financial statements under
   federal accounting standards and will provide FY 1998
   statements as required under federal accounting
   standards in January, 1999.

        As the report states, we have focused considerable
   effort on gathering the data needed to support the
   credit subsidy estimates and in preparing financial
   statements as required under federal accounting
   standards.  The report fails to mention that FHA has
   received clean (unqualified) audit opinions from its
   auditors since 1998.
      4
---- H-FA-has-engafed--te-ieee-cntwe-ar.t-4-a ss4.s-t-
   complying with the SFFAS No. 2 standards.  GAO, in
   their December 1998 report titled "Key Credit Agencies
   Had Difficulty Making Reasonable Loan Program Cost
   Estimates" encourages us to continue with our plan to
   have these contractors assist us in accumulating
   sufficient, relevant and reliable data to estimate the
   costs of our credit programs. Page 30 of the report
   states that HUD, "with the assistance of independent
   contractors, has focused significant effort on this
   area and has made considerable progress towards
   developing the data necessary to estimate loan program
   costs."

        FHA has committed extensive resources towards
   clearing the issues related to SFFAS No. 2 and FHA
   staff and its contractors meet with staff from GAO on a
   biweekly basis to discuss and resolve any remaining
   issues as they are uncovered.

        HUD is aware of the fact that it needs to enhance
   its data system for monitoring the progress of credit
   enhancement projects under the "Risk-Sharing
   Demonstration." We have responded by creating a system
   that will track these projects.  This system will be
   completed in January, 1999.

        The system will track the "Risk Sharing" project's
   name, number of units, mortgage amount, percentage of
   risk, HFA, QPE, originating lender, servicing
   organization and date closed. Additionally,


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                           Multifamily Housing has created a Quality Assurance
                           Unit that will include, as one of its responsibilities,
                           the oversight of our risk sharing partners'
                           performance.  The Information Specialists in Quality
                           Assurance are developing a program for tracking the
                           performance of our risk sharing partners.

                     20.   GAO STATEMENT

HUD's comment 49.              Page 22 states that "HUD expects to improve both
                           the efficiency and effectiveness of its operations
                           through these organizational changes."

                           HUD) CORRECTION

                                The organizational changes implemented through the
                           HUD Management Reform Plan are already improving the
                           efficiency and effectiveness of HUD's operations.


                           and effectiveness of HUD's reforms on its culture and
                           operations.  Its first five findings should be noted:

                                   1.   "HUD 2020 provides clarity to its mission.
                                        It separates service from compliance
                                        functions as stated in the twin mission
                                        statements of empowerment and restoring
                                        public trust. To meet this goal, the
                                        organization is divided into two distinct
                                        groups: 'Conmmunity Builders,' who will seek
                                        to empower communities; and 'Public Trust
                                        Officers,' responsible for guarding against
                                        waste, fraud, and abuse."

                                   2.   "When implemented, the 2020 Plan will
                                        provide improved customer service. To do
                                        this, HUD will reorganize into 'back-office'
                                        processing centers to take advantage of
                                        internal processing activities that cut
                                        across program lines and 'storefronts' to
                                        provide improved face-to-face customer
                                        service."

                                   3.   "When implemented, it will enhance the
                                        Department's ability to protect public
                                        trust. The centralized Enforcement Center
                                        and development of Public Trust Officers
                                        emphasizes HUD's new policy of zero
                                        tolerance of waste, fraud, and abuse.
                                        Public perception focuses on HUD's ability


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                        and the increased likelihood that it will
                        take legal action against those not in
                        compliance with HUD policies and
                        regulations. HUD's development of the Real
                        Estate Assessment Center centralizes
                        critical functions, reduces redundancy, and
                        seeks to improve the quality and consistency
                        of its outputs."

               4.       'System and internal control improvements
                        will restore its financial and management
                        credibility.  It addresses basic systems
                        problems such as data cleanup, integration
                        of financial systems, and internal controls.
                        The plan also recognizes the importance of
                        outsourcing functions that can be performed
                        more efficiently and effectively by the
                        private sector."

    .---       5. --   ||UD--2O0has   begne         tost-ef    -sense-o&    ..-.
                        innovation, entrepreneurship, and cutting-
                        edge technology more characteristic of a
                        private company than a public organization."


       Similarly, PriceWaterhouseCoopers reviewed the HUD
  2020 Management Reform Critical Milestones and found
  significant implementation of key elements of the plan:

           *           "HUD's Community Builders, a new corps of 217
                       urban and rural development specialists, have
                       been trained at Harvard University, and are
                       on the job in communities across the nation.
                       The Community Builders aim to improve
                       customer service by serving as a single point
                       of contact to help customers gain access to
                       the full range of HUD programs and services.
                       A new class of 230 Community Builders is
                       scheduled for the first quarter of FY 1999.

           *           The new HUD Enforcement Center has begun
                       operations. Under the direction of an FBI
                       Special Agent and four Assistant U.S.
                       Attorneys, the Enforcement Center promotes
                       greater accountability and standardization of
                       HUD's enforcement activities. Enforcement
                       offices have been opened in Atlanta, Chicago,
                       Fort Worth, New York, and Los Angeles.




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                               ar   The Real Estate Assessment Center is designed
                                    to perform physical and financial assessments
                                    of HUD's public and multifamily housing
                                    stock.  The new system marks the first time a
                                    uniform inspection of federally subsidized
                                    housing has been conducted. Over 4,200
                                    physical inspections have been completed
                                    since mid December of 1998; with HUD's total
                                    portfolio of 33,400 housing entities
                                    scheduled for inspections by December 31,
                                    1999.

                               a'    HUD has taken action to reform its
                                    procurement system. A Contract Management
                                     Review Board comprised of senior personnel
                                     has been established to promote more
                                     effective use of HUD's contracting dollars.
                                     Government technical representatives have
                                     been trained in each of the program areas to
                                         V-effvtvl- montur-H1tD's-conLtrt-Lt-.
                               -,oe m-------

                               •    The first Storefront opened in May, 1998 in
                                    Washington D.C. HUD Storefronts are designed
                                    as consumer oriented service centers to
                                    provide friendly, accessible service to the
                                    community.  Five more HUD Storefronts are
                                    scheduled to open across the country early
                                    next year.

                               *    Troubled Agency Recovery Centers opened in
                                    Memphis and Cleveland. These centers provide
                                    technical assistance to troubled public
                                    housing agencies.

                               *    The Financial Systems Integration project is
                                    underway with the creation of a General
                                    Ledger that will consolidate data from 89
                                    separate systems into a single system."

                    21. GAO STATEMENT

                             Page 22 states that 'the organizational changes
HUD's comment 50.       were generally not based on empirical analysis or
                        studies."

                        HUD CORRECTION

                            This is completely inaccurate. In a letter to Ms.
                        Judy England-Joseph, dated March 5, 1998, I laid out
                        the number of different analytical methods used to

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 design the HUD 2020 Management Reform Plan.              These
 included:

              Review of Critical Reports.  At the outset,
              HUD reviewed the voluminous analyses,
              studies, and hearings conducted by the GAO,
              HUD's own Inspector General, the National
              Academy of Public Administration, and
              Congressional Committee hearings.   These
              reports extensively documented HUD's
              management deficiencies and recommended
              solutions, many of which have been
              incorporated into HUD's plans.   For example,
              the IG and GAO have repeatedly called for the
              need for integrated financial systems,
              enhanced enforcement efforts against troubled
              properties and reallocation of staffing to
              address key program priorities.   HUD's
              management reform plans address each of these
              concerns.

              Pilot Program Experience. Perhaps the most
              critical changes to the HOD restructuring
              plans are the changes taking place in FHA's
              single family operations, where HUD is
              shifting from a retail approach in 81 field
              offices to a wholesale operation where single
              family mortgage applications are processed in
              four Homeownership Centers across the
              country. These changes are the linchpin to
              HUD's larger reform efforts because of the
              tremendous staffing reductions that are
              achieved through this consolidation.

       The proposed consolidation to four Homeownership
  Centers follows on the proven track record productivity
  improvements of a consolidated Homeownership Processing
  center that has been operational in Denver for the past
  three years. Relying on fewer staff, but state-of-the-
  art technology, the Denver Center has reduced mortgage
  processing times from 4-6 weeks to less than three
  days, with projected improvements to meet the industry
  standard of one day on the horizon, while actually
  increasing the total number of loan applications
  processed.

       The GAO appears to discount this "real world"
  demonstration of an effective reform by describing this
  substantial demonstration as "limited results of a
  pilot project."

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           Change Agent Teams. Secretary Cuomo
           established program office and cross-cutting
           function "Change Agent" teams consisting of
           more than 100 senior Headquarters and field
           staff to develop recommendations for reform.
           The dedication of cross-cutting senior
           managers to develop reform plans based on
           their experience and judgment is a device
           commonly used in both private- and public-
           sector restructuring efforts. Each change
           agent team undertook its own workload
           analysis and reviewed existing program
           structure, organizational structure, delivery
           systems, financial management systems, and
           internal controls before making their
           recommendations.

           Consultations with Outside Experts.   Prior to
           the release of the June MUD 20e20 report, IIUD
           consulted with management reform experts in
           both the public and private sector reform,
           including David Osborne, James Champy, and
           private management consultants Ernst and
           Young, LLP.  While each provided a range of
           insights, all encouraged HUD to act swiftly,
           to undertake bold rather than incremental
           reforms and to continue to refine the plan
           even as implementation proceeded. HUD has
           heeded this advice.

    *      Consultations with Affected Constituent
           Groups and Congress. HUD has undertaken
           exhaustive consultations with affected
           constituent groups and with members of
           Congress and their staffs since the release
           of the HUD 2020 report.  Such consultations
           have been critically important because they
           have provided feedback from the people who
           are using and delivering our programs. These
           consultations have resulted in substantial
           refinements of the original plan, and
           provided input into detailed implementation
           plans, including the decision to keep the
           Assessment and Enforcement Centers located in
           Washington, DC.

    *      Consultations with BUD's Inspector General.
           Senior HUD management staff have devoted


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                                         extensive time reviewing HUD's management
                                         reform plans with the Inspector General and
                                         her staff. Implementation plans have
                                         incorporated numerous suggestions. For
                                         example, at the IG's suggestion, HUD will
                                         maintain enforcement responsibility for near-
                                         troubled properties in FHA's Multifamily
                                         Office. Also, the IG has provided
                                         suggestions which have been incorporated for
                                         improving the monitoring of FHA Multifamily
                                         Contract Administrators.

                                    Outside experts support this. David Osborne's
                              review of the HUD 2020 MRP concluded that the plan
                              "uses appropriate reinvention strategies for HUD
                              specific challenges, and addresses the agency's core
                              problems." And finally, Booz-Allen & Hamilton said
                              "The change required, of people and of the HUD
                              institution, by this transformation is real, massive,
                              a nd-i,-s4i--
                                          Bee-34%!-en'expeerieeene-a    &aost-unpa-ral4-e-e
                              in scale for a government agency transformation and
                              certainly for HUD.       Change of this scale is always
                              difficult but, we believe HUD's approach of: (1)
                              creating the management vision to meet its mission as
                              defined by Congress; (2) designing a strategy; (3)
                              implementing structural changes, including
                              simultaneously creating organizations and shifting
                              personnel; and (4) involving all elements of the
                               Department in developing implementation plans is well
                              conceived and is appropriate. Under the HUD 2020 plan,
                              HUD has set out to reform by administrative action its
                              management structures and systems - reforms which when'
                              implemented, should present a significant improvement
                              in HUD's performance, lower the risk of fraud, waste
                              and abuse of its programs, and position HUD to better
                               serve America's communities.       The HUD transformation
                               initiative, emphasizing community-focused efforts
                              balanced by public trust functions, is significant in
                               scope and is fully responsive to Congressional mandates
                               and Administration reinventing government thrusts.
                               These are the foundations of HUD's reinvention
                               efforts.'

                       22. GAO STATEMENT

                                   The header on p.24 says that 'Organizational
                              Structure is in Place, but Transfer of Functions and
HUD's comment 51.             Responsibilities is in Transition."



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 HUD CORRECTION

     As previously stated and validated by
 E'ricewaterhouseCoopers, the Section 8 Financial
 Management Center, Real Estate Assessment Center and
 Enforcement Center are, in fact, performing significant
 functions which provide vital support to all of the
 Department's major program areas:   For example:

       *     REAC has initiated physical inspections which
             are essential to the Section 8 rental
             assistance re-certification process.

       *     Section 8 FMC has, in fact, centralized
             management and operation of the PIH and
             Housing rental assistance programs.   Phase I
             of the center's operations involves the full
             migration of the public workload. Phase II,
             involving the Housing rental assistance
             workload. is sc   ed   Lo        helR
                                          nn this    nscal
             Year.

       ·      The Enforcement Center has begun a phased
              workload migration of multifamily housing
              projects; has undertaken debarment actions,
              etc.

     Moreover, other major management reforms in core
 program areas have been implemented fully. These
 reforms represent the broad cross-section of the
 Department's operations. Public Housing Hubs/Centers
 are fully functioning and servicing housing authorities
 nationwide.  The PIH Grants Management Center has
 completed the consolidated processing of all major
 public housing grants.  The Housing Multifamily
 Hubs/Centers are fully operational and have implemented
 major reforms in project development (DAP), as well as,
 asset management (REMS). In FHEO, the Hubs/Centers
 have initiated the new strategy for processing
 enforcement actions (TEAPOTS).

     Community Builders and Community Builder Fellows
 have been fully deployed under the new HUD Business and
 Operation Plan system.  All major communities (states,
 counties and cities) are having their housing and
 community development needs met via individual field
 office action plans.




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                    GAO's Statement of Facts




                               In short, the header and following description
                           should be changed to accurately reflect the current
                           state of HUD's reforms.

                     23.   GAO STATEMENT

                                 Page 25 makes a broad generalization that "most
                           managers and staff said the transfer of functions was
                           in transition and they generally did not know when it
HUD's comment 52.          would be complete."

                           HUD CORRECTION

                                GAO visited only five HOD offices and a small
                           number of Headquarters organizations. We believe GAO is
                           reporting the results of a very small number of
                           interviews held with HUD managers and other staff. If
                           "most" and "generally" means that these views are
                           representative of at least half of HUD staff, then at
                           l-ao 19--of 25 eoUple5-eIcted-Ft-random-woul-d-heve-to-
                           have made such statements. If fewer than 25 were
                           interviewed, an even higher percentage would have had
                           to make such statements. We suspect this is not the
                           case and that GAO is reporting hearsay rather than
                           statistically significant fact. We ask that GAO
                           provide HUD with a detailed breakdown of the
                           statistically valid samples used to reach these
                           sweeping conclusions. Meeting reports that were
                           provided from GAO's field office visits indicate that
                           staff is fully informed of the implementation plan and
                           schedule, and understand what their roles and
                           responsibilities are during workload transition. HUD
                           staff expressed support for the changes and felt it
                           would have a positive effect on their workload.

                                Moreover, the PriceWaterhouseCoopers review found
                           that HUD's implementation plan is on schedule.

                     24.   GAO STATEMENT

                                Page 25 cites that "Although a new field
HUD's comment 53.          organization structure is in place, staffing decisions
                           were only recently completed, and some centers are
                           significantly understaffed."

