oversight

Community Development: Weak Management Controls Compromise Integrity of Four HUD Grant Programs

Published by the Government Accountability Office on 1999-04-27.

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

                 United States General Accounting Office

GAO              Report to Congressional Requesters




April 1999
                 COMMUNITY
                 DEVELOPMENT
                 Weak Management
                 Controls Compromise
                 Integrity of Four HUD
                 Grant Programs




GAO/RCED-99-98
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-281322

      April 27, 1999

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

      The Honorable Rick A. Lazio
      Chairman, Subcommittee on Housing
        and Community Opportunity
      Committee on Banking
        and Financial Services
      House of Representatives

      In response to a request by you as Chairman of the Subcommittee on Housing and Community
      Opportunity, House Committee on Banking and Financial Services, and the former Chairman of
      the Subcommittee on Housing Opportunity and Community Development, Senate Committee on
      Banking, Housing, and Urban Affairs, this report discusses whether controls are in place to
      ensure that block grant programs’ objectives are being achieved and that funds are being
      managed appropriately. In particular, the report discusses whether (1) the Department of
      Housing and Urban Development’s (HUD) on-site monitoring of grantees under the Grants
      Management System is adequate and (2) the Integrated Disbursement and Information System
      provides the data HUD needs to accurately assess grantees’ performance.

      As arranged with your offices, unless you publicly announce its contents earlier, we plan no
      further distribution of this report for 30 days after the date of this letter.

      We are providing copies of this report to Senator Connie Mack, the Chairman of the
      Subcommittee on Economic Policy, Senate Committee on Banking, Housing, and Urban Affairs;
      the Honorable Andrew Cuomo, the Secretary of Housing and Urban Development; and other
      interested parties. We will also make copies available to others upon request. Major
      contributors to this report are listed in appendix II.




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


             About one-quarter of the Department of Housing and Urban
Purpose      Development’s (HUD) budget—almost $6 billion in fiscal year 1998—is
             devoted to four formula block grant programs that support community
             development: the Community Development Block Grant Program, the
             Home Investment in Affordable Housing Program, the Emergency Shelter
             Grant Program, and the Housing Opportunities for Persons With AIDS
             Program. While each of these programs has a different purpose, they all
             provide federal funds to help grantees—primarily state and local
             governments—finance projects and services for local residents. In 1995,
             HUD revamped its approach to managing these formula block grants by
             requiring grantees to develop a consolidated plan that lays out how they
             will use all four programs. As part of its revamped approach, HUD changed
             its monitoring of grantees to reflect the collaborative relationship it was
             trying to establish with them. Under this approach, known as the Grants
             Management System, HUD developed the Integrated Disbursement and
             Information System so that grantees could enter information into a
             database that describes their planning and projects, draw federal funds,
             and inform the Department about how they are using those funds and
             what they are achieving with them.

             Concerned about changes in HUD’s approach to program monitoring, the
             former Chairman of the Subcommittee on Housing Opportunity and
             Community Development—now the Subcommittee on Housing and
             Transportation—Senate Committee on Banking, Housing, and Urban
             Affairs, and the Chairman of the Subcommittee on Housing and
             Community Opportunity, House Committee on Banking and Financial
             Services, asked GAO to assess whether controls are in place to ensure that
             the block grant programs’ objectives are being achieved and that funds are
             being managed appropriately. In particular, GAO examined whether
             (1) HUD’s on-site monitoring of grantees under the Grants Management
             System is adequate and (2) the Integrated Disbursement and Information
             System provides the data HUD needs to accurately assess grantees’
             performance.


             The Grants Management System and the Integrated Disbursement and
Background   Information System are administered by HUD’s Office of Community
             Planning and Development through 42 field offices throughout the United
             States. The Grants Management System—which HUD developed to
             deemphasize compliance monitoring of grantees and to promote a more
             collaborative approach that includes up-front assistance and a reliance on
             grantees’ monitoring systems—uses the Integrated Disbursement and



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                   Executive Summary




                   Information System as its chief monitoring tool. Allowed considerable
                   independence in carrying out the Grants Management System, the field
                   offices develop their own work plans, conduct their own evaluations of
                   grantees to determine which need more oversight and assistance, set their
                   own monitoring schedules, and determine the type and amount of
                   technical assistance they provide to their grantees.


                   While the Grants Management System provides a logical, structured
Results in Brief   approach to managing the four block grant programs, HUD’s monitoring
                   under the system—including on-site monitoring of grantees and the
                   Integrated Disbursement and Information System—does not ensure that
                   the programs’ objectives are being met and that grantees are managing
                   their funds appropriately. HUD considers its on-site monitoring of grantees
                   essential, but GAO found this monitoring is inadequate. The five field
                   offices GAO visited (accounting for about 20 percent of all block grant
                   funds in fiscal year 1998, or $1.18 billion) conduct on-site monitoring
                   infrequently because of a shift to a more collaborative relationship with
                   the grantees and because of a lack of resources, according to the directors
                   of the field offices. Furthermore, on-site monitoring seldom targets the
                   grantees that receive the poorest evaluations from the field offices
                   compared with other grantees, and this monitoring is not uniform or
                   comprehensive because the field offices lack specific guidance. The
                   reviews of some grantees conducted by GAO and others, especially HUD’s
                   Inspector General, have identified significant problems in grantees’
                   finances and performance. And while such reviews are not generalizable
                   to all block grant programs, these reviews, along with the breakdowns in
                   monitoring, call into question the integrity of programs funded at nearly
                   $6 billion in fiscal year 1998, including their safeguards against fraud,
                   waste, and abuse. This report makes recommendations designed to
                   improve the integrity of the block grant programs.

                   For its part, HUD’s Integrated Disbursement and Information System does
                   not provide the information the Department needs to accurately assess
                   grantees’ performance and thus does not compensate for these
                   breakdowns in monitoring. Fraught with major design flaws, the
                   information system makes the process for establishing and maintaining
                   accounts difficult and provides ample opportunity for major problems
                   with entering data, does not allow such problems to be corrected easily,
                   cannot track the program income from the revolving funds that grantees
                   establish, does not provide timely and accurate information, and has
                   difficulty producing reports. GAO also determined that the security controls



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                           Executive Summary




                           for the information system are weak and therefore do not provide
                           assurance that the system is safe from fraud and abuse. This report
                           recommends modifying or replacing the Integrated Disbursement and
                           Information System, whichever is more cost-effective, and taking other
                           steps to improve system security.



