oversight

Capacity Building: Section 4 Program Has Expanded and Evolved

Published by the Government Accountability Office on 2003-09-15.

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

                 United States General Accounting Office

GAO              Report to Congressional Requesters





September 2003
                 CAPACITY BUILDING
                 Section 4 Program Has
                 Expanded and
                 Evolved




GAO-03-975 

                                                September 2003


                                                CAPACITY BUILDING

                                                Section 4 Program Has Expanded and
Highlights of GAO-03-975, a report to           Evolved
Chairs, House Subcommittee on
Oversight and Investigations; House
Subcommittee on Housing and
Community Opportunity, Committee on
Financial Services




Congress recognized the                         We found that Section 4 has evolved from a narrowly targeted initiative that
importance of building the capacity             focused on providing funding for capacity building in 23 urban areas to a
of community development                        broader program that funds groups and activities in urban, rural, and tribal
organizations by passing Section 4              areas nationwide. The four organizations (grantees) use Section 4 funding to
of the HUD Demonstration Act of                 provide a variety of capacity-building support to their subrecipients. These
1993. The act authorized the                    subrecipients are nonprofit organizations that undertake locally targeted
Department of Housing and Urban
                                                initiatives in areas such as economic development, low-income housing
Development (HUD) to partner
with several national nonprofit                 construction, and job training. The Section 4 funds that the grantees receive
organizations that provide funding              help leverage private sector funding and in-kind contributions such as land
to these community groups for                   and equipment, pro bono legal services, office space, and voluntary labor.
such things as training, staff                  Since the four grantees became eligible for Section 4 funding, they have
salaries, office equipment and                  leveraged nearly $800 million in cash and in-kind contributions from the
supplies, and management                        private sector.
information systems. In 2002, HUD
provided $31 million for capacity-              HUD is responsible for ensuring that Section 4 funds are used according to
building activities. To help                    federal law and regulations and that grantees are utilizing funds efficiently
Congress with its oversight of                  and effectively. However, HUD relies on grantees to oversee their
Section 4, we reviewed the
evolution and use of Section 4
                                                subrecipients. The grantees had far-reaching organizational structures and
funding, the importance of Section              processes in place to monitor and control their subrecipients. But we found
4 funding to private sector                     that one of the seven subrecipients we tested for monitoring and control
involvement, and the management                 procedures had reimbursed a subrecipient for an item that was prohibited by
controls and measurements that                  the Office of Management and Budget (OMB). While HUD has the overall
are in place to assess Section 4.               responsibility to prevent such internal control failures, the cost-effectiveness
                                                of adding additional federal controls must be weighed against the amount of
                                                the federal dollars involved. We believe that as long as HUD and the
GAO recommends that HUD take
                                                grantees remain vigilant, additional controls are not necessary at this time.
steps to recover the grant funds                HUD is taking steps to develop a framework for assessing the effectiveness
one Section 4 grantee used to cover             of its technical assistance programs and will take part in an OMB Program
a bad debt.                                     Assessment Rating Tool review.

                                                Section 4 Geographical Expansion from 1994 to 2002




www.gao.gov/cgi-bin/getrpt?GAO-03-975.
                                                      1994: Cities that received Section 4 funding                  1997-2002: Cities that received Section 4 funding
To view the full product, including the scope
and methodology, click on the link above.       Source: GAO analysis of NCDI, LISC, Enterprise, HFHI, YBUSA data.
For more information, contact Thomas
McCool at (202) 512-8678 or
mccoolt@gao.gov.
Contents 



Letter                                                                                  1
             Results in Brief 
                                                         2
             Background
                                                                6
             Section 4 of the HUD Demonstration Act of 1993 Has Evolved and 

               Expanded Over the Years                                                10
             Federal Funding Has Encouraged Private Sector Involvement in
               the Section 4 Grantees’ Community Development Initiatives              19
             HUD’s Grantee Monitoring and Oversight Is Limited                        22
             Conclusions                                                              26
             Recommendation for Executive Action                                      27
             Agency Comments                                                          27
             Scope and Methodology                                                    27

Appendix I   Contact and Staff Acknowledgments                                        30
             GAO Contact                                                              30
             Acknowledgments                                                          30


Tables
             Table 1: NCDI Funding, 1991-2004 (in millions of dollars)                12
             Table 2: Section 4 Funding, 1994-2003 (in millions of dollars)           13
             Table 3: Additional Federal Funding for Capacity-Building and
                      Technical Assistance (in millions of dollars)                   18
             Table 4: Private Sector Funding (in millions of dollars)                 21


Figures
             Figure 1: The Organizational Structure of Section 4                        4
             Figure 2: Locations of HFHI Affiliates Receiving Section 4 Funds
                      between 1997 and 2001                                             8
             Figure 3: Cities Where YouthBuild USA Affiliates Received Section
                      4 Funds between 1997 and 2001                                   10
             Figure 4: Effect of Funding for CHAPA, an Enterprise Subrecipient,
                      for Technology Improvements                                     15
             Figure 5: Enterprise and LISC Subrecipient Rural County Coverage         17




             Page i                                          GAO-03-975 Capacity Building
Abbreviations

CDC               Community Development Corporation 

CDBG              Community Development Block Grant 

CHAPA             Citizen’s Housing and Planning Association 

Enterprise        The Enterprise Foundation 

GED               General Equivalency Diploma 

HFHI              Habitat for Humanity International

HOME              Home Investment Partnerships Program 

HOPWA             Housing Opportunities for Persons with AIDS 

HUD               U.S. Department of Housing and Urban Development 

GIS               Geographical Information Software 

LISC              Local Initiatives Support Corporation 

NCDI              National Community Development Initiative 

OMB               Office of Management and Budget 

PART              Program Assessment Rating Tool 

YBUSA             YouthBuild USA 




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Page ii                                                    GAO-03-975 Capacity Building
United States General Accounting Office
Washington, DC 20548




                                     September 15, 2003 


                                     The Honorable Sue W. Kelly 

                                     Chairman, Subcommittee on Oversight and Investigations 

                                     Committee on Financial Services 

                                     House of Representatives 


                                     The Honorable Bob Ney 

                                     Chairman, Subcommittee on Housing and 

                                     Community Opportunity 

                                     Committee on Financial Services 

                                     House of Representatives 


                                     For fiscal years 1997 through 2002, the Department of Housing and Urban 

                                     Development’s (HUD) budget for 20 capacity-building and technical 

                                     assistance programs was over $860 million.1 Of these funds, almost 

                                     $150 million was specifically designated to build the capacity of local 

                                     community development and affordable housing organizations through the 

                                     Section 4 program. Since its inception in 1993, the program has provided 

                                     capacity-building funds and services to over 1,590 local organizations in 

                                     more than 783 cities nationwide, either through direct grants or substantial 

                                     technical assistance activities. 