                           HUD CORRECTION

                                This is just wrong. As of the end of January,
                           1999, the Enforcement Center will have 148 (72%) staff
                           on board. Twenty-six (26) additional positions (all ih


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Challenges and Program Risks Identified in
GAO's Statement of Facts




   the field) have been posted and/or are in the final
   stage of the selection process. These will be filled
   in the next few weeks, bringing the Center to 84% of
   its total authorized staffing ceiling. The remaining
   16% should be filled in February.

       The EC staff has been trained appropriately and is
   able to handle the current and projected workload.

        More broadly, the Department is currently
   substantially staffed in accordance with HUD 2020
   plans. To date, the Office of Housing is 98% staffed
   to its HUD 2020 level, with 3356 staff on board
   against a ceiling of 3434. In accordance with the
   attached detailed analysis (Attachment 2), the
   Multifamily field offices are 98% at capacity, the HOC'
   are at 99% capacity, and the Financial Operations
   Center is at 98% capacity.        The small number of
   vacancies remaining (78), which are not significant in
   lirrht. of nlormAal attrition .sd   pe=onr
                                         r    e ctivity-for-ar--
   organization this size, are in the process of being
   merit: staffed and we should reach full capacity by the
   second quarter of the fiscal year.

       The staffing of the REAC is on target with its
   phased systems and operational development schedule.
   REAC's total estimated staffing level of 211 FTEs was
   arrived at using various work measurement and metrics
   analyses. However, REAC never intended to be at full
   staff capacity until its phased systems and operational
   development plans are completed. While significant
   systems development activity is still underway, REAC is
   using contracted development resources. Contracted
   resources are also supporting REAC's Laboratory
   Projects to produce interim results until development
   activities are substantially complete. Given the
   combination of in-house and contract resources, REAC
   considers itself to be adequately staffed at this
   juncture in its development life cycle.

        The Troubled Agency Recovery Centers (TARC) are
   now at 86% of projected staffing levels with 122
   people.  This staffing level is more than acceptable.
   Currently, there are 52 troubled Public Housing
   Agencies' (PHA), and staff are in training to assume
   additional troubled agencies that may result from the
   implementation of PHAS.

        The Grants Management Center (GMC), Special
   Applications and the Financial Management Center (FMC)


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                            are fully operational with 95% of projected staffing
                            levels and all 3 are running efficiently. GMC has
                            assumed NOFA processing and fund allocation. To date,
                            FMC has migrated the Section 8 workload from 49 of its
                            52 field offices or 95%, a significant accomplishment.

                    25.     GAO STATEMENT

                                Page 29 states that "staff losses were recovered
                            after HUD decided in May 1998 to assign unplaced staff
HUD's comment 54.           to permanent positions."

                            HUD CORRECTION

                                 The statement fails to recognize one of the major
                             goals of the HUD 2020 Management Reform Plan, which is
                             to change the way the Department operates. Our new
                             operations, whether in Hubs, Homeownership Centers,
                             Troubled Agency Recovery Centers, Property Disposition
                            -Cente:,  thf Er£furzmet    nd--Ra%     - Asesc--
                                                                          sment%
                                                                           --                    _
                             Centers or the Section 8 Financial Management Center,
                             are designed to improve and streamline program
                             administration and enhance customer services, in some
                             cases with less staff.

                                 To ensure that the enhanced staff resources would
                            also be utilized to address management deficiencies,
                            unassigned staff were placed in areas that represented
                            long-standing departmental problems that 2020 has
                            addressed. We deployed unassigned staff as follows:
                            Organization          No. of staff            Priority Function
                                                  Assigned
                       i.    Housing                        851       *   Muultifamily Rousing
                                                                          operations
                                                                          Single Faily HOC
                                                                          Operations
                      2.    Public and Indian               212       *   PIH Hub Operations
                            Housing                                   ·   ?ARC Operations
                                                                      *   Grants Management
                                                                      *   Financial Ianagemnt
                                                                      *   Section 8 Financial
                      3.    Community Planning              46        *   Field Operations and
                            and Development                               Monitoring
                                                                          Management
                                                                          Infozmation systems
                      4.    Fair Housing end                81        *   Civil Rights
                            Equal Opportunity                             Copliance and
                                                                        Enforceant
                                                                      · Feld Operations and
                                                                        Oversight



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                       GAO's Statement of Facts




                     5. Real Estate                        11          *    Implementation of
                        Assessment                                          Physical Inspection
                                                                            and Financial
                                                                            Assessment process

                      6. Enforcement Center                   5        *    compliance and
                                                                            Enforcement
                                                                            Operations

                      7. Field Policy and                  116         *    Customer Service
                         Management                                         Management
                                                                        ·    Technical Support

                      8.   Other                           36          *    Administrative,
                           Organizations                                    technical and policy
                            (e.g. CGC,                                      support to HUD 2020
                           Administration and                               implementation
                           PD&R)


                    26.    GAO STATEMENT

                                Page 30 of the report cites that "the Enforcement
                           Center had only 62% of its staff.

                           HUD CORRECTION

HUD's comment 55.               As of the end of January, 1999, the Enforcement
                           Center will have 148 (72%) staff on board. Twenty-six
                           (26) additional positions (all in the field) have been
                           posted and/or are in the final stage of the selection
                           process. These will be filled in the next few weeks,
                           bringing the Center to 84% of its total authorized
                           staffing ceiling. The remaining 16% should be filled
                           in February.

                                 The EC staff has been trained appropriately and is
                            able to handle the current and projected workload.

                    27.     GAO STATEMENT

                                Page 30 states "to date there had not been a
                            significant shift of workload from the field office to
                            the centers, according to the staff and managers we
                            interviewed from July through October 1999."

                            HUD CORRECTION

HUD's comment 56.               GAO's interviews must have been premature since
                            this is a totally inaccurate statement. The
                            Enforcement Center did not expect or receive cases
                            until after the July to October period in which GAO


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  Challenges and Program Risks Identified in
  GAO's Statement of Facts




   conducted it's interviews. We consider the over 200
   cases presently in the Enforcement Center as
   significant. In addition, debarment authority, which
   also created a shift of workload into the EC, was not
   delegated until October, 1998.

        The FMC established a schedule to migrate all the
   Section 8 financial management processing from the 52
   Public Housing field offices and ONAP between July 1
   and December 1, 1998.  As of December 1, the workload
   from 49 of the 52 offices had been migrated and is
   being performed at the FMC.  The remaining two PH
   offices requested until January, 1999 to finish their
   preparations for moving the workload; ONAP requested
   slightly more time to complete the transfer of some
   units to new Housing Entities before migrating the
   workload. We consider the migration of 49 offices in
   less than six months to be a significant
   accomplishment. Once an office has migrated its
--work-lea-to thc FRIC, that--           -f-ieL--f-tiooPn~ad.
   responsibilities for Section 8 financial processing
   effectively end. Moreover, Community Builders are also
   assisting with the workload reduction at the field
   offices.

        The Grants Management Center (GMC) has assumed the
   NOFA processing and fund allocation responsibilities
   for all major public housing programs. The Special
   Applications Center (SAC) is processing all
   demolition/disposition applications along with five
   home ownership applications which were previously
   handled by 52 field offices. The Troubled Agency
   Recovery Center (TARC) has migrated all work from the
   field to the two centers.  This relieved the field of a
   tremendous amount of staff time and effort.

         The migration of financial management workload
   from the Office of Housing is scheduled to begin in
   February, 1999, with the conversion of 3600 ACCs from
   PAS/LOCCS to HUDCAPS and their transfer to the FMC. A
   mid-to-late summer action will convert the remaining
   1000 ACCs. The timing of this process has been
   determined by the schedule for the conversion of the
   Department's General Ledger, now planned for January
   1999.   Migration of the financial workload for the
   approximately 21,000 HAP contracts of the Office of
   Housing is dependent upon the selection and deployment
   of Contract Administrators to perform specific duties;
   the selection and contracting process is under the
   jurisdiction of the Office of Housing.


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                    GAO's Statement of Facts




                    28. GAO STATEMENT

                             Page 30 states that, "HUD's single family
HUD's comment 57.       homeownership centers cannot handle the current
                        workload of HUD's inventory."

                        HUD CORRECTION

                              FHA has not yet implemented scheduled staffing
                        reductions in single family REO property disposition or
                        asset: management divisions. Therefore, any GAO
                        criticism of FHA performance in REO property
                        disposition cannot be linked to reductions in single
                        family staffing levels. Taken together, more than 450
                        FHA field staff presently work on single family REO
                        property disposition. Many single family REO staff
                        will be re-assigned to other divisions following
                        implementation of the new Management and Marketing
                        contracts natinide.----Howver, nonestaf
                        have been or will be released from their REO division
                        assignments until new private sector property
                        management and marketing (M&M) contractors are fully
                        operational in March, 1999.

                             The Single Family Home Ownership Centers (HOCs)
                        currently are at a combined 99 percent staffing level.
                        Out of 957 total positions, the four HOCs only have 10
                        vacancies at present, a relatively normal vacancy rate
                        due to periodic turnover.

                             As further evidence of adequate staffing levels in
                        the HOCs, last year the single family field staff
                        endorsed more than 1 million new loans (the third
                        highest total in FHA's history) and the REO staff sold
                        more than 64,500 REO properties, an increase of more
                        than 10 percent over FY 1997 when FHA sold
                        approximately 58,000 properties. These very impressive
                        performance numbers indicate that FHA is operating at
                        adequate staffing levels today.

                        Benefits of    M&   Contract.

                             FHA is in the process of implementing a new REO
                        property management and marketing (M&M) contracting
                        method that will rely entirely on private sector real
                        estate professionals to perform all work related to
                        maintaining, protecting, preserving and selling HUD-
                        owned properties. Full implementation of this proven
                        contracting model will allow for a substantial

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GAO's Statement of Facts




  realignment of HUD staff. In their report on HUD 2020
  reform, Booz-Allen Hamilton stated that this
  privatization of the FHA REO property disposition
  process would significantly reduce the FHA's staffing
  needs in the single family home ownership centers.

        Rather than relying on REAM contractors to manage
  properties and HUD field office staff to sell
  properties, FHA now will contract with private sector
  real estate professionals to perform virtually all
  functions related to both management and marketing of
  HUD RED properties. This M&M contracting approach is
  based on a successful pilot program run by FHA in
  Maryland, Louisiana and Sacramento, California over the
  last two years. During FY 1997, the pilot contractor
  was able to dispose of properties significantly faster
  than HUD in all three pilot sites. This resulted in
  properties returning to private ownership much more
  quickly. In addition, at two of the pilot sites, the
- average sales
              -price nder= the--pit+-iLerased and the
  average FHA profit per property sold increased or
  remained constant.

       Now FHA is expanding this successful contracting
  model nationwide. After making some adjustments to the
  program based on recommendations in a generally
  favorable audit of the pilot performed by the HUD
  Inspector General, including reducing the number of
  pass through expenses to HUD, FHA issued a request for
  proposals in August, 1998 for sixteen contracts to
  cover the entire country.   The M&M procurement is on
  schedule and FHA plans to award M&M contracts to
  qualified private sector real estate professionals in
  the second quarter of FY 1999, with the contractors
  slated to be begin operation in March 1999.

       By using private contractors to market and manage
  foreclosed properties, FHA will be able to take full
  advantage of the expertise and experience that private
  sector enterprise can bring to this process. M&M
  contractors will use private sector methods, such as
  multiple listing services and Internet advertising to
  reach a broader audience potential home owners.
  Relying on private sector contractors to perform more
  REO management and marketing functions also will permit
  FHA to substantially reduce the number of single family
  staff assigned to REO property disposition, and also
  free remaining staff to focus their effort and
  resources on monitoring and oversight of the M&M
  contractors.


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                     Challenges and Program Risks Identified in
                     GAO's Statement of Facts




                    29.   GAO STATEMENT

                                Page 31 states that, "Because of the workload
HUD's comment 58.         situation, it is taking HUD longer to sell the
                          properties and, as a result, the OIG estimates the
                          agency is incurring additional costs of $1 million a
                          day."

                          HUD CORRECTION

                                 It is wholly inaccurate to state that FHA is
                           spending an additional $1 million a day on REO. When
                           GAO staff were told of this error, they said they were
                          merely citing an OIG report and do not routinely check
                           the accuracy of such OIG reports, but merely report
                           their findings. While the number of REO properties in
                           inventory is up slightly, the cost of maintaining REO
                           properties in inventory is a cost which has been
                          hIrZnriR'(A I I :&nrfi0tpr
                                            q         wrn         iI
                                                             ?alaat/i  1 - .1   -...        P
                           experience. To clarify, GAO seems to have arrived at
                           this estimate by multiplying the number of total
                           properties in inventory, approximately 40,000
                           properties, by FHA's average holding cost per day.
                           While this is the cost of maintaining FHA's REO
                           inventory per day, it is misleading to represent this
                           as additional cost to the Government and the taxpayer
                           due to perceived delays in property sales.     As stated
                           above, FHA sold more than 64,500 properties last year,
                           a more than 10 percent increase over the previous
                           fiscal year. Therefore, it is not accurate to assume
                           that the size of the inventory of REO properties is due
                           to inadequate sales.      Furthermore, FHA's daily holding
                           costs are consistent with similar costs incurred by
                           other large REO holders such as Fannie Mae and Freddie
                           Mac. There are statistics that can be provided to
                           amplify our assertion.

                               A well reasoned assessment of the cost of FHA's
                          REO inventory would consider not only the flow of
                          properties sold on the back end, which was in excess of
                          70,000 properties in FY 98, up from 59,600 in FY 97,
                          but also the flow of properties coming into the
                          inventory due to insurance claims. In FY 1998, FHA
                          claims were up, contributing to the number of
                          properties in inventory, as FHA continued to bear the
                          brunt of a delayed recovery of some isolated real
                          estate markets.




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                    GAO's Statement of Facts




                    30.   GAO STATEMENT

                               Page 31 states that, "because staffing reforms
                          have not been fully implemented, their effectiveness in
HUD's comment 59.         correcting management deficiencies cannot be
                          demonstrated."

                          HUD CORRECTION

                               This statement is wrong for two reasons,  First,
                          the HUD 2020 staffing plan and placement actions are,
                          for the most part, completed and implemented. Nine
                          thousand placement actions have been completed by the
                          Department, as part of establishing new and operational
                          management reform organizations.

                               Secondly, as indicated throughout this letter,
                          management reform operations are well underway. This
                           -inlenced      by the   actua        pel
                                                                 efu-llaIe-of-worklirad&--
                          requirements by all program and consolidated centers.

                               Given the current state of operations, it is
                          illogical to conclude that the effectiveness of
                          corrective action to address management deficiencies
                          "cannot be demonstrated."  In fact, effective internal
                          controls are in place, the new organization structure
                          and management planning process (Business and Operating
                          Plan) are working, financial and management information
                          systems are routinely providing timely, accurate and
                          reliable information, and HUD staff have been trained
                          and assigned to perform the most mission-critical
                          functions.

                                The Department's major program areas, including
                          Housing, PIH, CPD, FHEO, OGC, and Administration are
                          all staffed to perform their required functions. The
                          EC and REAC are staffed to meet the needs of their
                          current operational workload schedules and
                          requirements. The internal merit staffing process has
                          resumed its normal pace of operations.