Principal Findings

Monitoring Under the       Although HUD’s Grants Management System Policy Notebook states that
Grants Management          on-site monitoring is an essential tool for determining whether program
System Does Not Ensure     requirements are being met, it does not specify when on-site monitoring
                           should be done. During fiscal year 1998, the five field offices GAO reviewed
That the Programs’         conducted visits to 33 grantees, or just 14 percent of their 228 grantees.
Objectives Are Being Met   Moreover, while HUD’s annual comparative review of grantees’
and That Grantees Are      performance is intended to target the grantees most in need of attention,
Managing Their Funds       only 38 of the 85 grantees HUD had originally designated for on-site
Appropriately              monitoring were determined to be among the lowest performing grantees,
                           or those needing the most oversight or assistance. Of the 33 grantees that
                           actually received on-site monitoring, only 15 were among the lowest
                           performing. According to the directors of four of the five field offices, the
                           level of on-site monitoring fell by 88 percent from 1990 through 1998
                           because of the shift to a more collaborative relationship with the grantees
                           and a lack of staff resources to conduct on-site monitoring, combined with
                           increased responsibilities for field office staff. Despite recognition of this
                           problem, the Office of Community Planning and Development has not
                           conducted a workforce analysis since 1996. Furthermore, the on-site
                           monitoring that does occur is not uniform or comprehensive because the
                           Policy Notebook does not specify the issues that should be covered during
                           a visit. Another problem is the latitude granted field offices in evaluating
                           grantees’ performance. The Policy Notebook provides the individual field
                           offices with considerable discretion in targeting grantees for review.

                           In visits to 11 grantees, GAO found significant problems that could have
                           been detected with on-site monitoring. Some project files had no evidence
                           that the grantees monitored the recipients of funds, such as nonprofit
                           organizations, and in one instance, the grantee acknowledged that it had
                           not monitored any of its recipients in the 1998 program year. Other files
                           lacked documentation to support payments and to justify cost overruns,
                           including one overrun of about $100,000. At one grantee, the nine project




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                            Executive Summary




                            files GAO reviewed lacked such key information as certifications that the
                            recipients have low or moderate incomes, statements of work, and
                            contracts, making determinations about the grantee’s performance
                            impossible. Similarly, in 11 reports since the implementation of the Grants
                            Management System, HUD’s Inspector General has found that grantees are
                            not complying with financial and performance requirements and has
                            questioned the expenditure of about $26 million. The Inspector General
                            has also faulted HUD’s monitoring of grantees. In some cases, the Inspector
                            General could not determine the extent of this monitoring because of
                            missing information, and in other cases, HUD had not annually assessed
                            grantees, as required.


The Integrated              Although the Integrated Disbursement and Information System (IDIS) was
Disbursement and            designed to provide complete, accurate, and timely information on
Information System Is Not   grantees’ expenditures and accomplishments, these goals are not being
                            achieved because of four significant problems. First, because of flaws in
Providing Needed            the design of the information system, grantees have had to enter the same
Information                 information multiple times—into another of HUD’s information systems;
                            into IDIS, several times; and into the grantees’ own systems for reporting to
                            their city—which could result in errors simply because of the multiple
                            data entries. According to HUD, as of mid-February 1999, grantees had
                            access to a batch file transfer process, referred to as Electronic Data
                            Interchange, which allows grantees to automatically extract data from
                            their own information systems and enter it into IDIS. Another difficulty is
                            the time involved for grantees to access and use the system; in visits to
                            grantees, GAO observed that accessing the system took as long as 40
                            minutes.

                            Second, when grantees enter incorrect information into IDIS, making
                            corrections is difficult. Five of the 11 grantees GAO visited reported having
                            multiple, significant errors in the system that they could not readily rectify.
                            To make the corrections, IDIS technical staff sometimes instructed the
                            grantees to create fake activities within IDIS (“dummy accounts”) to
                            reverse the incorrect data—although some of the grantees GAO spoke with
                            were reluctant to do this because the information could appear to be
                            inaccurate or fraudulent to outside observers.

                            Third, IDIS cannot track program income as it is received from the
                            revolving loan funds that many grantees establish for such things as
                            economic development loans. IDIS operates on the assumption that
                            program income, from whatever source, should be used immediately to



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Executive Summary




fund the next activity. That is, the system cannot segregate income from
revolving funds from other program income, although regulations permit
grantees to preserve program income for reuse exclusively in their
revolving funds. To work around this limitation, HUD instructs grantees to
delay entering information on such income until they are ready to spend
the money, but this approach requires grantees to keep two sets of books
and prevents HUD from using IDIS to determine how much income grantees’
are earning from their revolving funds and if grantees are meeting a
regulatory requirement to spend grant money in a timely manner.

Fourth, while IDIS was intended to allow HUD to track grantees’
performance on a real-time basis, it does not do so. IDIS does not require
grantees to enter performance information before it releases grant funds
to them. Grantees can obtain all funds for an activity without entering any
performance information about it, and most of the grantees GAO visited
waited until the end of the program year to enter information, when they
were required to complete annual reports. And after grantees have entered
the performance information, they have found that printing reports is
difficult, requiring staff to work through a number of computer
screens—as many as 70 at one field office GAO visited. GAO also determined
that the security controls for IDIS are weak and therefore do not provide
assurance that the information system is safe from fraud and abuse.
Although GAO’s Standards for Internal Controls states that users should
have limited, or segregated, access to a computer system according to
their responsibilities,1 GAO found instances in which particular users at
grantee locations had access that allowed them to both establish activity
accounts and draw down funds, thereby increasing the opportunity for
undetected errors or fraud. GAO also found instances in which terminated
employees retained access to IDIS. According to the HUD official
responsible for IDIS security, the staff resources devoted to arranging
access for grantees are strained. Just he and two others handle the
thousands of requests for access, he explained, and they cannot review the
requests for appropriateness. In addition, GAO found that the security
officer was not knowledgeable about computer security; the officer
acknowledged that while he is familiar with computer networks, he has
not done any work in security and has had no pertinent training. HUD is
now developing a new Department-wide information system based on IDIS
to manage all of its grant programs. IDIS’ major functions are to be
converted to a Windows environment, which will be more user-friendly.
But given the extent and nature of the problems with IDIS, GAO questions its

1
 GAO Internal Control: Standards for Internal Control in the Federal Government Exposure Draft
(GAO/AIMD-98-21.3.1.).



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                  Executive Summary




                  use as a model for the Department-wide system. To address the problems
                  GAO identified, IDIS will need to be modified extensively or replaced,
                  whichever is more cost-effective.


