oversight

Major Management Challenges and Program Risks: Department of Housing and Urban Development

Published by the Government Accountability Office on 1999-01-01.

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

               United States General Accounting Office

GAO            Performance and Accountability
               Series




January 1999
               Major Management
               Challenges and Program
               Risks
               Department of Housing
               and Urban Development




GAO/OCG-99-8
GAO   United States
      General Accounting Office
      Washington, D.C. 20548

      Comptroller General
      of the United States



      January 1999
      The President of the Senate
      The Speaker of the House of Representatives

      This report addresses the major performance and
      management challenges that have limited the
      effectiveness of the Department of Housing and Urban
      Development (HUD) in carrying out its mission. It also
      addresses corrective actions that HUD has taken or
      initiated on these challenges, including the reforms it
      announced in June 1997, and further actions that are
      needed. For many years, we have reported significant
      management problems at HUD. These problems are the
      results of serious deficiencies in internal controls,
      information and financial management systems,
      organizational structure, and staffing. These deficiencies
      cut across HUD’s program areas.

      HUD is making significant changes and has made credible
      progress since 1997 in laying the framework for
      improving the way the Department is managed. HUD’s
      Secretary and leadership team have given top priority to
      addressing the Department’s management deficiencies.
      This top management attention is critical and must be
      sustained in order to achieve real and lasting change.
      Importantly, given the nature and extent of the challenges
      facing the Department, it will take time to implement and
      assess the impact of any related reforms. While major
      reforms are under way, several are in the early stages of
      implementation. Consequently, we continue to believe, as
we reported in 1995 and 1997, that these management
deficiencies, taken together, place the integrity and
accountability of HUD’s programs at high risk.

This report is part of a special series entitled the
Performance and Accountability Series: Major
Management Challenges and Program Risks. The series
contains separate reports on 20 agencies—one on each of
the cabinet departments and on most major independent
agencies as well as the U.S. Postal Service. The series
also includes a governmentwide report that draws from
the agency-specific reports to identify the performance
and management challenges requiring attention across
the federal government. As a companion volume to this
series, GAO is issuing an update to those government
operations and programs that its work has identified as
“high risk” because of their greater vulnerabilities to
waste, fraud, abuse, and mismanagement. High-risk
government operations are also identified and discussed
in detail in the appropriate performance and
accountability series agency reports.

The performance and accountability series was done at
the request of the Majority Leader of the House of
Representatives, Dick Armey; the Chairman of the House
Government Reform Committee, Dan Burton; the
Chairman of the House Budget Committee, John Kasich;
the Chairman of the Senate Committee on Governmental
Affairs, Fred Thompson; the Chairman of the Senate
Budget Committee, Pete Domenici; and Senator Larry
Craig. The series was subsequently cosponsored by the



            Page 2                GAO/OCG-99-8 HUD Challenges
Ranking Minority Member of the House Government
Reform Committee, Henry A. Waxman; the Ranking
Minority Member, Subcommittee on Government
Management, Information and Technology, House
Government Reform Committee, Dennis J. Kucinich;
Senator Joseph I. Lieberman; and Senator Carl Levin.

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, the Secretary of Housing and
Urban Development, and the heads of other major
departments and agencies.




David M. Walker
Comptroller General of
the United States




            Page 3                GAO/OCG-99-8 HUD Challenges
Contents



Overview                                            6

Major                                              17
Performance and
Management
Issues
Related GAO                                        68
Products
Performance and                                    70
Accountability
Series




                  Page 4   GAO/OCG-99-8 HUD Challenges
Page 5   GAO/OCG-99-8 HUD Challenges
Overview



           Directly or indirectly, the Department of
           Housing and Urban Development (HUD)
           affects millions of Americans as it carries
           out the federal government’s missions,
           policies, and programs for housing and
           community development. These missions
           range from making housing affordable by
           insuring loans for multifamily rental housing
           properties and providing rental assistance
           for about 4.5 million low-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 nonfederally supported loans.
           HUD is also one of the nation’s largest
           financial institutions, with significant
           commitments, obligations, and exposure. As
           of September 30, 1997, HUD was responsible
           for managing about $454 billion in insured
           mortgages and $531 billion in guarantees of
           mortgage-backed securities.1 For fiscal year
           1999, it has $24.3 billion in budget authority.




           1
            These mortgage-backed securities are guaranteed by HUD’s
           Government National Mortgage Association and backed by pools of
           mortgage loans insured or guaranteed by HUD’s Federal Housing
           Administration, the Department of Agriculture’s Rural Housing
           Service, or the Department of Veterans Affairs.

           Page 6                        GAO/OCG-99-8 HUD Challenges
                 Overview




The Challenges   We designated HUD as a high-risk area in 1994
                 because of four serious, long-standing
                 departmentwide management deficiencies.
                 We reported on these deficiencies and HUD’s
                 progress in resolving them in 1995 and 1997.2
                 Taken together, these deficiencies placed the
                 integrity and accountability of HUD’s
                 programs at high risk. Specifically, internal
                 control weaknesses, such as a lack of
                 necessary data and management processes,
                 were a major factor leading to the HUD
                 scandals of the late 1980s. Second, poorly
                 integrated, ineffective, and generally
                 unreliable information and financial
                 management systems did not meet the needs
                 of program managers and weakened their
                 ability to provide management control over
                 housing and community development
                 programs. Third, HUD had organizational
                 deficiencies, such as overlapping and
                 ill-defined responsibilities and authorities
                 between its 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


                 2
                  High-Risk Series: Department of Housing and Urban Development
                 (GAO/HR-95-11, Feb. 1995) and High-Risk Series: Department of
                 Housing and Urban Development (GAO/HR-97-12, Feb. 1997).

                 Page 7                        GAO/OCG-99-8 HUD Challenges
Overview




procedures. Resolving these management
deficiencies is particularly critical for HUD
because its housing and community
development programs rely extensively on
the integrity of thousands of diverse
individuals and entities, such as cities, public
housing authorities, mortgage lenders,
contractors, and property owners over
whom it does not have direct control.

HUD  continues to make credible progress in
overhauling its operations to correct its
management deficiencies. First, it has
improved its financial reporting to the extent
that its Inspector General was able to
provide qualified opinions on its financial
statements for fiscal years 1996 and 1997,
compared with no opinion on the reliability
of its financial statements for fiscal year
1995. In addition, it deployed components
for improving its information and financial
management systems; reorganized its
resources by function; and established
various consolidated or centralized entities
for single-family insurance operations, the
payment of rental assistance, assessments of
HUD-owned or HUD-supported rental
properties, and enforcement activities.
Finally, it refocused and began retraining its
workforce.



Page 8                 GAO/OCG-99-8 HUD Challenges
Overview




A major contributor to this progress is HUD’s
June 1997 2020 Management Reform Plan, a
set of proposals intended to, among other
things, correct the management deficiencies
that we and others (e.g., HUD’s Inspector
General, external auditors) identified. The
plan calls for reducing the number of
programs, reducing staffing levels, retraining
the majority of the staff and separating
service from compliance functions,
reorganizing the 81 field offices,
consolidating processes and functions within
and across program areas into specialized
centers, and modernizing and integrating
information and financial management
systems. HUD has also linked its management
reform efforts to the strategic and annual
plans it has developed under the
Government Performance and Results Act of
1993.3 As a result, its success in achieving
strategic objectives and meeting annual
performance goals depends on the success
of its management reforms. Booz-Allen and
Hamilton, Inc., reported in March 1998 that
these reforms, when implemented, should
present a significant improvement in HUD’s
performance; lower the risk of fraud, waste,
and abuse in its programs; and position the
Department to better serve America’s
communities.
3
 The Results Act seeks to shift the focus of government
decisionmaking and accountability from activities to results.

Page 9                           GAO/OCG-99-8 HUD Challenges
Overview




While major reforms are under way, our
recent work indicates that internal control
weaknesses and problems with information
and financial management systems persist.
Furthermore, recent reforms to address the
Department’s organizational and staffing
problems are in the early stages of
implementation, and it is too soon to tell
whether or not they will resolve the major
deficiencies that we and others have
identified. Consequently, we continue to
believe, as we reported in 1995 and 1997,
that these deficiencies, taken together, place
the integrity and accountability of HUD’s
programs at high risk. To resolve these
management deficiencies, the Department
needs to ensure that the actions being taken
eliminate the remaining major internal
control weaknesses; strengthen the
management and oversight of efforts to
integrate HUD’s information and financial
management systems and correct these
systems’ weaknesses; ensure that the field
offices have enough staff to carry out the
work assigned, including the monitoring of
programs and activities and the assessment
of outcomes; and ensure that all staff have
the skills needed to perform their functions.




