oversight

High-Risk Series: Department of Housing and Urban Development

Published by the Government Accountability Office on 1997-02-01.

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

                United States General Accounting Office

GAO             High-Risk Series




February 1997
                Department of Housing
                and Urban Development




GAO/HR-97-12
GAO   United States
      General Accounting Office
      Washington, D.C. 20548

      Comptroller General
      of the United States



      February 1997
      The President of the Senate
      The Speaker of the House of Representatives

      In 1990, the General Accounting Office began a special
      effort to review and report on the federal program areas
      its work identified as high risk because of vulnerabilities
      to waste, fraud, abuse, and mismanagement. This effort,
      which was supported by the Senate Committee on
      Governmental Affairs and the House Committee on
      Government Reform and Oversight, brought a
      much-needed focus on problems that were costing the
      government billions of dollars.

      In December 1992, GAO issued a series of reports on the
      fundamental causes of problems in high-risk areas, and in
      a second series in February 1995, it reported on the status
      of efforts to improve those areas. This, GAO’s third series
      of reports, provides the current status of designated
      high-risk areas.

      This report addresses the Department of Housing and
      Urban Development (HUD), which we designated as a
      high-risk area in January 1994. The report discusses the
      corrective actions that HUD has taken or initiated since
      our February 1995 report (GAO/HR-95-11) and further
      actions that are needed. HUD’s Secretary and top
      management team have continued to give high priority to
      correcting the deficiencies that led to our high-risk
      designation. They and other HUD directors and staff have
made substantial efforts over the past 2 years in
continuing to plan and starting to implement significant
changes in the way the Department is managed. Our
recent survey of key program directors in HUD field
offices and our recent work involving specific HUD
programs and management initiatives indicate that some
of the actions that HUD has implemented thus far are
having a positive effect.

While HUD has formulated approaches and initiated
actions to address its Department-wide deficiencies, its
efforts are far from reaching fruition, and HUD’s programs
continue to pose a high risk to the government in terms of
their vulnerability to waste, fraud, abuse, and
mismanagement. To reduce the risks associated with the
agency’s wide spectrum of operations, we believe that
HUD can and should take several actions, including taking
additional steps to eliminate major internal control
weaknesses, completing its plans for major
improvements to its automated information systems,
completing its current plans for reorganizing field and
headquarters offices, and completing its efforts to assess
the skills of its staff members and develop appropriate
training to address the skills needed for new job
responsibilities. The Congress has an opportunity to help
HUD successfully eliminate the deficiencies that make it a
high-risk area by working with the Department on various
proposals for restructuring the agency and consolidating,
reducing, and/or reengineering many of its major
programs.




            Page 2                         GAO/HR-97-12 HUD
Copies of this report series are being sent to the
President, the congressional leadership, all other
Members of the Congress, the Director of the Office of
Management and Budget, and the heads of major
departments and agencies.




James F. Hinchman
Acting Comptroller General
of the United States




            Page 3                         GAO/HR-97-12 HUD
Contents



Overview                                 6

Background                              15

HUD’s Progress                          20
Toward
Correcting the
Four
Department-Wide
Management
Deficiencies
Further Action                          65
Needed
Related GAO                             69
Products
1997 High-Risk                          71
Series




                  Page 4   GAO/HR-97-12 HUD
Page 5   GAO/HR-97-12 HUD
Overview



           Since our 1995 high-risk report, the
           Department of Housing and Urban
           Development (HUD) has made some progress
           in overhauling its operations to correct the
           management deficiencies that led us to
           designate HUD as a high-risk area. However,
           many corrective actions are far from
           complete and problems continue.

           HUD is the principal federal department
           responsible for programs dealing with
           housing, community development, and fair
           housing opportunities. Its missions range
           from making housing affordable by insuring
           loans for multifamily rental housing
           properties and providing rental assistance
           for about 4.5 million lower-income residents,
           to helping revitalize over 4,000 localities
           through community development programs,
           to encouraging homeownership by providing
           mortgage insurance to about 7 million
           homeowners who might not have been able
           to qualify for conventional loans. According
           to an analysis performed by the HUD Office of
           Inspector General in December 1994, HUD
           was responsible for 240 programs/activities.
           HUD is one of the nation’s largest financial
           institutions, with significant commitments,
           obligations, and exposure. It is responsible
           for managing more than $400 billion worth
           of insured mortgages, $485 billion in


           Page 6                        GAO/HR-97-12 HUD
              Overview




              outstanding mortgage-backed securities, and
              about $180 billion in prior years’ budget
              authority for which it has future financial
              commitments.


The Problem   We designated HUD as a high-risk area in 1994
              because of four long-standing,
              Department-wide management deficiencies
              that make the agency vulnerable to waste,
              fraud, abuse, and mismanagement. First,
              internal control weaknesses, such as a lack
              of necessary data and management
              processes, were a major factor leading to the
              HUD scandals of 1989. Second, poorly
              integrated, ineffective, and generally
              unreliable information and financial
              management systems failed to meet program
              managers’ needs and weakened their ability
              to provide management control over housing
              and community development programs.
              Third, HUD had organizational problems,
              such as overlapping and ill-defined
              responsibilities and authorities between HUD
              headquarters and field organizations and a
              fundamental lack of management
              accountability and responsibility. Finally, an
              insufficient mix of staff with the proper
              skills hampered the effective monitoring and
              oversight of HUD’s programs and the timely
              updating of procedures.


              Page 7                         GAO/HR-97-12 HUD
           Overview




Progress   While HUD has formulated approaches and
           initiated actions to address the four
           Department-wide management deficiencies,
           HUD’s planned actions are far from complete.
           In the area of internal controls, HUD has
           made limited progress, but major problems
           persist. In 1995, HUD fully implemented its
           new management planning and control
           program, which is intended to identify and
           rank the major risks in each program and to
           devise strategies to abate those risks.
           Furthermore, at the end of fiscal year 1995,
           HUD reported that it had only 9 material
           internal control weaknesses—down from
           over 51 in the early 1990s. HUD’s Office of
           Inspector General, however, has questioned
           the (1) effectiveness of the Department’s
           management control program in identifying
           material weaknesses and assessing front-end
           risks and (2) the Department’s process for
           closing out three of eight material
           weaknesses during fiscal year 1995. Also,
           while the Department has greatly reduced its
           total number of material weaknesses, those
           remaining are significant and long-standing,
           and over the past 2 years, auditors have been
           unable to render opinions on HUD’s financial
           statements because of weaknesses involving
           internal controls and financial systems.
           According to HUD officials, as of
           December 1996, four material weaknesses


           Page 8                        GAO/HR-97-12 HUD
Overview




had final actions completed pending
verification reviews. Finally, despite its
importance as a management control tool,
HUD’s monitoring of program participants
continues to be a problem area.

HUD   continues to make progress in improving
its information and financial management
systems, but much work remains. It has
moved beyond the planning phase, and
portions of major new systems are becoming
operational. Despite these efforts, some of
the projects that involve major
improvements to HUD’s financial and
information management systems will not be
completed before the year 2000.
Furthermore, HUD still has 93 systems that do
not comply with the Federal Managers’
Financial Integrity Act (FMFIA) and therefore
cannot be relied upon to provide timely,
accurate, and reliable information and
reports to management. According to HUD
officials, many of these systems will be
replaced or enhanced as part of HUD’s plan to
integrate its financial systems. HUD’s efforts
to improve its systems have been hampered
by problems with systems development,
funding constraints, and data conversion
problems.




Page 9                         GAO/HR-97-12 HUD
Overview




To improve organizational structure, the
Department completed a field reorganization
that eliminated its regional office structure
and transferred direct authority for staff and
resources to the Assistant Secretaries and
plans additional reorganization efforts.
Although HUD has not evaluated the effects
of this reorganization, most field directors
we surveyed rated it successful overall and
believed that the reorganization had
achieved most of HUD’s intended
goals—namely, eliminating previously
confused lines of authority within programs,
enhancing communications, reducing levels
of review and approval, and improving
customer service.1 HUD, however, realized
that the reorganization had, to some extent,
impaired communications across program
lines at field offices and is taking actions it
believes will alleviate the situation. HUD still
plans additional efforts to empower field
office personnel and to streamline
headquarters and reduce HUD’s total staff by
29 percent (from about 10,500 to 7,500) by
the year 2000.
1
 HUD: Field Directors’ Views on Recent Management Initiatives
(GAO/RCED-97-34, Feb. 12, 1997). The survey, conducted during
August 1996, obtained opinions on HUD’s progress in correcting its
four Department-wide management deficiencies. We surveyed 155
persons serving as Directors of Single-Family Housing, Directors of
Multifamily Housing, Directors of Community Planning and
Development (CPD), and Directors of Public Housing in the 40
largest HUD field offices in terms of staff. Included in the total are
Directors of Housing, who are located in only 14 of the 40 field
offices.