                  To improve the integrity of the four block grant programs, GAO
Recommendations   recommends that the Secretary of Housing and Urban Development direct
                  the Assistant Secretary for Community Planning and Development to
                  (1) emphasize the importance of on-site monitoring by specifying the level
                  of grantee performance that requires it and the steps that should be taken
                  in conducting it; (2) conduct a workforce analysis to determine the
                  resources that may be required to better support the monitoring of
                  grantees; and (3) improve the Grants Management Process information
                  system by providing guidance to the field offices to ensure that they are
                  entering information consistently. GAO also recommends that HUD consider
                  whether it is more cost-effective to modify IDIS or replace it. Furthermore,
                  before IDIS is used as the base for developing the new grants management
                  information system for all of HUD’s grant programs, GAO recommends that
                  the problems it has identified with IDIS be corrected.

                  Lastly, HUD should immediately take steps to ensure that access to the
                  Integrated Disbursement and Information System (IDIS) is appropriately
                  limited and to ensure that the security officer for IDIS is fully aware of his
                  responsibilities and has the appropriate training and staff. Chapters 2 and
                  3 contain additional details on these recommendations.


                  GAO  provided HUD with a draft of this report for its review and comment.
Agency Comments   HUD  disagreed with a number of points in the report. HUD did not comment
                  directly on the recommendations aimed at strengthening the integrity of
                  the formula grant programs or improving the Integrated Disbursement and
                  Information System. (See app. I.)

                  HUD  commented that the report is unduly critical of its controls over the
                  four formula block grant programs. HUD offered two overall reasons for
                  this view. First, it commented that the report did not document the
                  large-scale changes that HUD had undertaken and that have led to
                  significant managerial improvements and strengthened accountability in
                  the programs. Second, HUD disagreed about the extent of on-site
                  monitoring of grantees that was necessary to provide effective
                  management oversight, noting it has “taken a more comprehensive,




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Executive Summary




modernistic approach”—that is, an ongoing, continuous process of which
on-site monitoring visits are one of several elements.

GAO’s report recognizes that HUD has undertaken important changes to
improve program management and accountability. It notes, among other
things, that HUD has revamped its approach to managing the programs by
requiring grantees to develop a consolidated plan that lays out how they
will use the funds for all four programs, changed its monitoring of grantees
to reflect a collaborative relationship, and developed the Integrated
Disbursement and Information System so that grantees could, among
other things, enter information describing their planning and projects and
draw federal funds. GAO’s report also concludes that HUD’s revamped
system provides a logical, structured approach to managing the block
grant programs and that HUD has recognized the need for effective systems
for overseeing the handling of program funds and the achievement of
program objectives. Furthermore, GAO added to this report information on
management improvements made to the Grants Management System that
HUD reported after GAO had completed its field work. This information
included, for example, HUD’s distribution of additional instructions for
incorporating more traditional risk elements, such as unresolved audit and
monitoring findings, into the field offices’ annual comparative review
process.

GAO also agrees that HUD has taken a more ongoing, continuous approach
to monitoring grantees and that this approach can provide useful insights
into grantees’ problems and achievements. However, GAO questions
whether, at this time, approaches other than significant levels of on-site
monitoring of grantees can adequately ensure that program objectives are
being met and that funds are being managed appropriately, given the
shortcomings of the Integrated Disbursement and Information System and
other monitoring tools, such as consultations and technical assistance
visits. GAO believes on-site monitoring is currently all the more important
to compensate for these shortcomings. This is not to say that on-site visits
should be made to every grantee each year; but rather, GAO believes
periodic visits to grantees HUD identifies as needing improvements are
essential.

HUD also did not comment on GAO’s findings about the accuracy,
completeness, and timeliness of the Integrated Disbursement and
Information System information on grantees’ expenditures and program
performance. Instead, it commented that GAO’s assessment fails to
consider recent efforts to improve it. HUD provided compensating factors



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Executive Summary




for some of the Integrated Disbursement and Information System’s
weaknesses and pointed to recent and planned changes to the system it
believed will correct these problems. GAO believes that HUD’s recent and
planned changes could, if properly implemented, improve the Integrated
Disbursement and Information System. However, the numerous additional
problems in usability, accuracy, and security still compromise HUD’s ability
to ensure the integrity of the four formula block grant programs.
Therefore, we did not make any changes to our recommendations.

GAO continues to believe that HUD’s revamped approach to managing the
programs, as implemented, does not provide adequate assurance that the
four block grant programs are meeting their objectives and that the funds
are being managed appropriately. In the draft of this report, GAO proposed
that HUD provide clearer and more detailed guidance on the factors that
should be considered in evaluating grantee performance, with a heavier
emphasis on factors that ensure compliance with program requirements.
In view of the fact that HUD has distributed guidance adding more
traditional risk factors to its annual comparative review, GAO has deleted
that proposed recommendation from the report. Furthermore, GAO
proposed that HUD improve the Grants Management Process information
system so that field offices have a single data entry point for information
on their monitoring activities. In view of the fact that on March 29, 1999
HUD added Grants Management Process screens to allow field offices to
describe their monitoring activities, GAO has deleted that proposed
recommendation from the report. In addition, GAO added information to
the report to reflect HUD’s guidance on conducting its annual comparative
review and its plans to update the Grants Management Policy Notebook.
Where appropriate, GAO has included other technical changes to the report.
GAO’s detailed responses and HUD’s comments appear in appendix I and are
discussed in chapters 2 and 3.