                                     To assist you with your oversight of the Section 4 capacity-building 

                                     program, you asked us to


                                •	   describe how funding under Section 4 of the HUD Demonstration Act of
                                     1993 has evolved and expanded over the years, how grantees use Section 4
                                     funding, and what other federal funding is available for capacity building;

                                •	   determine the importance of Section 4 funding to private sector
                                     involvement in community development initiatives; and


                                     1
                                      Capacity building can generally be defined as strengthening the capabilities of program
                                     recipients or providers—typically housing or community development organizations—to
                                     build institutional knowledge within those organizations. Among other things, capacity-
                                     building assistance can include funding for training, hiring staff, purchasing software,
                                     obtaining expertise from outside sources, and developing accounting systems and strategic
                                     plans. Technical assistance can generally be defined as training designed to improve
                                     performance or management. Congress and HUD sometimes use the terms
                                     interchangeably.



                                     Page 1                                                    GAO-03-975 Capacity Building
                   •   determine how HUD and Section 4 grantees control the management and
                       measure the impact of Section 4 programs.

                       To address these objectives, we reviewed public laws, federal regulations,
                       HUD directives, budget documents, and other materials that describe the
                       Section 4 program and authorized/appropriated funding amounts. We
                       interviewed HUD headquarters officials and grantee and subrecipient
                       officials at both the national headquarters and local office levels. We
                       visited subrecipients in eight cities, and at several we conducted file
                       reviews to evaluate grantee internal controls. Finally, we interviewed
                       private funders that provided grants or loans to the grantees and
                       subrecipients. We conducted our work in accordance with generally
                       accepted government auditing standards in Baltimore, MD; Boston, MA;
                       Cleveland, OH; Frederick, MD; Hughesville, MD; Kingston, RI; Americus,
                       GA; and Washington, D.C. Our scope and methodology are discussed in
                       greater detail at the end of this letter.


                       Section 4 of the HUD Demonstration Act of 1993 has evolved from a
Results in Brief       narrowly targeted initiative that focused on providing funding for capacity
                       building in 23 urban areas to a broader program that funds groups and
                       activities in urban, rural, and tribal areas nationwide. Section 4 authorized
                       HUD to become an equal partner with several private foundations and
                       financial institutions in the already existing National Community
                       Development Initiative (NCDI). NCDI, currently known as Living Cities,
                       began in 1991 as a partnership of public and private, for-profit and
                       nonprofit funders committed to revitalizing urban communities. NCDI
                       enlisted the assistance of two nationally recognized community building
                       organizations, the Local Initiatives Support Corporation (LISC) and the
                       Enterprise Foundation (Enterprise) to work with local community
                       development corporations (CDC) in 23 cities.2 In 1997, eligibility for
                       Section 4 funding was expanded to include Habitat for Humanity
                       International (HFHI), YouthBuild USA (YBUSA) and activities in cities
                       where NCDI was not active and in rural and tribal areas (fig. 1). Since
                       then, the four designated grantees have delivered Section 4 funds and




                       2
                        Community development corporations are neighborhood-based nonprofit organizations
                       that are involved in initiatives that focus on improving the economic, social, and physical
                       condition of their communities.




                       Page 2                                                       GAO-03-975 Capacity Building
services as operating support to their subrecipients (CDCs and affiliates).3
The grantees determine their individual approaches and administer their
funds in a variety of ways. Grantees can also tap into other federal funding
sources such as Community Development Block Grant (CDBG) funding
for capacity-building and technical assistance.




3
 Affiliates are independent, locally run nonprofit organizations joined to national
organizations by an agreement. HFHI affiliates agree to build low-income housing, while
YBUSA affiliates agree to provide job training, education, counseling, and leadership
development opportunities through the construction and rehabilitation of affordable
housing.




Page 3                                                     GAO-03-975 Capacity Building
Figure 1: The Organizational Structure of Section 4

                                             1994                                                                                          1997

                                                                                                            NCDI/
                                     NCDI (23 cities)                                                   Living Cities                       Non-NCDI (783 cities)
                                                                                                          (23 cities)
                 Private foundations
                                                                        HUD                                                                            HUD
               and financial institutions




                                                                                                                                                              Habitat for
                                                                                                      Enter-                          YouthBuild               Humanity
                  Enterprise                                       LISC                                              LISC
                                                                                                      prise                              USA                 International



                                                                                                      Local         Local
                Local offices                                Local offices                            offices       offices




                      CDCs                                         CDCs                                CDCs          CDCs               Affiliates             Affiliates




                                                                        NCDI cities (23 in total; starting in 1997, non-NCDI also impacts these 23 cities)
                                                                        Non-NCDI cities (760)

Source: GAO analysis of NCDI, LISC, Enterprise, HFHI, and YBUSA data.



                                                               While external factors such as economic trends and private sector
                                                               interests made it difficult to demonstrate empirically that Section 4



                                                               Page 4                                                                            GAO-03-975 Capacity Building
funding directly influenced private sector involvement in community
development initiatives, all four grantees and most of the private
foundations and lenders we contacted stressed the importance of federal
funding in leveraging funds from the private sector. For example, one
senior executive from a major lending institution indicated that federal
participation in NCDI provides funders with both a symbolic and a
financial incentive to join the NCDI consortium. Symbolically, federal
funding provides a sense of credibility to NCDI, as funders see federal
participation as a sign of good housekeeping and reduced risk. Financially,
federal participation adds more money to NCDI capacity-building
initiatives, in turn enabling subrecipients to raise more private funding. In
addition, Section 4 calls for significant private sector participation because
every dollar that is provided to grantees must be matched with three
dollars from private sources. Since federal regulations permit
contributions in the form of cash or verifiable third party in-kind services,
private sector involvement comes in the form of grants, loans, donated
land and equipment, pro bono legal services, donated office space, and
voluntary labor.4 Although all four grantees are able to raise these required
matching funds, each grantee has its own policies and may raise funds
nationally, locally, or both. Since the four grantees became eligible for
Section 4 funding, they have raised nearly $800 million in cash and in-kind
contributions from private foundations and businesses.

HUD uses desk audits and other document reviews to assess grantees’ use
of funds and relies on grantees to monitor their subrecipients. However,
HUD does not measure the impact of its grants. HUD is responsible for
ensuring that Section 4 funds are used according to federal law and
regulations and that grantees are utilizing funds efficiently and effectively.
HUD carries out this responsibility through limited desk reviews of work
plans that outline proposed activities and expected outcomes; quarterly
and annual progress reports that determine whether grantees are
achieving their stated goals; and payment vouchers and supporting
documentation, which help ensure that federal funds are used only for
eligible activities. HUD receives the same reports and follows the same
processes for both NCDI and non-NCDI activities but reviews NCDI work
plans in consort with other NCDI funders and non-NCDI activities on its
own. HUD depends on grantees to provide oversight of their subrecipients.


4
 Federal regulation 24 CFR 84.23 specifies what constitutes a matching contribution and
how it is counted and reported. These contributions cannot be included to meet the
matching requirements of any other federally assisted program and cannot be paid by the
federal government under another award.