Page 10                                         GAO/HR-97-12 HUD
Overview




HUD  has made some progress in addressing
the problems with staff members’ skills and
with resource management. The Department
has increased staff training since our 1995
report. Also, HUD has begun to implement a
needs assessment process to plan future
training. Although HUD has just begun to
evaluate the effectiveness of its stepped-up
training efforts, the directors we surveyed
generally believed that the skills of their staff
have improved over the past 2 years.
However, 40 percent of these directors rated
the Department’s current training as less
than good. The directors also said that more
training is needed in the use of information
systems, implementation of program
regulations, HUD-related technical skills, and
interpersonal skills. Moreover, we and HUD’s
Office of Inspector General have continued
to identify staff resource problems in HUD’s
major program areas, specifically in public
housing and at the Department’s Federal
Housing Administration (FHA).

Since our 1995 report, HUD has also
continued efforts to restructure and
consolidate its current wide array of
programs—an outcome we believe is
important to reducing HUD’s risks to an
acceptable level. These efforts will take on
added importance over the next few years


Page 11                          GAO/HR-97-12 HUD
Overview




when coupled with the continued
downsizing of HUD headquarters and field
office staffs. The HUD Inspector General, in a
March 1996 report, pointed out that staff
reductions and redeployments have resulted
in many critical program functions not being
adequately performed and continuing
imbalances in staffing-to-workload ratios
from office to office. In our telephone
survey, 77 percent of the directors pointed
out that they had fewer staff than needed.
The problems of inadequate staff resources
to monitor and administer HUD’s current
array of programs likely will be compounded
as the Department implements its
downsizing plans over the next 4 years,
unless actions are taken to consolidate,
reduce, and/or reengineer HUD’s existing
programs.

HUD has updated its “Reinvention Blueprint,”
now known as “Blueprint II,” which also
includes a major proposal to “reengineer” its
portfolio of multifamily rental properties
with both FHA mortgage insurance and
Section 8 project-based rental subsidies. In
addition to HUD’s reinvention and
reengineering proposals, others have made a
wide range of proposals, including to
completely dismantle HUD. Although limited
improvements to HUD’s existing program


Page 12                        GAO/HR-97-12 HUD
                 Overview




                 structure have been made, no substantial
                 changes to program-authorizing legislation
                 have been enacted.


Further Action   HUD’s programs will continue to remain
Needed           highly vulnerable to fraud, waste, abuse, and
                 mismanagement until the agency completes
                 more of its planned corrective actions and
                 until the administration and the Congress
                 reach closure on a strategy to either
                 consolidate, reduce, and/or reengineer HUD’s
                 programs to bring the Department’s
                 management responsibilities in line with its
                 capacity.

                 Although HUD may not have total authority to
                 eliminate its fundamental deficiencies, the
                 Department should (1) take steps to
                 eliminate major internal control weaknesses,
                 fully implementing its management control
                 program and ensuring the proper balance
                 between program delivery and program
                 monitoring; (2) complete the efforts to
                 integrate its major information and financial
                 management systems and continue to take
                 actions to meet the requirements of FMFIA;
                 (3) complete its current plans for
                 reorganizing headquarters and field offices,
                 including redeploying staff and consolidating
                 program activities and similar functions; and


                 Page 13                        GAO/HR-97-12 HUD
Overview




(4) complete its efforts to assess the skills of
its staff, develop appropriate training to
meet the need for certain skills, and increase
the number of staff receiving training.

In our view, the Congress now has an
excellent opportunity to help HUD to
eliminate its high-risk designation and to
align the agency’s management
responsibilities and capacity by authorizing a
major restructuring strategy that focuses
HUD’s mission and significantly consolidates,
reduces, and/or reengineers its many
separate program activities. HUD and others
have proposed various reforms, but thus far
substantial permanent reforms have not
been enacted. What is needed now is for the
administration and the Congress to agree on
the future direction of federal housing and
community development policy and put in
place the organizational and program
delivery structures that are best suited to
carry out that policy.




Page 14                          GAO/HR-97-12 HUD
Background



             The diversity of HUD’s missions has resulted
             in a Department that is intricately woven
             into the nation’s financial and social
             framework and that interacts with a number
             of diverse constituencies, such as public
             housing authorities, private property owners,
             and nonprofit groups. HUD also spends a
             significant amount of tax dollars in carrying
             out its missions. The discretionary budget
             outlays for HUD’s programs were estimated at
             close to $31.8 billion in fiscal year 1995, over
             three-fourths of which were spent on public
             and assisted housing programs. In addition,
             HUD is one of the nation’s largest financial
             institutions, with significant commitments,
             obligations, and exposure. It is responsible
             for managing more than $400 billion worth
             of insured mortgages, $485 billion in
             outstanding mortgage-backed securities,2
             and about $180 billion in prior years’ budget
             authority for which it has future financial
             commitments.

             Our February 1995 report discussed the four
             long-standing, Department-wide
             management deficiencies that first led us to
             designate HUD as a high-risk area in
             January 1994. We reported that:


             2
              Mortgage-backed securities are those insured or guaranteed by
             FHA, the Rural Housing Service, or the Department of Veterans
             Affairs.

             Page 15                                      GAO/HR-97-12 HUD
Background




1. Internal controls were weak. This was a
major factor leading to the 1989 HUD
“scandals” and their highly publicized
incidents of waste, fraud, abuse, and
mismanagement. Financial audits required
by the Chief Financial Officers Act of 1990
found that material internal control
weaknesses continued during fiscal year
1993 in HUD programs that insure, back, or
provide lender capital for billions of dollars
in home and multifamily rental housing
mortgages. These material weaknesses
included problems such as lack of staff and
administrative resources for managing
troubled assets, inadequate emphasis on
providing early warning of and preventing
loss through defaults, inadequate and
unreliable automated management
information systems, and inadequate
monitoring of contractors. In
December 1993, HUD identified its entire
management control system as a material
weakness under FMFIA.

2. Information and financial management
systems were inadequate. These systems
were poorly integrated, ineffective, and
generally unreliable. They neither satisfied
management’s needs nor provided adequate
control over HUD’s housing and community
development programs. These problems


Page 16                         GAO/HR-97-12 HUD
Background




occurred because historically HUD’s
information resources had not been planned
or managed to meet the Department’s
missions and strategic objectives. HUD also
lacked (a) a standard framework
(architecture) to govern the management
and use of information and information
resources, (b) a data management program,
(c) adequate security controls for its
computer systems, and (d) contingency
plans for the recovery and continued
processing of critical systems in the event of
a major disruption or disaster.

3. HUD’s organizational structure was
ineffective. Organizational problems
included overlapping and ill-defined
responsibilities and authorities in HUD
headquarters, regional offices, and field
offices; disagreement on program priorities;
and poor communication of policy updates
and management directives. A fundamental
problem was the lack of management
accountability and responsibility caused by
the Assistant Secretaries’ lack of direct line
authority over the field office staff who
implemented their programs.

4. HUD had an insufficient mix of staff with
the proper skills. The number and
qualifications of staff had proven inadequate


Page 17                         GAO/HR-97-12 HUD
Background




to perform essential functions, such as
effectively monitoring programs and
updating procedures. For example,
inadequate staff and resources had
hampered the performance of fundamental
FHA activities, such as monitoring insured
mortgage loans, servicing HUD-held
mortgages, and managing foreclosed
properties. Concluding that its methods of
utilizing resources and formulating needs
were inadequate, HUD designated resource
management Department-wide as an FMFIA
high-risk area in fiscal year 1993.

This report describes HUD’s progress, since
our February 1995 high-risk series, toward
correcting its four Department-wide
management deficiencies by (1) updating the
status of the plans, proposals, and actions
included in our last report; (2) describing the
major new initiatives that HUD has begun or
proposed since our last report; and
(3) providing indications of the effectiveness
of the actions HUD has implemented thus far
through the perceptions of key program
directors and examples from our recent
work involving specific HUD programs and
management initiatives. The report also
discusses our reasons for continuing HUD’s
high-risk designation and further corrective



Page 18                         GAO/HR-97-12 HUD
Background




actions that we believe are needed in order
for us to remove that designation.




Page 19                       GAO/HR-97-12 HUD
HUD’s Progress Toward Correcting the
Four Department-Wide Management
Deficiencies

                    HUD directors and staff have continued to
                    give high priority to correcting the
                    deficiencies that led to our high-risk
                    designation. Since our last report, the
                    Department has completed some planned
                    actions, continued to work toward
                    implementing others, and formulated some
                    new initiatives. However, many corrective
                    actions are far from reaching fruition and
                    problems continue.