Page 10               GAO/OCG-99-8 HUD Challenges
                     Overview




Internal Control     While HUD has initiated actions that should
Weaknesses Persist   help to address the internal control
                     weaknesses that we and others have
                     identified, material internal control
                     weaknesses persist in its management of the
                     Section 8 subsidy payment process, which
                     provides $18 billion in rental assistance;
                     control and management of staff resources;
                     management of losses resulting from
                     defaults in the single-family and multifamily
                     insurance programs; implementation of
                     automated systems to provide needed
                     management information or reliable data;
                     and monitoring of multifamily properties and
                     of the single-family and multifamily notes
                     inventories. In addition, HUD identified
                     inadequate contracting procedures as a
                     departmentwide material internal control
                     weakness for fiscal year 1997. Furthermore,
                     since we issued our 1997 report, we have
                     reported that HUD has not adequately
                     monitored, among other things, its real
                     estate asset management contractors, the
                     performance of appraisers of properties
                     purchased with FHA-insured loans, and its
                     process for deobligating funds no longer
                     needed for Section 8 project-based rental
                     assistance contracts.

                     A strong internal control system provides the
                     framework for accomplishing management


                     Page 11              GAO/OCG-99-8 HUD Challenges
                    Overview




                    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. Not having good internal
                    controls puts an entity at risk of
                    mismanagement, waste, fraud, and abuse.


Work Remains on     While efforts to integrate HUD’s information
HUD’s Information   and financial management systems are well
and Financial       under way, the Department will continue to
Management          be adversely affected by inadequate systems
Systems
                    and information until it has completed these
                    efforts. The fiscal year 1997 audit of HUD’s
                    consolidated financial statements continued
                    to report material internal control
                    weaknesses in financial systems that were
                    departmentwide or FHA-wide. In addition, we
                    recently reported that HUD does not know
                    when its systems integration effort will be
                    completed, or at what cost, because it has
                    not yet finalized detailed project plans or
                    cost and schedule estimates for this effort.4
                    We concluded that without such plans, the
                    Department is likely to continue to spend
                    millions of dollars, miss milestones, and still

                    4
                     HUD Information Systems: Improved Management Practices
                    Needed to Control Integration Cost and Schedule
                    (GAO/AIMD-99-25, Dec. 18, 1998).

                    Page 12                      GAO/OCG-99-8 HUD Challenges
                     Overview




                     not fully meet its objective of developing and
                     fully deploying an integrated financial
                     management system. We also reported that
                     HUD has not yet fully implemented a
                     complete, disciplined information
                     technology investment management process.
                     Therefore, we concluded that HUD does not
                     have adequate assurance that it is selecting
                     the right projects or maximizing its return on
                     investment.


It Is Too Early to   Although a new field organization structure
Assess the           is now in place and operational, it is too
Effectiveness of     early to assess the effectiveness of this
Organizational       structure in correcting organizational
Changes
                     deficiencies. Under HUD’s reform initiatives,
                     some of the work previously carried out by
                     field offices will be transferred to centers.
                     Such work includes the financial assessment
                     and physical inspection of multifamily
                     properties, work related to troubled public
                     housing authorities, enforcement activities,
                     and Section 8 financial management
                     activities. Additionally, some service and
                     compliance functions formerly assigned to
                     the field offices will be shifted to staff
                     designated as community builders and
                     public trust officers, respectively.




                     Page 13               GAO/OCG-99-8 HUD Challenges
                      Overview




                      However, the enforcement, financial
                      management, and real estate assessment
                      centers will not be performing all of their
                      centralized functions until 1999 and 2000,
                      when the transfer of functions and
                      responsibilities from the field offices to the
                      centers is expected to be complete. To date,
                      no significant transfers have occurred
                      except to homeownership centers, according
                      to the field office managers and staff we
                      interviewed between July and October 1998.5
                      Office managers also indicated that the
                      transfer of community service and outreach
                      functions and responsibilities from the field
                      offices to community builders was in a
                      transitional phase.


Staffing Under the    Because staffing reforms and workload
2020 Reform Plan Is   transfers from the field offices to the centers
in Transition         are still occurring, the effectiveness of HUD’s
                      changes in correcting staffing deficiencies
                      cannot be determined. For example, most of
                      the field offices we visited initially lost staff
                      following HUD’s staffing reforms. However,

                      5
                       From July through October 1998, we interviewed HUD managers
                      and staff at selected locations about the effect on their programs
                      and work of the various organizational changes made under the
                      2020 plan. We judgmentally selected the Denver homeownership
                      center; the Fort Worth, Chicago, Houston, and New Orleans field
                      offices; the troubled agency recovery center at Memphis; and the
                      real estate assessment and enforcement centers in Washington,
                      D.C., to conduct our work.

                      Page 14                          GAO/OCG-99-8 HUD Challenges
               Overview




               some of these staff losses were recovered
               after HUD finalized staffing decisions in
               September 1998. While most of the offices
               we visited reported being fully staffed, three
               of the centers were understaffed. The
               enforcement center had 62 percent of its
               authorized staff level, the real estate
               assessment center 40 percent, and the
               Memphis troubled agency recovery center
               86 percent. HUD managers said the vacant
               positions in these centers will be advertised
               sometime in 1999. In addition, HUD has not
               yet developed a process for identifying and
               justifying its staff resource requirements.


Progress and   Given the severity of the management
Next Steps     deficiencies that we and others have
               observed, it would not be realistic to expect
               that HUD would have substantially
               implemented its reform efforts and
               demonstrated success in resolving its
               management deficiencies in the 2 years since
               we issued our last report. Nevertheless, with
               close oversight by the Congress, HUD is
               making significant changes and has made
               credible progress since 1997 in laying the
               framework for improving its management.
               HUD’s Secretary and leadership team have
               given top priority to addressing the
               Department’s management deficiencies. This


               Page 15               GAO/OCG-99-8 HUD Challenges
Overview




top management attention is critical and
must be sustained in order to achieve real
and lasting change. Importantly, given the
nature and extent of the challenges facing
the Department, it will take time to
implement and assess the impact of any
related reforms. While major reforms are
under way, several are in the early stages of
implementation, and it is too soon to tell
whether or not they will resolve the major
deficiencies that we and others have
identified. Therefore, in our opinion, the
integrity and accountability of HUD’s
programs remain at high risk.




Page 16               GAO/OCG-99-8 HUD Challenges
Major Performance and Management
Issues


            The HUD scandals of the late 1980s focused
            public attention on management problems at
            HUD. In 1994, we designated HUD as a
            high-risk area because of four serious,
            long-standing departmentwide management
            problems. These deficiencies, taken
            together, placed the integrity and
            accountability of HUD’s programs at high risk.
            First, internal control weaknesses, such as a
            lack of necessary data and management
            processes, were a major factor leading to the
            scandals. Second, poorly integrated,
            ineffective, and generally unreliable
            information and financial management
            systems did not meet the needs of program
            managers 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 its
            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. These problems can
            affect the management of HUD’s $454 billion
            in insured mortgages and $531 billion in
            guarantees of mortgage-backed securities
            (as of September 30, 1997). They can also
            Page 17               GAO/OCG-99-8 HUD Challenges
                   Major Performance and Management
                   Issues




                   affect the management of HUD’s other
                   programs, funded by $24.3 billion in budget
                   authority for fiscal year 1999.


Actions Are        Internal control weaknesses that we and
Under Way to       others have identified at HUD in the past
Address Internal   include a lack of staff and resources to
Control            manage and monitor its real estate
Weaknesses, but    inventory, an inadequate early warning
                   system to prevent losses through defaults in
Problems Persist
                   its single-family and multifamily insurance
                   programs, inadequate controls over a rental
                   assistance program, inadequate automated
                   systems to provide needed management
                   information or reliable data, and an
                   inadequate management control system.

                   A strong internal control system provides the
                   framework for accomplishing 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. Not having good internal
                   controls puts an entity at risk of
                   mismanagement, waste, fraud, and abuse.




                   Page 18                  GAO/OCG-99-8 HUD Challenges
Major Performance and Management
Issues




In February 1997, we reported that HUD had
made limited progress in addressing internal
control weaknesses by implementing a new
management planning and control program
intended to identify and rank the major risks
in each program and devise strategies to
abate those risks. We also reported that HUD
had reduced the material weaknesses
identified through its Federal Managers’
Financial Integrity Act (FMFIA) assessment
from 51 in the early 1990s to 9 at the end of
fiscal year 1996.6 At the same time, we noted
that the remaining material weaknesses
were long-standing and put large sums of
money at risk and that financial audits
continued to identify material internal
control weaknesses in HUD’s programs. We
also found that managers were not actively
assessing risks in their programs as required
under the management control program.
Finally, we reported in 1997 that HUD’s
monitoring of program participants, despite
its importance as a management tool,
continued to be problematic.



6
 Management control programs for federal agencies are mandated
by FMFIA and supplemented by requirements established by the
Office of Management and Budget. Each year, federal departments
are to report whether their management control systems provide
reasonable assurance that the requirements of FMFIA are being
met, identify any new material weaknesses and instances of
nonconformance, and report any corrective actions taken on
previously existing material weaknesses.