                    31. GAO STATEMENT

HUD's comment 60.              Page 6 cites as a material weakness HUD's
                          "inadequate emphasis on providing early warning of, and
                          preventing losses due to defaults on insured
                          mortgages."




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 Development's Comments on the Major
 Challenges and Program Risks Identified in
 GAO's Statement of Facts




HUD CORRECTION

      Over the last several months, FHA has taken a
number o:' steps to enhance three distinct strategies to
monitor insured loan performance and mitigate losses due
to defaults on insured mortgages. These strategies
include FHA lender monitoring and enforcement, automated
systems to monitor insured loan performance and the FHA
loan loss mitigation program designed to provide
troubled borrowers effective options to foreclosure, and
thereby reduce the number of FHA defaults and claims.
Specific enhancements in these areas include:

             FHA has developed a new automated system for
             monitoring loan performance data by lender
             and geographic Area.   In May, 1996, Single
             Family implemented the Neighborhood Watch
             system, which was designed to track FHA
             insured loan parform.nc_    y several diffal-e-_
             characteristics include the originating
             lender, the FHA loan program, specific loan
             characteristics, and geographic areas.     With
             the ability to provide these detailed -loan
             characteristics in real estate markets across
             the country, Neighborhood Watch gives FHA
             staff a powerful automated tool for
             monitoring defaults and making relative
             comparisons of lender performance. To date,
             the system's focus has been on early payment
             defaults and claims, and access has been
             limited to HUD staff.    In 1999, the system
             will be made available to lenders through
             FHA's secure Internet gateway, the FHA
             Connection. Also in 1999, the system will be
             enhanced to add comparisons of servicing
             performance.  It is FHA's expectation that
             lenders will use this tool for self-policing.

             *
             FHA opened a new National Lose Mitigation
             Center located in Oklaihoma City in PF 1998.
             This new center, with thirty-seven staff
             dedicated entirely to loan loss mitigation
             servicing, opened the Summer of 1997 and
             became fully operational with thoroughly
             trained staff in February, 1998.   FHA staff
             in the Oklahoma Center provide foreclosure
             avoidance counseling to FRA homeowners in
             default, on-site training to high volume
             servicing lenders, and training seminars on

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          the FHA loan loss mitigation program to FHA
          loan servicers across the country.

    *     FHA is experiencing increased use of the Loan
          Loss Mitigation program. After a somewhat
          slow start to FHA's new Loan Loss Mitigation
          program, which was introduced in the middle
          of FY 1996, FHA now is seeing a dramatic
          increase in the number of homeowners in
          default who are gaining access to one or more
          foreclosure avoidance options offered by FHA.
          In FY 1998, FHA helped more than 11,000
          homeowners in default take advantage of
          foreclosure avoidance options, with the
          number of assisted families increasing each
          month as the program continues to gain
          momentum.

    *     FHA is preparing to launch a new performance-
          Qua    lty
                   Assura n  cem
                             Division in HD
          Quality Assurance Division in HUD
          Headquarters is on schedule to restart the
          Credit Watch/Termination initiative in FY
          1999. This initiative is designed to improve
          lender origination performance by regularly
          reviewing mortgagees' early payment default
          and claim rates by branch office within
          regional markets, and alerting mortgagees of
          deficient performance.   If a mortgagees'
          default and claim rate is excessive in
          comparison to area averages, the mortgagee
          can be placed on probation (Credit Watch
          status) or be suspended from FHA programs
           (Termination of Origination Approval
          Agreement), depending on the severity of its
          poor performance. FHA anticipates this
          powerful new lender monitoring and
          enforcement program will dramatically enhance
          lenders' underwriting and servicing
          performance.

    *     FPA also has increased the number of. lender
          monitors and mortgagee reviews.  In FY 1997,
          the Department increased the number of
          monitors from approximately 23 to 74, and in
          FY 1998 that number more than doubled to 154
          monitors.  The number of on-site monitoring
          reviews grew from 256 in FY 1997 to 430 in FY-
          1998, rising at somewhat a slower pace than


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           the staffing levels as newer monitors were
           trained and gained experience. In FY 1999
           FHA has established a goal of performing 900
           on-site reviews for FY 1999.  This increase
           in activity, naturally, increases lender
           awareness of FHA program requirements, and
           again, is designed to improve lender
           performance and mitigate losses due to
           defaults and claims.

           Finally, over the last year, FHA has also
           taken a number of steps to ensure that
           monitoring priorities, procedures and
           recommended remedies are consistent,
           including:

                 - Documenting Goals and Strategies.
                   Senior Single Family management met in
                   December. 1997. to plan a consistent
                   approach to lender mIonaltLollng as
                   responsibility for these functions
                   transferred to the Home Ownership
                   Centers.  The results of those
                   discussions were published as the
                   'Quality Assurance Division Guide"
                   which was distributed to all current
                   and new mortgagee monitors, and Single
                   Family management. This guide
                   describes methods of targeting, risk
                   factors to consider, the review
                   process, forms used, bases for
                   referrals, and performance
                   expectations..

                 - Routine Communications and Shared
                   Systems.  There has been and continues
                   to be a concerted effort to make QAD
                   practices and communications
                   consistent. The five QAD Directors
                  (i.e. Headquarters plus the four HOCs)
                   hold monthly conference calls to raise
                   and resolve issues. All monitoring
                   efforts are tracked through a national
                   computer system. This system is also
                   the source of reports on
                   accomplishments towards the monitoring
                   goals. An electronic file of past


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                                                 "findings letters" (i.e.
                                                 correspondence to mortgagees
                                                 describing their deficiencies) has
                                                 been created and will be made
                                                 available to the HOCs in January,
                                                 1999. In addition, systems are being
                                                 enhanced to aid in targeting poorly
                                                 performing lenders.

                                               - Training. All monitors and QAD
                                                 management received refresher training
                                                 in March, 1998, on the techniques of
                                                 conducting origination, servicing and
                                                 Title I reviews, risk factors and
                                                 priorities, documentary support,
                                                 targeting tools and other topics. For
                                                 the newly assigned/reassigned monitors,
                                                 this classroom training was followed by
                                                 manyueeks-ofn-theJn-h tatr  ining and._   .
                                                 mentorIng Dy more senior monitors.

                      32.     GAO STATEMENT

                                   Page 25 states that "The lack of sufficient travel
                              funds to conduct on-site monitoring of program
                              activities is a problem. According to some officials,
                              the scarcity of travel funds has prevented them from
    HUD's
     comment 61.              conducting some on-site reviews."

                              HUD CORRECTION

                                   This is another example of how GAO takes isolated
                              comments garnered from a non-statistically significant
                              base and extrapolates into broad generalizations and
                              then does not even check the underlying facts. This
                              statement is grossly inaccurate. HUD's travel budget
                              has significantly increased from $13.5 million, $15.6
                              million to $19.0 million for Fiscal Years 1997, 1998
                              and 1999, respectively. Moreover, GAO does not appear
                              to have any statistically valid evidence of how an
                              alleged lack of travel funds has led to insufficient
                              monitoring.

                      33.     GAO STATEMENT

                                   Page 25 states that "Program officials and a
                              community builder in one HUD field office (emphasis
                              added) identified a need for HUD to clarify the
                              authority of the community builders in dealing with HUD
HUD's comment 62.
                                                        72




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              Note: References to page numbers refer to those of HUD'S letter of
              December 28, 1998.

              1. HUD'S Comment, p. 1

              HUD  commented that "Comprehensive reorganization, major system
              developments and deployment, carefully crafted staffing reforms, and the
              hallmark achievement of HIUD'S first ever audited financial statements are
              all glossed over by GAO as minor advances and are presented as interesting
              interim movements toward some unknown mark on an undefined
              measuring stick."'

              GAO'S   Response

              We disagree. In the statement of facts we provided HUD on December 15,
              1998, we described the major actions it has taken and the achievements it
              has realized since it launched its 2020 Management Reform Plan in
              June 1997, including each of the items mentioned above by the
              Department. In addition, we discussed HUD'S goals under the plan for the
              areas where we identified management deficiencies: internal controls,
              systems, organization, and staffing. Beyond the statement of facts
              providedl to HUD, in our final report 2 our "Overview" included a summary of
              HUD'S aclhievements since the 2020 plan was announced and our
              conclusion that HUD has made credible progress in laying the framework
              for improving its management.

              HUD'S comment implies that our statement of facts lacked clear criteria for
              evaluating its progress. See our response to comment 3 for a discussion of
              our criteria for evaluating HUD'S progress and related matters.

              2. HUD'S Comment, p. 2

              HUD commented that under its 2020 Management Reform Plan, "the
              Department implemented a bold initiative to fundamentally re-design the
              manner in which HUD delivers its programs." According to HUD, "The
              profound significance of... [its] major achievements and
              accomplishments is missing in the report, as well as a corresponding

              'HUD was referring to its fiscal year 1997 financial statements, upon which it received a qualified audit
              opinion. After HUD responded to our statement of facts, HUD's Inspector General issued, on March 29,
              1999, its unqualified opinion on HUD's consolidated federal accounting-based financial statements for
              fiscal year 1998, which is further discussed under HUD's comment 17.
              2
               Major Management Challenges and Program Risks Department of Housing and Urban Development
              (GAO/OCG-99-8, Jan. 1999).



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description of reduced risk at the agency. The Department has developed
and implemented a detailed plan for reform-a plan that has reduced the
risk of waste, fraud, and abuse." According to HUD, "the tenor of the draft
report leaves the reader to conclude that, since there are not absolute
measurable results in all areas, little that is positive has happened at the
Department during the past two years."

GAO'S   Response

As mentioned, the statement of facts we provided HUD described a number
of positive achievements made by HUD since it launched its 2020 reforms.
We stated, among other things, that HUD'S reforms could help to address
internal control weaknesses facing the agency and described HUD's
establishment and implementation of risk assessments for programs that
were established or substantially revised; development and deployment of
information and financial management systems; and establishment and
operation of various HUD offices, including its specialized and nationwide
centers that consolidate processes and functions within and across
program areas.

While the 2020 reforms may help reduce HUD'S risks, we were not aware of
significant evidence demonstrating that risks had actually been reduced at
the time of our work regarding major management challenges and
program risks. In addition, HUD'S comments on our statement of facts do
not present evidence demonstrating that its risks have been reduced. HUD'S
fundamental contention is that since it has made plans and begun
implementing changes in the way it delivers programs, risks have been
reduced. The only evidence HUD provided in its December 28, 1998, letter
demonstrating that its risks have been reduced is a 300-percent increase in
debarments, which appears to be based on the increase in debarments
from 30 debarments in 1996 to about 100 in 1997. Our January 1999 report
on HUD'S major management challenges and program risks included this
information.

HUD'S characterization  of the tenor of our report may, in part, be
attributable to the fact that as a statement of facts, the document provided
to HUD did not include the "Overview" that appeared in the final report. As
explained previously, the "Overview" provided our views on the
significance of the 2020 plan reforms.




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3. HUD'S Comment, pp. 2 and3.

HUD expressed concern that we had not provided the specific criteria for
the "high-risk" designation to be removed since the Department raised the
question in a June 23, 1998, letter from the Department's Acting Deputy
Secretary to GAO'S Acting Comptroller General. In that letter, HUD
requested that we present established and objective criteria that had been
and would be used to determine what programs in an agency constitute
high risk and what makes an entire federal agency high-risk.

GAO'S Response

 Our conclusion that HUD'S programs are high-risk is based on the status of
 four serious, long-standing Department-wide management deficiencies
 that, taken together, have placed the integrity and accountability of HUD'S
programs at high risk since 1994. We have issued numerous reports and
 testimonies over the past 15 years pointing to these significant
 management deficiencies that cut across HUD'S program areas. We and
 others (i.e., HUD'S Inspector General and external auditors) have observed
these management deficiencies. Because HUD is one of the nation's largest
 financial institutions responsible for managing about $454 billion in
 insured mortgages, about $531 billion in guarantees of mortgage-backed
 securities, and about $24 billion in current budget authority and because
 these four weaknesses continue largely unresolved or recent reforms to
 address them are in the early stages of implementation (and it is too soon
 to tell whether they will resolve the deficiencies), our professional
judgment is that HUD'S programs continue to be a high-risk area.

On several occasions, we have discussed with HUD officials our criteria for
designating a program or agency high-risk. In addition, we included our
criteria in our 1997 High-Risk Series report 3 and in our written response to
HUD'S Acting Deputy Secretary's June 23, 1998, letter on this subject. We
have pointed out that our criteria for designating programs or agencies as
high-risk areas stem directly from our professional and objective judgment
about patterns of significant management deficiencies uncovered over
time in our audits, as well as those of inspectors general and others, that
remain largely unresolved. We stated in our response to HUD'S June 23,
1998, letter that programs and agencies for which we have removed our
high-risk designation are those that have demonstrated results in
overcoming management deficiencies. We further stated that it is
important to note that while reform initiatives are important, plans for
reform are not sufficient in and of themselves. Rather, it is the results of
3
    High-Risk Series: Department of Housing and Urban Development (GAO/HR-97-12, Feb. 1997).



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such reform initiatives-demonstrating that management problems have
been corrected-that count.

As mentioned above, our February 1997 High-Risk Series report on HUD
clearly laid out the actions-such as eliminating material internal control
weaknesses-that we believed were necessary to reduce the risks to the
agency's programs. We also met with HUD officials in August 1997 and
provided them with a list of corrective actions that would need to be
substantially completed to address the deficiencies that made HUD
high-risk in our opinion, such as completing improvements to its financial
and information management systems. The list largely mirrored the
discussion in our February 1997 report.

As pointed out in our January 1999 report on HUD'S major management
challenges and program risks, our recent work indicates that internal
control weaknesses and problems with information and financial
management systems persist at the Department. Furthermore, recent
reforms to address the Department's organizational and staffing problems
are in the early stages of implementation, and it is too soon to tell whether
or not they will resolve the major deficiencies that we and others have
identified. Consequently, we continue to believe, as we reported in 19958
and 1997, that these deficiencies, taken together, place the integrity and
accountability of HUD'S programs at high risk.

4. HUD's Comment, p. 3

HUD asserted that we have has been unable to articulate what constitutes
high risk at the Department and for all agencies and in fact have
acknowledged that no such governmentwide test of high risk exists. HUD
also stated that it should be provided specific criteria used to determine
whether an agency is high-risk; the data used to determine whether an
agency is high-risk; the data showing how other agencies stood when we
applied that objective, standardized high-risk test; and the analysis we
used in comparing the data on HUD to the high-risk criteria.

GAO'S   Response

As discussed in our response to comment 3, we have informed HUD
officials about what constitutes high risk at the Department in our opinion,
what the Department needs to accomplish to remove the designation, and
what is not sufficient to remove the designation.

sHigh-Risk Series: Department of Housing and Urban Development (GAO/HR-95-11, Feb. 1995).


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In response to HUD's request that it be provided the criteria we use to
determine whether any agency is high risk and how the agencies
compared when we applied our criteria, we have informed HUD officials
that the criteria we apply to the Department are the same criteria we have
applied tlo other agencies. Our criteria included considering factors such
as the significance of HUD's management deficiencies, their impact on
program operations, past successes achieved in resolving the deficiencies,
and the amount of risk inherent in HUD'S operations.