Internal Controls   A strong internal control system provides the
                    framework for the accomplishment of
                    management objectives, accurate financial
                    reporting, and compliance with laws and
                    regulations. Effective internal controls serve
                    as checks and balances against undesired
                    actions, thereby providing reasonable
                    assurance that resources are effectively
                    managed and accounted for. The lack of
                    good internal controls puts an entity at risk
                    of mismanagement, waste, fraud, and abuse.

                    In February 1995, we reported that HUD was
                    in the process of implementing a
                    management planning and control program
                    as part of its strategic performance system.
                    Each of HUD’s major program areas was to
                    develop annual plans that contained
                    management control elements which


                    Page 20                        GAO/HR-97-12 HUD
                      HUD’s Progress Toward Correcting the
                      Four Department-Wide Management
                      Deficiencies




                      identified and ranked the risks in each
                      program and then described how the risks
                      would be abated. We also reported that
                      actions were being taken on the internal
                      control weaknesses identified in
                      independent audits of FHA’s and the
                      Government National Mortgage
                      Association’s (GNMA) financial statements
                      but that all actions were not complete and
                      that all of the weaknesses had not been
                      eliminated. The following subsections
                      update and assess HUD’s subsequent actions
                      to address weak internal controls.


Questions About the   Management control programs for federal
Effectiveness of      agencies are mandated by FMFIA and by
HUD’s Actions to      supplemental requirements from the Office
Reduce Internal       of Management and Budget (OMB). Each
Control Weaknesses
                      year, the federal Departments are to report
                      whether their management control systems
                      provide reasonable assurance that the
                      requirements of FMFIA are being met, any
                      new material weaknesses and
                      nonconformance, and any corrective actions
                      taken on previously existing material
                      weaknesses. An agency’s internal accounting
                      and administrative controls generally should
                      provide reasonable assurance that
                      obligations and costs are in compliance with
                      applicable laws; that funds, property, and


                      Page 21                                GAO/HR-97-12 HUD
HUD’s Progress Toward Correcting the
Four Department-Wide Management
Deficiencies




assets are adequately safeguarded; and that
revenues and expenditures are properly and
reliably accounted for and reported. FMFIA
also requires that accounting systems
conform to the accounting principles and
standards mandated by the Comptroller
General of the United States.

In July 1994, HUD began implementing its
new management planning and control
program. According to a memorandum
prepared by HUD’s Chief Financial Officer
(CFO) on the design of the new program, the
process should be based on front-end risk
assessments of new and substantially revised
programs and ongoing monitoring of existing
programs.3 Fiscal year 1995 was HUD’s first
full year of implementing its strategic
performance system, which includes the
management planning and control program.
In its March 1996 report to the Congress and
the President on compliance with FMFIA, HUD
stated that improved financial management,
coupled with strategic program planning and
performance, had enabled the Department to
report no new material weaknesses for fiscal



3
 Front-end risk assessments of new and revised programs are
designed to define the control environment, identify control risks,
describe the systems needing additional controls, and document
the actions required to reduce control risks.

Page 22                                        GAO/HR-97-12 HUD
HUD’s Progress Toward Correcting the
Four Department-Wide Management
Deficiencies




year 1995.4 The report also stated that on the
basis of the substantial improvements that
management had made during fiscal year
1995 and the progress achieved in reducing
the number of material weaknesses and
correcting material nonconformance, HUD
could provide reasonable assurance that the
objectives of FMFIA for management controls
and financial systems were being met, with
the exception of the material weaknesses
and nonconformance specifically outlined in
the report.

In August 1996, HUD’s Office of Inspector
General reported that it disagreed with the
Department’s statement on compliance with
FMFIA’s requirements. The Office disagreed
because it believed that the Department had
failed to consider (1) the magnitude of the
problems acknowledged in its own FMFIA
report and (2) additional material
weaknesses pertaining to (a) inadequate
verification of rental assistance payments,
(b) the need to improve efforts to monitor
public housing authorities, and (c) its
inability to properly reconcile HUD’s Fund
Balance account with the Department of the



4
 Report on Compliance With the Federal Managers’ Financial
Integrity Act for Fiscal Year 1995, HUD (Washington, D.C.:
Mar. 1996).

Page 23                                    GAO/HR-97-12 HUD
HUD’s Progress Toward Correcting the
Four Department-Wide Management
Deficiencies




Treasury.5 In addition, the Inspector
General’s report stated that weaknesses
existed in the management planning and
control program because HUD’s major
program areas were not performing
front-end risk assessments on new or
substantially modified programs, as required.

Also, of the eight material weaknesses
reported closed by HUD during fiscal year
1995, the Inspector General found that three
material weaknesses had been closed
without following HUD’s policy and the intent
of OMB’s Circular A-123.6 Although the
circular does not mandate that a verification
review be performed before closing a
material weakness, these sources call for a
determination that sufficient corrective
actions have been taken and that the desired
results have been achieved before a material
weakness can be considered corrected.
From fiscal year 1993 through fiscal year
1995, HUD’s verification reviews have been
performed by the Inspector General or an
independent contractor to determine if the
actions have been implemented and the

5
 U.S. Department of Housing and Urban Development Report on
Fiscal Year 1995 Financial Statements, Office of Audit, HUD, Office
of Inspector General (96-FO-177-0003, Aug. 16, 1996).
6
 In response, HUD’s CFO stated that HUD had complied with the
guidelines pursuant to FMFIA; the contention that the Department
closed material weaknesses without appropriate documentation
was erroneous.

Page 24                                       GAO/HR-97-12 HUD
HUD’s Progress Toward Correcting the
Four Department-Wide Management
Deficiencies




weakness abated. CFO officials told us that
they had waived the formal verification
reviews in two instances on the basis of the
certification and documentation provided by
program management that the problems
were corrected and no longer material and in
one instance because the program was
targeted for future consolidation or
elimination. Also, three other weaknesses
that HUD reported as closed were simply
merged into other larger, open material
weaknesses because of an overlap of
remaining corrective actions for two or more
weaknesses.

To determine the prevalence of closing
weaknesses without a verification review or
by merging them into other open
weaknesses, we examined HUD’s stated
procedures for closing material weaknesses
in fiscal years 1992 through 1995 and found
that, except in the three cases cited above,
either the Inspector General or a contractor
had performed verification reviews before
closing material weaknesses. Also, we found
that two weaknesses reported closed in
fiscal year 1992 and four weaknesses
reported closed in fiscal year 1993 were
merged into other open weaknesses.




Page 25                                GAO/HR-97-12 HUD
HUD’s Progress Toward Correcting the
Four Department-Wide Management
Deficiencies




We are also concerned about the
effectiveness of the management planning
and control program in assessing risks and
developing the abatement strategies to
reduce them. We noted in our review of the
management plans prepared by single-family
and multifamily housing, public and Indian
housing, and CPD for fiscal years 1995 and
1996 that (1) the only risks identified in the
management control section of each of the
management plans were previously
identified material weaknesses and (2) the
abatement actions were those outlined in
HUD’s report on compliance with FMFIA. We
noted that HUD has not identified a new
material weakness since its FMFIA report on
fiscal year 1993 activities. According to an
August 1996 OMB memorandum, failure to
identify any new material weaknesses over
the span of several years is reason to
question a Department’s assessment efforts.
According to CFO officials, the Department
will be adding several new material
weaknesses for fiscal year 1996 within its
FMFIA certification.


While acknowledging that the risks
identified in the management control
sections of the plans were previously
identified material weaknesses, CFO officials
noted that some of the program performance


Page 26                                GAO/HR-97-12 HUD
HUD’s Progress Toward Correcting the
Four Department-Wide Management
Deficiencies




priorities and the strategies to reach the
goals would reduce the Department’s risks.
Officials noted that in developing
instructions for the fiscal year 1997
management plans, they hoped to provide a
better link between the management plans,
goals, and priorities and the management
control elements associated with the risks in
the programs.

Officials from HUD’s Office of Housing-FHA
Comptroller’s Office and the Office of Public
and Indian Housing told us that they rely
primarily on financial audits and other audits
by HUD’s Inspector General to identify new
material weaknesses. We believe, however,
that the best qualified individuals to fulfill
the requirements of FMFIA to identify existing
or potential problems with the agency’s
programs are the federal directors of these
programs. As of the end of September 1996,
the Office of Housing had performed two
front-end risk assessments. One assessment,
dated October 18, 1995, was a limited review
of the impact of Housing’s reorganization on
internal controls and corrective actions; the
other, dated March 7, 1996, assessed HUD’s
hospital risk-sharing program, which
provides mortgage and loan insurance for
nonprofit and public hospitals. According to
HUD officials, Housing expects to complete



Page 27                                GAO/HR-97-12 HUD
HUD’s Progress Toward Correcting the
Four Department-Wide Management
Deficiencies




front-end risk assessments for three
additional programs during fiscal year 1997.
According to Office of Public and Indian
Housing officials, that office has not yet had
any new or substantially revised programs
requiring front-end risk assessments. In
September 1996, the Deputy Secretary issued
a memorandum to program managers giving
the CFO authority to delay program
implementation when front-end risk
assessments were not performed in
accordance with established guidelines.