Page 19                        GAO/OCG-99-8 HUD Challenges
                      Major Performance and Management
                      Issues




2020 Reform Plan Is   Under its June 1997 2020 Management
Directed Toward       Reform Plan, HUD has taken a number of
Internal Control      actions to begin addressing its internal
Weaknesses            control problems. In 1998, HUD’s Office of
                      Chief Financial Officer (CFO) established the
                      Risk Management Division, which worked
                      with the Department’s program offices and
                      nationwide centers in preparing risk
                      assessments for programs that were being
                      established or substantially revised. In fiscal
                      years 1997 and 1998, the CFO also worked
                      with certain program offices to prepare
                      special risk assessments on some existing
                      programs to identify and develop action
                      plans to reduce risks. The program offices,
                      with assistance from the CFO, will continue
                      to carry out special risk assessments on
                      existing programs. The CFO is also
                      developing a risk evaluation database that
                      will be used to identify programs needing
                      special risk reviews. The database will
                      include information on program funding,
                      reviews by us and HUD’s Inspector General,
                      and internal reviews. In addition, as of
                      September 30, 1998, the CFO’s Risk
                      Management Division completed risk
                      management training for over 1,100
                      headquarters and field managers. As of
                      November 1998, the CFO had also revised the
                      1992 handbook on HUD’s Management
                      Control Program. The revised handbook,


                      Page 20                  GAO/OCG-99-8 HUD Challenges
Major Performance and Management
Issues




among other things, reinforces the
requirement that front-end risk assessments
be performed on any new program with a
funding level of $10 million or more and on
substantially revised programs or
administrative functions where the revision
results in increases or decreases of more
than $10 million or the revision is equal to a
change of 5 percent in the budget line item.

As part of its reform plan, HUD established a
real estate assessment center, which has
issued regulations on the physical and
financial assessments of multifamily
properties and public housing authorities.
However, the center will not be fully
functional until 2000. It will not begin
financial assessments of multifamily
properties until around April 1999, when
audited financial statements on the
properties are submitted to HUD. Although
physical inspections of public housing
authorities will start in 1999, financial
assessments will not begin until 2000. The
additional year is needed to give housing
authorities time to convert their annual
financial statements from HUD’s accounting
guidance to generally accepted accounting
principles in accordance with the uniform
financial standards for HUD’s housing
programs. The center began physically


Page 21                  GAO/OCG-99-8 HUD Challenges
Major Performance and Management
Issues




inspecting multifamily properties in
October 1998 and, according to HUD, had
inspected over 4,200 properties as of late
December 1998.

HUD  also established an enforcement center
to investigate and take enforcement actions
against troubled multifamily and public
housing authority properties that do not
comply with HUD’s regulations. Although the
enforcement center began operations on
September 1, 1998, it is not scheduled to
perform all of its centralized functions until
around April 1999, when it is to begin
receiving referrals of troubled multifamily
properties from the real estate assessment
center.7 However, as of December 1998, the
enforcement center was working on 200
multifamily property cases referred to it by
housing staff, according to HUD. Also,
according to HUD, debarments of multifamily
landlords totaled about 100 in 1997, more
than three times the 1996 total.




7
 The referrals will be based on the property’s physical and financial
condition, the property’s management performance, and residents’
satisfaction. Before being referred to the enforcement center,
public housing authorities will have 1 year to work with one of two
troubled agency recovery centers within the Office of Public and
Indian Housing to correct the deficiencies identified by the
assessment center.

Page 22                          GAO/OCG-99-8 HUD Challenges
                    Major Performance and Management
                    Issues




Problems With       The Chief Financial Officers Act of 1990 and
Internal Controls   the Government Management Reform Act of
Persist             1994 required HUD and 23 other major
                    agencies to annually prepare and subject to
                    audit organizationwide financial statements.
                    These reports are submitted to the Congress
                    through the Office of Management and
                    Budget (OMB). The fiscal year 1997 financial
                    statement audits conducted by public
                    accounting firms or HUD’s Inspector General
                    found continued material internal control
                    weaknesses in the programs of HUD and
                    HUD’s Federal Housing Administration (FHA).
                    According to the Inspector General, HUD
                    needs to overcome issues with its internal
                    control environment. For example, it needs
                    to upgrade its financial systems and improve
                    its resource management to eliminate
                    problems that are hindering its ability to
                    carry out its mission and manage its
                    programs. However, the Inspector General’s
                    fiscal year 1997 financial audit of the
                    Government National Mortgage Association
                    found no material internal control
                    weaknesses.

                    HUD’s Inspector General issued a qualified
                    opinion on HUD’s fiscal year 1997
                    consolidated financial statements.8 The

                    8
                     U.S. Department of Housing and Urban Development Audit of
                    Fiscal Year 1997 Financial Statements, Office of Inspector General
                    (98-FO-177-0004, Mar. 20, 1998).

                    Page 23                         GAO/OCG-99-8 HUD Challenges
Major Performance and Management
Issues




qualification related to HUD’s inability to
account for its credit programs in
accordance with federal accounting
standards.9 These accounting standards were
developed to generally mirror the credit
reform legislation that was enacted to better
capture the government’s cost of extending
credit. During 1998, HUD, with the assistance
of independent contractors, has focused
significant effort toward improving its ability
to reasonably estimate the costs of its loan
programs and has developed a plan that, if
fully implemented, should help it prepare
reasonable estimates in the future. HUD’s
current loan cost estimates are being
reviewed as part of the fiscal year 1998
financial statement audit, which, once
completed, will determine the
reasonableness of these estimates.

The fiscal year 1997 financial audit
continued to find material weaknesses in
HUD’s internal controls, and the Inspector
General reported that HUD continues to face
major challenges in its efforts to correct
long-standing material internal control
weaknesses. For example, HUD reported that
it spent about $18 billion to provide rent and

9
 For HUD’s consolidated reporting purposes, FHA’s financial
results must be reported using federal accounting standards. FHA
has been unable to comply with these standards, particularly as
they relate to accounting for credit programs.

Page 24                         GAO/OCG-99-8 HUD Challenges
Major Performance and Management
Issues




operating subsidies through a variety of
programs. On the basis of data for calendar
year 1996, HUD estimated that it had provided
over $900 million in overpayments.
Households generally are required to pay
30 percent of their income toward rent, and
HUD provides the balance of the rental
payment. When households fail to disclose
all of their income, HUD may end up paying a
greater rental subsidy than otherwise would
be required. This high level of improper
payments exists because HUD does not have
adequate internal controls over the process
of verifying tenants’ self-reported
income—the primary factor in determining
the amount of assistance HUD pays. This was
one of the material internal control
weaknesses reported by HUD’s Inspector
General in the financial audit report for
fiscal year 1997.10 In fiscal year 1998, HUD
unveiled a multifaceted plan to identify
households’ unreported and/or
underreported income. The plan includes
steps to (1) further expand HUD’s computer
matching efforts, (2) strengthen
recertification policies and procedures,
(3) ensure that HUD’s information systems


10
 Other material internal control weaknesses included the need to
complete improvements to financial systems, improve resource
management, and continue efforts to improve the monitoring of
multifamily properties.

Page 25                         GAO/OCG-99-8 HUD Challenges
Major Performance and Management
Issues




have accurate and complete data on tenants,
(4) institute penalties, and (5) perform
monitoring and oversight functions,
including revising and expanding audit
procedures to be incorporated into OMB’s
A-133 Compliance Supplement.11

The public accounting firm KPMG Peat
Marwick LLP, in auditing FHA’s financial
statements for fiscal year 1997, found that
the statements were presented fairly, in all
material respects, in conformity with
generally accepted accounting principles.12
However, the audit continued to find
material weaknesses in FHA’s internal
controls. These weaknesses included
insufficient staff and administrative
resources for such tasks as performing loss
mitigation functions,13 managing troubled


11
  The compliance supplement outlines important provisions
governing federal programs, including the requirements for auditing
them.
12
  Federal Housing Administration, Audit of Fiscal Year 1997
Financial Statements, Office Inspector General (98-FO-131-0003,
Mar. 9, 1998) (prepared by KPMG Peat Marwick LLP for the Office
of Inspector General). Although FHA received an unqualified audit
opinion on these financial statements, the reported amounts related
to FHA’s loan programs, derived using federal accounting
standards, are significantly different from those that would have
been reported had generally accepted accounting principles been
used.
13
  FHA’s loss mitigation program seeks, among other things, to
mitigate losses resulting from foreclosure by using alternatives to
foreclosure, such as loan modifications.

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assets, and implementing new automated
systems; inadequate emphasis on providing
early warning of, and preventing losses due
to, defaults on insured mortgages; and
resolving remaining problems with
accounting and financial management
systems. The report added that because of
the issues’ complexity, implementing
sufficient changes to mitigate these internal
control weaknesses will take several years.

In addition, we and HUD’s Inspector General
have identified weaknesses related to HUD’s
contract management, including problems
with the Department’s automated
procurement systems, assessment and
planning for contract needs, and oversight of
contractors’ performance. Following the
Inspector General’s 1997 review of HUD’s
contracting practices, contracting
departmentwide was added as a material
internal control weakness in the FMFIA
assessment for fiscal year 1997. HUD is
implementing reforms to address these
weaknesses, including appointing a chief
procurement officer, redesigning the
contract procurement process, and
establishing standard training requirements
for staff responsible for monitoring
contractors’ progress and performance.