Page 5                                                    GAO-03-975 Capacity Building
                    While it appeared that grantees maintained far-reaching organizational
                    structures and processes to monitor and control their subrecipients, we
                    found that one grantee had reimbursed a subrecipient for a bad debt, an
                    activity that is prohibited by the Office of Management and Budget
                    (OMB).5 HUD does not currently measure the impact of Section 4 funding
                    but relies on its grantees to measure the impact of their individual
                    programs. However, HUD is taking steps to develop a framework for
                    assessing the effectiveness of its technical assistance programs and will
                    take part in an OMB Program Assessment Rating Tool review (PART)
                    designed to help in making informed budget decisions, supporting
                    management, identifying program design problems, and promoting
                    performance measurement and accountability.6


                    In 1991, a group of for-profit and nonprofit public and private funders
Background 
        started NCDI, currently known as Living Cities, to revitalize urban
                    communities.7 NCDI is composed of 17 major corporations, foundations,
                    and the federal government—HUD and the Office of Community Services
                    of the Department of Health and Human Services. In its first decade of
                    operation, NCDI assembled a community development system composed
                    of

               •	   two of the largest national community-building organizations to administer
                    the initiative—LISC and Enterprise;

               •    300 CDCs in 23 cities; and

               •	   local operating support collaboratives, which include local foundations,
                    banks, corporations, and local governments, that identify and draw on
                    local technical expertise and governmental and economic resources and
                    use them to sustain and enhance the capacity of CDCs.




                    5
                     OMB Circular A-122 indicates that, among other things, bad debts are ineligible for federal
                    funding.
                    6
                     PART is a series of questions designed to provide a consistent approach to rating
                    programs across the federal government.
                    7
                    Prior to becoming Living Cities, NCDI was a virtual organization handled by consultants.
                    NCDI did not have staff or occupy office space. Living Cities now has staff and oversees
                    NCDI’s operations.




                    Page 6                                                      GAO-03-975 Capacity Building
As of September 1, 2001, NCDI had provided $234.8 million to its 23 cities.
Of this amount, about three-quarters was for project funding and the
balance, about $60 million, supported capacity building with operating
grants and training.

LISC, founded in 1979 and headquartered in New York City, is the largest
community-building organization. LISC’s mission, involving hundreds of
CDCs, is to rebuild whole communities by supporting these groups. LISC
operates local programs in 38 urban program areas and 70 rural
communities. According to LISC, it has raised more than $4 billion from
over 2,200 investors, lenders, and donors, which has leveraged an
additional $6 billion in public and private sector funds. In addition,
according to LISC, it has helped 2,200 CDCs build or rehabilitate more
than 110,000 affordable homes, created over 14 million square feet of
commercial and community space, and helped generate 40,000 jobs.

Enterprise was founded in 1982 as a vehicle for helping low-income people
revitalize their communities. Headquartered in Columbia, Maryland,
Enterprise has offices in 18 communities across the nation. Enterprise
works with a network of 2,200 nonprofit organizations, public housing
authorities, and Native American tribes in 800 locations, including more
than 100 CDCs. The Enterprise Foundation provides these organizations
with technical assistance, training, short and long-term loans, equity
investments, and grants. According to Enterprise, it has raised nearly $430
million to support community-based development that has helped produce
17,000 affordable homes and assisted 20,000 low-income individuals in
finding employment.

HFHI, founded in 1976 and headquartered in Americus, Georgia, is a
nonprofit ecumenical Christian housing ministry (faith-based
organization) seeking to eliminate substandard housing. HFHI builds and
rehabilitates houses with the help of homeowner (partner) families,
volunteer labor, and donations of money and materials. Work is done at
the local community level by affiliates that coordinate all aspects of home
building, including fund-raising, building site selection, partner family
selection and support, construction, and mortgage servicing. HFHI
provides its affiliates with information, training, and a variety of other
support services. Affiliates are primarily volunteer driven, though some
have their own staff. Affiliates are monitored and supported by HFHI staff
across the country. HFHI currently has over 1,669 affiliates, and in 27
years has built over 150,000 houses worldwide, including more than 40,000
homes in the United States. Figure 2 shows the 526 cities where HFHI
affiliates have directly received Section 4 funds.


Page 7                                           GAO-03-975 Capacity Building
Figure 2: Locations of HFHI Affiliates Receiving Section 4 Funds between 1997 and 2001




                                            HFHI cities (526)

Source: GAO analysis of HFHI data.
                                        YBUSA was founded in 1990 and is headquartered in Somerville,
                                        Massachusetts. It is a national nonprofit organization that provides
                                        capacity-building grants on a competitive basis to support the efforts of
                                        organizations that are planning to or are operating Youthbuild programs in
                                        their communities, many of which are funded by the HUD Youthbuild
                                        grant program. 8 A Youthbuild program is a comprehensive youth and
                                        community development program as well as an alternative school.
                                        Youthbuild programs, which offer job training, education, counseling, and


                                        8
                                         Under the Housing and Community Development Act of 1992, “Hope for Youth:
                                        Youthbuild,” HUD awarded Youthbuild programs grants and contracts totaling $403 million
                                        for fiscal years 1993 to 2002. In addition to capacity-building funds, YBUSA has received
                                        funds from HUD to provide technical assistance to Youthbuild program recipients.




                                        Page 8                                                    GAO-03-975 Capacity Building
leadership development opportunities through the construction and
rehabilitation of affordable housing, serve young adults ages 16 to 24 in
their own communities. Participants split their time between the
construction site and the classroom, where they earn GEDs or high school
diplomas and prepare for jobs or college. The buildings that are
constructed or rehabilitated during the program are primarily low-income
housing. YouthBuild USA serves as the national intermediary and support
center for over 200 Youthbuild programs. Over half of the Youthbuild
programs are members of YBUSA’s affiliated network. As shown in figure
3, YBUSA affiliates located in 106 cities have received Section 4 funds
from 1997 to 2001.




Page 9                                          GAO-03-975 Capacity Building
Figure 3: Cities Where YouthBuild USA Affiliates Received Section 4 Funds between 1997 and 2001




                                                  YouthBuild USA cities (106)

Source: GAO analysis of YouthBuild USA data.




                                               The scope of eligible activities funded by Section 4 of the HUD
Section 4 of the HUD                           Demonstration Act of 1993 has changed over the years. Originally the act
Demonstration Act of                           focused on providing funding for capacity building in 23 urban areas.
                                               Currently, it provides funding to groups and activities in urban, rural, and
1993 Has Evolved and                           tribal areas nationwide. Section 4 authorized HUD to join other
Expanded Over the                              corporations and foundations as an equal partner in NCDI to develop the
                                               capacity and ability of CDCs in 23 cities. In 1997, Section 4 was expanded
Years                                          to include two more grantees, HFHI and YBUSA as well as more cities, and
                                               rural and tribal areas. The grantees’ organizational structures and missions
                                               vary, as do their strategies for awarding Section 4 funds and the types of




                                               Page 10                                          GAO-03-975 Capacity Building
                            activities they authorize. Each grantee has initiatives in rural and tribal
                            areas.9 Additional federal funding, such as Community Development Block
                            Grants, is also available to grantees for capacity building and technical
                            assistance.