HUD’s total number of open material
weaknesses has decreased from 51 in fiscal
year 1991 to 9 reported in the fiscal year
1995 FMFIA report. HUD also stated in the 1995
report that it considers itself to be in
compliance with FMFIA but recognizes that it
still faces serious problems, as identified by
the remaining nine material weaknesses.
Although HUD has reduced the total number
of material weaknesses, those remaining are
long-standing and involve large sums of
money, and progress to abate them has been
slow. The remaining open material
weaknesses, as of the end of
September 1996, are the (1) management
and control of staff resources, (2) Section 8
subsidy payment process, (3) community
development block grant entitlements,


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(4) Section 236 excess rental income,
(5) Section 235 accounting system,
(6) single-family housing resources and asset
management, (7) multifamily housing
resources and asset management strategy,
(8) Section 8 bond refunding program, and
(9) title II prepayment and preservation
program.7 These material weaknesses, which
were first identified in fiscal years 1983
through 1993, involve key HUD programs and
billions of dollars. For example, material
weaknesses affect more than $18 billion in
the subsidy funds that HUD disburses
annually, primarily through its Section 8 and
Section 236 programs.

Legislation enacted in January 1996
eliminated a program that OMB had
designated as a high-risk area. OMB had
considered FHA’s mortgage assignment
program—a program designed to help
borrowers in default—to be a high-risk area
because the program’s controls did not
protect the financial interests and resources

7
 According to HUD officials, as of December 1996, four of these
material weaknesses—the Section 236 excess rental income,
Section 235 accounting system, community development block
grant entitlements, and title II prepayment and preservation
program—have final actions completed and have effectively
resolved the material weaknesses with verification reviews
pending. The Section 8 program provides tenant-based and
project-based rental assistance; the Section 236 program is a rental
housing assistance program; and the Section 235 program is a
homeownership assistance program.

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                       of the government. In October 1995, we
                       issued a report raising concerns about the
                       program, concluding that it had mixed
                       results and high costs.8 As a result, the
                       legislation eliminated the program and
                       provided HUD with the authority to assist
                       borrowers in default by other means.


Financial Audits       The Chief Financial Officers Act of 1990
Continue to Identify   required HUD and some other agencies to
Internal Control       report annually to the Congress through OMB
Weaknesses             on their financial status and any other
                       information needed to fairly present the
                       agencies’ financial position and results of
                       operations. To meet this requirement, either
                       contracted public accounting firms or HUD’s
                       Office of Inspector General conducts annual
                       financial audits of FHA’s, GNMA’s, and HUD’s
                       consolidated financial statements. These
                       audits continue to identify material internal
                       control weaknesses in FHA and other HUD
                       programs. However, the fiscal year 1995
                       financial audit of GNMA found no remaining
                       internal control material weaknesses.

                       The public accounting firm KPMG Peat
                       Marwick LLP, in conducting the audit of
                       FHA’s financial statements for fiscal year


                       8
                       Homeownership: Mixed Results and High Costs Raise Concerns
                       About HUD’s Mortgage Assignment Program (GAO/RCED-96-2,
                       Oct. 18, 1995).

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1995, found the statements were presented
fairly, in all material aspects, in accordance
with generally accepted accounting
principles. However, the audit found
continued material weaknesses in FHA’s
internal controls.9 The weaknesses reported
included the lack of staff and administrative
resources for such tasks as performing loss
mitigation functions, managing troubled
assets, and implementing new automated
systems; inadequate emphasis on providing
early warning of, and preventing loss
through, defaults; the need to quickly resolve
HUD-held multifamily and single-family
mortgage notes so that additional resources
are available for monitoring; and the need to
continue improving the accounting and
financial management systems. The report
added that given the complexity of the
issues, implementing sufficient changes to
mitigate the internal control weaknesses
noted is a multiyear effort.

In August 1996, the Inspector General
reported that it was not able to express an
opinion on the reliability of HUD’s
consolidated financial statements covering
fiscal year 1995. The Inspector General’s
reasons for not expressing an opinion were

9
 Federal Housing Administration, Audit of Fiscal Year 1995
Financial Statements, prepared by KPMG Peat Marwick LLP for the
Office of Inspector General (June 7, 1996).

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that material weaknesses prevent HUD from
ensuring that federally subsidized housing
units, for which more than $18 billion in
funds are disbursed, are occupied by eligible
families and that those families living in such
units are paying the correct rents and, as a
result, that the expenditures reported in the
financial statements for these programs are
fairly stated in all material respects or that
expenditures comply, in all material
respects, with applicable laws and
regulations. CFO officials said that only a
portion of the $18 billion in disbursements
represents “excess subsidies.” The officials
said that the Department has initiated efforts
to estimate the amount of excess subsidies
for the fiscal year 1996 consolidated audit.
This work, expected to be completed in
February 1997, is being performed on a
statistical sample of tenants from a database
of the Department’s assisted housing
tenants.

Another reason that the Inspector General
did not express an opinion on the financial
statements was that HUD has not been able to
reconcile a net difference of $190 million
between its fund balance and the Treasury
account. In December 1996, CFO officials
provided us with documentation that shows
that the difference between HUD’s records


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and the Treasury has been subsequently
reduced to about $35,000. HUD’s Office of
Inspector General told us that it could not
verify the difference, but that $35,000 was
approximately correct.

The report also identified the need to
improve the monitoring of public housing
authorities and multifamily projects as a
material internal control weakness for fiscal
year 1995.10 The Inspector General’s report
stated that to improve its internal control
environment, HUD, among other things, needs
to upgrade financial systems and improve
resource management.11

Weak controls continue to subject HUD to the
risk of waste, fraud, abuse, and
mismanagement. Often, these are discovered
during audits or investigations, rather than
being discovered from the routine
operations of management controls in place.
For example:


10
 In response, HUD’s CFO said that he did not believe that the
deficiencies cited in the Inspector General’s report provided a
sufficient basis to prevent the Inspector General from expressing
an opinion on HUD’s financial statements.
11
  The independent audit firm of Price Waterhouse reported that it
was unable to express an opinion on HUD’s consolidated financial
statements covering the previous fiscal year due to many of the
same problems. See Audit of the U.S. Department of Housing and
Urban Development Fiscal Year 1994 Financial Statements Price
Waterhouse (95-FO-177-0004, Aug. 28, 1995).

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•   A March 1996 Inspector General report
    stated that the lack of effective controls over
    software maintenance left HUD unable to
    (1) make informed decisions on replacing
    systems, (2) control the quality of software
    changes because the necessary data are not
    collected, and (3) hold contractors
    accountable for the quality and cost of their
    services performed because standards have
    not been developed.12
•   The Office of Inspector General during fiscal
    year 1996 found cases of potential fraud or
    mismanagement in multifamily housing that
    included the following: (1) the general
    partner of a multifamily housing project
    made over $4 million in loans to his affiliated
    company without HUD’s authorization
    between January 1994 and December 1995
    and (2) contrary to a Regulatory Agreement,
    the agent/owners of another group of
    properties withdrew funds totaling over
    $1.1 million in excess of surplus cash, thus
    contributing to the default of one project and
    reducing the amount of operating cash for
    other projects.
•   Between October 1, 1994, and March 31,
    1996, 1,360 recipients of HUD funds were
    indicted on criminal charges; 412 were
    convicted and given prison sentences

    12
     Controls Over Software Maintenance Must Be Significantly
    Strengthened, HUD, Office of Inspector General (96-DP-166-0001,
    Mar. 5, 1996).

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                      totaling 752 years and probation or
                      suspended sentences totaling 335 years.
                      Much of the information that led to these
                      penalties was uncovered by Operation Safe
                      Home, a federal law enforcement task force
                      that includes HUD’s Office of Inspector
                      General.