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                      The other material internal control
                      weaknesses reported as open under the
                      FMFIA assessment for fiscal year 1997
                      pertained to the (1) Section 8 subsidy
                      payment process, (2) multifamily resource
                      and asset management strategy, (3) Section 8
                      bond refunding, (4) single-family resource
                      and asset management strategy,
                      (5) management and control of staff
                      resources, (6) monitoring of insured
                      mortgages and multifamily projects,
                      (7) Secretary-held multifamily and
                      single-family mortgage notes inventories,
                      and (8) income verification. HUD has reduced
                      its material weaknesses from 51 in fiscal
                      year 1991 to the 9 remaining open as of fiscal
                      year 1997. Some of these remaining
                      weaknesses are long-standing—one dates
                      back to 1983, while four others date back to
                      1993—and some, such as those relating to
                      the $18 billion rental assistance program,
                      involve billions of dollars.


Problems in           Despite its importance as a management
Monitoring Existing   control tool, monitoring continues to be
Programs Persist      problematic for HUD in many program areas.
                      Such a management control tool is
                      particularly critical for HUD because its
                      housing and community development
                      programs rely extensively on the integrity of


                      Page 28                  GAO/OCG-99-8 HUD Challenges
    Major Performance and Management
    Issues




    thousands of diverse individuals and entities
    such as cities, public housing authorities,
    mortgage lenders, contractors, and property
    owners. Illustrations of HUD’s monitoring
    problems follow.

•   In July 1997, we reported that HUD’s
    administration of its preservation program14
    was hampered by a number of factors that
    collectively limited the Department’s ability
    to ensure that the program was being
    managed effectively and efficiently, that
    federal funds were being spent wisely, and
    that the program was being carried out as
    required.15 We concluded that not having a
    uniform, up-to-date system to monitor
    owners’ compliance with the program’s
    requirements limited HUD’s ability to ensure
    that owners were adhering to long-term
    affordability restrictions requiring them to
    maintain properties for low-income
    occupancy in exchange for financial
    incentives. Our findings contributed to the
    Congress’s decision to stop funding the
    program.

    14
      The preservation program was aimed at keeping existing
    multifamily housing affordable for lower-income households as the
    owners of these properties were approaching eligibility to pay off
    their mortgages.
    15
      Housing Preservation: Policies and Administrative Problems
    Increase Costs and Hinder Program Operations
    (GAO/RCED-97-169, July 18, 1997).

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•   In March 1998, we also reported that HUD
    does not have an adequate system in place to
    oversee real estate asset management
    contractors.16 As a result, HUD offices were
    not adequately performing all of the
    functions needed to ensure that the
    contractors were meeting their contractual
    obligations to maintain and protect
    HUD-owned properties. Our physical
    inspection of properties under contract
    management identified serious problems,
    including vandalism, maintenance problems,
    and safety hazards. We concluded that these
    conditions may decrease the marketability of
    HUD’s properties; decrease the value of
    surrounding homes; increase HUD’s holding
    costs; and, in some cases, threaten the health
    and safety of neighbors and potential buyers.

    A recent report by HUD’s Inspector General
    also states that HUD’s oversight of real estate
    asset management contractors is
    inadequate.17 The report noted that some
    contractors had not been visited by HUD staff
    since 1996 and 1997. The problem was due to
    a shortage of single-family staff because of
    downsizing, increased workload, and HUD’s

    16
     Single-Family Housing: Improvements Needed in HUD’s Oversight
    of Property Management Contractors (GAO/RCED-98-65, Mar. 27,
    1998).
    17
     Semiannual Report to the Congress as of September 30, 1998,
    HUD, Office of Inspector General (as of Sept. 30, 1998).

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    inability to implement steps developed under
    its 2020 plan for handling properties when
    borrowers defaulted.

•   In our May 1998 report on appraisals of
    selected properties for home buyers seeking
    FHA single-family loans in New Jersey and
    Ohio, we reported that HUD field offices in
    Camden, New Jersey, and Cleveland, Ohio,
    had not adequately monitored the
    performance of appraisers.18 We found that
    appraisal reports on eight of nine properties
    did not reflect conditions we observed that
    adversely affected the structural soundness
    and continued marketability of the houses
    and the health and safety of the occupants.
    As of February 1998, five of the eight
    properties had been purchased with
    FHA-insured mortgages. In addition, the
    Cleveland office did not take any disciplinary
    action against an appraiser who had received
    several unacceptable performance ratings.
    To improve the appraisal process and
    provide more protection to home buyers,
    HUD implemented a new home buyer
    protection plan in June 1998.
•   In July 1998 we reported that HUD’s
    procedures for identifying and deobligating
    funds that are no longer needed do not

    18
     Appraisals for FHA Single-Family Loans: Information on Selected
    Properties in New Jersey and Ohio (GAO/RCED-98-145R, May 6,
    1998).

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    ensure that (1) all Section 8 project-based
    balances are evaluated each year and
    (2) balances that are no longer needed for
    specific Section 8 project-based contracts
    are identified and deobligated in a timely
    manner.19 We found that the review process
    did not provide HUD with adequate assurance
    that the reviews were being conducted and
    identified funds were being deobligated.
    Assurance was inadequate because HUD did
    not adequately oversee the program offices’
    reviews and did not require the responsible
    program officials to certify that the
    unexpended balances associated with the
    Section 8 project-based contracts were still
    needed. We identified about $517 million in
    HUD’s accounting system that, as of
    September 30, 1997, was no longer needed
    because the contracts had expired, been
    terminated, or never been executed. We
    pointed out in our report that if HUD had
    identified and deobligated these funds, it
    could have recaptured and used them to
    reduce the Department’s request for Section
    8 funding.
•   In July 1998, we reported problems with
    HUD’s oversight of lenders’ compliance with
    requirements of the home improvement loan


    19
     Section 8 Project-Based Rental Assistance: HUD’s Processes for
    Evaluating and Using Unexpended Balances Are Ineffective
    (GAO/RCED-98-202, July 22, 1998).

    Page 32                        GAO/OCG-99-8 HUD Challenges
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                     insurance program.20 We noted that in fiscal
                     year 1997, HUD conducted on-site quality
                     assurance reviews of only 4 of the
                     approximately 3,700 lenders participating in
                     the program. We also found that loan claim
                     files submitted by lenders to, and paid for by,
                     HUD following loan defaults often do not
                     contain required loan documents, including
                     the original loan applications and
                     certifications signed by the borrowers
                     stating that the property improvement work
                     has been completed.


What Remains to Be   While HUD has initiated actions under the
Done                 2020 Management Reform Plan that could
                     help to address its internal control
                     weaknesses, such as efforts to improve the
                     management and oversight of its real estate
                     inventory, the reforms are not fully
                     implemented, and it is too soon to assess
                     their effectiveness. In addition, HUD still
                     faces significant material internal control
                     weaknesses, including weaknesses in the
                     control structure intended to help ensure
                     that $18 billion in rental subsidies are based
                     on tenants’ correct incomes. As reform
                     efforts are fully implemented, HUD needs to
                     ensure that the actions being taken under


                     20
                      Home Improvement: Weaknesses in HUD’s Management and
                     Oversight of the Title I Program (GAO/RCED-98-216, July 16, 1998).

                     Page 33                         GAO/OCG-99-8 HUD Challenges
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                  the 2020 reform plan and related efforts will
                  address the remaining material internal
                  control weaknesses.


Key Contacts      Judy A. England-Joseph, Director
                  Housing and Community Development Issues
                  Resources, Community, and Economic
                    Development Division
                  (202) 512-7631
                  englandjosephj.rced@gao.gov

                  Linda M. Calbom, Director
                  Resources, Community, and Economic
                    Development Division Accounting
                    and Financial Management Issues
                  Accounting and Information Management
                    Division
                  (202) 512-9508
                  calboml.aimd@gao.gov


Work Remains on   HUD relies extensively on information and
HUD’s             financial management systems to manage its
Information and   programs. However, we have reported in the
Financial         past that these systems have been
Management        inadequate because they were poorly
                  integrated, ineffective, and generally
Systems
                  unreliable. They neither satisfied
                  management’s needs nor provided adequate



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                      control over HUD’s housing and community
                      development programs.

                      In 1997, we reported that HUD was continuing
                      to make progress in improving its
                      information and financial management
                      systems, but much work remained: Some of
                      the projects would not be completed until
                      2000. In addition, in our 1997 report we
                      noted that HUD had reported that most of its
                      systems did not comply with FMFIA and
                      therefore could not be relied upon to provide
                      timely, accurate, and reliable financial
                      information and reports to management.


2020 Reform Plan Is   The 2020 Management Reform Plan called
Directed Toward       for HUD to modernize and integrate outdated
Systems’              financial management information systems
Weaknesses            with an efficient state-of-the-art system,
                      incorporating such features as efficient data
                      entry, support for formulating and executing
                      budgets, updates on the status of funds,
                      standardized data for quality control, and
                      security control. The plan also stated that
                      information and accounting systems that did
                      not comply with FMFIA would be overhauled
                      to correct deficiencies. Finally, the plan
                      stated that information and accounting
                      systems’ functions would be consolidated



                      Page 35                  GAO/OCG-99-8 HUD Challenges
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into the new accounting systems or
eliminated.