We also have informed HUD officials that different agencies' functions,
programs, and organizational units have been removed and added each
time we have updated our high-risk designations. Because different
agencies present different exposures to risk and management deficiencies
can differ in their impact on programs, we have advised HUD officials that
independent, professional, and objective judgment of knowledgeable GAO
professionals plays a role in determining whether a program is high-risk.
We have also advised them that professional judgment will also play a role
in determining at what point improvements made by HUD in resolving its
management deficiencies will mean that the agency overall will no longer
warrant the designation high-risk, but that individual functions and/or
specific :programs within the agency may instead be designated high-risk.

In our January 8, 1999, response to HUD'S Deputy Secretary's letter of
December 28, 1998, we pointed out our consistent application of our
criteria for high-risk designations. We explained that we reached our
conclusion about HUD and all of our determinations of which government
operations are considered to be high-risk in our January 1999 Performance
and Accountability Series reports9 using the same methodology and
criteria, -which were the same as those used for our February 1997
High-Risk Series reports.

5. HUD'S Comment, pp. 3 and 4

HUD stated that senior GAO staff had indicated that no high-risk test was
being applied to all federal agencies, that the label of high risk was applied
on the basis of the professional judgment of GAO staff, and that a high-risk
test of having four or more agencywide problems had not been applied to
any other agency.



9
 Major Management Challenges and Program Risks: A Governmentwide Perspective (GAO/OCG-99-1,
Jan. 1999).


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GAO'S   Response

HUD'S assertion is incorrect. Senior GAO officials have told HvD officials that
we consider the implications of all management deficiencies in
determining whether an agency is high-risk or not. The fact that a specific
number of agencywide problems exist at a particular agency does not
automatically mean that an agency or program is high-risk. To apply such
a limited test would discount the effect of such factors as the prevalence
of the deficiencies, past successes achieved by agencies in resolving them,
and exposure to risk.

Overall, the intent of our special effort to review and report on federal
government program areas that we consider at greater risk is to focus our
resources and attention as well as those of the Congress and agency
management on actions needed to correct the most serious problems in
selected areas. Our criteria for designating programs as high-risk areas
stem directly from our professional and objective judgment about patterns
of significant management deficiencies in the federal government
uncovered over time in our audits, as well as those of inspectors general
and others, that remain largely unresolved. A determination includes our
consideration of factors such as the seriousness of the management
deficiencies identified; their cumulative impact on program operations,
federal spending, and the ability of an agency to carry out its mission; the
results achieved by past efforts to resolve the deficiencies; and the amount
of risk of fraud, waste, and abuse inherent in an agency's operation.

In addition, as we pointed out in our January 1999 performance and
accountability series, an increasing amount of information is becoming
available through the implementation of the performance-based
management legislation that the Congress has enacted. This information
makes it both possible and appropriate for GAO to periodically reassess the
methodologies and criteria it uses to determine which operations,
functions, and entities should be included in the performance and
accountability series reports and which should be identified as
"high-risk."

We also pointed out in this January 1999 report that we plan to undertake
a comprehensive review and reassessment of this area during 1999. In
conducting this review and reassessment, and in accordance with our
normal practices, we will consult with key stakeholders, including
selected congressional and agency representatives, before completing our
approach to the 2001 series.



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Our review effort likely will result in new ways of determining and
presenting major management challenges and program risks, especially in
connection with selected functions (e.g., strategic planning, organizational
alignment, human capital strategies, and contract management) as well as
at the overall department and agency level. This reassessment may also
result in the consolidation of GAO'S current high-risk series as an important
component of an expanded performance and accountability series. The
ultimate determination of what should be included in this series and what
should be deemed to be "high-risk" will continue to involve the
independent, professional, and objective judgment of GAO professionals.

6. HUD's Comment, p. 4

HUD asserted that GAO has a shifting standard for determining if HUD is
high-risk. HUD stated that senior GAO staff initially indicated that they
would apply a standard for removing HUD from the high-risk list if
"reasonable progress" was achieved in implementing the 2020 reforms and
at another time stated that the standard would be "results" and a
demonstration that HUD'S problems have been fixed completely-that
there were substantial, long-term results bearing out the success and
sustainability of the reforms.

GAO'S   Response

Senior GAO officials informed HUD officials that we would be fair in
assessing the progress made by the Department and that reasonable
progress in successfully resolving its management deficiencies by means
of verifiable results was the standard we would apply in our review. HUD is
incorrect in asserting that the standard we said we would apply was
reasonable progress in implementing the 2020 plan reforms.

7. HUD'S Comment, p. 5

HUD  commented that if we believed that it was not possible for HUD to be
removed from the list, that working assumption must be stated explicitly
in the report or the report would be misleading.

GAO'S   Response

Our views on the difficulties faced by HUD in resolving its management
deficiencies and removing the high-risk designation were communicated
to the Department and others over a year ago. In testimony before the



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Subcommittee on Housing Opportunity and Community Development,
Senate Committee on Banking, Housing, and Urban Affairs, on May 7,
1998, we said that HUD's management deficiencies have had a long history,
that they did not happen overnight, and that it will not be easy for HUD to
overcome many of them. In addition, in response to a specific question
from Chairman Connie Mack regarding whether HUD was still high-risk and
the likelihood of removing the agency from our next series of high-risk
reports, GAO'S Director of Housing and Community Development Issues,
made the following comments: "They are high-risk today, and there's a
very good chance that they will be high-risk early next spring, when we
issue our next report. However, I think we will be recognizing the progress
that the agency has made. And the big point is realizing that this is a
multiyear effort. It is not an easy task that they have set out." A copy of the
draft hearing transcript was attached to our July 24, 1998, letter to the
Acting Deputy Secretary.

Our January 1999 report on HUD's major management challenges and
program risks included the statement that, given the severity of HUD's
management deficiencies, it would not be realistic to expect that the
Department would have substantially implemented its reform efforts and
demonstrated success in resolving its management deficiencies in the 2
years since we issued our last report.

8. HUD'S Comment, p. 6

HUD asserted  that senior GAO staff, in repeated discussions, said they
believed that HUD had made substantial progress in reducing risk, that the
agency's risk profile was significantly improved over the last time GAO
conducted a review. Yet, HUD asserted, this view was absent from the
report.

GAO'S   Response

In reports, testimonies, and meetings, senior GAO officials have
complimented HUD officials for undertaking reforms of its programs. The
GAO officials have characterized these reforms as representing solid
progress, as being far-reaching, as affecting nearly all operational aspects
of the Department, and as constituting credible progress.

However, they have not characterized these reforms as reducing risk or
significantly improving HUD'S risk profile. Rather, they have consistently
maintained that it must be demonstrated that reforms have led to



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substantial and verifiable results in resolving management deficiencies to
remove the high-risk designation. At the same time, as we discuss in our
responses to comments 4 and 5, the independent, professional, and
objective judgment of knowledgeable GAO professionals plays a role in
determining whether a program is high-risk.

9. HUD'S Comment, p. 6

HUD commented that GAO'S draft report failed to use and cite three
independent and objectives studies of the Department's reforms by
management experts-Booz-Allen and Hamilton, the Public Strategies
Group, and PricewaterhouseCoopers.

GAO'S     Response

While GAO'S statement of facts mentioned the Booz-Allen and Hamilton,
Inc., report, the thrust of this report was not discussed in detail in our
statement of facts. This was because this report as well as the Public
Strategies Group and PricewaterhouseCoopers reports were primarily
aimed at describing the progress made in implementing the 2020 reforms,
and not at developing evidence demonstrating that the reforms have led to
substantial and verifiable results in resolving HUD'S management
deficiencies. In our January 1999 report on HUD'S major management
challenges and program risks, we included information on the Public
Strategies Group report in addition to the Booz-Allen and Hamilton, Inc.,
report.

10. HUD'S Comment, p. 7

HUD commented that GAO had withheld the conclusion section of the report
from HUD'S review and that senior GAO staff were orally characterizing the
report as maintaining the high-risk label for HUD. The absence of the
section, HUD said, severely compounded its difficulty in responding
accurately and appropriately to the specific text of the report.

GAO'S   Response

The statement of facts we provided HUD officials for review did not contain
conclusions. This is because this statement was provided to HUD officials
to obtain their comments on the accuracy and completeness of the
information we obtained and analyses we made. We did not obtain agency




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comments on the draft conclusions of any of our reports in the
January 1999 series on major management challenges and program risks.

11. HUD's Comment, p. 8

HUD asserted  that we characterized its financial management systems
inaccurately, given the many comprehensive systems improvements that
have been made within the past few years. HUD stated that our discussion
was focused almost entirely on process improvements and was not
properly balanced by the brief summary of major system
accomplishments.

HUD  cited the statement in our report, "According to its cFO [Chief
Financial Officer], HUD continues to make progress addressing system
problems by deploying systems and/or system modules to manage and
monitor the Department's programs," and stated that "it should be clear to
any objective viewer that when a large number of systems have been
successfully developed and deployed, a substantial improvement in the
systems environment has inevitably occurred." However, HUD stated,
"GAO refuses to attest to such facts despite its one-year review and only
attributes this information to 'CFO' hearsay."

GAO'S   Response

We disagree. Our statement of facts (1) noted that HUD had developed and
deployed a number of systems or components for systems; (2) provided
examples of these systems; and (3) referred to our report entitled HUD
Information Systems: Improved Management Practices Needed to Control
Integration Cost and Schedule (GAO/AIMD-99-25, Dec. 18, 1998), which
included a more detailed discussion of HUD'S major system
accomplishments. In our December 1998 report, we reported that although
HUD had developed and deployed various systems or modules for 12 of 14
systems integration projects, the Department did not know when the
systems integration effort would be completed, or at what cost, because
the Department had not yet finalized detailed project plans or cost and
schedule estimates for this effort. We concluded that without such plans,
the Department is likely to continue to spend millions of dollars, miss
milestones, and still not fully meet its objective of developing and fully
deploying an integrated financial management system.

We also disagree with the implications of HUD'S comment that our
December 1998 report on HUD's information systems should have



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concluded that when a large number of systems have been successfully
developed and deployed, a substantial improvement in the systems
environment has inevitably occurred. Successfully developing and
deploying systems depend on several factors, including whether user
requirements were met, existing material or internal control weaknesses
were eliminated, and the systems were developed and deployed using
sound methodologies. Given the objectives and scope of our review, we
could not conclude in our December 1998 report whether HUD had
successfully developed and deployed a large number of systems or had
made substantial improvements in its systems environment.

12.   HUD'S   Comment, p. 8

HUD believed that our observation that it did not finalize the revised project
plans for completing the core accounting system (HUDCAPS) was wrong.
HUD stated that during the initial phase of the 1-year review of systems at
HUD, it provided us with a completed first-year plan; a final draft of the
second-year plan; and, in November 1998, the complete project plan.

GAO'S   Response

HUD's  comment relates to our December 1998 report on HUD's information
systems and not our statement of facts. We agree that HUD provided us
with copies of the fiscal year 1998 and fiscal year 1999 project plans for
HUDCAPS. However, we found that the fiscal year 1999 plan was incomplete
because it did not include a schedule that showed key milestones, tasks,
task dependencies, and a critical path demonstrating how HUDCAPS would
be completed and integrated with other systems by October 1999, the date
projected by HUD for completing an integrated core financial system. In
addition,, on December 4, 1998, HUD provided to us what the Department
referred to as a complete project plan for the core accounting system,
HUD's Centralized Accounting and Program System (HUDCAPS). This was 22
days after HUD provided us with official comments on our draft report and
35 days after we had requested comments. By that time, our report was
already being printed for publication and, consequently, was issued
without noting whether a project plan for HUDCAPS had been completed.
Also, in our December 1998 report, we pointed out that HUD had not yet
finalized other detailed project plans that are necessary to complete the
systems integration effort.




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13. HUD'S Comment, p. 8

HUD  commented that it had recently installed a standard general ledger and
chart of accounts that did not previously exist. It asserted, "This is a
critical accomplishment that was barely mentioned by GAO and is key to
the Department's publishing integrated financial statements for the entire
agency."

GAO'S Response

HUD's deployment of a Department-wide standard general ledger was
mentioned in our statement of facts. However, detailed information on it
was not included in our statement because it had been in effect for so little
time during the period of our review. The new standard general ledger was
not used to prepare HUD's fiscal year 1998 consolidated financial
statements but will be used to prepare its fiscal year 1999 consolidated
financial statements, for which an audit report will be prepared in the
spring of 2000. In addition, while the new standard general ledger and
chart of accounts should greatly improve the efficiency of preparing
integrated financial statements for the entire agency, HUD was already able
to produce integrated financial statements prior to these improvements.

14. HUD's Comment, p. 9

HUD  commented that our statement of facts dwelt on the Department's
efforts to evaluate whether its management systems conform to the
requirements of Federal Managers' Financial Integrity Act (FMFIA) and of
the Office of Management and Budget (OMB) Circular A-127. HUD also
stated that it self-declared certain systems as noncompliant based on its
interpretation of the general Joint Financial Management Improvement
Project (JFMIP) criteria. HUD asserted that it chose to apply a vigorous
standard whereby if only 1 of the 12 criteria was unmet, then the system
was labeled as noncompliant. HUD also stated that it had yet to obtain any
clear guidance from GAO, despite repeated inquiries, on whether the
Department was applying a significantly higher standard for systems
noncompliance than other agencies.

GAO'S   Response

HUD'S  comments imply that it was holding itself to a higher standard than
other federal agencies because it declared systems nonconforming if only
1 of the 12 JFMIP criteria was unmet. However, HUD'S records show that
most of the 38 systems it declared not in conformance with FMFIA criteria


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in 1998 did not conform with 3 or more of the 12 criteria. According to
HUD'S records, 21 of 38 nonconforming systems did not meet 3 or more of
the 12 criteria, and 10 of the 21 nonconforming systems did not meet 10 or
11 criteria. Three of the 38 systems were reported as nonconforming
because they did not meet one criterion; 9 did not meet two criteria;
information on why 4 systems were not in conformance was not available;
and another system, although reported to be nonconforming, was actually
conforming.

We have not reviewed the standards applied by other federal agencies in
determining their systems' compliance with JFMIP criteria and therefore
cannot offer any comments on the standards they follow.

15. HUD'S Comment, p. 9

HUD stated, "We strongly believe that it is very important that these system
accomplishments be highlighted and discussed in greater detail, and that
these changes are reflected in a changed GAO analyses of HUD'S systems."

GAO'S   Response

See our response to comment 11.

16. HUD'S   Comment, p. 18

HUD  coummented that during the past year, the Department had
aggressively tackled the issue of computer matching and income
verification and improved subsidy verification. HUD established a task
force with staff from Public and Indian Housing; Policy Development and
Research; the Assessment Center; and the Chief Financial Officer's (cFo)
Office to expand capabilities for ensuring that subsidies are paid on the
basis of tenants' incomes that are correct.

GAO'S   Response

Our statement of facts pointed out the material internal control weakness
over the process of uncertain verification of tenants' incomes. The
statement also explained that in fiscal year 1998, HUD unveiled a
multifaceted plan to address this weakness. The effectiveness of the steps
HUD has taken to address this issue, however, will most likely not be
known until the fiscal year 1999 financial statement audit is completed in
the spring of 2000.