Directors’ Views on   Although, a majority of the HUD field program
Internal Controls     directors we surveyed believed that internal
                      controls generally were good, a significant
                      percentage of them viewed the adequacy of
                      internal controls on various activities as fair
                      or poor. For example, directors rated
                      internal controls as fair or poor in protecting
                      resources from fraud (38 percent), ensuring
                      that resources were used efficiently and
                      effectively (31 percent), ensuring
                      compliance with laws and regulations
                      (44 percent), and ensuring that reported data
                      are reliable (50 percent). About 78 percent of
                      the directors believed that HUD headquarters
                      has put a medium or high emphasis on
                      reducing the risks of fraud and abuse, but
                      they were split concerning the amount of
                      emphasis needed. About 56 percent of the
                      directors thought that the amount of
                      emphasis was correct, and about 44 percent
                      thought that it should be greater.



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Monitoring of           Despite its importance as a management
Existing Programs       control tool, monitoring continues to be a
                        problem area for HUD. The Department
                        Management Control Program Handbook
                        recognizes that monitoring program
                        participants, either by on-site audit activities
                        or remote monitoring, is a critical
                        management control. In addition, a
                        memorandum from HUD’s CFO about HUD’s
                        efforts to design a new management
                        planning and control program stated that
                        controls over existing programs would be
                        based upon monitoring. However, financial
                        audits, our recent survey of HUD’s field
                        program directors, and our recent case study
                        work at HUD’s Massachusetts and St. Louis
                        offices showed that adequate monitoring is
                        not being carried out. A lack of staff
                        resources, travel funds, and headquarters
                        emphasis were cited by many of the field
                        office directors we surveyed as reasons why
                        monitoring is not being carried out. The
                        following three examples from these various
                        sources illustrate the monitoring
                        deficiencies. We also found that a lack of
                        monitoring was a problem in HUD’s CPD
                        programs.

                    •   We and HUD’s Inspector General found
                        problems with field offices conducting the
                        required annual physical inspections of


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    multifamily properties identified as troubled
    or potentially troubled projects. We found
    that the St. Louis office had not inspected 20
    of 44 troubled projects and 7 of 30
    potentially troubled projects during the year
    preceding our case study work. Fifteen of
    these projects had not been inspected for at
    least 2 years. On the other hand, all nine
    projects that we looked at in the
    Massachusetts State Office had been
    inspected in 1995 or 1996, and the average
    time between the most current inspection
    and the previous one was about 14 months.
    HUD’s Inspector General found that the
    required annual physical inspections were
    made for only 98 of 176 projects during fiscal
    year 1995 and that only 63 received a
    follow-up on identified deficiencies.
•   Monitoring the performance of contracted
    Real Estate Asset Managers (REAM)13 has also
    been a problem. At the Massachusetts State
    Office, which has a history of inadequate
    monitoring, we found that the contractors
    were not reviewing 10 percent of the
    REAM-managed single-family properties each
    month, which is HUD’s expectation if
    adequate staff, travel funds, and time are
    available. In a June 1996 report, the

    13
      HUD hires REAM contractors to perform day-to-day property
    management, including physical inspections, elimination of
    imminent hazards to the public, and preservation and protection of
    the property.

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    Inspector General stated that the
    Massachusetts State Office had not
    developed controls to ensure that its REAM
    contractors were adequately carrying out
    their responsibilities.14 The Inspector
    General found that in spite of repeated
    problems with the timeliness and lack of
    submission of inspection reports by three
    REAM contractors, the HUD Office still had not
    established a system of procedures and
    controls to monitor the timely submission of
    the reports, track complaints, or perform
    on-site inspections. In November 1996, the
    Director of the Massachusetts State Office’s
    Single-Family Housing Division said that
    since July 1996, the Division has established
    tighter controls over REAM activity. The
    Director added that the Division’s Chief of
    Production and Real Estate Officer
    completed an on-site inspection of the REAM
    in August and that the monthly 10-percent
    reviews are now being done. In addition, a
    manual and computerized complaint log has
    been established and staff are tracking the
    resolution of complaints.
•   During our case study work at the
    Massachusetts State Office, we selected 10
    projects initially funded by the Community
    Improvement Assistance Program between

    14
      Controls Over Real Estate Asset Manager (REAM) Contracts,
    Massachusetts State Office, HUD, Office of Inspector General
    (96-BO-123-0001, June 12, 1996).

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1986 and 1992 to determine if HUD was
monitoring them. For five projects, we found
no documentation in the files that any
monitoring had taken place. In addition,
none of the 10 project files contained all of
the required housing authority semiannual
progress reports showing program fund
expenditures and progress against approved
implementation schedules. In
September 1996, 1 month after we reviewed
the files, officials provided us with additional
documentation in the form of monitoring
logs for fiscal years 1990 through 1993. The
logs indicate that all but one of the 10
projects we had selected had been
monitored at least once. However, the
officials could provide only two additional
monitoring reports that indicated the
outcome of the site visits. No documentation
was provided for any monitoring subsequent
to fiscal year 1993.

HUD’s field program directors believed that
monitoring needs to be increased and given
more emphasis by HUD headquarters.
Seventy-one percent of the directors we
surveyed said HUD needs to increase its use
of on-site inspections, 58 percent said that
HUD headquarters placed a low or medium
emphasis on completing essential
monitoring, and 42 percent said that


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                  headquarters should place a higher emphasis
                  on monitoring, especially the on-site
                  monitoring of HUD’s clients and the
                  monitoring of HUD’s contractors. In
                  December 1996, HUD officials said that to
                  address these concerns, the Inspector
                  General, along with a program office, issued
                  a Compliance Supplement that directs
                  independent auditors to address compliance
                  areas of importance to HUD directors.
                  According to these officials, with
                  diminishing and stretched resources,
                  directors should use independent auditors
                  and related reports as a primary compliance
                  monitoring tool.


Information and   In February 1995, we reported that HUD had
Financial         (1) set up an information resource
Management        management (IRM) planning structure to give
Systems           high priority to correcting long-standing
                  problems with information and financial
                  management systems; (2) clarified
                  accountability by making Assistant
                  Secretaries responsible for managing the
                  information and financial systems in their
                  program areas; (3) issued data
                  administration standards; (4) taken some
                  actions to strengthen computer security
                  controls; (5) developed detailed plans for
                  projects to improve financial systems; and


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    (6) begun revising its transition plan for
    integrating its overall financial systems.15 We
    also reported that HUD needed to continue to
    improve support of its missions by
    strengthening planning for its strategic
    business and information resources
    management and by establishing a strategic
    information architecture and
    Department-wide data management
    program.

    Since our 1995 report, problems with
    information and financial management
    systems have continued to negatively affect
    HUD’s ability to effectively manage its
    programs. For example:

•   In a June 1996 report on FHA’s fiscal year
    1995 financial statements, independent
    auditors continued to list FHA’s automated
    systems as a material internal control
    weakness because some systems either did
    not provide needed management information
    or did not provide reliable information.
•   In March 1996, HUD reported to the Congress
    that 93 of its information and financial

    15
      HUD’s projects to integrate financial systems include redesigning
    or developing its financial, information, and mixed
    financial/program information systems to meet the Department’s
    business needs. Once the integration projects are completed, the
    data are supposed to be fully integrated either through a common
    database or through the ability to transfer data from one system to
    another electronically.

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                          management systems did not meet the
                          requirements of the FMFIA and therefore
                          could not be relied upon to provide timely,
                          accurate, and reliable financial information
                          and reports to management.
                      •   According to the Inspector General,
                          problems with financial systems have also
                          impaired FHA’s ability to comply with the
                          Credit Reform Act of 1990, which was
                          enacted to better capture the government’s
                          cost of extending credit. FHA’s single-family
                          systems that account for periodic premiums
                          are not capable of generating the
                          case-specific cash flow data needed to
                          comply with the act. HUD officials said that
                          they have developed an action plan to have
                          all systems comply with credit reform
                          requirements by 1998.


Status of Plans for       HUD   has continued taking steps to improve
Improving HUD’s           its IRM activities since our 1995 report. Many
Information               of these steps respond to specific
Resource                  recommendations made in our April 1994
Management
                          report on HUD’s IRM program.16 For example,
                          in June 1995 HUD released the first edition of
                          its transition plan for integrating financial
                          systems and issued a revised plan in
                          August 1996. HUD’s program offices have

                          16
                           HUD Information Resources: Strategic Focus and Improved
                          Management Controls Needed (GAO/AIMD-94-34, Apr. 14, 1994).

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developed business strategy plans and
information strategy plans to identify their
strategic business and information needs.
HUD recently completed a Department-wide
information strategy plan and expects to
publish a strategic IRM plan in early 1997.
According to an official in the Office of
Information Technology, HUD also recognizes
the need to tie together the various planning
activities so that the Department’s strategic
IRM plan and other plans are clearly linked
together. A Systems Integration Steering
Committee was established to oversee the
implementation of the IRM plan. Other
actions that HUD has taken over the past 2
years include (1) preparing an initial version
of a Department-wide information
architecture in September 1995;
(2) establishing a Central Information
Management function, establishing revised
data administration standards and
procedures, and providing a central data
administrator with the authority to ensure
compliance with Department-wide
standards; (3) establishing a central data
repository, issuing standards and procedures
governing the repository, and providing
training to program area and systems
development personnel; and (4) partially
installing security software on its mainframe
computers to conform with the federal and


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                        departmental requirements for access to
                        sensitive information and systems.