Section 4 Provides          NCDI in 1991 started with seven large national foundations and a major
Capacity-Building Funding   insurance company and was administered by LISC and Enterprise. This
to Four Organizations       consortium of funders believed CDCs could achieve greater and more
                            lasting success if they could count on a significant reliable commitment of
                            multiyear operating support, project financing, technical assistance, and
                            training. To date, NCDI has had four phases (rounds) of funding. In the
                            first phase (1991-93), NCDI funders pledged $62.9 million (see table 1).
                            With the enactment of Section 4, HUD joined phase II of NCDI, which also
                            included 12 private foundations and financial institutions, as an equal
                            partner.10 Congress’ goal in authorizing HUD to participate in NCDI was to
                            develop the capacity and ability of CDCs to undertake community
                            development and affordable housing projects and programs. HUD’s
                            involvement resulted in some changes to the way funds were disbursed.
                            While the foundations provided funding through Living Cities (NCDI),
                            which in turn distributed grant funds to LISC and Enterprise, HUD
                            distributed its funding directly to LISC and Enterprise. In addition, unlike
                            other NCDI funders, HUD provided funding only after expenses were
                            incurred, monitored funding more closely, and restricted uses to capacity-
                            building activities. In 2001, 17 foundations and corporations committed
                            another 10 years to the initiative.




                            9
                            None of the grantees distinguish between rural and tribal programs.
                            10
                              NCDI’s goals coincided with HUD’s program goals in the Community Development Block
                            Grant Program and the Home Investment Partnerships Program (HOME). Both programs
                            emphasize the use of neighborhood-based, nonprofit community development
                            organizations to provide affordable housing and economic development in low-income
                            neighborhoods.




                            Page 11                                                   GAO-03-975 Capacity Building
Table 1: NCDI Funding, 1991-2004

 Dollars in millions
                                                                Living Cities
 Living Cities            NCDI I      NCDI II      NCDI III (Second Decade)
 Initiative            1991-1993   1994-1997     1998-2001        2001- 2004          Total
 Private funder           $62.86      $67.85            $87                $93.7   $311.41
 HUD                          0           20             16                   20         56
 Total                    $62.86      $87.85          $103                $113.7   $367.41
Source: NCDI.



Congress did not appropriate funds for HFHI and YBUSA until 1997 (see
table 2).11 At that time, LISC and Enterprise were given the option of using
Section 4 funding to continue NCDI activities in the original 23 cities or to
undertake new non-NCDI activities in other cities, which expanded the
geographical dispersion of Section 4 funding. In addition, Congress
required the grantees to set aside a portion of Section 4 funding for rural
and tribal areas. Unlike the NCDI activities, whose funding objectives were
determined by the responsible funders, LISC and Enterprise worked
directly with HUD in creating the objectives for non-NCDI cities.




11
  Section 4 grants cover a 4-year period. We are only providing information on the FY 1997
grant for HFHI and YBUSA because it was the only grant that had been completed at the
time of our review.




Page 12                                                       GAO-03-975 Capacity Building
Table 2: Section 4 Funding, 1994-2003

 Dollars in millions
                                                                                                     Total $ allocated for
 Fiscal year                      Enterprise                    LISC            YBUSA        HFHI                Section 4
                             NCDI       non-NCDI        NCDI      non-NCDI
 1994                         $10                 $0      $10            $0          $0        $0                     $20
 1995                            0                0         0             0           0         0                       0
 1996                            5                0         5             0           0         0                      10
 1997                            3               4.6        3            4.6        7.6        7.6                   30.4
 1998                            0               7.5        2            5.5          0         0                      15
 1999                            0               7.5        2             6           0         0                      15
 2000                            0                10        2            8.2        2.5        3.8                   26.3
 2001                           10               2.5       10            2.5          4        3.5                   32.5
 2002                            0              12.5      1.4            11           2         4                    30.9
 2003                            0                14        3            11           2        4.2                   34.2
 Total                        $28              $58.6    $37.7          $48.8      $18.1     $23.1                  $214.3
Source: HUD.



Grantees Use a Variety of               LISC and Enterprise are national organizations that use local program
Methods to Help Build                   offices to provide financial and technical support to CDCs. The staff at the
Capacity                                local program offices work with CDCs to achieve community-driven goals.
                                        For example, through its Boston local office, LISC provided several
                                        Section 4 grants to the Madison Park Development Corporation. A $78,000
                                        grant was used to help the CDC improve the Dudley Square Business
                                        district in the Roxbury neighborhood of Boston. The Cleveland Enterprise
                                        office provided Section 4 funds to the Cleveland Neighborhood
                                        Partnership Program, a local support collaborative that provides
                                        organizational and real estate development and neighborhood planning for
                                        Cleveland CDCs.

                                        According to HFHI and YBUSA officials, these organizations provide
                                        direct grants to affiliates but operate somewhat differently. HFHI has
                                        provided grants to affiliates on a 3-year diminishing basis to hire new staff
                                        or establish warehouse facilities, with an expectation of increasing house
                                        production by at least 15 percent. In addition, HFHI has established
                                        regional support centers to bring technical assistance closer to affiliates.
                                        YBUSA uses Section 4 funds to provide a variety of grants to its affiliated
                                        network, such as operating grants, program enhancement grants, special
                                        assistance grants, and scholarships to staff and students. In addition,




                                        Page 13                                            GAO-03-975 Capacity Building
YBUSA has used Section 4 funds to build its capacity to serve as a national
support center and to provide technical assistance and training.

LISC and Enterprise consider the subrecipient’s stage of development
when making Section 4 funding decisions. For example, a new
organization might receive Section 4 funds to pay for a portion of the
salary of the executive director, whereas more established CDCs might
receive funding to upgrade their financial management software. All
grantees stressed that because capacity building takes time, they provide
multiyear support to subrecipients. However, three of the four grantees
indicated that they generally fund subrecipients in ways that encourage
the organizations to become financially independent. Officials from LISC
and Enterprise explained that although some subrecipients receive
multiple grants for several years, the grants are small enough to keep
subrecipients from becoming dependent on Section 4 funds for daily
operations. As noted earlier, HFHI’s grants, which are provided to hire
new staff, diminish over a 3-year period. According to HFHI, the affiliates’
gradual absorption of staff costs leads to independence from—rather than
dependence on—federal funding. YBUSA, however, has provided Section 4
funding to affiliates to pay for general operations during years when they
had not received funding under HUD’s Youthbuild program.

Generally, Section 4 funds are used to pay for staff salaries, training,
technology, and office supplies and equipment and to fund the operating
support collaboratives. For example, with its 1997 funds HFHI provided
direct grants to 60 affiliates to pay for staff salaries (usually an executive
director). The YouthBuild Boston affiliate used Section 4 funds to hire an
administrative coordinator and enhance its technological capabilities. The
Washington, D.C., LISC office provided Section 4 funding to a local CDC to
pay for some staff training and to purchase equipment and other supplies
to outfit a homebuyer’s training center. Enterprise has used Section 4
funds to develop on-line tools, such as a best practices database, and to
bring current technology to CDCs. For example, Enterprise awarded one
nonprofit organization, Citizen’s Housing and Planning Association
(CHAPA) in Boston, Section 4 funds to administer the NET-Works
program, a program to enhance the technological capacity of CDCs in the
New England region. As a result, 36 CDCs received computer equipment,
Internet access, and assistance in developing websites. Figure 4 illustrates
the broad impact that Section 4 funding had for this nonprofit organization
on other CDCs.




Page 14                                            GAO-03-975 Capacity Building
                       Figure 4: Effect of Funding for CHAPA, an Enterprise Subrecipient, for Technology
                       Improvements




                                                                                                      Maine




                                                                                 Vt.      N.H.