According to HUD, it had developed and
deployed 11 new financial management
systems or components for these systems as
of December 1998. For example, in
March 1998, the Office of Housing deployed
the first phase of the Real Estate
Management System, a new system being
developed to implement 2020 reforms; the
Office of Fair Housing and Equal
Opportunity deployed an enhanced version
of the first module for the Grants Evaluation
Management System and completed
development on a second module to support
the tracking of grantees in fiscal year 1998;
the Office of Public and Indian Housing
deployed the sixth module to support the
Integrated Business System’s requirements
and implemented a new module to support
the requirements of the Office of Native
American Programs; and the CFO’s office
developed and deployed a consolidated
HUD-wide general ledger for fiscal year 1999
that will include summary transactions for
the entire Department.

As part of its 2020 reform efforts, HUD is also
(1) cleaning up certain data elements in its
systems where necessary, including verifying


Page 36                  GAO/OCG-99-8 HUD Challenges
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the reliability of the data, and (2) verifying
the reliability of other data. Because the
cleanup effort has just begun, it is too early
to assess its impact. HUD selected 395 data
elements for cleanup and/or verification
from 18 different financial and mixed
systems. About half the data elements were
selected for verification only, to be
performed by an independent contractor.
These data elements are part of HUD’s
Community 2020 System, which identifies
HUD projects in a given community and
provides demographic information for use
by HUD grantees and the public. A fourth of
the data elements scheduled for cleanup will
be cleaned up in the first quarter of fiscal
year 1999, and most of the remaining data
elements will be cleaned up in the second
quarter of fiscal year 1999. HUD plans to hire
a contractor to verify the cleanup results but
has not yet established a schedule for the
verification.

In March 1998, we also testified on HUD’s
year 2000 program. At that time, the
Department was behind schedule in
renovating 20 of its 30 mission-critical
systems and was not tracking the status of
work to replace an additional 12
mission-critical systems. HUD recently
reported that it had completed all of its year


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                  2000 renovations for both mission-critical
                  and non-mission-critical systems and had
                  finished certifying 93 percent of these
                  systems and implementing 86 percent of
                  them. HUD expects to complete the
                  certification and validation process by
                  January 31, 1999.


Problems With     HUD began a financial management systems
Systems Persist   integration (FSI) effort in 1991 to replace
                  about 100 financial and mixed
                  systems—which support both management
                  and financial information needs—with 9 new
                  standard integrated systems over a 7-year
                  period. Management and oversight problems
                  prompted HUD to revise its FSI strategy in
                  September 1993 to more accurately take into
                  account the Department’s program
                  operations and business processes and to
                  strengthen management and oversight. HUD
                  revised its FSI strategy again in
                  September 1997 to extend the date for fully
                  deploying the core financial management
                  system (i.e., the backbone of FSI) to
                  October 1999 and to include the
                  development and deployment of additional
                  new systems required to meet organizational
                  and management changes called for in the
                  2020 Management Reform Plan.



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In December 1998, we reported that HUD did
not know when the systems integration
effort would be completed, or at what cost,
because the Department had not yet
finalized detailed project plans or cost and
schedule estimates for this effort. We
concluded that without such plans, the
Department is likely to continue to spend
millions of dollars, miss milestones, and still
not fully meet its objective of developing and
fully deploying an integrated financial
management system. While HUD’s FSI cost
increases and schedule delays are not yet
fully known, the Department expects to
spend about $239 million for development
costs plus $132 million for maintenance
costs through September 1999. We also
reported that management and oversight
problems continue to hamper the systems
integration effort and that these problems
may persist because HUD lacks an effective
process to manage its information
technology investments. For instance, HUD
has not yet fully implemented a complete,
disciplined information technology
investment management process that
includes selecting, controlling, and
evaluating FSI projects and conforms with
requirements in information-technology-
related legislative reforms such as the
Clinger-Cohen Act of 1996 and the


Page 39                  GAO/OCG-99-8 HUD Challenges
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Paperwork Reduction Act of 1995.
Therefore, we concluded that HUD does not
have adequate assurance that it is selecting
the right projects or maximizing its return on
investment. HUD agreed with our overall
recommendations to prepare complete and
reliable estimates of the life-cycle costs and
benefits of the 1997 FSI strategy and
individual FSI projects, implement and
institutionalize a disciplined information
technology investment management process
that is consistent with federal laws and
guidelines, and develop and use structured
processes for estimating FSI costs.

Other problems with information and
financial management systems continue to
limit HUD’s ability to effectively manage its
programs, as the following examples show.

Our reports on HUD’s tenant-based and
project-based Section 8 assistance programs
illustrate the need for further improvement
in financial management. In February 1998,
we reported that flaws in HUD’s budget
process led to significant overestimates of
contract renewal needs.21 For example, in its
budget submission to the Congress, HUD
doubled-counted the administrative fees to

21
 Section 8 Tenant-Based Housing Assistance: Opportunities to
Improve HUD’s Financial Management (GAO/RCED-98-47, Feb. 20,
1998).

Page 40                      GAO/OCG-99-8 HUD Challenges
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be paid to housing agencies for operating the
Section 8 tenant-based program. We also
reported that HUD made insufficient use of
supporting historical data to justify this
program’s needs. Recognizing these
inaccuracies, HUD submitted a revised budget
estimate that was $1 billion lower than its
original estimate. In July 1998, we reported
that HUD had requested more funding than it
needed for Section 8 project-based contract
amendments because it did not have
effective processes for taking unexpended
balances into account when determining
funding needs as part of its budget process.
While HUD used a model to perform such an
analysis for its fiscal year 1999 budget
request, we found errors in this analysis,
including the exclusion of active contracts,
the incomplete reporting of all available
funding, and weaknesses in the method used
to estimate contract expenditure rates.
Recognizing these problems, the Congress
determined that no new funding for Section
8 amendments was necessary. Accordingly,
the Congress did not provide the $1.3 billion
that HUD had requested and rescinded an
additional $1.65 billion in excess Section 8
funding that had been appropriated for
Section 8 amendments and the Section 8
moderate rehabilitation program.



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In February 1998, HUD completed a
departmentwide effort to evaluate whether
its systems conformed to the requirements
of FMFIA and of OMB Circular A-127. HUD
reported that 38 of its 92 systems did not
conform (HUD had reported in 1997 that 85
systems did not conform).22 The Inspector
General’s March 1998 report pointed out,
however, that 21 of the 31 systems that HUD
had reclassified as conforming did not have
detailed assessments and justifications
available as required by HUD’s CFO. HUD’s
internal guidance for these reviews did not
stipulate when or how the program staff
should verify that the systems met OMB’s
requirements.

We selected three previously nonconforming
systems that were determined to be in
compliance in 1998 to obtain a better
understanding of how HUD’s staff determined
the systems were now in compliance.23 The

22
 HUD deleted 52 systems from the 1997 list of nonconforming
systems in 1998. Thirty-one systems were reclassified from
nonconforming to conforming, 14 systems were discontinued and
dropped from the list, and 7 systems were designated as
nonfinancial and dropped from the list. In total, five systems were
added to the list.
23
  We selected one system from each of three HUD program
offices—the Homeless Assistance Management Information
System, Office of Community Planning and Development;
Multifamily Tenant Characteristics System, Office of Public and
Indian Housing; and Single-Family Default Monitoring System,
Office of Housing.

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assessments prepared by the program staff
for these systems ranged in detail from a
checklist providing for “yes” and “not
applicable” responses to a list of the 12 FMFIA
requirements with narrative comments for
each requirement. The comments did not
explain how the program staff arrived at
their assessments, nor were there supporting
documents explaining how they reached
their conclusions. Program officials told us
that the assessments were based on the
program staff’s knowledge of the systems.

However, reliance on staff’s knowledge of a
system without verification or supporting
documentation does not always result in an
accurate evaluation of the system’s
compliance. In one of the three cases, for
example, we found that the program staff
had determined that the system’s internal
controls for data reliability satisfied the
requirements. OMB’s guidance on internal
controls requires that reliable data be
obtained, maintained, and disclosed in
reports produced by the system. However,
HUD’s Inspector General found, in the fiscal
year 1997 financial audit report, that the
system’s data were incomplete, untimely,
and inaccurate. In another case, we were
informed that the system’s security
requirements had been reviewed by HUD’s


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technology staff, but a later investigation by
HUD staff revealed that such a review had not
been performed.

HUD’s CFO is developing more detailed FMFIA
guidance for program staff. The CFO is also
aware of the need to evaluate the adequacy
of the FMFIA assessments and plans to
contract for an initial assessment of one of
HUD’s systems in order to determine how this
evaluation can best be accomplished for all
of HUD’s systems. These efforts are in early
stages, however, and it is likely that it will be
some time before they are completed.