Page 9                                   GAO/RCED-99-98 Community Development
Contents



Executive Summary                                                                               2


Chapter I                                                                                      12
                        Four Block Grant Programs Provide Funds for Community                  12
Introduction              Revitalization and Aid to the Homeless
                        CPD’s Oversight of Grants Through the Grants Management                14
                          System
                        IDIS                                                                   19
                        Objectives, Scope, and Methodology                                     20


Chapter 2                                                                                      23
                        CPD’s Implementation of the Grants Management System Does              24
Monitoring Under the       Not Ensure That On-Site Monitoring Occurs and That the Poorest
Grants Management          Performing Grantees Are Reviewed
                        Reviews Have Identified Significant Financial and Performance          32
System Does Not            Problems at Grantees
Ensure That Grantees    Little Oversight by CPD Headquarters of Field Offices’ Operations      34
Are Managing Their      Conclusions                                                            36
                        Recommendations to the Secretary of Housing and Urban                  37
Funds Appropriately        Development
to Achieve Program      Agency Comments and Our Evaluation                                     37
Objectives
Chapter 3                                                                                      39
                        IDIS’ Design Flaws Make the System Difficult to Use, and               39
Financial and             Information Is Not Always Complete, Accurate, and Timely
Management              Security Controls Do Not Provide Assurance That IDIS Is Safe           44
                          From Fraud and Abuse
Information System Is   HUD Plans Major Changes                                                47
Not Providing the       Conclusions                                                            47
Information Needed      Recommendations to the Secretary of Housing and Urban                  48
                          Development
to Manage and           Agency Comments and Our Evaluation                                     49
Monitor Grant
Programs
Appendixes              Appendix I: Comments From the Department of Housing and                50
                          Urban Development
                        Appendix II: Major Contributors to This Report                         81




                        Page 10                               GAO/RCED-99-98 Community Development
          Contents




Figures   Figure 1.1: The Grants Management System’s Seven-Step Process           17
          Figure 1.2: CPD’s Management of Formula Grant Programs                  20
          Figure 2.1: Five Field Offices’ On-Site Monitoring of Grantees,         25
            Fiscal Year 1998
          Figure 2.2: Field Offices’ On-Site Monitoring of Poor Performing        26
            Grantees




          Abbreviations

          AIDS       Acquired immunodeficiency syndrome
          HIV/AIDS   Human immunodeficiency virus/acquired
                          immunodeficiency syndrome
          HOME       Home Investment in Affordable Housing Program
          HUD        Department of Housing and Urban Development
          IDIS       Integrated Disbursement and Information System
          CPD        Office of Community Planning and Development


          Page 11                                GAO/RCED-99-98 Community Development
Chapter I

Introduction


                         About one-quarter of the Department of Housing and Urban
                         Development’s (HUD) budget—almost $6 billion in fiscal year 1998—is
                         devoted to four formula block grant programs that support community
                         development. While those programs have different purposes, they all
                         provide federal funds to grantees to help finance projects and services for
                         local residents. The grantees include (1) 964 communities known as
                         entitlement communities—generally cities designated as central cities of
                         metropolitan statistical areas, other cities with populations of at least
                         50,000, and qualified urban counties with populations of at least
                         200,000—and (2) 48 states and some communities besides entitlement
                         communities whose programs are administered directly by HUD.

                         In 1995, HUD revamped its management of these formula block grant
                         programs. Instead of having a grantee develop separate plans for each
                         program, a grantee is now required to develop a consolidated plan that
                         lays out how it will use funds from the four programs for community
                         development. To implement the use of consolidated plans and focus on
                         performance monitoring, HUD instituted the Grants Management System—a
                         seven-step process for managing program funds and activities—which
                         placed greater reliance on the communities’ actions to police themselves;
                         it also phased in the Integrated Disbursement and Information System
                         (IDIS), which is a computerized reporting system for recording the
                         information grantees provide on their withdrawal of grant funds and their
                         accomplishments.


                         HUD’s Assistant Secretary for Community Planning and Development
Four Block Grant         administers four formula block grant programs that help communities plan
Programs Provide         and finance their growth and development and provide shelter and
Funds for Community      services for homeless people. The four programs are the Community
                         Development Block Grant Program, the Home Investment in Affordable
Revitalization and Aid   Housing Program (HOME), the Emergency Shelter Grant Program, and the
to the Homeless          Housing Opportunities for Persons With AIDS Program. The grantees in
                         these programs distribute their grant funds to some 10,000 “subrecipients,”
                         such as nonprofit providers, while the states distribute their grants to local
                         governments. These subrecipients and local governments provide services
                         directly to the beneficiaries of the programs.

                         In order to participate in the four programs, grantees must meet general
                         and specific requirements. For instance, in order to apply for one of the
                         four formula grants, a grantee must develop a long-term plan, generally for
                         3 to 5 years, that lays out activities under all four programs. This plan must



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                           Chapter I
                           Introduction




                           include an assessment of needs for housing and the homeless; a housing
                           market analysis; a 1-year action plan; certifications of compliance with
                           various regulatory requirements, standards, and procedures that the
                           jurisdiction will use to monitor activities carried out in furtherance of the
                           plan; and a citizen participation and government consultation plan.
                           Projects and activities undertaken with program funds must meet the
                           specific objectives and requirements of each program.


Community Development      The Community Development Block Grant Program has long been the
Block Grant Program        principal federal community development program, providing funding for
                           metropolitan cities and urban counties and for small cities. The program
                           provides annual grants on a formula basis that takes into account
                           population, poverty, housing overcrowding, the age of the housing, and
                           any change in an area’s growth in comparison with that of other areas. The
                           activities undertaken must address at least one of three national
                           objectives: They must (1) benefit low- and moderate-income families,
                           (2) aid in the prevention or elimination of slums or blight, or (3) meet
                           urgent community development needs. In fiscal year 1998, the Congress
                           appropriated about $4.9 billion for the Community Development Block
                           Grant Program. This funding was subject to over $700 million in set-asides,
                           including ones for Indian tribes and historically black colleges.


Home Investment in         The HOME Program provides federal assistance to participating
Affordable Housing         jurisdictions or Indian tribes for housing rehabilitation, rental assistance,
                           assistance to first-time homebuyers, and new housing construction. The
                           HOME formula for allocating funds measures a jurisdiction’s share of the
                           total need for an increased supply of affordable housing.

                           In fiscal year 1998, the Congress appropriated about $1.5 billion for the
                           HOME Program—$863 million was allocated by formula to cities, urban
                           counties, and consortiums (contiguous units of local government), and
                           $575 million went to the states. The program’s funding is also subject to
                           several set-asides.