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17. HUD'S Comment, p. 25

Concerning the Department's financial statements, HUD commented that it
received its first-ever qualified audit opinion 2 years ago (in prior years,
auditors issued disclaimers of opinion) and that it was on track to receive
an unqualified (clean) opinion for its fiscal year 1998 consolidated
financial statement. According to HUD, "This is a keystone achievement
and reflective of the changing attitude of HUD managers in recognizing
their fiscal responsibilities and the vast improvement in HUD'S financial
systems and financial data."

GAO'S   Response

Our statement of facts on HUD'S major management challenges and
program risks pointed out that HUD had received a qualified opinion on its
fiscal year 1997 financial statements. Beyond the statement of facts
provided to HUD, in our final report our "Overview" pointed out HUD'S
improvement in receiving a qualified opinion on its fiscal years 1996 and
1997 financial statements.

After we issued our report on HUD's major management challenges and
program risks, HUD'S Inspector General issued, on March 29, 1999, its
unqualified opinion on HUD's consolidated federal accounting-based
financial statements for fiscal year 1998. The Inspector General stated in
this report that in previous fiscal years, she was unable to conclude that
HUD'S consolidated financial statements were reliable in all material
respects. Therefore, her ability to conclude that HUD's fiscal year 1998
financial statements were reliable was noteworthy. We agree that
obtaining an unqualified opinion on its fiscal year 1998 financial
statements was a noteworthy accomplishment for HUD. However, the
Inspector General also stated that because of continued weaknesses in
HUD'S internal controls and financial management systems, this
accomplishment came only after HUD and its contractors went through
 extensive ad hoc analyses and special projects to develop account
balances and necessary disclosures.

 18.   HUD'S   Comment, p. 28

 HUD commented     that credit reform (the reason for the qualified opinion in
 fiscal year 1997) initiatives within the Department have made significant
 progress. The Federal Housing Administration (FHA) has received from a
 major public sector accounting firm an unqualified (clean) opinion on its



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statements since 1993, HUD explained. The Department expected
compliance with the requirements of credit reform in its fiscal year 1998
financial statements and stated that significant work has already been
accomplished.

GAO'S     Response

 Our January 1999 report on HUD'S major management challenges and
program risks included material recognizing that during 1998, HUD,with
the assistance of independent contractors, focused significant effort on
improving its ability to prepare loan program cost estimates in accordance
with federal accounting standards and credit reform requirements. Our
January 1999 report also stated that HUD has developed a plan that, if fully
implemented, should help it prepare reasonable estimates of loan program
costs in the future. Also, although FHA received an unqualified audit
opinion on its fiscal year 1997 financial statements, the amounts reported
for FHA'S loan program costs were derived using private sector generally
accepted accounting principles that are significantly different from those
prepared on the basis of federal accounting standards.

After we issued our report on HUD'S major management challenges and
programn risks, HUD'S Inspector General and the public accounting firm
KPMG LLP issued unqualified audit opinions on HUD'S consolidated and
FHA'S federal accounting-based financial statements for fiscal year 1998.
These unqualified opinions indicate that HUD and FHA were able to develop
reasonable estimates of loan program costs for fiscal year 1998. However,
the Inspector General also noted that this required extensive ad hoc
efforts by HUD's Office of Housing and contractor support personnel.

19. HUD'S Comment, p. 28

HUD  commented, "GAO says that [the Department's] systems are inadequate
because they are poorly integrated, ineffective and generally unreliable."
Disagreeing, HUD stated that over 60 percent of its systems are compliant,
including its financial systems. In support of this, HUD stated, "Our
financial statements are now considered accurate (save for a single audit
qualification on credit reform) and thus, the underlying data are
accurate-which was not true two years ago." HUD contended that we
downplayed this accomplishment despite the significant attention focused
on this goal by the Congress, OMB, and GAO management.




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GAO'S   Response

HUD'S comment on our characterization of its systems misstated the
statement of facts we provided to the Department. Our characterization
appeared in a passage that began, "However, these systems have been
inadequate because ... " and went on to summarize the information we
had reported in our 1997 High-Risk Series report regarding information
and financial management systems. In our January 1999 report on HUD's
major management challenges and program risks, we added the phrase
"we have reported in the past" to make it clearer that the statement
referred to HUD'S past problems.

20. HUD's   Comment, p. 29

HUD commented that significant work has been done to develop new
accounting and financial management systems: "We now have a new
standard, fully compliant HuD-wide general ledger. And, we have
developed and deployed 11 new financial management systems."

GAO'S   Response

See our response to comment 13 for a discussion of HUD'S general ledger.

Our January 1999 report on HUD'S major management challenges and
program risks recognized the development and deployment of the 11
financial management systems. Our December 1998 report on HUD'S
information systems contained additional information on the status of
HUD'S systems integration projects.

21. HUD'S Comment, pp. 30-32

HUD  asserted that there have been major, comprehensive accomplishments
in financial systems integration. Accordingly, HUD said that we should be
able to state, on the basis of the documentation submitted, that the listed
11 systems have been developed and deployed during the past few years:
the Integrated Disbursement and Information System; the Integrated
Business System; the HUD Procurement System; the Grants Evaluation
Management System; HUDCAPS; the Tenants Rental Assistance Certification
System; the Budget Formulation System; the Community 2020 Geographic
Information System; the Budget Outlay Support System; the Single Family
Premium Collection System; and the Real Estate Management System.




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GAO'S   Response

Our statement of facts mentioned that HUD was continuing to make
progress addressing system problems by deploying systems or modules to
manage and monitor departmental programs and provided examples of
these systems. Our December 1998 report on HUD's information systems
included a detailed discussion on the status of HUD'S financial systems
integration and the systems that have been developed and deployed to
support it. (Also, see our response to comment 11.)

22.   HUD's   Comment, pp. 32 and 33

HUD  commnented that the Department agreed with a principal finding of our
December 1998 report on its information systems-that the Department
must improve its information technology capital planning process.
However, according to HUD, our report did not take note of several major
accomplishments and, in effect, suggested that no process was in place.
HUbD commented that it has had in place a structured process for selecting
information technology investments since 1989 and has consistently made
improvements to that process over the past decade.

GAO'S   Response

We disagree. Our statement of facts and December 1998 report stated that
HUD did not have an effective process to manage its information
technology investments. This is not the same as stating that there was no
process in place, as suggested by HUD'S comments.

Specifically, in our December 1998 report, we explained that we reviewed
HUD'S recent selection and control processes beginning with fiscal year
1997 and found that both processes were incomplete and inadequate to
make sound investment decisions and properly manage the selected
investments. The major deficiencies we found with HUD'S processes were
that (1) finvestment decisions were made without reliable, complete,
up-to-date project-level information and (2) oversight was not based on
project-specific measures, which are required to effectively monitor and
control information technology projects.




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23. HUD's Comment, p. 34

HUtD asserted  that the statement, "Managers were not actively assessing
risks in their programs as required under the management control
program," was totally false. HUD went on to discuss risk assessments that
have been prepared since 1996, as well as its Community Planning and
Development's grants management system.

GAO'S Response

The statement HUD quoted was in a paragraph in our statement of facts
that began, "In February 1997 we reported ... " This paragraph
summarized the information we had reported in our 1997 High-Risk Series
report regarding internal controls. Our January 1999 report on HUD'S major
management challenges and program risks reiterated the phrase "we
reported in 1997" at the end of the paragraph to make it clearer that this
statement referred to past problems at HUD.

Contrary to the implications of HUD'S comments on risk assessments, our
statement of facts discussed the Department's activities regarding the
preparation of risk assessments for its nationwide centers, as well as other
programs. In addition, our statement discussed a number of other
activities HUD initiated to address its internal control problems, including
the establishment of the Risk Management Division and real estate and
enforcement centers and the development of a risk evaluation database.
Also, in our February 1997 High-Risk Series report, we pointed out that in
July 1994, HUB began implementing its new management planning and
control program, which was based on front-end risk assessments of
certain programs.

At the time of our work on HUD'S major management challenges and
program risks, we were completing a review of HUD'S Community Planning
and Development's grant management system. Subsequently, on April 27,
1999, we issued a report entitled Community Development: Weak
Management Controls Compromise Integrity of Four HUD Grant Programs
 (GAO/RCED-99-98).

 24. HUD'S Comment, p. 35

HUD commented that the heading "2020 Reform Plan Directed Toward
Internal Control Weaknesses" was a misleading statement and needed to
be revised to accurately reflect that the plan was not solely directed
toward internal control weaknesses and to state that 2020 effectively


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addressed those problems. HUD also noted that 1,100 field and
headquarters managers received internal control training during fiscal year
1998.

GAO'S   Response

Our statement of facts described actions initiated by HUD under its 2020
reform plan that were intended to address its internal control problems as
well as its other management deficiencies. In the "Overview" section of
our statement, which was not provided to HUD, we stated that HUD's 2020
reform plan addresses more than its management deficiencies.

However, we disagree that HUD'S actions effectively addressed the internal
control weaknesses that we and others previously reported. Our statement
of facts and January 1999 report on HUD'S major management challenges
and program risks showed that internal control problems persist at HUD.
As pointed out in those documents, material internal control weaknesses
persist in its (1) management of the Section 8 subsidy payment process,
which provides $18 billion in rental assistance; (2) management of staff
resources; (3) management of losses resulting from defaults in the
single-family and multifamily housing insurance programs;
(4) implementation of automated systems to provide needed management
information or reliable data; (5) monitoring of multifamily properties and
single-family and multifamily housing notes inventories; and
(6) contracting procedures. Furthermore, since we issued our
February 1997 High-Risk Series report on HUD, we have reported that the
Department has not adequately monitored, among other things, its real
estate asset management contractors, the performance of appraisers of
properties purchased with FHA-insured loans, and its process for
deobligating funds no longer needed for Section 8 project-based rental
assistance contracts.

Finally, the statement of facts recognized that as of September 30, 1998,
the CFO'S Risk Management Division completed risk management training
for headquarters and field managers and supervisors at or above the GS-13
level. Our January 1999 report on HUD'S major management challenges and
program risks included the information that over 1,100 HUD headquarters
and field managers completed risk management training.




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25. HUD'S Comment, p. 35

HUD  commented that the statement, "REAC [the real estate assessment
center] will not be fully functional until 2000," does not acknowledge that
"significant aspects of REAC'S housing assessment operations are already
functioning well beyond any systems ever used at HUD." As an example,
HUD explained that the center's new physical inspection data collection
device and protocol are already in operational use, with over 4,200
inspections completed through mid-December 1998. HUD felt that we
"should ... acknowledge that all critical components of REAC'S housing
assessment processes are scheduled to be functioning to improve the
Department's monitoring and enforcement activity before the year 2000."
In addition, HUD explained, the center has completed initial advisory
scores for several hundred public housing authorities and is assisting the
enforcement center with physical and financial assessments of 200
enforcement case referrals made by the multifamily housing program
center's staff.

GAO'S   Response

Our statement of facts pointed out that as part of its reform plan, HUD
established a real estate assessment center, which had issued regulations
on the physical and financial assessments of multifamily properties and
public housing authorities. It also pointed out that the center would not be
fully functional until 2000 because it would not begin financial
assessments of multifamily properties until around April 1999, when
audited financial statements on the properties were to be submitted to
HUD. Lastly, our statement of facts pointed out that although physical
inspections of public housing authorities would start in 1999, financial
assessments would not begin until 2000. The additional year is needed to
give housing authorities time to convert their annual financial statements
from HUD'S accounting guidance to generally accepted accounting
principles in accordance with the uniform financial standards for HUD'S
housing programs.

In addition, our statement of facts discussed the potential benefits that
HUD expects to achieve through the establishment of the real estate
assessment center and acknowledged that HUD plans to physically and
financially assess the total inventory of multifamily properties and public
housing authorities. However, to date neither HUD nor we are able to
evaluate the extent to which this reform has led to substantial and
verifiable results in resolving management weaknesses.



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Regarding the inspections completed by the center, our January 1999
report on HUD'S major management challenges and program risks
recognized that 4,200 inspections had been completed as of
late-December 1998. Our report also recognized that 200 cases had been
referred to the enforcement center. In this regard, it should be noted that
HUD's portfolio of multifamily properties totals around 32,000, and more
than 13,000 public housing developments nationwide.

26. HUD's Comment, p. 36

HUD   commented that our statement, "Although the Enforcement Center
began operations on September 1, 1998, it is not scheduled to perform all
of its centralized functions until around April 1999, when it is to begin
receiving referrals of troubled multifamily properties from the Real Estate
Assessment Center," did not recognize that the enforcement center had
been receiving cases and performing all of its functions and was regularly
receiving additional cases from Housing and the real estate assessment
center. To date, HUD reported, the enforcement center had received 200
cases, and the Department had dramatically improved enforcement at the
agency, for example, increasing debarments of bad landlords by
300 percent over the years.

GAO'S   Response

HUD'S comment that the enforcement center had received 200 cases from
Housing and the real estate assessment center is inconsistent with other
statements made in the letter, which said that the 200 referrals came from
the Office of Multifamily Housing (see comment 25). On January 8, 1999,
an enforcement center official advised us that all referrals had come from
the Office of Multifamily Housing only.

As discussed previously, our January 1999 report on HUD'S major
management challenges and program risks recognized the 200 cases
received by the enforcement center and the increase in debarments.

27. HUD'S Comment, p. 37

HUD commented that we would be more accurate if we stated that material
weaknesses are found within the financial statements at all federal
agencies and departments. According to HUD, "Most cabinet level agencies
have on the average 8-24 material weaknesses with DOD [the Department of
Defense] exceeding 50 open material weaknesses." Consequently, HUD felt



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that this problem is not isolated to HUD and that we needed to make this
acknowledgment.

GAO'S   Response

Our statement of facts and January 1999 report on HUD'S major
management challenges and program risks were about HUD and not other
federal agencies. Other GAO reports have been prepared on such challenges
and risks faced by other agencies. However, it should be noted that on the
basis of fiscal year 1997 audits, there were six federal entities that had no
material internal control weaknesses. Also, we have designated DOD's
financial management as high-risk since 1995.

28. HUD's Comment, pp. 37 and 38

HUD commented that "GAO fails to tell the entire story," particularly
about how HUD compares to other federal agencies regarding compliance
with the reporting requirements under credit reform and Statement of
Federal Financial Accounting Standards (SFFAS) No. 2. Approximately
60 percent of the agencies that credit reform affects have not achieved full
compliance, HUD stated.

However, HUD pointed out, FHA has achieved compliance for its credit
programs in accordance with private sector accounting standards-that is,
FHA has received an unqualified (clean) audit opinion under generally
accepted accounting principles for its financial statements since 1993. As a
result of the qualification in HUD's fiscal year 1997 consolidated financial
statement audit, FHA has developed a plan to comply with the reporting
requirements of SFFAS No. 2.

HUD asserted that its work and accomplishments in this area had been
praised in another GAO report titled Credit Reform: Key Credit Agencies
Had Difficulty Making Reasonable Loan Program Cost Estimates. (Our
credit reform report was a draft report at the time HUD made these
comments). HUD concluded, therefore, that there appeared to be a tension,
if not direct contradiction, between this other report and the statement of
facts.

Also, HUD stated that we should emphasize the accomplishment of
receiving a qualified opinion because 2 years ago, the Department was not
able to receive any type of opinion on its financial statement.