In its March 1998 audit report on HUD’s fiscal
year 1997 consolidated financial statements,
the Inspector General continued to report
material internal control weaknesses in
financial management systems that were
departmentwide or FHA-wide. Among the
major deficiencies in these systems, which
were reported in prior years and continue to
some degree, the report cited (1) inadequate
assurance about the propriety of Section 8
rental assistance payments; (2) insufficient
information on the credit quality of
individual multifamily loans; (3) insufficient
information on FHA’s operations by program,
geographical area, or other relevant
component; (4) a lack of integration between


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                     program and accounting systems
                     necessitating duplicate data entry, producing
                     data inconsistencies, and preventing the
                     blending of financial and program data to
                     develop meaningful performance measures;
                     and (5) security weaknesses in both HUD’s
                     general processing controls and specific
                     application controls. In addition, according
                     to KPMG Peat Marwick LLPs audit report,
                     some of FHA’s automated systems either do
                     not provide needed management information
                     or do not produce reliable information.

                     In April 1998, we reported that participation
                     in demonstration programs has enabled HUD
                     to facilitate the financing of affordable
                     multifamily housing while limiting its
                     exposure to loss through risk sharing.24 We
                     concluded that while HUD retained
                     responsibility for monitoring its risk-sharing
                     partners’ performance, its data system for
                     monitoring the progress of credit
                     enhancement projects is unreliable.


What Remains to Be   While efforts by HUD to integrate its financial
Done                 systems are well under way, it will continue
                     to be adversely affected by inadequate
                     systems and information until its efforts are

                     24
                       Housing Finance: FHA’s Risk-Sharing Programs Offer Alternatives
                     for Financing Affordable Multifamily Housing (GAO/RCED-98-117,
                     Apr. 23, 1998).

                     Page 45                        GAO/OCG-99-8 HUD Challenges
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               successfully completed. In the meantime, we
               believe HUD needs to strengthen the
               management and oversight of its efforts to
               integrate financial systems, including its
               information technology investment
               decisions. In addition, HUD needs to continue
               its efforts to bring nonconforming systems
               into conformance with FMFIA requirements.
               As part of this process, HUD’s needs to ensure
               that its assessments of systems to determine
               conformance are well documented and
               verified. Finally, HUD needs to eliminate the
               material internal control weaknesses related
               to systems.


Key Contacts   Judy A. England-Joseph, Director
               Housing and Community Development Issues
               Resources, Community, and Economic
                 Development Division
               (202) 512-7631
               englandjosephj.rced@gao.gov

               Joel C. Willemssen, Director
               Civil Agencies Information Systems Issues
               Accounting and Information Management
                 Division
               (202) 512-6408
               willemssenj.aimd@gao.gov




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                     Linda M. Calbom, Director
                     Resources, Community, and Economic
                       Development Division Accounting and
                       Financial Management Issues
                     Accounting and Information Management
                       Division
                     (202) 512-9508
                     calboml.aimd@gao.gov


It Is Too Early to   In the past, an ineffective organizational
Assess the           structure has also contributed to
Effectiveness of     management problems throughout HUD.
Organizational       Organizational problems have included
Changes              overlapping and ill-defined responsibilities
                     and authorities between HUD headquarters
                     and field organizations and a fundamental
                     lack of management accountability and
                     responsibility.

                     In February 1997, we reported that HUD had
                     completed a field reorganization in 1995,
                     which eliminated its regional office structure
                     and transferred direct authority for staff and
                     resources to the assistant secretaries, and
                     was planning additional reorganization
                     efforts. Although HUD had not evaluated the
                     effects of its reorganization, most field
                     directors we surveyed at that time rated it as
                     successful overall and believed that the
                     reorganization had achieved most of the


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                            intended goals—namely, eliminating
                            previously confused lines of authority within
                            programs, enhancing communication,
                            reducing levels of review and approval, and
                            improving customer service.25


2020 Reform Plan            During 1997 and 1998, HUD again reorganized
Further Reorganizes         its field resources. Under its 1997 2020
Field Offices and           Management Reform Plan, HUD reorganized
Consolidates                its field resources by function, rather than
Activities in Centers
                            strictly by program, and consolidated,
                            centralized, or privatized functions and
                            responsibilities where needed. Its actions
                            included the following:

                        •   HUD  consolidated (1) single-family housing
                            insurance operations—previously carried
                            out in 81 field offices—in four
                            homeownership centers and (2) certain
                            multifamily housing development and
                            management functions—previously located
                            in more than 50 field offices—into 18 hub
                            offices.
                        •   The Office of Public and Indian Housing
                            consolidated some of its
                            functions—previously performed in 52
                            public housing offices—into 27 hub offices
                            and 16 program centers; centralized the


                            25
                             HUD: Field Directors’ Views on Recent Management Initiatives
                            (GAO/RCED-97-34, Feb. 12, 1997).

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    management of competitive grants and
    public housing operating and capital funds
    into one grants center; centralized
    applications for demolition/disposition,
    designated housing, and homeownership
    plans into one special applications center;
    and centralized activities to improve the
    performance of troubled public housing
    authorities into two troubled agency
    recovery centers.
•   The Office of Fair Housing and Equal
    Opportunity consolidated programs’
    compliance monitoring and enforcement
    functions within its existing field structure of
    48 offices into 10 hubs, 9 program centers,
    and 23 program offices.
•   HUD staff were given a primary
    mission—either performing service
    functions as a community builder or
    performing compliance functions as a public
    trust officer. The community builders are to
    be the first point of contact for HUD
    customers and are to provide technical
    expertise, have knowledge of finance
    programs, and provide economic
    development advice to the community. In
    contrast, public trust officers are to serve as
    the front line for monitoring and protection
    against waste, fraud, and abuse and for
    ensuring compliance with programs’
    requirements.


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In addition, HUD established three nationwide
centers—a Section 8 financial management
center to consolidate budgeting, financial,
and payment functions for its rental
assistance programs; a real estate
assessment center to consolidate physical
and financial assessment functions for its
real estate inventory; and an enforcement
center to consolidate its enforcement
functions. The CFO’s accounting operations
have been consolidated from 10 divisions
into one center.

As noted by the Public Strategies Group and
others, HUD expects to improve both the
efficiency and effectiveness of its operations
through these organizational changes.
Beyond allowing the agency to operate with
a smaller workforce, other expected benefits
include (1) reducing the time for
endorsements for single-family housing
insurance and development applications for
multifamily housing; (2) reducing paperwork
requirements for grant programs;
(3) insuring greater financial management
accountability, since budgetary and financial
responsibilities are centralized;
(4) improving HUD’s ability to manage public
and assisted housing portfolios though the
operations of the assessment center; and



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(5) improving HUD’s ability to enforce
contractual requirements with private
owners, public housing authorities, and
other HUD clients. In March 1998, we
reported that the benefits HUD anticipated
from the organizational changes were
generally not based on detailed empirical
analyses or studies, but rather on a variety of
factors, including some workload data, the
limited results of one pilot project, best
practices identified in HUD field offices,
benchmarks from other organizations, and
managers’ and staff’s experience and
judgment.26

HUD  has clearly linked the efforts under its
2020 Management Reform Plan to the plan it
has developed under the Results Act, so that
its success in meeting annual performance
goals and achieving strategic objectives
depends on the success of its management
reform efforts. According to HUD, its
September 30, 1997, strategic plan builds on
the foundation of management reforms. The
fiscal year 1999 annual performance plan
further states that the reforms are keyed to
work in tandem with HUD’s strategic plan and
legislative initiatives. The annual
performance plan established specific goals


26
 HUD Management: Information on HUD’s 2020 Management
Reform Plan (GAO/RCED-98-86, Mar. 20, 1998).

Page 51                     GAO/OCG-99-8 HUD Challenges
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for the 2020 management reform efforts,
including goals for HUD’s nationwide real
estate assessment, enforcement, and Section
8 financial management centers. The goals
include establishing a workforce that is
empowered, capable and accountable for
results; establishing streamlined, efficient
operations; establishing performance that
produces results; capturing, standardizing,
improving and evaluating financial and
physical data on the real estate inventory;
consolidating organizations and employees
to deal with HUD’s enforcement activities;
and establishing a unified center for
processing Section 8 payments. Each of the
goals has various indicators to help measure
whether it is being achieved.

In mid-1998, HUD issued guidelines on
developing new business and operating
plans to implement its management reforms,
along with performance goals, throughout
the agency for fiscal year 1999. In developing
these new plans, HUD revised its strategic
objectives somewhat from those in the
strategic and annual performance plans. The
business operating plan consolidates the
seven strategic objectives in HUD’s
September 30, 1997, strategic plan, into five
strategic objectives and adds one new
strategic objective, “restoring the public


Page 52                  GAO/OCG-99-8 HUD Challenges
                         Major Performance and Management
                         Issues




                         trust.” Each program area and field office
                         has drafted a business operating plan
                         showing how it expects to support the newly
                         defined strategic objectives and use
                         performance goals to assess its progress in
                         achieving the objectives. The business
                         operating plans were finalized at the end of
                         November 1998, according to a HUD official.