Emergency Shelter Grants   The Emergency Shelter Grants Program is designed to supplement state,
Program                    local, and private efforts to provide emergency shelter assistance for the
                           homeless. Program funds can be used to rehabilitate or convert buildings
                           for use as emergency shelters for the homeless, to pay for certain
                           operating expenses and essential services in connection with emergency



                           Page 13                                   GAO/RCED-99-98 Community Development
                            Chapter I
                            Introduction




                            shelters for the homeless, and to conduct activities to prevent
                            homelessness.

                            Under this program, HUD makes grants to the states, units of general local
                            government, and territories on the basis of the Community Development
                            Block Grant formula. In fiscal year 1998, the Congress appropriated
                            $823 million for Homeless Assistance Grants, of which $165 million was
                            allocated for the Emergency Shelter Grants program.


Housing Opportunities for   The Housing Opportunities for Persons With AIDS Program gives states and
Persons With AIDS           localities the resources and incentives to devise long-term strategies for
                            meeting the housing needs of low-income persons with human
                            immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS)
                            or related diseases.

                            HUD  awards 90 percent of the annual appropriation by formula to eligible
                            metropolitan statistical areas and states. Metropolitan areas with
                            populations greater than 500,000 and more than 1,500 cumulative cases of
                            AIDS are eligible for grants; the most populous city in an eligible
                            metropolitan area serves as that area’s grantee. In addition, states with
                            more than 1,500 cumulative cases of AIDS in areas outside of eligible
                            metropolitan areas qualify for funds. The remaining 10 percent of the
                            program’s annual appropriation is set aside for grants awarded on a
                            competitive basis. In fiscal year 1998, the Congress appropriated
                            $204 million for the Housing Opportunities for Persons With AIDS Program.


                            HUD’s Office of Community Planning and Development (CPD) administers
CPD’s Oversight of          the four formula grant programs through 42 field offices located
Grants Through the          throughout the United States. These offices report directly to CPD’s Office
Grants Management           of Executive Services, Field Management Division. Both headquarters and
                            field offices are now relying on the Grants Management System to oversee
System                      grantees.


Field Office Organization   Each field office is managed by a director, who is responsible for ensuring
                            that the field office’s annual work plan is carried out. An annual work plan
                            is based on the field office’s annual assessment of each grantee and a
                            comparison of the grantees’ performances (known as an annual
                            comparative review). The work plan describes the actions the field office
                            plans to take for each grantee during the year. For example, grantees



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                    Introduction




                    designated as needing improvement may be scheduled for technical
                    assistance or on-site monitoring.

                    Reporting to the director are teams of CPD representatives who are
                    responsible for monitoring a caseload of grantees. Each team is managed
                    by a program manager. Several types of support staff supplement the
                    efforts of the CPD representatives. For example, financial analysts review,
                    monitor, evaluate, and provide technical advice and assistance on financial
                    matters concerning grant awards and grantees’ financial systems. Other
                    support staff include environmental, relocation and real estate, and
                    clerical staff.


CPD Headquarters’   The 42 field offices report directly to the Office of Executive Services,
Organization        Field Management Division. The division is responsible for setting
                    priorities, promulgating departmental goals, providing resources, solving
                    problems, representing the field offices in headquarters, training, and
                    evaluating field offices’ performance. It operates through eight desk
                    officers, each of whom is responsible for a number of field
                    offices—including monitoring the offices’ operations, providing
                    assistance, and providing input to the field offices’ end-of-the-year
                    evaluation signed by the Director of the Office of Executive Services.

                    The desk officers oversee the field offices through telephone
                    conversations and E-mail correspondence, occasional on-site visits, and
                    periodic queries to the Grants Management Process information system.
                    This information system is a computerized management information
                    system that the field offices use to record their interactions with their
                    grantees. For example, once a CPD representative completes a review and
                    assessment of the grantee’s annual plan for using its formula grant funds,
                    the results are entered into the Grants Management Process information
                    system.


Grants Management   In 1995, HUD introduced the Grants Management System to ensure that
System              formula block grantees are achieving high performance and are in
                    compliance with program requirements. This system deemphasized
                    compliance monitoring and placed greater emphasis on (1) promoting a
                    more collaborative approach that includes up-front assistance to help
                    grantees achieve their goals and identify and solve their problems and
                    (2) ensuring that grantees develop systems to monitor their own
                    performance. Before the Grants Management System, HUD’s primary



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activities in administering the block grant programs were to assist
communities in understanding program requirements and to monitor local
programs to ensure compliance with statutory and regulatory
requirements.

The Grants Management System and the information systems supporting
it—the Integrated Disbursement and Information System (IDIS) and the
Grants Management Process information system—are intended to help HUD
comply with the requirements of the Government Performance and
Results Act of 1993 (P.L. 103-62). The act requires agencies to establish
long-term general goals as well as associated annual goals. In addition,
agencies must measure their performance against the goals they have set
and report publicly on how well they are doing. The Grants Management
System is intended to target limited resources so that they can best be
used to achieve locally defined goals while also providing best practices to
serve as models to enhance and improve performance among all grantees.

As figure 1 shows, the Grants Management System is a seven-step process
of interaction between CPD and the grantees that involves (1) consulting,
(2) conducting a plan review and assessment, (3) monitoring a grantee’s
performance (performance-based program management), (4) reviewing
the grantee’s consolidated annual performance and evaluation report,
(5) conducting an annual community assessment, (6) conducting an
annual comparative review, and (7) systematically identifying and
encouraging the use of best practices. Broadly, the Grants Management
System establishes internal controls—plans, methods, and procedures
used to meet objectives—that involve monitoring and, according to GAO’s
Standards for Internal Controls in the Federal Government, must
themselves be monitored. Field offices enter the results of each of these
steps into the Grants Management Process information system.




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                                       Introduction




Figure 1.1: The Grants Management System’s Seven-Step Process




                                       Source: CPD.


Consultation                           CPD uses consultation as a tool to enhance the quality and effectiveness of
                                       a grantee’s plans and programs. These consultations are held as early as
                                       possible in the grantee’s process for developing its next year’s planned
                                       activities. The participants in these meetings should include the chief
                                       elected official of the community and other stakeholders, as appropriate.
                                       The discussions should be centered on relevant planning, performance,
                                       and compliance issues. When possible, these discussions should be
                                       conducted at the grantee’s offices.