                                                                                         Mass.

                                                                                               R.I.
                                                                                       Conn.


                            City with 1 CHAPA subgrantee

                            City with 2 CHAPA subgrantees

                            City with 3 CHAPA subgrantees

                            City with 5 CHAPA subgrantees

                       Source: GAO analysis of CHAPA data.




Rural Areas Now Have   Congress did not require grantees to set aside Section 4 funding for rural
Access to Section 4    and tribal areas until 1997.12 All four grantees currently have initiatives that
Funding                focus on these areas. For example, LISC has a rural office that supports
                       both a national program and a program in the Mississippi River Delta
                       Region of the United States covering 56 counties and parishes. In fiscal
                       years 1997 through 2002, LISC awarded Section 4 grants totaling



                       12
                        For its rural and tribal programs, YBUSA generally follows the Rural Housing Service’s
                       requirement that most households receiving assistance be located in rural communities
                       with fewer than 20,000 residents. HFHI classifies rural counties as those with fewer than
                       100,000 residents and rural cities as those with no more than 25,000 residents. LISC defines
                       rural counties as those having no cities with 50,000 or more residents. Enterprise considers
                       communities rural if they have fewer than 50,000 residents.




                       Page 15                                                         GAO-03-975 Capacity Building
approximately $9 million to rural CDCs. Enterprise has awarded $6.2
million in Section 4 grants to rural CDCs. Unlike LISC, Enterprise does not
have a rural office. Enterprise services its rural and tribal subrecipients
through partnerships with other state and regional rural agencies and the
Housing Assistance Council, which administers Enterprise’s Rural
Capacity Building Initiative, and through its regional and local office
structure.13 Although 218 of the 1,003 LISC and Enterprise CDCs provide
services to rural and tribal areas, many of them cover large geographical
areas. For example, 57 of the 72 rural CDCs that are funded by LISC,
operate in more than one county, and 64 of the 146 rural CDCs that are
funded by Enterprise operate in more than one county. Figure 5 shows the
cities where LISC and Enterprise subrecipients who work in rural areas
are located and the multiple counties they serve.




13
  The Housing Assistance Council is a national nonprofit corporation created to increase
the availability of decent and affordable housing for rural low-income people.




Page 16                                                    GAO-03-975 Capacity Building
Figure 5: Enterprise and LISC Subrecipient City and Rural County Coverage




                                                              Rural cities (201)

                                                              No Enterprise/LISC coverage (2,151)

                                                              LISC coverage (349)

                                                              Enterprise coverage (492)

                                                              Enterprise and LISC coverage (149)


Source: GAO analysis of LISC and Enterprise data.
                                                    HFHI makes an effort to reserve at least one-third of its Section 4 funding
                                                    for its rural affiliates. HFHI awarded $4.6 million of its fiscal year 1997
                                                    Section 4 funds to 60 affiliates of which 33 were rural. According to
                                                    YBUSA officials, meeting the required set-aside has been a challenge.
                                                    YBUSA’s outreach efforts have included encouraging rural affiliates to
                                                    apply for planning, operating, and program enhancement grants and for
                                                    specialized technical assistance. According to a YBUSA official, over the
                                                    course of the 1997 grant, about $2.5 million of YBUSA’s $7.6 million
                                                    allocation was focused on rural and tribal and partly rural and tribal
                                                    programs. Of this amount, about $1.3 million was for direct grants to sites
                                                    and about $1.2 million was for services to sites. A YBUSA official told us


                                                    Page 17                                          GAO-03-975 Capacity Building
                            that as of July 2003, 84 of the 203 operating Youthbuild programs were
                            rural and partly rural.


Grantees Receive            LISC, Enterprise, HFHI, and YBUSA also receive capacity-building and
Capacity-Building Funding   technical assistance funds from other HUD programs (table 3). The
from Other Federal          primary difference between Section 4 funding and other federal funding is
                            that the other federal funding for capacity-building and technical
Programs                    assistance is generally awarded competitively, while Section 4 funding is
                            noncompetitive. Several federal programs offer capacity-building funds:
                            CDBG, HOME, and Housing Opportunities for Persons with AIDS
                            (HOPWA). All grantees’ Section 4 capacity-building funds exceed those
                            received from other federal programs.

                            Table 3: Additional Federal Funding for Capacity-Building and Technical Assistance

                             Dollars in millions
                                                       Total other
                                                           federal
                             Intermediary                 funding         Federal program
                             LISC                                  8.6    CDBG Technical Assistance
                                                                          HOME Technical Assistance (1994-2002)
                             Enterprise                          13.1 	   CDBG Technical Assistance
                                                                          HOME Technical Assistance
                                                                          HUD Technical Assistance /Capacity Building
                                                                          HOPWA Technical Assistance (1995-2002)
                             YBUSA                               20.2     Youthbuild program (1997-2002)
                                                                          Corp. for National and Community Service for
                                                                          AmeriCorps (1997-2003)
                                                                          U.S. Dept. of Labor for Welfare to Work (1998-2001)
                             HFHI                                  7.5    Self-help Homeownership Opportunity Program (1999)
                            Source: LISC, Enterprise, YBUSA, and HFHI.




                            Page 18                                                             GAO-03-975 Capacity Building
                          While it was difficult to demonstrate empirically that Section 4 directly
Federal Funding Has       influenced private sector involvement in community development
Encouraged Private        activities, funders and grantees said that federal involvement served as a
                          catalyst for private fund-raising and provided credibility to subrecipients
Sector Involvement in     in terms of their ability to comply with the requirements that are
the Section 4             associated with federal funding. Some local funders of CDCs and affiliates
                          were not aware of the specific Section 4 funding the subrecipients
Grantees’ Community       received but indicated that both federal funding and diverse funding
Development               streams are important. Since matching funds can be raised either
Initiatives               nationally, locally, or a combination of both, each grantee employs its own
                          matching policy and raises funds from foundations, corporations, banks,
                          individual donors, and nongovernmental sources. Since the creation of
                          Section 4, grantees have raised nearly $800 million from the private sector,
                          in matching and other cash and in-kind contributions.


Grantees and Private      The grantees and nearly all of the private lenders and foundations we
Contributors Generally    contacted stressed the importance of federal funding in leveraging funds
Believe that Federal      from the private sector. For example, officials from LISC, Enterprise, and
                          Living Cities indicated that private funding and lending have increased
Funding Is Important to   since HUD’s involvement. In addition, Enterprise officials indicated that
Private Sector            the private sector believes that federal funding provides an incentive to
Participation             work in areas and projects that would be less likely to receive funding
                          without federal involvement. HFHI officials said that federal funding is
                          imperative because it is the only way for all-volunteer organizations to
                          transition into staff-managed, volunteer-based organizations. YBUSA
                          officials said that federal funding, especially funding that leverages private
                          funding, has enabled YBUSA to be proactive in assisting Native American
                          and rural programs.