Continuing              The lack of integrated financial systems has
Challenges to           been a major part of HUD’s long-standing IRM
Integrating Financial   problems. Recognizing this lack, HUD is
Systems                 working to create a network of flexible,
                        integrated computer systems that will enable
                        program staff to oversee the financial and
                        programmatic integrity of their operations.
                        The efforts include establishing
                        Department-wide financial systems with
                        standardized data to meet the requirements
                        of good financial management.

                        HUD has progressed beyond just planning for
                        integrating its financial systems and is now
                        beginning to bring some portions of the new
                        systems into operation. Beginning with fiscal
                        year 1995 appropriations, HUD’s core
                        accounting system has been processing
                        administrative accounting functions. In
                        addition, in August 1995 the Office of Public
                        and Indian Housing implemented its portion
                        of this system that will account for $8 billion
                        to $9 billion of rental assistance provided to
                        public and Indian housing authorities and
                        the state agencies that administer the
                        program. CPD also has begun to implement
                        the Integrated Disbursement and
                        Information System to account for the


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disbursement and track the use of funds
under its four formula grant programs.
Funding for these programs totaled about
$6.7 billion for fiscal year 1995. As of
December 1996, 106 grantees are operating
on the system, and CPD had planned to have
the remainder of the more than 900 grantees
on the system by the end of calendar year
1998, according to a CPD official responsible
for implementing the system. Recently,
however, the Assistant Secretary for CPD
agreed to delay the implementation of the
system for some grantees until various
problems cited by the grantees are
addressed.

According to departmental information, HUD
had a total of 116 systems classified as either
financial or mixed (providing both financial
and program information), as of
March 1996.17 Many of these systems will be
replaced, and HUD will upgrade others to
resolve integration problems, data problems,
and deficiencies in the support provided to
managers. However, for a number of systems
HUD has yet to develop upgrade or
replacement plans. A number of system
integration projects are still in progress and
are not scheduled to be completed for

17
 The actual number of systems in HUD’s inventory may be counted
differently, depending on whether systems and subsystems are
counted separately. The 116 counts both systems and subsystems.

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another 1 to 4 years. According to CFO
officials, although HUD’s systems are not
currently fully integrated, HUD is able to
record its financial transactions in its core
financial system through a combination of
system interfaces and manual transactions.
These officials believe that this lack of
integration does not impede the
Department’s ability to generate its financial
statements in a timely and accurate manner
or preclude the Department from obtaining
an audit opinion on the consolidated
financial statements. Table 1 shows HUD’s
major systems integration projects, the
number of current systems that each will
replace, and estimated completion dates.




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Table 1: HUD’s Major Systems Integration Projects
                                                                                  Estimated
                                                         No. of systems to       completion
System name                             HUD office             be replaced             date
HUDCAPS-Central Accounting and          CFO
Program System                                                             30            2000
Office of Public and Indian             PIH
Housing-CAPS                                                              N/A             9/97
Office of Public and Indian             PIH
Housing-Integrated Business System                                           5          12/98
TRACS-Tenant Rental Assistance and      Housing
Certification System                                                         2            9/99
IDIS-Integrated Disbursement and        CPD
Information System                                                           5          12/98
FHAMIS-Federal Housing                  Housing
Administration Mortgage Insurance
System                                                                       4           2001
                              Note: N/A= Not applicable because it is part of HUDCAPS.
                              Each of HUD’s systems integration projects currently has major
                              modules operational. The estimated completion dates reflect
                              the final phase-in for each of these systems.



                              Although HUD has made progress since our
                              1995 high-risk report, integration efforts
                              have been hampered by systems
                              development and data conversion problems.
                              The Office of Inspector General reported in
                              March 1996 that the systems development
                              problems and delays were largely
                              attributable to a combination of funding
                              constraints and a continuing need for
                              program management’s stronger
                              commitment to systems development and


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better project management.18 Officials
responsible for systems integration told us
that data conversion has been another
delaying factor. According to these officials,
converting data from old systems to the new
systems and ensuring that it is accurate have
been more complicated and time consuming
than anticipated.

Another challenge to HUD’s future systems
integration efforts, according to one official,
will be to maintain consistent and adequate
funding in a downsizing environment.
Approved funding for the systems
integration projects over recent years was
$30.5 million for fiscal year 1994,
$44.4 million for fiscal year 1995, and
$33 million for 1996. HUD’s budget request for
fiscal year 1997 was $47 million. A final
challenge may be that systems requirements
could change once final decisions are made
on restructuring HUD and its programs. (See
later section that discusses the proposals to
reform or “reinvent” HUD.) Once those
decisions are made, some currently planned
information and financial management
systems may not be needed and/or there may
be a need for completely new systems.



18
 Semiannual Report to the Congress, HUD, Office of Inspector
General (Washington, D.C.: Mar. 1996).

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Organizational   In 1995, we reported that HUD had an
Structure        ineffective organizational structure that
                 included overlapping and ill-defined
                 responsibilities and authorities between HUD
                 headquarters and field organizations and a
                 fundamental lack of management
                 accountability and responsibility. We
                 pointed out that HUD was in the process of
                 reorganizing its field office structure and
                 was just beginning to implement a plan for
                 streamlining its headquarters organization, a
                 plan which OMB had approved in October
                 1994. In September 1995, HUD completed the
                 field office reorganization, which was
                 intended to eliminate previously confused
                 lines of authority, enhance communications,
                 reduce levels of review and approval, and
                 improve customer service. This action
                 eliminated HUD’s 10 regional offices,
                 transferred direct authority for field program
                 staff and resources to the Assistant
                 Secretaries in HUD headquarters, and
                 restructured the Department’s 81 field
                 offices. HUD plans to continue its
                 reorganization efforts by reducing
                 headquarters staff, redeploying staff, and
                 further streamlining and consolidating field
                 activities.

                 In our recent telephone survey, program
                 directors in the state and area offices highly


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rated the success of the 1995 field office
reorganization. Almost three-fourths of them
rated the reorganization’s overall success as
either good (49 percent) or excellent
(25 percent). They gave similar high marks
to its success in achieving most of HUD’s
intended outcomes. Between 69 and
85 percent of the directors we surveyed
rated progress as good or excellent in the
categories of improving the lines of program
management authority and accountability,
empowering staff and field directors, and
improving communications between the
field and headquarters and between HUD and
its customers.

Some directors commented that the new
structure of field program directors
reporting directly to higher-level program
directors in headquarters had inhibited
communication between program staffs at
the field offices. They said that because
there were now fewer reasons for the
different program staffs to interact, they
tended to be less informed about the
developments in one another’s programs.
According to its Director, HUD’s Field
Reorganization Task Force became aware of
this situation and by June 1996 had taken
actions to correct it. Among other things, the
task force granted “coordinators” in the state


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and area offices more authority to
coordinate across program lines and added
program integration requirements to senior
managers’ performance expectations and
appraisals.

In January 1996, HUD announced additional
efforts to reduce headquarters staff and
further streamline its field organizational
structure. A management action plan issued
in April 1996 calls for, among other things,
reducing headquarters staff from 3,500 to
3,000 by the end of fiscal year 1997,
consolidating many program operations and
processing functions into service centers,
redeploying and training headquarters and
field staff to better balance staff with service
delivery needs, and closing up to 10 of HUD’s
81 field offices by the end of fiscal year 1997.
According to the Director of the Office of
Departmental Operations and Coordination,
HUD expects by the year 2000 to reduce total
staffing from about 10,500, its level at the
end of fiscal year 1996, to about 7,500 (a
29-percent reduction) and is currently
studying closing additional field offices.

One of HUD’s objectives in this further
reorganization is to make itself a
“community-first” Cabinet-level Department
by, among other things, creating a smaller,


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decentralized workforce that is highly
trained and that has a dramatically changed
mandate to respond to local priorities. As
part of this effort, HUD plans not only to
reduce headquarters staff but also to
restructure headquarters functions to those
that are logically Washington based (e.g.,
policy development, budgeting, and
congressional relations) and to transfer
program delivery functions and staff to the
field. HUD also plans to (1) give field staff
more flexibility and authority to work with
communities, (2) give the positions of
Secretary Representatives and Office
Coordinators at its state and area offices
more power to solve problems and to make
customer service a priority, and (3) redeploy
and train up to 1,000 field office employees
to help correct staffing imbalances and to
place program delivery and decision-making
authority nearer to communities.