Organizational           During 1998, all of HUD’s various offices,
Structure Is in Place,   hubs, program centers, and specialized and
but Transfer of          nationwide centers became operational.
Functions and            However, the real estate assessment,
Responsibilities Is in
                         enforcement, and financial management
Transition
                         centers will not be performing all of their
                         centralized functions until 1999 and 2000. As
                         previously discussed, while the real estate
                         assessment center had inspected over 4,200
                         multifamily properties as of December 1998,
                         it will not begin the financial assessment of
                         multifamily properties until around April
                         1999, and it will not begin the physical
                         inspection and financial assessment of
                         public housing authorities until 1999 and
                         2000, respectively. Furthermore, as
                         discussed previously, the enforcement
                         center is not scheduled to begin receiving
                         referrals of multifamily properties from the
                         real estate assessment center until around
                         April 1999. The transfer of the Section 8


                         Page 53                  GAO/OCG-99-8 HUD Challenges
Major Performance and Management
Issues




financial management processing workload
from HUD’s public housing field offices to the
financial management center is expected to
be completed in January 1999. However, the
transfer of the Section 8 financial
management workload relating to 4,600
annual contribution contracts from the
Office of Housing field offices to the
financial management center will not begin
until February 1999 and is expected to be
completed in mid- to late summer 1999. Also,
when the transfer of the financial
management workload for approximately
21,000 housing assistance contracts from the
Office of Housing field offices to the center
occurs will depend on when contract
administrators are selected and deployed.
According to the director of the financial
management center, the transfer may not
take place until late 1999 or early 2000.

There has not yet been a significant shift of
functions and responsibilities from the field
offices to the centers except at
homeownership centers, according to the
field office managers and staff we
interviewed between July and October 1998.
Office managers also indicated that the
transfer of community service and outreach
functions and responsibilities from the field



Page 54                  GAO/OCG-99-8 HUD Challenges
                     Major Performance and Management
                     Issues




                     offices to the community builders was in a
                     transitional phase.


Field Office Staff   A recent survey by the National Partnership
Are Positive About   for Reinventing Government showed that
Organizational       70 percent of HUD’s workforce identified the
Changes              agency’s reinvention efforts as a top priority.
                     All of the managers and staff we interviewed
                     said that the organizational changes under
                     the 2020 Management Reform Plan were
                     beneficial overall. For example, some
                     managers and staff stated that their
                     responsibilities and lines of authority and
                     accountability for programs were more
                     clearly defined. In addition, some managers
                     and staff pointed out that obtaining
                     clearance on routine issues took less time
                     because program managers in the field had
                     greater authority to make decisions.
                     Managers and staff also stated that once the
                     various centers and community builders
                     assume all of their functions, the field offices
                     will have more time to carry out their public
                     trust responsibilities—namely, compliance
                     and monitoring. However, most managers
                     and staff we interviewed said the transfer of
                     functions was in transition and they
                     generally did not know when it would be
                     complete.



                     Page 55                  GAO/OCG-99-8 HUD Challenges
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Despite these generally positive comments,
15 program managers and groups of staff we
interviewed at six locations—four HUD field
offices and two centers—expressed
concerns about not having enough travel
funds to conduct on-site monitoring of
program activities. Although HUD’s travel
budget increased from $13.5 million in fiscal
year 1997 to $19 million for fiscal year 1999,
according to these officials, a lack of travel
funds has prevented them from conducting
some on-site monitoring reviews. According
to some of these officials, resources used in
implementing some of the 2020 plan’s
changes, such as staff relocation and the
outreach activities of community builders,
may have contributed to the lack of travel
funds. Additionally, the Inspector General’s
December 1998 semiannual report notes that
while travel funds for fiscal year 1999 are
similar to prior years’ expenditures, travel
funds for program staff have been reduced
by the allocation of travel funds for
community builders. According to the
report, program staff have said that travel
funds have been reduced to such a level that
the staff will not be able to perform
necessary monitoring.




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What Remains to Be   Although a new field organization structure
Done                 is now in place and operational, the transfer
                     of functions from the field offices to the
                     centers has not been completed, and staffing
                     decisions were only recently completed.
                     Furthermore, some of the centers that began
                     assuming their functions in 1998 will not be
                     carrying out all functions until 1999 and
                     2000. In accordance with the Results Act,
                     HUD needs to monitor the performance of the
                     centers as they assume their functions, as
                     well as track the other organizational
                     changes, to determine whether the 2020
                     reform plan’s goals are being achieved.


Key Contact          Judy A. England-Joseph, Director
                     Housing and Community Development Issues
                     Resources, Community, and Economic
                       Development Division
                     (202) 512-7631
                     englandjosephj.rced@gao.gov


Staffing Under       HUD has been downsizing since the 1980s. In
the 2020 Reform      the past, not having enough staff with the
Plan Is in           necessary skills—coupled with not having
Transition           adequate financial and management
                     information systems, which could have
                     helped staff oversee operations—has limited
                     HUD in performing essential functions, such



                     Page 57                  GAO/OCG-99-8 HUD Challenges
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                       Issues




                       as monitoring programs and updating
                       procedures.

                       In 1997, we reported that HUD had made
                       some progress in addressing problems
                       identified in our 1995 report, including
                       problems with staff members’ skills,
                       resource management, and staff training,
                       and had begun to implement a needs
                       assessment process to plan future training.
                       We also reported that the HUD directors we
                       surveyed at that time generally believed that
                       their staff members’ skills had improved
                       over the previous 2 years; however,
                       40 percent of the directors rated the
                       Department’s training as less than good. In
                       addition, we reported that we and the
                       Inspector General had continued to identify
                       staff resource problems in HUD’s major
                       program areas.


2020 Reform Plan       Assurance that HUD has the right number of
Has Resulted in        staff with the proper skills has been an issue
Significant Staffing   of concern to us, the Inspector General, and
Changes                others for a number of years. HUD’s 2020
                       Management Reform Plan not only
                       established a basic goal of reducing staffing
                       from about 10,500 to 7,500 but also included
                       several proposals affecting staff resource
                       capacity. For example, the plan calls for


                       Page 58                  GAO/OCG-99-8 HUD Challenges
    Major Performance and Management
    Issues




    refocusing and retraining HUD’s workforce;
    reducing more than 300 programs, through
    consolidation or elimination, to 70;
    deregulating well-run public housing
    authorities; and replacing the current field
    structure with one that consolidates
    functions within and across program areas.
    The plan also calls for implementing a
    resource estimation process that, according
    to HUD, will be a disciplined and analytical
    approach to identify, justify, and integrate
    resource requirements and budget
    allocations.

    Since the 2020 Management Reform Plan
    was announced in June 1997, HUD’s staffing,
    now totaling about 9,000 full-time positions,
    has undergone significant changes, including
    the following:

•   Over 1,000 staff left the agency as a result of
    buyouts.
•   Over 3,000 staff were voluntarily reassigned
    to what HUD termed substantially similar
    positions in the same geographical area.
•   Over 1,000 staff were placed in new
    positions under a merit staffing plan.
•   Over 1,300 staff who were unplaced after the
    reorganization were placed in permanent
    positions as of September 1998.



    Page 59                  GAO/OCG-99-8 HUD Challenges
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                   •   More than 200 new staff were hired as
                       community builders.


Staffing Targets       Much attention has focused on the origin
Under the 2020         and rationale for the downsizing targets in
Reform Plan Are        the 2020 Management Reform Plan. When
Uncertain              first announced, the plan established a target
                       of 7,500 full-time staff by 2000, a goal
                       subsequently extended to 2002. Our
                       March 1998 report on the plan found that
                       HUD’s target staffing levels were not based on
                       a systematic analysis of needs. While HUD
                       used historical workload data to apportion
                       or allocate predetermined target numbers of
                       staff among different locations or functions,
                       it did not systematically analyze how many
                       staff it needed to carry out a given
                       responsibility or function. Our finding was
                       consistent with that of HUD’s Inspector
                       General, who reported that the Department
                       adopted a target of 7,500 staff without first
                       performing a detailed analysis of its mission
                       and projected workload.

                       In an April 1998 briefing on the
                       implementation of its 2020 plan, HUD showed
                       an authorized staffing level of 7,826 under
                       the reforms. This staffing level was
                       consistent with a March 1998 report by
                       Booz-Allen and Hamilton, Inc., which


                       Page 60                  GAO/OCG-99-8 HUD Challenges
Major Performance and Management
Issues




concluded that 7,400 to 8,100 staff would be
adequate for HUD to properly fulfill its
responsibilities in 2002, assuming the
successful implementation of the new
organizations, processes, and systems;
passage of legislation to consolidate
programs; and realization of the benefits of
portfolio reengineering for multifamily
properties. In March 1998, HUD also reported
that it would maintain its current staffing
level (approximately 9,000 full-time
equivalent positions) unless (1) the Congress
enacts legislation to consolidate HUD’s
programs and (2) there is a substantial
reduction in the number of troubled
multifamily assisted properties and troubled
public housing authorities.