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GAO'S Response

Our report on credit reform entitled Credit Reform: Key Credit Agencies
Had Difficulty Making Reasonable Loan Cost Estimates
(GAO/AIfID-99-31) was issued on January 29, 1999. This report showed that
three out of the five key credit agencies we reviewed were not able to
comply with credit reform, including HUD. The discussion in that report
related to HUD'S ability to comply with credit reform was entirely
consistent with our January 1999 report. For example, our credit reform
report stated, "HUD was unable to provide adequate supporting data for its
fiscal year 1997 financial statements estimates of its loan program costs,
which resulted in a qualified audit opinion from HUD's IG [Inspector
General] on those financial statements. This lack of supporting data also
raises questions about the integrity of loan program cost information
submitted for budgetary purposes." The report also contained a discussion
of the effort made by HUD in 1998 to resolve this problem and the plan it
developed.

(Also, see our response to HUD'S comment 18 on the fiscal year 1998
financial statement audits.)

29. HUD'S Comment, p. 38

HUD  commented that our statement, "Although HUD has reduced its
material weaknesses from 51 in fiscal year 1991 to the 9 remaining open as
of fiscal year 1997, some of the remaining weaknesses are long-standing,"
was very dismissive in its tone, so HUD suggested deleting the "although."
HUD maintained that the reduction was real progress.

GAO'S   Response

Our statement intended to provide evidence of the progress HUD has made
since 1991 in this area. At the same time, it is important to note that some
of the nine material weaknesses remaining open as of fiscal year 1997 are
indeed ]ong-standing-one dates back to 1983, while four others date back
to 1993--and some, such as those relating to the $18 billion rental
assistance program, involve billions of dollars.

It should also be noted that in our February 1997 High-Risk Series report,
we reported that at the end of fiscal year 1995, HUD reported that it had
nine material internal control weaknesses, the same number as in 1997.
Since our February 1997 report, HUD has removed four material



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weaknesses and added four, so the total remains at nine. The four areas in
which material weaknesses were removed were community development
block grant entitlements, Section 236 excess rental income, Section 235
accounting system, and the title II prepayment and preservation program.
The four material weaknesses added involved the monitoring of insured
mortgages and multifamily projects, Secretary-held multifamily and
single-family mortgage notes, income verification, and contracting.

We deleted the word "although" in our January 1999 report, as suggested
by HUD.

30. HUD'S Comment, p. 39

HUD questioned the use of material from our report Housing Preservation:
Policies and Administrative Problems Increase Costs and Hinder Program
Operations (GAO/RCED-97-169, July 18, 1997) as an illustration of monitoring
problems at HUD. The Department pointed out that the program is no
longer funded and that the remaining issues from that report relate to
oversight of those projects that were funded and their compliance with
affordability restrictions that owners agreed to in exchange for financial
incentives. According to HUD, since the report was issued in July 1997, the
Department, along with Multifamily Housing in particular, has taken
significant steps that will greatly enhance its ability for project oversight to
ensure compliance with program requirements. HUD also explained the
steps it has taken to enhance its ability to ensure compliance with program
requirements.

GAO'S   Response

The description in our statement of facts of the problems we found in
HUD's preservation program was accurate. Contrary to HUD's assertion that
the report dealt mainly with funding and targeting aspects of the program,
substantial segments of the report dealt with problems in HUD's
management and oversight of the program. As noted in our report, these
problems contributed to the program's high cost and hampered its
effectiveness. One of the key problems we identified was that
headquarters' oversight of its field offices' implementation of the program
was limited. For example, headquarters did not conduct systematic
reviews of field offices that processed preservation transactions, and the
information received by headquarters was generally limited to the
aggregate dollar amounts of the preservation incentives approved by field
offices. As a result, HUD headquarters was not in a position to identify or



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respond effectively to problems and issues that arose. We also questioned
whether some of the reviews performed by HUD field offices of
applications for preservation funding were sufficient to ensure that the
costs were prudent and represented the best use of preservation funds.

While the Congress terminated funding for the preservation program, a
key factor in the Congress's decision was HUD'S poor management of the
program--a point clearly stated in our statement of facts we provided to
the Department. HUD remains responsible for ensuring that property
owners who participated in the program comply with affordability
restrictions that were placed on their properties and stated that its newly
created Office of Quality Assurance will be testing cases and project
managers' follow-up to ensure that HUD'S field offices are addressing the
affordability and compliance requirements under the preservation
program. While we have not performed any recent work to assess HUD'S
actions in this area, the Department did not indicate that any such reviews
have been performed or that it has formulated any specific guidance for its
field offices to follow on how they should monitor property owners'
compliance with affordability restrictions (a weakness identified in our
report).

31. HUD'S Comment, p. 41

According to the Department, GAO'S statement, "HUD'S inability to
implement plans under 2020 for handling properties on which borrowers
defaulted was due to a shortage of Single Family staff because of
downsizing." was false. HUD asserted that it has adequate staffing in its
single-family housing operations.

GAO's   Response

HUD'S comment misstated the statement of facts we provided to the
Department. Our statement of facts said that the Inspector General
reported that "The problem [of oversight of contracts] was due to a
shortage of single-family staff because of downsizing and HUD'S inability to
implement plans under 2020 for handling properties on which borrowers
defaulted." Our statement of facts did not state or imply that HUD'S inability
to implement the 2020 plan was due to a shortage of staff because of
downsizing. Also, we attributed the assessment to HUD'S Inspector General
in her December 1998 semiannual report to the Congress.




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However, we revised the above statement in our January 1999 report on
HUD'S major management challenges and program risks to reflect the
specific wording used in the Inspector General's semiannual report and to
more fully describe her reasons for characterizing the oversight of
contractors as inadequate.

32. HUD'S Comment, p. 42

HUD commented that we gave "only passing reference to the Home Buyer
Protection Plan, in fact just one sentence." HUD explained that it is
aggressively implementing the plan, which was announced in June 1998.

GAO'S   Response

We disagree that more information on the Home Buyer Protection Plan
was needed in our January 1999 report. Many of the plan's procedures and
operations had not been finalized or implemented at that time. Therefore,
we are unable to comment on whether the Home Buyer Protection Plan
has led to substantial and verifiable results in improving HUD's appraisal
process. After we issued our report on HUD's major management
challenges and program risks, in April 1999 we issued a report on HUD'S
appraisal process, which discussed, among other things, potential changes
to various processes resulting from the Home Buyer Protection Plan.4

33. HUD's Comment, p. 43

HUD  disagreed with our statement that it is too early to assess the
effectiveness of the reform efforts to address internal control weaknesses.
HUD stated that giving only one sentence for such a major reform is
misleading to the reader and indicates a bias against documenting how
substantially HUD has reduced risk. HUD stated that we are taking the
approach that unless "operational perfection is attained ... then the work
and efforts to date remain unrecognized, unmeasurable, and without
impact on the HUD operations." HUD also stated that our statement of facts
did not recognize the risk assessments that had been completed, the
internal control training provided to its managers, the high-level
management attention paid to corrective action plans, and the
demonstrable steps taken toward resolving several open material
weaknesses. HUD also pointed to the Booz-Allen Hamilton study issued in
March 1998 as further evidence that progress is being made.

 4
  Single-Family Housing: Weaknesses in HUD's Oversight of the FHA Appraisal Process
 (GAO/RCED-99-72, Apr. 16, 1999).



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GAO'S   Response

Our statement of facts recognized the steps HUD has taken to address its
internal control weaknesses, such as risk assessments that have been and
are being performed and internal control training provided to its
managers, as discussed in our response to comment 23. We also
recognized in our statement of facts that the 2020 reform plan has
potential for addressing HUD'S deficiencies.

Our basic point on internal control weaknesses and HUD'S other
management deficiencies is that HUD is making significant changes and has
made credible progress since 1997 in laying the framework for improving
the way the Department is managed. However, given the nature and extent
of the challenges facing the Department, it will take time to implement and
assess the impact of any related reforms. While major reforms are under
way, several are in the early stages of implementation, and it is too soon to
tell whether or not they will resolve the major deficiencies that we and
others have identified. Consequently, we continue to believe, as we
reported in 1995 and 1997, that these management deficiencies, taken
together, place the integrity and accountability of HUD's programs at high
risk.

HUD  indicated that a study by Booz-Allen is further evidence that progress
is being made. This review, which primarily involved Booz-Allen's review
and analyses of HUD'S staffing requirements under the 2020 reorganization,
was conducted from December 19, 1997, through February 27, 1998.
Booz-Allen obtained information for its study primarily by reviewing HUD'S
implementation plans and assessing the adequacy and reasonableness of
the staffing levels proposed in each plan. While the Booz-Allen study noted
that the 2020 organization is in place, as stated in HUD's comments, it also
characterizes some of the changes under the reorganization much the
same as we did, namely, as being in process. For example, the study stated
that the organization "is being staffed" and that "progress has been made
in implementing the revised organizations." The study did not offer
evidence of substantial and verifiable results in resolving HUD'S
management deficiencies as a result of the 2020 reforms. Furthermore, the
study is dated March 1998, before all of the centers were operational, HUD's
downsizing was officially halted, or the "unplaced" staff were given
permanent assignments.




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34. HUD's   Comment, p. 44

HUD commented that the heading in our statement of facts "Much Work
Remains on HUD'S Information and Financial Management Systems"
mischaracterized the work that the Department has done in the past 2
years. For example, HUD stated that it has developed and implemented 11
new systems and that all of its accounting systems are A-127 compliant.
HUD suggested that the heading be revised to "Much Work Has Been
Accomplished Relating To HUD'S Information and Financial Management
Systems."

GAO'S   Response

Our statement of facts and December 1998 report on HUD'S information
systems noted that progress has been made in developing and deploying
systems. However, our December 1998 report concluded that while the
Department has developed and deployed various modules and systems for
12 of the 14 different projects initiated under the 1993 and 1997 financial
systems integration strategies, the systems integration effort has not yet
been completed. Additional work that must be completed before HUD has
integrated its financial management and information system includes
(1) developing interfaces between the mixed systems and the core
financial management system and (2) completing the individual systems
integration projects (i.e., the mixed systems) such as the Grants
Evaluation Management System, FHA'S Mortgage Insurance System, and
the FHA Financial Data Warehouse. In addition, as pointed out in our 1999
report on HUD'S major management challenges and program risks, work on
cleaning and verifying certain data elements from 18 different financial
and mixed systems is in process.

35. HUD's Comment, p. 45

HUD commented that our statement that most of HUD's systems, "did not
comply with Federal Managers' Financial Integrity Act (FMFIA) and
therefore could not be relied upon to provide timely, accurate and reliable
financial information and reports to management," was misleading, given
the documentation that had been provided to us. HUD also stated that it has
had far more vigorous standards for compliance with FMFIA than any other
federal agency. While HUD noted that some nonfinancial systems are not
yet compliant with the act, it stated the systems that have the most risk
exposure for HUD are fully compliant.




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GAO'S   Response

HUD's comment misstated the statement of facts we provided to the
Department. The statement appeared in a paragraph that began, "In 1997
we reported .. ." This paragraph summarized the information we had
reported in our 1997 High-Risk Series report regarding information and
financial management systems. We reported that at that time, 93 of HUD's
116 systems did not comply with FMFIA. In our January 1999 report on
HUD'S major management challenges and program risks, we reiterated the
phase "in our 1997 report" to make it clearer that the statement referred to
HUD'S past problems.

 In our statement of facts, we acknowledged that HUD in 1998 reported that
 38 of its 92 systems were not in compliance withl FMFIA. However, we also
 reported that for three systems we reviewed, HUD'S determination that the
 systems complied with FMFIA requirements was based upon staff members'
 knowledge, without any verification or documentation. In addition, our
 statement of facts reported that the Inspector General's March 1998 report
 to the Congress pointed out that 21 of the 31 systems that HUD had
 reclassified as conforming in 1998 did not have detailed assessments and
justifications available, as required by HUD'S CFO. HUD'S internal guidance
for these reviews did not stipulate when or how the program staff should
verify that the systems met OMB'S requirements.

(Also see our response to comment 14 regarding the Department's
assertion that it may have more vigorous standards for complying with
FMFIA than any other federal agency.)

36.   HUD'S   Comment, p. 45

HUD conunmented that our statement of facts negatively described HUD'S
data clean up efforts and that our description had a dismissive tone that
incorrectly ignored its work to date.

GAO's Response

We disagree. Our statement of facts presented a factual discussion of the
status of HUD's data cleanup efforts, which we said were ongoing, and
concluded that it was too soon to assess their impact.




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37. HUD'S Comment, p. 45

HUD commented that it agreed with the general recommendations in our
December 1998 report on HUD'S information systems but that the thrust of
our report was not properly focused and was in some cases inaccurate.

According to HUD, "The report is not accurate concerning the dollars
expended on the development of financial systems; the report does not
properly compare like systems when year to year comparisons are made;
and most importantly, the report does not cite in its conclusions the many
system improvements that HUD has accomplished. In short, the
conclusions and recommendations are focused almost entirely on process
improvements and are not properly balanced by summarizing the major
system accomplishments of the Department."

GAO'S   Response

The majority of these comments are associated with our December 1998
report and do not relate to issues discussed in our statement of facts. HUD'S
comments and our responses to those comments were contained in our
December 1998 report and are discussed in the following passages-items
38 through 43.

38. HUD's Comment, pp. 46-49

HUD commented that our December 1998 report was not accurate about
the dollars expended on the development of financial systems. HUD also
commented that the report indicated that the initial cost of the
Department's financial systems integration (FSI) strategy was $103 million;
that the number increased to $206 million with the 1993 strategy; and that
by the end of fiscal year 1999, the cost would be approximately
$540 million. According to HUD, this interpretation was misleading and
inaccurate because it did not compare like systems and did not
 differentiate development costs, maintenance costs, and non-FsI costs. "A
 more accurate estimate for the FSI effort is $250 million. This is a key
point," HUD asserted, "and the numbers and the text should be corrected..




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GAO'S   Response

In our December 1998 report and statement of facts we stated the
Department expects to spend about $239 million for development costs
plus $132 million for maintenance costs. However, we also reported that
HUD had not yet finalized the plans, cost, and schedule to complete its
current FSI strategy, and, therefore, FSI costs continue to be uncertain.
Accordingly, HUD'S estimates have fluctuated considerably, as reflected in
various documents we received from the cFo and his staff. For example,
cost estimates have changed from the $540 million reported by HUD in
June 1998, to the $255 million cited in the Department's November 12,
1998, comments on our draft report on information systems, to the
$239 million that HUD reported a week later. However, we found that the
$255 million and the $239 million estimates did not include at least
$132 million associated with maintaining FSI systems. As pointed out in our
December 1998 report, HUD'S continuing uncertainty as to what the total
cost estimate is for FsI through September 1999, demonstrates the
Departrnent's need to develop and use well-defined cost-estimating
processes to prepare reliable cost estimates.

39.   HUD'S   Comment, p. 46

HUD commented that our December 1998 report did not properly compare
like systems when year-to-year comparisons were made.