In its March 1996 report, HUD’s Office of
Inspector General stated that while HUD’s
newly implemented field reorganization
could provide more accountability within the
existing program structure, it is not
well-suited for carrying out this new vision
of a “community-first, place-based” program
delivery structure. The Inspector General
was of the opinion that creating Secretary


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Representative and Office Coordinator
functions with limited authorities over field
program directors would be inefficient and
noted that this idea had been tried with
limited effectiveness at other federal
agencies.

Consolidating program operations is another
objective of HUD’s further reorganization
plans. To help cope with decreasing
resources and correct historical staff and
workload imbalances, HUD is consolidating
various field operations and processing
functions into field service centers. For
example, HUD established a regional center in
Denver to process applications for FHA
mortgage insurance on single-family homes
that had formerly been handled by nine HUD
field offices. HUD expanded operations of the
Denver center and established additional
centers in Atlanta and Philadelphia in fiscal
year 1996. Ultimately, HUD hopes to
consolidate all single-family processing
functions into five regional service centers
located in Denver, Philadelphia, Atlanta, San
Francisco, and Chicago.

HUD’s April 1996 management action plan
also calls for creating “administrative”
service centers and for consolidating
accounting functions into service centers.


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HUD  plans to consolidate a number of
administrative service functions (such as
facility and property management,
procurement, supply management, printing,
and records management) into three centers.
HUD’s Chief Financial Officer also has
proposed to consolidate accounting
functions and close HUD’s current 10 field
accounting divisions (located in HUD’s former
regional offices) by the end of fiscal year
1998. The CFO plans to establish two
administrative accounting centers (located
in Atlanta and Fort Worth) that would
centrally process all travel and procurement
payments and one program accounting
center (located in Denver) that would
control funds and process payments for
HUD’s programs currently handled by the
field accounting divisions located in Atlanta,
Denver, and Fort Worth. Assuming that the
planned integration of program accounting
systems proceeds as scheduled, the CFO
anticipates that workloads will be reduced to
the point where the program center could
gradually replace the remaining seven field
accounting divisions by the end of fiscal year
1998, resulting in estimated savings of
$6 million annually.

We also reported in 1995 that FHA was
studying its organization. HUD subsequently


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                   formulated a legislative proposal designed to
                   consolidate numerous FHA multifamily
                   insurance authorities into one more flexible
                   authority, provide more flexible products
                   and pricing, reduce the government’s
                   insurance risks, provide multifamily loans
                   through capable industry partners (such as
                   housing finance agencies), and enable FHA to
                   continue offering direct credit enhancements
                   to serve unmet multifamily housing needs.
                   The Congress has not yet enacted any
                   legislative restructuring of FHA. However,
                   while it is still seeking legislative changes,
                   HUD notes that it has taken actions under its
                   existing authority to improve FHA’s business
                   practices—for example, revising
                   underwriting standards for insured
                   single-family loans, entering into risk-sharing
                   partnerships, and conducting asset sales to
                   reduce its notes inventory and increase
                   returns to the FHA insurance fund.


Staff and Skills   In our February 1995 high-risk series, we
                   reported that HUD has had an insufficient mix
                   of staff with the proper skills, which has
                   hampered the effective monitoring and
                   oversight of HUD’s programs and the timely
                   updating of procedures. We reported that
                   given the reality of today’s federal budget
                   constraints, HUD has attempted to address


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the problem of staff and resource shortages
primarily by initiatives designed to make
more effective and efficient use of existing
resources. We commended the Department’s
efforts to upgrade the skills of its staff
through establishing a Training Academy in
January 1994, developing a “distance
learning” or satellite training curriculum, and
creating individual development plans for
employees. However, we also noted that
both the National Academy of Public
Administration and HUD’s Inspector General
had expressed concerns about the adequacy
of the resources committed to these efforts.

Since our 1995 report, the Department has
taken steps to increase the effectiveness of
its staff training by beginning to implement a
needs assessment process to plan future
training, promoting the use of individual
development plans for employees,
expanding its use of distance learning,
forming partnerships with colleges and
universities to create new educational
opportunities for staff, and substantially
increasing expenditures for training. The
needs assessment plan calls for
(1) identifying the skills essential to HUD’s
mission, (2) surveying employees to assess
the level of those skills in its workforce, and
(3) planning a cost-efficient delivery system


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to satisfy the workforce’s training needs. The
Department’s expenditures on training
increased from $5 million in 1994 to
$16 million in 1996. These steps increased
the amount of training HUD provided its staff
in fiscal years 1994 through 1996.

HUD’s management of staff resources over
the past 2 years also has been criticized. In a
report to the Congress issued in March 1996,
the Inspector General noted that HUD made
decisions about staff reductions and
redeployments in connection with its recent
reorganization efforts without an adequate
analysis of the impact these decisions would
have on the Department’s ability to
administer its programs. The report stated
that as a result, “many critical program
functions are not being adequately
performed, and . . . there are continuing
imbalances in staffing-to-workload ratios
from office to office.” Consequently, the
report concluded that “. . . there is little
assurance that HUD’s $1 billion for annual
salaries and expenses budget is efficiently
and effectively used to further HUD’s mission
and minimize program risks.”

Over the past 2 years, we have reported on
the continuing skill and resource
management problems related to HUD’s


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public housing program. In March 1996, we
testified on the Department’s recent efforts
to deal with large, chronically troubled
housing authorities that provide substandard
or unsafe housing, such as those in Chicago,
New Orleans, and San Francisco. We
commended HUD’s efforts but noted that
requiring HUD to take over additional housing
authorities in the future would overtax staff
resources.19 Moreover, we cautioned that
focusing its already-stretched management
resources on a handful of troubled
authorities would prevent HUD from
providing appropriate oversight of the
majority of authorities that were not
chronically troubled.20

Notwithstanding the above problems, our
recent survey of HUD field program directors
indicates that HUD’s efforts may be producing
some positive effects, but pockets of
problems remain. Although 71 percent of the
directors said the overall quality of training
had improved over the last 2 years, about
40 percent of these directors rated the
Department’s current training as only fair or
poor. The directors we surveyed generally
believed that the skills of their staff have

19
 Housing and Urban Development: Limited Progress Made on HUD
Reforms (GAO/T-RCED-96-112, Mar. 27, 1996).
20
 Housing and Urban Development: Public and Assisted Housing
Reform (GAO/T-RCED-96-25, Oct. 13, 1995).
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improved over the last 2 years. About
85 percent of the directors said that the skills
of their staff had improved at least
somewhat during that time. The directors
were especially satisfied with their staffs’
technical job skills and their knowledge of
new programs. Although a majority of the
directors were also satisfied with the skills
of their staff, in three other areas, 27 percent
of the directors were not satisfied with their
staffs’ knowledge of new regulations,
28 percent were not satisfied with their
staffs’ interpersonal skills, and 42 percent
were not satisfied with their staffs’
knowledge of information systems.

About 40 percent of the directors rated the
quality of HUD’s training curriculum as only
fair or poor. A majority of the directors
believed that training should be increased in
each of the areas we asked about,
particularly in the use of information
systems (88 percent) and technical job skills
(73 percent). One director commented that
because HUD employees are now expected to
do more than process forms and ensure
compliance with agency regulations, they
need training in marketing, outreach,
finance, and monitoring. Other needs,
according to one or more other directors,
include training in credit underwriting, real


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estate appraisal, asset management,
negotiation, and interpersonal skills.

We and other auditors also have continued
to identify problems with staff members’
skills and resource problems in specific HUD
programs. For example, in June 1996 an
independent audit firm cited limited staff
and administrative resources as a material
weakness that prevented FHA from devoting
adequate resources to preventing losses,
properly managing troubled assets, and
quickly implementing new automated
systems. In 1995, we also reported that FHA’s
ability to correct historical deficiencies in
the management and oversight of loans to
nursing homes and retirement centers could
be negatively affected by FHA’s planned
restructuring and staff reductions.21 In 1996,
we also reported that FHA staff did not have
sufficient health care expertise to manage
the key program functions related to hospital
mortgages and had to rely on the experience
of Department of Health and Human
Services staff to monitor hospitals’ financial
performance.22


21
 HUD Management: Greater Oversight Needed of FHA’s Nursing
Home Insurance Program (GAO/RCED-95-214, Aug. 25, 1995).
22
 FHA Hospital Mortgage Insurance Program: Health Care Trends
and Portfolio Concentration Could Affect Program Stability
(GAO/HEHS-96-29, Feb. 27, 1996).