                          NCDI lenders and funders indicated that Section 4 funding had both a
                          psychological and a real impact on private sector involvement in the
                          initiative. For example, one senior executive from a major lending
                          institution indicated that federal participation in NCDI provided funders
                          with a symbolic and financial incentive to join the NCDI consortium.
                          Symbolically, federal funding provides a sense of credibility to NCDI, as
                          funders see federal participation as a sign of good housekeeping and
                          reduced risk. Financially, federal participation adds more money to NCDI
                          capacity-building initiatives, in turn enabling subrecipients to raise more
                          private funding. Another lender said that HUD’s participation in a CDC
                          through Section 4 funding served as an indication of good management
                          and internal controls. An insurance company also noted that Section 4
                          funding showed that the federal government was strongly committed to a


                          Page 19                                            GAO-03-975 Capacity Building
                            coordinated effort to build CDC capacity, and a foundation told us that the
                            federal presence legitimized NCDI as the CDC capacity-building vehicle
                            with the greatest payoff. Furthermore, nearly all of the YBUSA and HFHI
                            private funders that we interviewed said that federal funding was an
                            incentive for their participation in the program. For example, one funder
                            said that federal support was like a “seal of approval.” Another funder said
                            that Section 4 funding created a positive incentive because the availability
                            of invaluable hard-to-get federal funding increased the viability of any
                            project.

                            Most funders and lenders that provide funding directly to CDCs and
                            affiliates stressed that federal funding was beneficial, but some of those
                            local funders were not aware that subrecipients received Section 4 funds.
                            Some LISC and Enterprise subrecipient funders explained that federal
                            funding and diverse funding streams were characteristics of a viable
                            organization. One funder suggested that public funding was critical, since
                            private philanthropy could only do so much. Another foundation indicated
                            that it looked to organizations that had a diversified funding structure,
                            since it could not provide sole support for an organization.

                            The four funders we spoke with that provided funding directly to the
                            YouthBuild Boston affiliate were split on whether federal participation
                            was an incentive to their involvement. Two said that federal participation
                            was an incentive; while the other two said their decision to provide
                            funding was based solely on the affiliate’s mission.

                            Officials from most of the five organizations we spoke with that provided
                            funding to an HFHI affiliate in Rhode Island indicated that federal
                            participation was not an incentive, but two said that having other sources
                            of funding encouraged them to participate. An official from one
                            organization indicated that while federal funding indirectly provides an
                            incentive for participation, the organization provided funding primarily
                            based on the affiliate’s reputation and mission.


Cost Sharing Requirements   Section 4 funding calls for significant private sector participation in
Are Specified in Law and    community development initiatives because Section 4 requires that
Grantee Policies            grantees match each dollar awarded with three dollars in cash or in-kind
                            contributions from private sources. Matching funds are raised nationally
                            and locally and come from nongovernmental sources including private
                            foundations, corporations, banks, and individual donors. Each grantee has
                            its own matching policy and procedures for complying with the matching
                            requirement.


                            Page 20                                           GAO-03-975 Capacity Building
                             LISC and Enterprise generally meet their matching requirement at the
                             national level but encourage CDCs to seek private contributions to aid in
                             the match. However, LISC requires subrecipients in rural areas to raise at
                             least $1 for each $1 they receive; the remainder of the match is raised
                             nationally. Conversely, HFHI and YBUSA require their affiliates to raise at
                             least $3 for every dollar of Section 4 funding they receive. While both
                             HFHI and YBUSA impose this requirement on all of their affiliates,
                             including those in rural and tribal areas, if YBUSA rural and tribal affiliates
                             cannot raise the 3 to 1 match, the national organization will provide the
                             difference. Officials from the four grantees told us that raising the private
                             matching funds had not been a problem. For example, for the 1997 grant
                             HFHI and its 60 affiliates that received Section 4 funding raised almost
                             $155.6 million in private contributions. YBUSA and its affiliates raised
                             $26.6 million in private contributions to match its $7.6 million grant.


Grantees Have Raised         Since the four grantees became eligible for Section 4 funding, they have
Significant Amounts of       raised nearly $800 million from the private sector in matching funds and
Private Sector Funding and   other cash and in-kind contributions. However, we could not demonstrate
                             empirically that Section 4 funding influenced the grantees’ fund-raising
Other Resources              owing to external factors such as economic trends and private sector
                             interests. Between 1994 and 2001, LISC and Enterprise raised $457 million,
                             and from 1997 to 2002, HFHI and YBUSA raised $341 million (see table 4).

                             Table 4: Private Sector Funding

                                 Dollars in millions
                                 Grantee                                  Private sector funding      Time period
                                                                                               a
                                 LISC                                                    $319.9       1994-2001
                                 Enterprise                                               136.7       1994-2001
                                 YouthBuild USA                                            26.6b      1997-2001
                                 HFHI                                                     314.5       1998-2002
                                 Total                                                   $797.7
                             Source: LISC, Enterprise, YBUSA, and HFHI.
                             a
                              LISC private sector grants for 1994 and 1995 contain government funding due to different accounting
                             practices at that time.
                             b
                             This number only includes YBUSA’s matching funds and not all private sector funding.


                             In addition to providing funding, the private sector has contributed in-kind
                             services to CDCs, including managerial skills, mentoring, and volunteer
                             labor. For example, representatives from the private sector serve on



                             Page 21                                                               GAO-03-975 Capacity Building
                        LISC’s local advisory boards to help local program offices make funding
                        decisions and are members of operating support collaboratives in several
                        cities. HFHI’s local affiliates use volunteers for office and construction
                        work and for their boards of directors.


                        HUD monitoring is limited to desk reviews of the grantees’ compliance
HUD’s Grantee           with their grant agreements. In general, the grant agreements require
Monitoring and          several kinds of reporting information including work plans, semiannual
                        or quarterly financial status reports, requests for grant payment vouchers,
Oversight Is Limited    and final reports. However, HUD’s involvement in reviewing grantee work
                        plans differs for NCDI and non-NCDI activities. Since HUD does not
                        directly monitor the subrecipients’ capacity-building activities, it relies on
                        the grantees to monitor and oversee them. The grantees have several
                        mechanisms in place to ensure that subrecipients are complying with their
                        individual grant agreements. However, in a subset of files we reviewed, we
                        found that a grantee had funded an ineligible activity for one subrecipient.
                        Also, HUD does not have specific impact measures in place for Section 4.


HUD Monitors Grantees   HUD’s efforts to monitor the grantees include desk reviews of work plans,
but Not Subrecipients   annual performance reports, semiannual financial status reports, requests
                        for grant payment vouchers, and final performance reports. According to
                        HUD, the four grantees sign grant agreements that obligate them to
                        comply with HUD and OMB requirements. For example, grantees must
                        submit work plans that identify when and how federal funds and
                        nonfederal matching resources will be used and present performance
                        goals and objectives in enough detail to allow for HUD monitoring. In
                        addition, the grant agreements require grantees to submit annual reports
                        showing actual progress made in relation to the work plans, plus
                        semiannual financial status reports that show private sector matches and
                        grant expenditures to a certain date. Grantees are not permitted to begin
                        activities or to draw down funds until HUD approves the work plans.
                        Furthermore, the grant provisions require that in order to receive
                        payment, grantees must submit a payment voucher with supporting
                        invoices that provide enough information to allow HUD to determine
                        whether the costs are reasonable in relation to the work plan’s objectives.
                        Finally, the grant agreement stipulates that within 90 days of completing
                        the grant award, the grantee must submit a final report summarizing all the
                        activities conducted under the award including any significant program
                        achievements and problems reasons for the program’s success or failure.