The 2020 Management Reform Plan also
calls for HUD to implement a proposed
resource estimation and allocation process.
In its annual performance plan for fiscal year
1999, submitted to the Congress in
March 1998, HUD noted that it no longer has
departmental systems for measuring work
and reporting time and that it lacks a single
integrated system to support resource
allocation. HUD reported that it intends to
work with the National Academy of Public
Administration to develop a methodology or
approach for resource management that will


Page 61                  GAO/OCG-99-8 HUD Challenges
                     Major Performance and Management
                     Issues




                     allow the Department to identify and justify
                     its resource requirements for effective and
                     efficient program administration and
                     management. According to the Academy, the
                     resource estimation elements will include
                     workload factors and analysis based on
                     quantifiable estimates of work requirements
                     for planning, developing, and operating
                     current and proposed programs, priority
                     initiatives, and functions. The methodology
                     will also enable HUD to estimate resources
                     for its budget formulation and execution and
                     to link resources to performance measures.
                     According to a HUD official, as of
                     November 1998, work had been completed
                     on the resource management methodology
                     and was ready to be tested at selected
                     offices, but a component to validate the
                     methodology had not yet been completed.


Staffing Was in      Most of the field offices we visited initially
Transition at the    lost staff following the 2020 staffing changes.
Offices We Visited   However, some of these staff losses were
                     recovered after HUD decided in May 1998 to
                     assign unplaced staff to permanent




                     Page 62                  GAO/OCG-99-8 HUD Challenges
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                    Issues




                    positions.27 According to HUD, most of the
                    formerly unplaced staff had been assigned
                    positions as of September 1998, and most
                    were in place. At a few locations, some of
                    the formerly unplaced staff will not be
                    reporting to their new positions until 1999.
                    While most of the offices we visited reported
                    being fully staffed, three of the centers were
                    understaffed. The enforcement center had
                    62 percent of its authorized staff level, the
                    real estate assessment center 40 percent, and
                    the Memphis troubled agency recovery
                    center 86 percent.28 HUD managers said the
                    vacant positions in these centers will be
                    advertised sometime in 1999.


Workload Was Also   Under 2020 reforms, some of the work
in Transition       previously carried out by HUD field offices
                    will be transferred to centers. Such work
                    includes financial assessment and the
                    physical inspection of multifamily
                    properties, work related to troubled public

                    27
                      After making a number of personnel decisions in the fall of 1997
                    to implement the 2020 reforms, HUD sent letters to approximately
                    3,000 employees notifying them that they had not been placed in
                    positions in HUD’s new organization. In May 1998, the Secretary
                    announced that the downsizing activity would cease and that the
                    1,300 staff who were still unplaced at that time would be given
                    permanent assignments.
                    28
                     The troubled agency recovery center’s operations will address,
                    among other things, the recommendation of the National
                    Performance Review (now the National Partnership for
                    Reinventing Government) that HUD target efforts to resolve severe
                    difficulties with problem public housing authorities.
                    Page 63                           GAO/OCG-99-8 HUD Challenges
Major Performance and Management
Issues




housing authorities, enforcement activities,
and Section 8 financial management
activities. In addition, community builders
will assume certain functions previously
carried out by field office staff. Once
workload transfers are completed, managers
at the field offices we visited expect their
workload to decrease, although these
managers did not know how much of a
reduction would occur. To date, there has
not been a significant shift in workload from
the field offices to the centers, according to
the staff and managers we interviewed from
July through October 1998. These managers
and staff said the transfer of work to the
centers and the assumption by community
builders of their responsibilities was in
transition.

Additionally, efforts to match workforce to
workload at HUD’s homeownership centers
have presented difficulties. According to the
Inspector General’s December 1998
semiannual report, HUD’s single-family
homeownership centers cannot handle the
workload currently associated with HUD’s
inventory of Secretary-held notes or
inventory of single-family properties, which
HUD receives through foreclosures. This
situation has developed because HUD’s plans
to sell the properties before they enter its


Page 64                  GAO/OCG-99-8 HUD Challenges
                     Major Performance and Management
                     Issues




                     inventory have not evolved and its plans to
                     sell the existing notes inventory have been
                     postponed. HUD is currently hiring
                     contractors to assist in managing and
                     disposing of its single-family property
                     inventory.


Managers Were        The 2020 Management Reform Plan stated
Generally Positive   that HUD would retrain the majority of its
About Training and   staff. The field office managers and staff we
Staff Skills         interviewed during our 1998 field office visits
                     reported that their training increased
                     significantly with the plan’s implementation.
                     The managers and staff were generally
                     positive about the amount of training
                     available to them and the quality of the
                     training. Training varied from that provided
                     at universities, to external professional
                     certification training, to videotaped
                     programs and substantial on-the-job training
                     needed because of staff reassignments. For
                     example, staff at the Memphis troubled
                     agency recovery center reported spending
                     most of their first 3 months on the job in
                     locally developed training programs and in
                     on-the-job-training with more experienced
                     public housing staff. Staff and managers
                     reported a need for continuing program area
                     and specialized computer training.



                     Page 65                  GAO/OCG-99-8 HUD Challenges
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                     Issues




                     In addition, managers reported during our
                     1998 field office visits that the skills of their
                     staff varied from adequate to excellent and
                     were sufficient for the staff to do their jobs,
                     except in the case of some of the recently
                     assigned, formerly unplaced staff. The
                     managers told us that while the formerly
                     unplaced staff may lack specific program
                     knowledge, they have the ability to do the
                     work.


What Remains to Be   Because staffing reforms and workload
Done                 transfers from the field offices to the centers
                     are still in transition, the effectiveness of
                     HUD’s changes in correcting staffing
                     deficiencies cannot be determined. In
                     accordance with the Results Act, HUD needs
                     to closely monitor the implementation of its
                     staffing reform efforts to ensure that the
                     field offices and staff have the resources and
                     skills to carry out the work assigned,
                     including the monitoring of programs and
                     activities and the assessment of outcomes. In
                     addition, HUD needs to complete its efforts to
                     develop a process for identifying and
                     justifying its staff resource requirements.


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


                     Page 66                  GAO/OCG-99-8 HUD Challenges
Major Performance and Management
Issues




Resources, Community, and Economic
  Development Division
(202) 512-7631
englandjosephj.rced@gao.gov




Page 67                  GAO/OCG-99-8 HUD Challenges
Related GAO Products



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

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

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

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

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

            Single-Family Housing: Improvements
            Needed in HUD’s Oversight of Property
            Management Contractors (GAO/RCED-98-65,
            Mar. 27, 1998).




            Page 68               GAO/OCG-99-8 HUD Challenges
Related GAO Products




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

HUD Management: Information on HUD’s 2020
Management Reform Plan (GAO/RCED-98-86,
Mar. 20, 1998).

Section 8 Tenant-Based Housing Assistance:
Opportunities to Improve HUD’s Financial
Management (GAO/RCED-98-47, Feb. 20, 1998).

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

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

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




Page 69                GAO/OCG-99-8 HUD Challenges
Performance and Accountability Series



             Major Management Challenges and Program
             Risks: A Governmentwide Perspective
             (GAO/OCG-99-1)

             Major Management Challenges and Program
             Risks: Department of Agriculture
             (GAO/OCG-99-2)

             Major Management Challenges and Program
             Risks: Department of Commerce
             (GAO/OCG-99-3)

             Major Management Challenges and Program
             Risks: Department of Defense (GAO/OCG-99-4)

             Major Management Challenges and Program
             Risks: Department of Education
             (GAO/OCG-99-5)

             Major Management Challenges and Program
             Risks: Department of Energy (GAO/OCG-99-6)

             Major Management Challenges and Program
             Risks: Department of Health and Human
             Services (GAO/OCG-99-7)

             Major Management Challenges and Program
             Risks: Department of Housing and Urban
             Development (GAO/OCG-99-8)




             Page 70              GAO/OCG-99-8 HUD Challenges
Performance and Accountability Series




Major Management Challenges and Program
Risks: Department of the Interior
(GAO/OCG-99-9)

Major Management Challenges and Program
Risks: Department of Justice (GAO/OCG-99-10)

Major Management Challenges and Program
Risks: Department of Labor (GAO/OCG-99-11)

Major Management Challenges and Program
Risks: Department of State (GAO/OCG-99-12)

Major Management Challenges and Program
Risks: Department of Transportation
(GAO/OCG-99-13)

Major Management Challenges and Program
Risks: Department of the Treasury
(GAO/OCG-99-14)

Major Management Challenges and Program
Risks: Department of Veterans Affairs
(GAO/OCG-99-15)

Major Management Challenges and Program
Risks: Agency for International Development
(GAO/OCG-99-16)




Page 71                     GAO/OCG-99-8 HUD Challenges
Performance and Accountability Series




Major Management Challenges and Program
Risks: Environmental Protection Agency
(GAO/OCG-99-17)

Major Management Challenges and Program
Risks: National Aeronautics and Space
Administration (GAO/OCG-99-18)

Major Management Challenges and Program
Risks: Nuclear Regulatory Commission
(GAO/OCG-99-19)

Major Management Challenges and Program
Risks: Social Security Administration
(GAO/OCG-99-20)

Major Management Challenges and Program
Risks: U.S. Postal Service (GAO/OCG-99-21)

High-Risk Series: An Update (GAO/HR-99-1)




The entire series of 21 performance and
accountability reports and the high-risk
series update can be ordered by using
the order number GAO/OCG-99-22SET.




Page 72                     GAO/OCG-99-8 HUD Challenges
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