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Most of the HUD field program directors we
surveyed considered the current staffing
levels inadequate. The majority (77 percent)
believed that they had fewer staff than
needed to administer their programs. This
was particularly true for the directors in
multifamily housing and CPD. The directors
said that staff reductions over the past 2
years had increased the remaining staff
members’ workload and that where program
activities were not receiving adequate
monitoring, lack of staff is a major reason.
Most directors also cited staff members’ lack
of skills as a major or minor reason that
some needed monitoring was not being
performed.

Some directors in our survey also expressed
concern that the recent organizational
improvements could be undermined by
planned staff reductions. Staffing levels,
which were 12,800 in 1993 and reduced to
about 10,500 at the end of fiscal year 1996,
are expected to fall to 7,500 by the year 2000.
In addition, some directors expressed
concern that the Department’s training
efforts may not be able to keep pace with
changing expectations for the skills needed
by HUD staff—particularly given the
likelihood of further reorganizations.



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                 No matter how successful HUD’s current
                 efforts to address staffing and skill mix
                 problems prove to be, they may not be
                 enough to fully correct the Department’s
                 long-standing problems in the absence of a
                 major effort to consolidate, reduce, or
                 restructure HUD’s current programs. The
                 problems of inadequate staff resources to
                 monitor and administer HUD’s current array
                 of programs likely will be compounded as
                 the Department implements its plan to
                 downsize to 7,500 by the year 2000, unless
                 actions are taken to consolidate, reduce,
                 and/or reengineer HUD’s existing programs.


Proposals to     According to a December 1994 analysis done
Reform or        by the Inspector General, HUD had the
“Reinvent” HUD   responsibility for 240 programs/activities.
                 During that same month, HUD announced a
                 proposal, known as the “Reinvention
                 Blueprint,” which called for consolidating
                 programs, devolving responsibility for
                 program design and implementation to
                 states and localities, and HUD’s assuming the
                 role of overseer and clearinghouse for
                 national models. In 1995, HUD drafted a
                 legislative proposal designed to implement
                 its Reinvention Blueprint; however, it was
                 never introduced as a bill in the Congress.



                 Page 62                                GAO/HR-97-12 HUD
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HUD has since drafted a revised, but similar,
plan known as “Blueprint II.”

HUD’s  Blueprint II incorporates HUD’s
“mark-to-market” and later “portfolio
reengineering” proposals, which were
designed to address the long-standing
problems in HUD’s insured multifamily
Section 8 portfolio amounting to about
$18 billion. The portfolio suffers from three
basic problems—high subsidy costs, high
exposure to insurance loss, and the poor
physical condition of some properties. To
address these problems, HUD in 1995
proposed a “mark-to-market” strategy to
(1) eliminate project-based subsidies as
contracts expired; (2) let the market set
rents and restructure mortgages as
necessary, (3) terminate FHA’s insurance on
refinanced mortgages; and (4) provide
assisted residents with portable tenant-based
subsidies.

In addition, others have made a wide variety
of proposals for reforming or reinventing
HUD, including proposals to completely
dismantle the Department. While some
limited, yet significant, improvements to
HUD’s existing program structure have been
made, a comprehensive redesign of HUD’s
overall mission and program delivery


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structure has not occurred. Likewise,
various bills to fundamentally restructure
HUD’s programs to subsidize multifamily
rental housing also have been proposed, but
thus far none has been enacted.




Page 64                                GAO/HR-97-12 HUD
Further Action Needed



            HUD  deserves credit for its continued
            emphasis on, and progress toward,
            addressing its long-standing management
            deficiencies. While HUD has completed some
            actions, initiated other actions, and
            formulated some new approaches since our
            last report, many of its planned and
            proposed corrective actions are still far from
            reaching fruition. As a result, the
            Department’s fundamental problems remain.
            Of particular concern is the persistence of
            material internal control weaknesses in
            some of HUD’s largest dollar programs and
            the Department’s lack of integrated
            information and financial management
            systems. Although the systems are being
            implemented in phased releases, until HUD
            completes integrating these data systems,
            which by its own estimates is years away,
            the lack of good information will continue to
            have a negative impact on the Department’s
            operations and limit its capacity to
            adequately control and monitor funds.

            HUD’s  programs will remain at high risk to
            fraud, waste, abuse, and mismanagement
            until the agency completes more of its
            planned corrective actions and until the
            administration and the Congress agree on
            and implement a strategy to either
            restructure, consolidate, reengineer, and/or


            Page 65                        GAO/HR-97-12 HUD
    Further Action Needed




    reduce HUD’s programs so as to bring the
    Department’s management responsibilities
    in line with its management capacity. While
    it may not be totally within HUD’s power to
    eliminate its fundamental deficiencies, it is
    nevertheless important for HUD to sustain
    and build on the corrective momentum it has
    generated thus far. While working toward
    the resolution of the broader issues of policy
    and structure, HUD needs to continue taking
    what actions it can to reduce to acceptable
    levels the risks associated with its wide
    spectrum of operations and to make
    substantial progress. Specifically, HUD needs
    to

•   (1) take steps to eliminate major internal
    control weaknesses, (2) fully implement its
    management planning and control program
    and ensure that it meets the requirements of
    FMFIA, and (3) ensure the proper balance
    between program delivery/results and
    program monitoring;
•   complete its efforts to integrate major
    information and financial management
    systems and continue to take actions to get
    all of its systems in compliance with FMFIA
    and improve their usefulness to managers in
    overseeing programs and monitoring
    day-to-day program activities;



    Page 66                        GAO/HR-97-12 HUD
    Further Action Needed




•   complete its current plans for reorganizing
    headquarters and field offices, including
    redeploying staff and consolidating program
    activities and like functions within its
    current legislative authority; and
•   complete its efforts to assess its employees’
    skills, develop appropriate training to meet
    employees’ needs for skills, and increase the
    number of staff receiving training.

    In our view, the Congress now has an
    excellent opportunity to help HUD eliminate
    the deficiencies that make it a high risk and
    to align the agency’s management
    responsibilities and capacity by authorizing a
    major restructuring strategy that focuses
    HUD’s mission and significantly consolidates,
    reduces, and/or reengineers its many
    separate program activities. HUD and others
    have proposed various bills to reform or
    reinvent the agency, but thus far no major,
    permanent changes have been enacted. What
    is needed now is for the administration and
    the Congress to agree on the future direction
    of federal housing and community
    development policy and the organizational
    and program delivery structures that are best
    suited to carry out that policy. Given the
    high stakes involved (tens of billions of
    federal dollars each year), the inherent
    trade-offs involved in understanding and


    Page 67                        GAO/HR-97-12 HUD
Further Action Needed




ranking the needs of those seeking HUD’s
assistance, and the other demands on the
total federal budget, coming to closure on
federal housing policy and the structure of
HUD will likely take some time. Given the
magnitude of the many tasks at hand, we
believe that HUD continues to pose a high risk
to the government in terms of its
vulnerability to waste, fraud, abuse, and
mismanagement.




Page 68                        GAO/HR-97-12 HUD
Related GAO Products



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

            Multifamily Housing: Effects of HUD’s
            Portfolio Reengineering Proposal
            (GAO/RCED-97-7, Nov. 1, 1996).

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

            FHA Hospital Mortgage Insurance Program:
            Health Care Trends and Portfolio
            Concentration Could Affect Program
            Stability (GAO/HEHS-96-29, Feb. 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 (GAO/T-RCED-96-25,
            Oct. 13, 1995).

            HUD  Management: Greater Oversight Needed
            of FHA’s Nursing Home Insurance Program
            (GAO/RCED-95-214, Aug. 25, 1995).




            Page 69                        GAO/HR-97-12 HUD
Related GAO Products




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

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




Page 70                      GAO/HR-97-12 HUD
1997 High-Risk Series



             An Overview (GAO/HR-97-1)

             Quick Reference Guide (GAO/HR-97-2)

             Defense Financial Management (GAO/HR-97-3)

             Defense Contract Management (GAO/HR-97-4)

             Defense Inventory Management (GAO/HR-97-5)

             Defense Weapon Systems Acquisition
             (GAO/HR-97-6)

             Defense Infrastructure (GAO/HR-97-7)

             IRS Management (GAO/HR-97-8)

             Information Management and Technology
             (GAO/HR-97-9)

             Medicare (GAO/HR-97-10)

             Student Financial Aid (GAO/HR-97-11)

             Department of Housing and Urban
             Development (GAO/HR-97-12)

             Department of Energy Contract Management
             (GAO/HR-97-13)




             Page 71                        GAO/HR-97-12 HUD
1997 High-Risk Series




Superfund Program Management
(GAO/HR-97-14)




The entire series of 14 high-risk reports
can be ordered by using the order
number GAO/HR-97-20SET.


Page 72                     GAO/HR-97-12 HUD
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