                        Page 22                                            GAO-03-975 Capacity Building
HUD officials told us that staffing constraints caused the agency to focus
mostly on grantee work plans and payment vouchers. HUD reviews how

the grantees select subrecipients, set benchmarks, and plan to build
capacity. HUD uses different processes to review NCDI and non-NCDI
work plans. As an equal player, HUD reviews NCDI’s work plans together
with other funders and meets twice a year to discuss NCDI initiatives and
goals for each city. However, HUD reviews and approves non-NCDI work
plans by itself. A HUD official told us that HUD staff focus most of their
attention on the funding aspects of the work plans. HUD officials told us
that they check the semiannual financial status reports and accompanying
narratives to determine whether the expended amounts are in line with the
amounts stated in the work plans.

Section 4 grant funds are provided to grantees after costs are incurred, so
grantees must periodically submit vouchers and supporting
documentation that detail expenditures by city or project in order to
receive payment. HUD staff review the vouchers and supporting
documentation to ensure that funds are used for the eligible activities
stated in the work plans and that expenditures such as travel and indirect
costs are within HUD guidelines and do not exceed available funding.
HUD has denied payments for activities not contained in approved work
plans or not supported by the required documentation. For example, in
March 2003, HUD withheld over $650,000 in Section 4 funding because one
grantee did not submit a final report, several financial reports, a work
plan, and two annual plans. In June 2003, however, the grantee provided
the necessary documents and HUD released the funds.

In addition, grantees must submit financial status reports that show
whether the organizations are meeting their matching requirements.
However, HUD relies on the grantees to ensure that they and their
subrecipients are matching funds correctly. Both LISC and Enterprise
have a formal matching policy. LISC’s policy explicitly states that counting
the same funds as matching funds under more than one program is
prohibited and requires its subrecipients to identify the sources and
amounts of matching funding they have received twice a year. Enterprise’s
matching requirements are tracked on an ongoing basis and are certified
by an Enterprise official. YBUSA requires its affiliates to submit
documentation that supports the sources and amounts of matching funds
committed before it will release Section 4 funding, and HFHI requires
affiliates to report matching funds data quarterly.




Page 23                                           GAO-03-975 Capacity Building
HUD Relies on Grantees to   HUD does not directly monitor subrecipients’ and affiliates’ capacity-
Monitor Subrecipients       building activities but instead relies on the grantees for monitoring and
                            oversight. Like HUD, grantees initiate grant agreements with their
                            subrecipients and affiliates. These grant agreements generally include
                            such things as the purpose of the grant, grant amount, time frame,
                            disbursement conditions, causes for suspension and termination,
                            restrictions on use of grant funds, and reporting and accounting
                            requirements that describe how the grantee will monitor the grant. The
                            grantees use the grant agreements as the basis for monitoring their
                            subrecipients’ performance.

                            The grantees use several mechanisms to ensure that subrecipients are
                            complying with their grant agreements. For example, LISC and Enterprise
                            officials indicated that throughout the grant period, local offices
                            communicate with their subrecipients by telephone or email or in person
                            in order to follow their progress. Similarly, YBUSA staff told us that they
                            monitor affiliates by telephone as well as through on-site technical
                            assistance. LISC, Enterprise, and YBUSA require each subrecipient to
                            submit a monthly activity report, semiannual project reports and
                            narratives, and final reports. However, the grantees have different
                            procedures, forms, and checklists that guide their monitoring activities.

                            Operating support collaboratives aid LISC and Enterprise in their
                            oversight through proposal reviews, organizational assessments, work
                            plan reviews, on-site reviews, quarterly report reviews, and annual and 3-
                            year evaluations. The LISC and Enterprise local offices use the
                            collaboratives’ monitoring information when making their Section 4
                            funding decisions.14

                            HFHI and its regional office personnel evaluate all affiliates every 3 years
                            based on a “Standards of Excellence” program. The program has three
                            elements: best practices, acceptable practices, and minimum standards.
                            According to HFHI officials, continued failure to meet minimum standards
                            will lead to probationary status and eventually disaffiliation. The program
                            provides clear guidelines for affiliate self-assessments and HFHI
                            evaluations as well as a systematic process for ensuring that Habitat


                            14
                              The operating support collaboratives vary by city. The one in Cleveland, for example,
                            distributes money competitively each year, while the one in Washington, D.C., has a 3-year
                            funding cycle. They may be run by an independent nonprofit organization or as an entity of
                            Enterprise or LISC. In some instances, subrecipients that received funds from the operating
                            support collaboratives also received Section 4 grants directly from Enterprise or LISC.




                            Page 24                                                    GAO-03-975 Capacity Building
                          affiliates are complying with the organization’s basic principles. If HFHI
                          national or regional staff are aware of illegal activities or violations of
                          HFHI’s minimum standards, immediate action can be taken to correct the
                          problem. The evaluation covers internal controls and audits. All affiliates
                          with an annual income of $250,000 or more, assets of $500,000 or more, or
                          both are required to have an independent annual audit. Affiliates are also
                          requested to submit their annual report to HFHI.


Even with Comprehensive   While the grantees appear to have comprehensive processes to monitor
Controls, Problems May    and control their subrecipients, our review of seven subrecipients’ grant
Still Occur               files identified a subrecipient that suffered from organizational and
                          financial problems that eventually led to its demise. This subrecipient was
                          the grantee’s second-largest in terms of Section 4 funding, receiving 10
                          grants that totaled almost $1 million over a 7-year period. One grant for
                          $143,000 paid for several activities, one of which was a bad debt—an
                          ineligible expenditure according to OMB Circular A-122. Since HUD
                          officials do not receive and review subrecipient grant agreements and
                          payment vouchers, HUD was not aware of the ineligible cost. The grantee
                          has since taken several steps to ensure that similar problems do not occur,
                          including having a staff member perform increased subrecipient
                          monitoring to verify that sufficient management controls are in place to
                          ensure that grant funds are used appropriately and effectively. This
                          monitoring includes a full review of the grant request and award
                          documents, followed by a review of supporting documentation to verify
                          compliance with allowable expenses and consistency with the work plan.
                          In addition, site visits are made to subrecipients that have received large
                          amounts of funding and a “watch report” is maintained to track all
                          subrecipients that are late in responding to requests for information.