GAO'S   Response

In our D)ecember 1998 report, we responded to this comment by stating
that we were asked to identify the initial objectives; development,
deployment, and maintenance costs; and completion dates for HUD's FSI
effort and how they had changed. Our report described the systems and
the estimated costs that were included as part of the three plans and
strategies for achieving integrated financial management systems. In
addition, in our December 1998 report, we explained that HUD'S underlying
strategy to implement integrated financial management systems had
changed three times. In finalizing the December 1998 report, we also
clarified estimates for the FsI strategies and the expected costs through
fiscal year 1999.




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40. HUD'S Comment, p. 46

According to HUD, we did not cite the many system improvements that HUD
has accomplished.

GAO'S   Response

As described, HUD's comment relates to our December 1998 report. We
responded to this comment in our December 1998 report by summarizing
the actions taken by HUD to date in our conclusions and adding
information to our discussions of various FSI systems throughout the
report.

41. HUD'S Comment, p. 46

HUD  commented that it was not given credit for the fact that it was one of
the first agencies to implement the Information Technology Investment
Portfolio System (I-TPS).

GAO'S   Response

Our December report gave HUD credit for deploying I-TIPS to select
information technology investments. However, it did not state that HUD
was among the first agencies to implement I-TIPS because our work did not
focus on comparing HUD to other federal agencies in implementing I-TIPS.
Our objective was to determine whether HUD had followed industry best
practices and had implemented the provisions of the Clinger-Cohen Act of
1996 and the Paperwork Reduction Act of 1995 that are required to
manage FSI projects as investments.

 42. HUD'S Comment, p. 46

 HUD  commented that we also observed that the Department did not finalize
 the revised project plans for completing the core accounting system,
 HUDCAPS. HUD explained that it provided the final plan for completing
 HUDCAPS to us earlier. Furthermore, the Department pointed out that it
 recently installed a standard general ledger and chart of accounts, which
 the Department felt was barely mentioned in the statement of facts.




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GAO'S   R      esponse

See GAO'S response to comments 12 and 13.

43.   HUD'S   Comment, pp. 46 and 47

HUD feltthat the accomplishments of the Department were scattered
throughout and not properly brought together and highlighted;
"cumulatively," HUD asserted, "they paint a very different picture of the
agency's progress."

GAO's R        esponse

HUD's comment is primarily associated with our December 1998 report on
the Department's information systems. To respond to HUD'S comment, we
summarized the status of HUD'S FSI effort to date and expanded the
discussion of individual FsI projects to reflect the new information
provided by HUD. Also, for our January 1999 report on HUD's major
management challenges and program risks, we added information stating
that HUD had told us that it had developed and deployed various modules
and systems for 11 financial management systems.

44. HUD's Comment, p. 49

HUD  comunented that we made "a very weak mention" of the fact that the
Department had completed its Year 2000 renovation of all systems, both
mission critical and noncritical ahead of schedule. HUD also stated that we
failed to mention that it was 93 percent complete with the certification of
its systems and 86 percent complete with its implementation as of
December 1998.

GAO'S Response

Our January 1999 report on HUD'S major management challenges and
program risks was updated to reflect that recently HUD reported that the
certification of its systems was 93 percent complete and its
implementation was 86 percent complete.




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45. HUD's   Comment, p. 49

HUD disputed our use of the weaknesses we reported in its estimates of
project-based Section 8 amendment needs and recaptures of project-based
Section 8 funding as an example of a financial management systems
problem. 6 (The reports in question are our reports entitled Section 8
Project-Based Rental Assistance: HUD's Processes for Evaluating and Using
Unexpended Balances Are Ineffective (GAO/RCED-98-202, July 22, 1998) and
Section 8 Tenant-Based Housing Assistance: Opportunities to Improve
HUD's Financial Management (GAO/RCED-98-47, Feb. 20, 1998). HUD asserted
that the Congress's decision to reduce budget authority associated with
project-based Section 8 amendments by $2.9 billion was a policy decision
rather than attributable to a systems problem.

GAO'S Response

While the Congress's decision to reduce the funding for Section 8
amendments was ultimately a policy decision, HUD failed to note that the
decision was reached only after we identified serious flaws in the
estimates of the project-based Section 8 amendment needs that HUD had
provided to the Congress in connection with its fiscal year 1999 budget
request. More specifically, we found that HUD had substantially
overestimated its long-term funding needs for project-based Section 8
amendments and had underestimated the amount of recaptured funds that
could be used to meet its fiscal year 1999 amendment needs. These
problems occurred because HUD did not ensure that the data used to
analyze project-based Section 8 amendment needs were complete,
accurate, and current. HUD also did not sufficiently review the analyses of
amendment needs that a HUD contractor performed to ensure that they
were reliable. We found substantive errors in these analyses. When these
errors were corrected and the analyses were updated to take into account
the OMB'S then-current economic assumptions, the estimate of long-term
shortfalls in Section 8 amendment needs decreased from $19 billion to less
than $2 billion. Furthermore, while HUD'S budget request indicated that
only $463 million in recaptured funds could be used to offset fiscal year
 1999 Section 8 amendment needs, the revised analyses indicated that HUD
would be able to recapture almost $3.7 billion from Section 8 contracts
expiring in fiscal years 1998 and 1999, a substantial portion of which could
be used to offset these needs. We also note that in responding to our
December 1998 report, HUD agreed with our recommendation for
6
 Amendment funding is provided to Section 8 contracts that have insufficient funding available for
HUD to make rental assistance payments through the remaining life of the contracts. In contrast, for
project-based Section 8 contracts for which expenditures have been less than anticipated, funds may
be recaptured and used to help fund other Section 8 contracts.



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improvements in its preparation of future budget requests for the Section 8
project-based program.

46. HUD's Comment, p. 50

HUD  commented that we painted an inaccurate picture of its oversight of
the Section 8 tenant-based and project-based assistance programs. HUD
pointed out that no housing authority had ever double-paid administrative
fees and that it had not yet agreed with our assertion that fees have been
double-counted for project-based assistance. HUD disputed the reference to
$1 billion and believed that $1,416,000 (annual cost) would depict a more
adequate accounting picture. HUD also asserted that its process model was-
appropriate, although we and the Congress disagreed with the approach
and assumptions that provided for level funding of increases for Section 8
over the budget period and the application of current excesses.

GAO'S   Response

We agree that language in our statement of facts could have been
construed to mean that administrative fees to housing agencies had been
double paid in both the tenant- and project-based programs, although this
was not the statement's intent. Our January 1999 report on HUD's major
management challenges and program risks clarified that the
double-counting occurred only in the budgeting process and did not
involve the project-based portion of the Section 8 program.

However, our statement that HUD in September 1997 submitted to the
Congress a revised budget estimate that was over $1 billion less than its
original estimate for renewing Section 8 housing assistance contracts was
correct. Furthermore, the principal reason for this amended budget
request was, as HUD stated in its comments on our report, the identification
of the double-counting error and its subsequent adjustment.

Regarding project-based Section 8 amendments, HUD was incorrect in
stating that we and the Congress disagreed with the approach and
assumptions that provided for a level funding of Section 8 increases over
the budget period. Our concerns with HUD's estimates of Section 8
amendment needs had nothing to do with the concept of leveling out
funding shortfalls. The revised analyses cited in our report on
project-based Section 8 unexpended balances all used the leveling
methodology that HUD built into its Budget Forecasting System model.
Under this approach, HUD spreads estimated funding shortfalls over the



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remaining term of a Section 8 contract rather than beginning to recognize
them in the year in which the contract is projected to run out of funds.
Instead, as discussed in our response to the previous comment, our
concerns related to the fact that HmD's estimates of amendment needs were
overstated because of errors, omissions, and methodological weaknesses.

47. HUD'S Comment, p. 51

HUD  commented that we repeated our statement, "In 1997... we noted that
HUD had reported most of its systems did not comply with FMFIA and
therefore could not be relied upon to provide timely, accurate, and reliable
financial information and reports to management." four times and that HUD
finds no fault with its methodology to determine compliance with FMFIA.
HUD suggested that we rewrite this section in a more positive tone.

GAO'S   Response

HUD  is incorrect. This statement was not repeated in our statement of
facts, although we did mention FMFIA a number of times in describing HUD'S
management deficiencies in internal controls and information systems. As
in the other sections of our statement of facts, we began the discussion of
information and financial management systems with a summary statement
of concerns described in our 1997 High-Risk Series report, which included
this statement. We then discussed the current status of systems'
compliance and HUD'S determination of their conformance with FMFIA
standards. In our statement of facts, we also discussed FMFIA under the
section on internal controls. That discussion focused on the material
internal control weaknesses identified through HUD'S FMFIA assessment,
and we noted that HUD had reduced the number of weaknesses identified.
We did not reword the lead-in paragraph to this section, as HUD suggested,
because it was a restatement of facts in an issued GAO report.

Material weaknesses reported under MFIA are those management control
deficiencies that the agency head determines are significant enough to be
reported in the annual FMFIA report. In addition, government auditors are
also required to identify management control weaknesses that, in their
opinion, pose a risk or threat to the internal control systems of an audited
entity, such as a program or operation, even if the management of the
entity would not report the weaknesses outside of the agency. HUD's Office
of Inspector General uses the terms "material weaknesses" and
"reportable conditions" to identify these weaknesses.




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48. HUD'S Comment, p. 51

HUD commented that we painted a negative picture of FHA'S compliance
with the Credit Reform Act of 1990.

GAO'S   Response

See our responses to comments 18 and 28. In our January 1999 report, we
moved the paragraph to which HUD referred and combined it with the
discussion of credit reform in a section on internal controls.

49.   HUD'S   Comment, p. 53

HUD  commented that our statement, "HUD expects to improve both the
efficiency and effectiveness of its operations through these organizational
changes,," did not reflect that HUD'S organizational changes, implemented
through the HUD Management Reform Plan, were already improving the
efficiency and effectiveness of operations. As proof, HUD cited excerpts
from two reports prepared by HUD consultants.

GAO'S   Response

As described in our statement of facts, while HUD'S organizational structure
is in place, it is too early to assess whether the problems we identified in
the past have been corrected. Specifically, the enforcement, financial
management, and real estate assessment centers will not be performing all
of their centralized functions until 1999 and 2000, when the transfer of
functions from the field offices to the centers has been completed.
Consequently, we cannot yet determine if these reform efforts have led to
substantial and verifiable results in resolving HUD'S management
deficiencies.

Moreover, neither HUD nor the consultants it cited provided any evidence
demonstrating that the organizational changes have led to substantial and
verifiable results in resolving management deficiencies. Rather, one of the
consultants, David Osborne, endorsed the 2020 plan's concept and
discussed improvements that will occur to HUD'S operations once the plan
is implemented. The other consultant, PricewaterhouseCoopers, in its
December 1998 report on HUD'S 2020 reforms, found that implementation
of some of the 2020 plan's reforms-such as the establishment of the
community builders and the enforcement, real estate assessment, and
troubled agency recovery centers-is well under way, with each project



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meeting or substantially meeting all of the critical milestones that HUD
established for completion as of September 1; however, the report did not
address the effectiveness of the changes being made or completed.

50. HUD's Comment, p. 55

HUD  commented that our statement, "the organizational changes were
generally not based on empirical analysis or studies," was completely
inaccurate. HUD referred to a March 5, 1998, letter to GAO, which laid out
different analytical methods used to design the 2020 plan, including the
review of critical reports; pilot program experience; change agent teams;
and consultations with outside experts, affected constituent groups, the
Congress, and HUD'S Inspector General.

HUD  also commented that it consulted with recognized management
experts prior to the June 1997 release of the 2020 plan, and with affected
constituent groups and the Congress after the plan's release. In addition,
HUD stated that it had incorporated the Inspector General's suggestions
into its implementation plans.

GAO'S   Response

HUD's   March 5, 1998, letter was in response to a draft of our report entitled
HUD Management: Information on HUD's 2020 Management Reform Plan
(GAO/RCED-98-86, Mar. 20, 1998). In both that report and our statement of
facts, we stated that the efficiencies   HUD   claimed under the 2020 plan were
generally not based on detailed empirical analyses or studies. Instead, HUD
relied on a variety of factors, including workload data; the limited results
of one pilot project; best practices identified in HUD field offices;
benchmarks from other organizations, and managers' and staff members'
experience and judgment.

We agree that consultations with management experts, affected
constituent groups, the Congress, and HUD'S Inspector General are useful
in improving the reforms being undertaken (including organizational
changes) and building support for them. However, the purpose of our
January 1999 report was to provide information on HUD'S analytical
support for the efficiencies it expects from the reforms-that is, the extent
of data supporting the anticipated quantitative and qualitative benefits
stated in the 2020 reform plan.




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51. HUD's   Comment, pp. 58-60

HUD commented that our heading "Organizational Structure Is in Place,
but Transfer of Functions and Responsibilities Is in Transition" and the
information following it should be changed to reflect that centers
established under the 2020 plan are "performing significant functions
which provide vital support to all of the Department's major program
areas." HUD discussed the operations of some of the centers, other
management reforms in program areas, and the efforts of the community
builders and community builder fellows.

GAO's   Response

We believe that our heading was supported by the information we
included in the section and that it provided an accurate description of
HUD's status in implementing its organizational changes under the 2020
reforms. For example, when the transfer of the financial management
workload for approximately 21,000 housing assistance contracts from the
Office of' Housing field offices to the financial management center occurs
will depend on when contract administrators are selected and deployed.
According to the director of the financial management center, the transfer
may not take place until late 1999 or early 2000.

Our basic point is that although a new field organization structure is now
in place and operational, it is too early to assess the effectiveness of this
structure in correcting organizational deficiencies. The enforcement,
financial management, and real estate assessment centers will not be
performing all of their centralized functions until 1999 and 2000, when the
transfer of functions from the field offices to the centers has been
completed.

52. HUD'S Comment, p. 60

HUD commented that we made a broad generalization in saying that "most
managers and staff said the transfer of functions was in transition and they
did not know when it would be complete." Since we visited "only five HUD
offices and a small number of headquarters organizations," the
Department asserted, we were "reporting hearsay rather than statistically
significant fact."




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GAO'S   Response

From July through October 1998, we interviewed HUD officials in the
Denver homeownership center; the Ft. Worth, Chicago, Houston, and New
Orleans field offices; the troubled agency recovery center at Memphis; and
the real estate assessment and enforcement centers in Washington, D.C.,
about various aspects of their operations before the 2020 reforms were
implemented and after their implementation. We also interviewed
randomly selected professional staff from each of the program areas in
those locations. In total, we interviewed over 50 program managers and
professional staff from 25 programs at the locations we visited. The
purpose of our interviews was not to obtain a statistically valid sample of
HUD employees' views on the reorganization. Rather, it was to obtain
information from program managers and staff at selected locations
affected by the reorganization. In response to HUD's comment, however,
our final report, where appropriate, indicated that the views expressed are
those of the HUD staff that were interviewed only.

53. HUD'S Comment, p. 60

HUD commented that our statement, "Although a field organization
structure is in place, staffing decisions were only recently completed, and
some centers are significantly understaffed," was "just wrong." HUD
stated that staffing at the enforcement center would be completed in
February and that staffing at the real estate assessment center was on
target with its phased systems.