Plan Review and Assessment             CPD uses the grantee’s consolidated plan and annual action plan as the
                                       basis for its program management and evaluation responsibilities. CPD’s
                                       review and assessment focuses on the plans’ completeness; their
                                       effectiveness as communication tools for citizens; the soundness of their
                                       strategies and the likelihood that they will address identified needs; and
                                       their ability to serve as the basis of future assessment and performance
                                       evaluation. CPD has 45 days from receipt of the plans to review and
                                       approve or disapprove them or the plans are automatically approved.




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                              Introduction




Performance-Based Program     CPD is to oversee the grantee’s activities throughout the program year
Management                    through performance-based management. This process includes an
                              assessment of the performance and overall effectiveness of the programs
                              implemented by the grantees as well as traditional compliance monitoring.
                              CPD must use a wide range of tools in evaluating a grantee’s performance.
                              These tools include the consolidated and action plan review and
                              assessment, performance data that the grantee enters into IDIS, the annual
                              community assessment, on-site monitoring, and consultations with
                              community officials and other stakeholders to define or improve a local
                              program.

Consolidated Annual           At the end of the program year, a grantee submits a consolidated annual
Performance and Evaluation    performance and evaluation report whose goal is to show what the grantee
Report                        has accomplished with the grant funds. The report allows CPD, local
                              officials, and the public to draw conclusions on grantees’ performance. A
                              grantee should submit this report to its CPD field office 90 days after the
                              end of the grantee’s program year, which varies by grantee. The report is
                              to cover all activities undertaken by the grantee during the program year
                              regardless of the fiscal year of the grant. If a grantee fails to submit the
                              report in a timely manner, CPD can suspend or terminate the grantee’s
                              funding. According to the Grants Management System Policy Notebook,
                              CPD’s review of the report should be completed within 60 days of receipt;
                              however, this time frame is not required by regulation.

Annual Community Assessment   Using the consolidated annual performance evaluation report and other
                              available information, such as the results of monitoring activities, CPD
                              annually assesses each grantee’s performance to determine whether the
                              grantee has carried out its planning, activities, and reporting in accordance
                              with statutory requirements and provides the grantee with a written report
                              on its performance. This assessment is to begin no later than 3 months
                              after the end of the program year. CPD is to complete the assessment
                              within 60 days and provide the grantee with a letter that cites the grantee’s
                              accomplishments and any areas that need improvement. The grantee is
                              given 30 days to comment on the assessment’s findings.

Annual Comparative Review     In conducting an annual comparative review, each field office evaluates its
                              portfolio of grantees by quality and risk and identifies grantees that it
                              considers to be performing exceptionally well, those that are performing
                              adequately, and those that need more oversight or assistance. At the
                              completion of this review, CPD develops a work plan for each grantee that
                              describes the management strategy for the grantee for the coming program
                              year. If the grantee has areas needing improvement, the field office will



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                     Introduction




                     identify actions and strategies for addressing that problem. Actions may
                     include on-site monitoring, technical assistance provided by staff and
                     contractors, peer-to-peer assistance, and training.

Best Practices       During the annual comparative review or at any time, field offices identify
                     best practices—systems and programs that work particularly well and that
                     can be used to improve the performance of other grantees. Best practices
                     are programs or projects, management tools, and/or techniques that fulfill
                     at least two of the following characteristics:

                 •   They generate a significant positive impact on those they are intended to
                     serve or manage and are replicable in other areas of the country, region, or
                     local jurisdiction.
                 •   They demonstrate the effective use of partnerships among government
                     agencies, nonprofit organizations, and/or private businesses.
                 •   They display creativity in addressing a problem.


                     IDIS is a computer-based management information system that
IDIS                 consolidates planning and reporting processes across the four formula
                     grant programs. The grantees use this system to enter information on
                     consolidated planning, establish projects and activities to draw down
                     funds, and report accomplishments. The system is supposed to reduce the
                     grantees’ reporting burden by providing a single computer system for
                     obtaining funding and reporting on the use of grant funds, regardless of
                     the formula grant program. Moreover, the system is supposed to provide
                     CPD staff with real-time performance data from the grantees, such as the
                     number of people served, jobs created, houses rehabilitated; income
                     characteristics of beneficiaries; benefits provided; information to judge if
                     national objectives are being met; and information on funds drawn down
                     by the grantees. This information is needed for CPD to evaluate grantee
                     performance and to determine the assistance is needed.

                     Figure 1.2 shows CPD’s structure and information systems in managing the
                     four formula grant programs.




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                                  Chapter I
                                  Introduction




Figure 1.2: CPD’s Management of
Formula Grant Programs




                                  Source: GAO’s analysis of CPD data.



                                  The former Chairman of the Subcommittee on Housing Opportunity and
Objectives, Scope,                Community Development—now the Subcommittee on Housing and
and Methodology                   Transportation—, Senate Committee on Banking, Housing, and Urban
                                  Affairs, and the Chairman of the Subcommittee on Housing and
                                  Community Opportunity, House Committee on Banking and Financial
                                  Services, asked GAO to assess whether controls are in place to ensure that
                                  the block grant programs’ objectives are being achieved and that funds are
                                  managed appropriately. In particular, we examined whether (1) HUD’s
                                  on-site monitoring of grantees under the Grants Management System is
                                  adequate and (2) the Integrated Disbursement and Information System
                                  provides the data HUD needs to accurately assess grantees’ performance.




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Our work focused on CPD’s four formula grant programs—the Community
Development Block Grant Program, HOME Investment in Affordable
Housing Program, Housing Opportunities for Persons With AIDS Program,
and Emergency Shelter Grants Program. We evaluated IDIS operations and
the Grants Management System, CPD headquarters’ oversight of its 42 field
offices, and 5 field offices’ oversight of 11 grantees. In selecting field
offices, we considered geographic dispersion, size, grant fund allocations,
and past performance.

In addressing both questions, we examined information from a number of
sources, including relevant GAO reports, the HUD Office of the Inspector
General’s audits of CPD’s formula grant programs, and independent
contractor’s audits and studies of IDIS and CPD’s internal controls. In
addition, we interviewed key agency officials, the independent contractors
supporting IDIS and reviewing the Grants Management System, and
representatives of various grantee organizations.