HUD Does Not Measure      HUD has not measured the impact of Section 4 funding on improving the
the Impact of Section 4   capacity of its grantees and subrecipients. However, HUD requires its
Funding                   grantees to submit annual work plans that include specific details of how
                          federal and private resources will be used and to identify performance
                          goals and objectives that should be attained during the grant period. In
                          addition, OMB is currently requiring HUD and the NCDI grantees to
                          conduct a PART review. PART assessments are used for making budgeting
                          decisions, supporting management, identifying design problems, and
                          promoting performance measurement and accountability. The assessment
                          includes questions on a program’s purpose and design, strategic planning,
                          management, and results. Furthermore, in response to a GAO report
                          recommendation that HUD require program offices to determine the


                          Page 25                                          GAO-03-975 Capacity Building
              practicability of measuring the impact of technical assistance and
              establishing objective, quantifiable, and measurable performance goals,
              HUD is working with a group of national technical assistance providers to
              develop a framework to assess the effectiveness of its technical assistance
              programs. 15

              Living Cities has also contracted with a consultant to develop impact
              measurements for the 23 NCDI cities. Other evaluations16 have resulted in
              measures that gauge the capacity-building system in NCDI cities and
              categorize organizational capabilities into five different stages of growth—
              initiation, demonstration, professionalization, instutionalization, and
              maturation.17


              While Section 4 funds must be used for capacity-building initiatives,
Conclusions   grantees are afforded a great deal of discretion as to how they administer,
              use, and oversee these funds. HUD is responsible for ensuring that
              grantees are utilizing Section 4 funds according to federal law and
              regulations and has several controls in place to ensure that they do.
              However, HUD relies primarily on its grantees to make certain that this
              responsibility is carried out at the subrecipient level. We found that
              grantees generally had good management systems and controls in place to
              monitor their subrecipients and to ensure that they carried out their work
              plans, met their objectives, and used federal funds legally and responsibly.
              However, even with good controls, problems can still occur, as we found



              15
               U.S. General Accounting Office, HUD MANAGEMENT: Impact Measurement Needed for
              Technical Assistance, GAO-03-12 (Washington, D.C.: Oct. 25, 2002).
              16
               Christopher Walker and Mark Weinheimer, “Community Development in the 1990s”
              (Washington, D.C.: The Urban Institute, September 1998); and Weinheimer and Associates,
              “HUD Section 4: Building the Capacity of CDCs,” (Washington, D.C.: Assessment Report,
              June 2001).
              17
                Initiation refers to the first stage of growth, when a civic or church group forms to
              provide a social service or advocate on an issue. The group lacks staff or at least lacks staff
              trained in development. Demonstration occurs when an existing group assumes an initial
              program in community development. The new CDC lacks staff and relies on volunteers. In
              the third stage, professionalization, the CDC takes on larger projects (20-30 units) or builds
              several homes and is able to secure funds for staff and more projects. When a CDC reaches
              the fourth stage, institutionalization, the staff has developed expertise and taps into public
              and private sources of support that is enabling it to do one large project after another. A
              CDC has reached maturation when it can maintain a consistent level of staff expertise,
              manage multiple projects simultaneously, and move into new programs that meet
              community needs.




              Page 26                                                       GAO-03-975 Capacity Building
                       at one CDC. While HUD has overarching responsibility for detecting such
                       internal control failures, the cost-effectiveness of adding additional federal
                       controls at the subrecipient level must be weighed against the size of the
                       program and the amount of federal funding involved. Given the relative
                       size of the Section 4 program and the fact that similar problems should not
                       recur if HUD and the grantees remain vigilant, we do not believe that
                       additional controls are necessary at this time.


                       We recommend that the Secretary of HUD take steps to recover the grant
Recommendation for 	   funds that one Section 4 grantee used to cover a bad debt.
Executive Action

                       In an e-mail dated August 7, 2003, HUD provided technical comments,
Agency Comments        which we incorporated into this report as appropriate.


                       To accomplish our objectives, we reviewed public laws, federal
Scope and              regulations, HUD directives, budget documents and other material that
Methodology            described the Section 4 program, grantees’ missions and organizational
                       structures, and authorized and appropriated funding. To determine how
                       Section 4 funding has evolved and expanded over the years and how
                       grantees use Section 4 funding, we interviewed HUD, Living Cities, LISC,
                       Enterprise, YBUSA, and HFHI officials in national, local, and rural offices,
                       and subrecipients in Americus, GA; Baltimore, MD; Boston, MA;
                       Cleveland, OH; Frederick, MD; Hughesville, MD; Kingston, RI; and
                       Washington, D.C. We collected data from LISC, Enterprise, and
                       YouthBuild USA showing the number of multiple grants and amounts
                       provided to CDCs or affiliates. We selected five CDCs/affiliates from three
                       grantees. For LISC and Enterprise, we chose the CDCs that had received
                       the greatest number of grants and analyzed the purpose of each grant. For
                       YBUSA, we selected the affiliates that had received the highest dollar
                       amounts.18 To create the maps of subrecipients and cities that received
                       Section 4 funding, we obtained city data from NCDI, LISC, Enterprise,
                       YBUSA, HFHI, and CHAPA and used geographical information software
                       (GIS) to create the maps. We used the same software to create the rural



                       18
                        The criteria differed for YBUSA because of the shorter grant time frame. Habitat for
                       Humanity was not included in this analysis because it does not allow affiliates to receive
                       multiple grants in any Section 4 grant cycle.




                       Page 27                                                      GAO-03-975 Capacity Building
county maps with data obtained from LISC and Enterprise that listed each
CDC categorized as rural and the counties they served.

To determine the importance of Section 4 funding to private sector
involvement in community development initiatives, we reviewed public
laws, federal regulations, HUD directives, budget documents, and other
materials. We obtained 1994 through 2001 private contribution data from
LISC and Enterprise and 1997 through 2001 data from YBUSA and HFHI.
We obtained matching policy information from HUD and the grantees and
interviewed private funders that had provided either grants or loans to
each of the grantees and subrecipients we visited in Boston, MA;
Baltimore, MD; Frederick, MD; and Kingston, RI. We based our selections
on the subrecipients’ proximity to our offices in Washington D.C., and
Boston, MA, and the amount of Section 4 funding they received.

To determine how HUD and Section 4 grantees controlled the
management and measured the impact of Section 4 programs, we
reviewed and analyzed HUD and grantee criteria, processes and
procedures for monitoring, controlling, and measuring performance and
tested grantee monitoring and control procedures at seven subrecipients.
In addition, we reviewed reports prepared by Living Cities and the Urban
Institute that discussed NCDI’s history and accomplishments.

We conducted our work from September 2002 through April 2003 in
accordance with generally accepted government auditing standards.


As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution of this report until 30
days from the report date. At that time we will provide copies of this
report to the Chairman and Ranking Minority Members, Senate Committee
on Banking, Housing, and Urban Affairs; the Chairman and Ranking
Minority Member, House Committee on Financial Services; and the
Ranking Minority Members of its Subcommittees on Oversight and
Investigations and Housing and Community Opportunity. We will also
send copies to the Secretary of Housing and Urban Development and the
Director of the Office of Management and Budget. In addition, the report
will be available at no charge on GAO’s Web site at http//:www.gao.gov.




Page 28                                          GAO-03-975 Capacity Building
Please contact me at (202) 512-8678 if you have any questions about this
report. Key contacts and contributors are listed in appendix I.




Thomas J. McCool
Managing Director, Financial Markets
 and Community Investment




Page 29                                          GAO-03-975 Capacity Building
Appendix I: Contact and Staff
Acknowledgments

                    Andy Finkel (202) 512-6765
GAO Contact
                    In addition, Emily Chalmers, Nadine Garrick, Diana Gilman, John McGrail,
Acknowledgments 	   John Mingus, Frank J. Minore, and Marc Molino made key contributions to
                    this report.




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