GAO'S   Response

It was not the intent of our statement of facts to imply criticism about
staffing levels but, rather, to provide evidence on the status of staffing. As
we stated in our statement of facts, staffing decisions for about 1,300
employees were completed in September 1998, when the unplaced staff
were given permanent assignments. The reported staffing levels at the
centers were based upon our interviews through October, and the time
frames were noted in our statement of facts. We also recognized in our
statement of facts that HUD managers expected to advertise the unstaffed
positions in 1999. In its comments, HUD also noted that full staffing at the
centers had not yet been achieved.

We deleted the word "significantly" from the discussion of staffing levels
in our January 1999 report on HUD's major management challenges and
program risks.


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54. HUD'S Comment, p. 62

HUD commented that our statement, "Staff losses were recovered after HUD
decided in May 1998 to assign unplaced staff to permanent positions,"
failed to recognize one of the major goals of the 2020 plan, which is to
change the way the Department operates. According to HUD, to ensure that
additional staff addressed management deficiencies, unassigned staff were
placed in areas that represented long-standing departmental problems that
2020 had addressed.

GAO'S   Response

It is not clear to us what HUD intended with this statement. The point of
this section of our statement of facts was to demonstrate that staffing
under HUD'S new organizational structure was in transition because some
positions were only recently filled and some of the centers established
under the 2020 plan were not yet fully staffed.

55. HUD'S Comment, p. 63

HUD  commented that we should update our statement that "the
Enforcement Center had only 62% of its staff"' to reflect the staffing level it
intended to achieve by the end of January 1999. HUD also noted that the
remaining positions were due to be filled by February 1999.

GAO'S   Response

Our statement of facts noted what HUD'S staffing levels were as of the time
of our work and stated that the managers of the centers planned to
advertise the remaining positions in 1999. To add material to our final
report on when expected staffing levels would be met would not have
been appropriate in our opinion because of the degree of uncertainty that
surrounded some of HUD'S staffing expectations. For example, the director
of the enforcement center told us that he was not sure whether positions
would be filled at the center because they had been advertised previously
but had not been filled.

56. HUD'S Comment, p. 63

HUD commented that our interviews must have been premature because
our statement, "to date there has not been a significant shift of workload
from the field offices to the centers, according to the staff and managers
we interviewed from July through October," was totally inaccurate. HUD


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provided an example of 200 referrals of troubled projects to the
enforcement center and spoke of the shift of some work to the financial
management center and the grants management center.

GAO'S   Response

Our statement of facts reflected the status of workload transfers at the
time of our review. As pointed out in our January 1999 report on HUD's
major management challenges and program risks, the real estate
assessment, enforcement, and financial management centers will not be
performing all of their centralized functions until 1999 and 2000. While the
real estate assessment center had inspected over 4,200 multifamily
properties as of December 1998, it would not begin financial assessments
of multifamily properties until around April 1999, and it will not begin its
physical inspections and financial assessments of public housing
authorities until 1999 and 2000, respectively. In this regard, it should be
noted that HUD's portfolio of multifamily properties totals around 32,000
and more than 13,000 public housing developments nationwide.

Furthermore, the enforcement center was not scheduled to begin
receiving referrals of multifamily properties from the real estate
assessment center until around April 1999. The transfer of the Section 8
financial management processing workload from HUD'S public housing
field offices to the financial management center was expected to be
completed in January 1999. However, the transfer of the Section 8
financial management workload relating to 4,600 annual contribution
contracts from the Office of Housing field offices to the financial
management center was not to begin until February 1999 and was
expected to be completed in mid- to late summer 1999. Also, when the
transfer of the financial management workload for approximately 21,000
housing assistance contracts from the Office of Housing field offices to the
center occurs will depend on when contract administrators are selected
and deployed. According to the director of the financial management
center, the transfer may not take place until late 1999 or early 2000.

In addition, we do not believe that the referral of 200 cases of troubled
projects to the enforcement center represents a significant shift in
workload because HUD has at least 2,500 troubled multifamily projects in
inventory, and, by some of its own estimates, the total may be as high as
5,000. In addition, a significant function of the financial management
center relates to the Office of Housing's workload, which has yet to be
transferred.



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Appendix II
GAO's Responses to HUD's Comments on
the Major Challenges and Program Risks
Identified in GAO's Statement of Facts




57. HUD'S Comment, p. 65

In reference to our statement that "HUD's single family homeownership
centers cannot handle the current workload of HUD'S inventory," the
Department stated that FHA had not yet implemented scheduled staffing
reductions in the single-family HuD-owned property disposition or asset
management divisions and that any criticism of FHA'S performance in this
area could not be linked to a reduction in staffing levels for single-family
properties. HUD also pointed out that the fact that about 60,000 properties
were sold indicates that staffing levels are adequate. HUD also stated that
FHA is in the process of implementing new marketing and management
contracts to maintain, protect, and sell HuD-owned properties, which will
allow for a realignment of HUD staffing. The contract is based on a pilot
program operated in three locations over the last 2 years.

GAO'S   Response

We revised our January 1999 report on HUD'S major management
challenges and program risks, deleting the reference to inadequate staffing
as a reason for not being able to handle the workload. Our statement was
based on HUD's Inspector's General's December 1998 report to the
Congress.

HUD'S   conclusion that selling 60,000 properties indicates that staffing is
adequate is questionable. When the 1989 HUD scandals occurred, HUD was
selling a large number of properties. The problem was not selling
properties; rather, it was exercising proper control over the agents who
were doing the selling and over the properties while they were in HUD'S
inventory.

It should be noted that in discussing the contracting pilot, HUD focused on
its successful aspects and did not mention other aspects of the pilot that
were less successful. For example, HUD stated that at two pilot sites, the
average sales price increased and FHA'S average profit per property sold
increased or remained constant. This is not the complete story. According
to HUD'S evaluation of the pilot, the sales price at one office increased by
17 percent, but the increase at the other site was minimal-less than
1 percent. The third site experienced an 8-percent loss. Regarding profit,
one site experienced a 15-percent increase, a second experienced a
2-percent decrease, and at the third there was a "dramatic" decrease (the
percentage is not cited in HUD'S analysis). Thus, while the new approach




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Appendix II
GAO's Responses to HUD's Comments on
the Major Challenges and Program Risks
Identified in GAO's Statement of Facts




seems to offer potential, it is not clear how much more successful the new
approach will be than HUD'S traditional approach.

58. HUD'S Comment, p. 67

HUD  commented that our statement, "Because of the workload situation, it
is taking HUD longer to sell the properties and, as a result, the OIG [Office of
Inspector General] estimates the agency is incurring additional costs of
$1 million a day," was "wholly inaccurate."

GAO'S   Response

Our statement was based on a December 1998 HUD Inspector General
report to the Congress and was so attributed in our statement of facts.
Because we had not independently verified this information, we deleted
this sentence from our January 1999 report on HUD's major management
challenges and program risks.

59.   HUD'S   Comment, p. 68

HUD  maintained that our statement, "Because staffing reforms have not
been fully implemented, their effectiveness in correcting management
deficiencies cannot be demonstrated," was wrong for two reasons. First,
HUD stated that the 2020 staffing plan and placement actions were, for the
most part, completed and implemented. According to HUD, "Nine thousand
placement actions have been completed by the Department, as part of
establishing new and operational management reform organizations."
Second, HUD stated that reform operations were well under way, as
"evidenced by the actual performance of workload requirements by all
program and consolidated centers."

GAO'S   Response

We revised our January 1999 report on HUD'S major management
challenges and program risks to state that, "Because staffing reforms and
workload transfers from the field offices to the centers are still in
transition, the effectiveness of HUD'S changes in correcting staffing
deficiencies cannot be determined." While we agree that the bulk of the
staffing decisions resulting from the 2020 reforms have been made, we
disagree that there is evidence that the resulting staffing levels are
adequate to meet workload needs. As previously stated, workload transfer
from the field offices to the centers is still in a transitional phase. Until



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Appendix II
GAO's Responses to HUD's Comments on
the Major Challenges and Program Risks
Identified in GAO's Statement of Facts




most of that transfer takes place, neither the field offices nor the centers
will know whether they can handle the workload. The director of the
financial management center told us, for example, that the center's
authorized staffing level would be inadequate once it assumed its full
workload in about a year. In addition, as pointed out in our statement of
facts and January 1999 report, both we and HUD'S Inspector General
reported that monitoring and oversight of programs continues to be a
problem at HUD.

60. HUD's Comment, p. 68

HUD noted that we cited HUD'S material internal control weakness of
"inadequate emphasis on providing early warning of and preventing losses
due to defaults on insured mortgages" in our statement of facts. HUD
provided information on actions it had planned or taken to address this
weakness.

GAO'S Response

The material internal control weakness cited by HUD was reported by
independent public accountants in their audit of FHA'S fiscal year 1997
financial statements. On March 12, 1999, after the issuance of our
January 1999 report on HUD's major management challenges and program
risks, the same material internal control weakness was reported by an
independent public accountant in its audit of FRA'S fiscal year 1998
financial statements.

61. HUD's Comment, p. 72

Criticizing a point we made about travel funds ("The lack of sufficient
travel funds to conduct on-site monitoring of program activities is a
problem. According to some officials, the scarcity of travel funds has
prevented them from conducting some on-site reviews"), HUD
characterized the statement as "another example of how GAO takes
isolated comments garnered from a non-statistically significant base and
extrapolates into broad generalizations and then does not even check the
underlying facts." HUD pointed out that the travel budget has significantly
increased from $13.5 million to $15.6 million to $19 million for fiscal years
1997, 1998, and 1999.




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Appendix II
GAO's Responses to HUD's Comments on
the Major Challenges and Program Risks
Identified in GAO's Statement of Facts




GAO'S   Response

We disagree with HUD's characterization of our statements. In our
statement of facts, we clearly established that the information obtained
was from interviews of managers and staff conducted during visits to six
field locations. The information was not intended to be nor was it
presented as the views of a larger group of HUD employees. Nevertheless,
we revised our January 1999 report on HUD'S major management
challenges and program risks to specify that 15 of the program managers
and groups of staff out of the 38 we interviewed expressed concerns
regarding the availability of travel funds for monitoring.

We also included in our January report HUD'S comments regarding the
increase in the budget for travel funds. However, it should be noted, as
pointed out in the report, that increases in travel funds do not necessarily
translate into more travel funds for monitoring programs. Finally, HUD's
Inspector General has also reported that it has been told that travel funds
for program monitoring may not be adequate.

62.   HUD's   Comment, p. 72

 HUD  commented that our statement, "Program officials and a community
 builder in one HUD field office identified a need for HUD to clarify the
 authority of the community builders in dealing with HUD staff, locally
 elected officials, and industry representatives," reflected an isolated
 instance that had been dealt with in training; therefore, HUD felt the
 statement should be deleted.

 GAO'S    Response

 We had included this example in our statement of facts because the
 incident that prompted both the community builder and program officials
 to bring it to our attention was in our opinion, and theirs, very serious.
 However, we deleted the example from our final report.




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Appendix III

Major GAO Reports on HUD's Management


               Community Development: Weak Management Controls Compromise
               Integrity of Four HUD Grant Programs (GAO/RCED-99-98, Apr. 27, 1999).

               HUDInformation Systems: Improved Management Practices Needed to
               Control Integration Cost and Schedule (GAO/AIMD-99-25, Dec. 18, 1998).

               Section 8 Project-Based Rental Assistance: HUD'S Processes for Evaluating
               and Using Unexpended Balances Are Ineffective (GAO/RCED-98-202, July 22,
               1998).

               Home Improvement: Weaknesses in HUD'S Management and Oversight of
               the Title I Program (GAO/RCED-98-216, July 16, 1998).

               Appraisals for FHA Single-Family Loans: Information on Selected
               Properties in New Jersey and Ohio (GAO/RCED-98-145R, May 6, 1998).

               Housing Finance: FHA'S Risk-Sharing Programs Offer Alternatives for
               Financing Affordable Multifamily Housing (GAO/RCED-98-117, Apr. 23, 1998).

               Single-Family Housing: Improvements Needed in HUD'S Oversight of
               Property Management Contractors (GAO/RCED-9-65, Mar. 27, 1998).

               Year 2000 Computing Crisis: Strong Leadership Needed to Avoid
               Disruption of Essential Services (GAOrT-AIMD-98-117, Mar. 24, 1998).

               HUD Management: Information        on HUD'S 2020 Management Reform Plan
               (GAO/RCED-98-6, Mar. 20, 1998).

               Section 8 Tenant-Based Housing Assistance: Opportunities to Improve
               HUD'S Financial Management (GAO/RCED-9847, Feb. 20, 1998).

               Housing Preservation: Policies and Administrative Problems Increase
               Costs and Hinder Program Operations (GAO/RCED-97-169, July 18, 1997).

               High-Risk Series: Department of Housing and Urban Development
               (GAO/HR-97-12, Feb. 1997).

               HUD: Field Directors' Views on     Recent Management Initiatives
               (GAO/RCED-97-34, Feb. 12, 1997).

               Multifanily Housing: Effects of HUD'S Portfolio Reengineering Proposal
               (GAO/RCED-97-7, Nov. 1, 1996).




               Page 128                       GAO/RCED/AIMD-99-189 HUD's Management Challenges
Appendix III
Major GAO Reports on HUD's Management




Housing and Urban Development: Limited Progress Made on HUD Reforms
(GAORT-RCED-96-112,   Mar. 27, 1996).

Homeownership: Mixed Results and High Costs Raise Concerns About
HUD'S Mortgage Assignment Program (GAO/RCED-96-2, Oct. 18, 1995).

Housing and Urban Development: Public and Assisted Housing Reform
(GAorr-RCED-96-25, Oct.   13, 1995).

Federally Assisted Housing: Expanding HUD'S Options for Dealing With
Physically Distressed Properties        (GAO/T-RCED-95-38,   Oct. 6, 1994).

Federally Assisted Housing: Condition of Some Properties Receiving
Section 8 Project-Based Assistance Is Below Housing Quality Standards
(GAO/r-RCED-94-273, July 26, 1994).

Section 8 Rental Housing: Merging Assistance Programs Has Benefits but
Raises Implementation Issues (GAO/RCED94-85, May 27, 1994).

HUDInformation Resources: Strategic Focus and Improved Management
Controls Needed (GAO/AIMD-94-34, Apr. 14, 1994).

Multifamily Housing: Status of HUD'S Multifamily Loan Portfolios
(GAO/RCED-94-183FS, Apr. 12, 1994).

Multifamily Housing: Impediments to Disposition of Properties Owned by
the Department of Housing and Urban Development (GAOfr-RCED-93-37,
May 12, 1993).

 HUDReforms: Progress Made Since the            HUD   Scandal, but Much Work
 Remains (GAO/RCED-92-46, Jan. 31, 1992).

 Increasing the Department of Housing and Urban Development's
 Effectiveness Through Improved Management (GAO/RCED-84-9, Vols. I and II,
 Jan. 10, 1984).




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Appendix IV

 GAO Contacts and Staff Acknowledgments


GAO Contacts      Judy A. England-Joseph, (202) 512-7631
                  Linda M. Calbom, (202) 512-9508
                  Joel C. Willemssen, (202) 512-6408


Acknowledgments   In addition to those named above, Shirley L. Abel, Yvette R. Banks, Jeannie
                  B. Davis, David G. Gill, Angelia V. Kelly, Robert Procaccini, Phillis L. Riley,
                  Stewart O. Seman, and John H. Skeen, III, made key contributions to this
                  report.




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