In evaluating the Grants Management System, we interviewed CPD officials
at field offices located in Fort Worth, Texas; Boston, Massachusetts; Los
Angeles, California; Coral Gables, Florida; and Omaha, Nebraska. In our
analysis, we applied the relevant criteria GAO has issued on internal
controls and guidelines for evaluations and the laws, regulations, and
procedures pertaining to the four formula block grant programs. We
evaluated the Grants Management System’s design and reviewed its
implementation in each of the five field offices. Specifically, we assessed
the caseloads of each field office representative; analyzed the offices’
process for reviewing and monitoring grantees’ action plans, transactions,
and performance information; and documented the field offices’ responses
to this information.

We also visited a total of 11 grantees managed by the five field offices we
visited. These grantees were selected on the basis of their size,
performance evaluations, and proximity to the field offices. While at these
grantees, we interviewed relevant city officials and conducted limited file
reviews to determine if HUD was effectively managing these grants,
obtained the grantees’ opinions on the level of monitoring and technical
assistance provided by the CPD field office; and validated selected
information provided through IDIS. The grantees we visited include Fort
Worth, Arlington, and Dallas, Texas; Lincoln, Nebraska; Council Bluffs,
Iowa; Medford, and Lowell, Massachusetts; Inglewood, and Ontario,
California; and Miami, and Pompano Beach, Florida.




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Introduction




We evaluated IDIS internal controls and conducted selective testing of IDIS
transactions. We interviewed key HUD officials both in headquarters and
the field as well as staff at the grantees we visited regarding IDIS’
functionality, training, and security. We also tested IDIS’ accuracy by
tracing financial and accomplishment data to source documents for
randomly selected activities.

Our review was conducted from May 1998 through April 1999 in
accordance with generally accepted government auditing standards.




Page 22                                  GAO/RCED-99-98 Community Development
Chapter 2

Monitoring Under the Grants Management
System Does Not Ensure That Grantees Are
Managing Their Funds Appropriately to
Achieve Program Objectives
              While the Grants Management System provides a logical, structured
              approach to managing the four block grant programs, CPD’s monitoring
              under the system, of which IDIS is a critical part, does not ensure that
              program objectives are being met and that funds are being managed
              appropriately. While the on-site monitoring of grantees is an essential tool
              for making such determinations, it is all the more important because of the
              shortcomings of IDIS (discussed in ch. 3) and other monitoring tools, such
              as consultations, technical assistance visits and audits performed by
              independent public accounting firms. For the five CPD field offices we
              visited, accounting for approximately 20 percent of all formula grant funds
              in fiscal year 1998 ($1.18 billion), most of the poorest performing grantees,
              identified by CPD through the annual comparative review, were not
              identified for on-site visits. And even when on-site visits were scheduled
              for the poorest performing grantees, the visits often did not occur because
              of a shift in emphasis away from intensive on-site monitoring and resource
              constraints in the field offices. Furthermore, CPD headquarters has reduced
              its oversight of the field offices because of a desire for a more
              collaborative relationship and because of resource constraints.

              Such breakdowns in monitoring make the Department vulnerable to fraud,
              waste, and abuse in its formula grants programs. In our review of 11
              grantees, we identified various problems related to the financial
              operations of and results achieved by grantees, including vouchers
              assigned to the wrong project and year and incomplete or missing
              information on key data such as recipients, statements of work, and
              contracts. In addition, since the Grants Management System was
              introduced in 1995, HUD’s Inspector General has questioned grantees’
              expenditure of about $26 million. Finally, the Inspector General and an
              independent study performed in 1998 of six field offices and 11 grantees
              reported that CPD’s monitoring is inadequate.




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                            Monitoring Under the Grants Management
                            System Does Not Ensure That Grantees Are
                            Managing Their Funds Appropriately to
                            Achieve Program Objectives




                            While HUD’s Grants Management Policy Notebook emphasizes the
CPD’s Implementation        importance of on-site monitoring in implementing the Grants Management
of the Grants               System, stating that on-site monitoring is an essential tool for determining
Management System           whether important program requirements are being met, the five field
                            offices we visited have generally conducted limited on-site monitoring of
Does Not Ensure That        grantees and of those grantees CPD identifies as most in need of oversight
On-Site Monitoring          or assistance. Furthermore, when on-site reviews occur, field offices may
                            not obtain the comprehensive, in-depth information they need to oversee
Occurs and That the         grantees’ performance. A problem exists with the definition of poor
Poorest Performing          performance because CPD has not established standard criteria for
Grantees Are                determining the level of performance grantees achieve, which means that
                            CPD has no assurance that the grantees most at risk of failing to meet
Reviewed                    program requirements are consistently being identified for more intensive
                            review.


Field Offices Have          The field offices we visited targeted about 37 percent of their grantees for
Conducted Limited On-Site   on-site monitoring but visited far fewer. As figure 2.1 shows, during fiscal
Monitoring of Grantees      year 1998, the five field offices identified 85 of their 228 grantees for
                            on-site monitoring but only conducted 33 visits—14 percent of all grantees.
and Have Not Focused on
the Poorest Performing
Grantees




                            Page 24                                    GAO/RCED-99-98 Community Development
                                          Chapter 2
                                          Monitoring Under the Grants Management
                                          System Does Not Ensure That Grantees Are
                                          Managing Their Funds Appropriately to
                                          Achieve Program Objectives




Figure 2.1: Five Field Offices’ On-Site
Monitoring of Grantees, Fiscal Year
1998




                                          Source: GAO’s analysis of CPD’s data.




                                          Furthermore, while the grantee evaluation performed during the annual
                                          comparative review is intended to maximize the use of limited resources
                                          by targeting the grantees most in need of attention, the 33 grantees visited
                                          by the five field offices were not necessarily those CPD had determined
                                          were the poorest performers. As figure 2.2 shows, only 38 of the 85
                                          grantees designated for on-site monitoring were rated among the lowest
                                          performing grantees in the annual comparative review, that is, those
                                          needing the greatest oversight or assistance. Moreover, only 15 were
                                          actually monitored, and the remaining 23 visits were cancelled because of
                                          resource limitations, according to the field office directors.




                                          Page 25                                    GAO/RCED-99-98 Community Development
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                                           Monitoring Under the Grants Management
                                           System Does Not Ensure That Grantees Are
                                           Managing Their Funds Appropriately to
                                           Achieve Program Objectives




Figure 2.2: Field Offices’ On-Site Monitoring of Poor Performing Grantees




                                           Source: GAO’s analysis of CPD’s data.




                                           According to the CPD directors of four of the five field offices, they have
                                           significantly reduced their on-site monitoring of grantees in recent years.2
                                           According to monitoring information provided by the four directors,
                                           on-site monitoring in these offices fell by about 88 percent between 1990
                                           and 1998. Nevertheless, officials of two associations that represent
                                           grantees—the National Community Development Association and the
                                           National Association for County Community and Economic
                                           Development—and several grantees we visited supported more on-site
                                           monitoring because monitoring ensures that they are generally on the right
                                           track. They said they want to know whether they are operating their
                                           programs properly and to have problems corrected before they are
                                           penalized for inadequate management. One association official said that
                                           some grantees are becoming concerned because they have not been
                                           monitored in years.


                                           2
                                            The Miami field office could not provide historical monitoring information because it was not
                                           established until 1996.



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                               System Does Not Ensure That Grantees Are
                               Managing Their Funds Appropriately to
                               Achieve Program Objectives




                               Infrequent on-site monitoring by CPD has occurred for two principal
                               reasons discussed below: (1) a shift in emphasis under the Grants
                               Management System and (2) significant resource reductions.

Shift in Monitoring Emphasis   The Grants Management System shifted the focus of the
                               government/grantee relationship from one of monitoring grantee
                               compliance with program requirements to a more collaborative
                               relationship that includes up-front assistance to help grantees achieve
                               their objectives and identify and solve problems. In line with this
                               philosophy, CPD encouraged the field offices to increase the level of remote
                               monitoring through IDIS and other tools such as IDIS reports, consultations,
                               technical assistance visits, and audits performed by independent
                               accounting firms and reduce the level of intensive on-site monitoring. In
                               February 1997, we reported that of the 32 CPD directors surveyed,
                               41 percent said that headquarters’ emphasis on completing essential
                               monitoring was low, and 66 percent believed that the amount of on-site
                               inspections should increase.3

Significantly Reduced          As the directors of the five field offices said, and as we reported in
Resources                      February 1997, the level of on-site monitoring is lower than it should be
                               principally because of a lack of staff and travel funds. Resources have
                               been reduced while responsibilities have increased. CPD lost almost
                               one-fourth of its staff—264 people—between 1992 and 1997. At the same
                               time, staff have had to take on new responsibilities for programs worth
                               billions of dollars: homelessness programs, technical assistance grants,
                               and Empowerment Zone and Enterprise Community grants.4 This caused
                               the annual grants per employee to double from about two to about four
                               over approximately the same period. In addition, the staff in some field
                               offices have to carry out administrative tasks because of administrative
                               staff shortages. CPD directors told us that staff reductions, combined with
                               workload increases, have forced them to have to make sacrifices, and they
                               consistently mentioned the elimination of on-site monitoring as one of
                               those sacrifices.

                               Furthermore, CPD directors told us that the Grants Management System
                               was not generating resource efficiencies as they had hoped. While IDIS,
                               along with the Grants Management Process information system, were to


                               3
                                   HUD: Field Directors’ Views on Recent Management Initiatives (GAO/RCED-97-34, Feb. 12, 1997).
                               4
                                CPD oversees a number of programs designed to reduce homelessness, technical assistance grants to
                               help grantees correctly administer CPD programs, and the Empowerment Zone and Enterprise
                               Community Program, which is designed to help selected distressed communities develop
                               comprehensive approaches for dealing with their social and economic problems.



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                             System Does Not Ensure That Grantees Are
                             Managing Their Funds Appropriately to
                             Achieve Program Objectives




                             foster the efficiencies of remote monitoring, IDIS requires substantial time
                             to learn and maintain, and the annual consultations also use time and
                             travel dollars, the directors reported. According to the directors, these
                             extra requirements make on-site monitoring more difficult.

                             Officials in one field office told us that the cost of travel is a major factor
                             in determining which grantees will receive on-site monitoring because the
                             field office has to cover a large geographic area. They said that the
                             grantees that are relatively close to the field office receive the greatest
                             oversight. For instance, while this field office had nominated a grantee for
                             a best practices award, field office staff still made weekly technical
                             assistance visits to that grantee because it was nearby. Yet, of the field
                             office’s 16 poorest performing grantees, only 3 received on-site
                             monitoring. In May 1997, CPD acknowledged these problems in its
                             Management Reform Plan, which noted the following:

                             “Among . . . [CPD’s] key problems are: a. Staff and travel funds are too limited to do
                             adequate on-site monitoring and validation of high risk activities of grantees. b. CPD
                             approves over 1,300 competitive grants a year and has to monitor cumulatively many
                             thousands of competitive grants, a workload increasingly difficult to handle with the loss of
                             23% of staff since 1992 and continued drop in staff under the downsizing. c. With the
                             approval of hundreds of economic development projects in the past several years, CPD has
                             insufficient staff resources in both number and expertise to monitor these programs
                             adequately.” 5


                             Despite recognition of this problem, CPD has not conducted a workforce
                             analysis to determine its staffing needs and accurately target its staff
                             resources since 1996. Furthermore, while HUD’s travel budget increased
                             from $15.6 million in fiscal year 1998 to $19 million for fiscal year 1999,
                             HUD decreased CPD’s field office travel allocation from $416,051 in 1998 to
                             $412,000 in 1999. Moreover, the field office travel allocation for fiscal year
                             1999 is over $100,000 less than it was in fiscal year 1994.



On-Site Monitoring That Is   Before the Grants Management System was established, field offices used
Conducted Is Not Uniform     the CPD Monitoring Handbook more universally. This handbook specified
or Comprehensive             the level of monitoring warranted for high-risk grantees and the scope and
                             intensity of the on-site review. It indicated that on-site monitoring should
                             include validating reported information by reviewing case files; reviewing
                             financial information; spot-checking capital improvement projects; and


                             5
                              The HUD 2020 Management Reform Plan presents a fundamental management overhaul that focuses
                             on improving HUD’s management of its programs and staff.



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Monitoring Under the Grants Management
System Does Not Ensure That Grantees Are
Managing Their Funds Appropriately to
Achieve Program Objectives




visiting sites that provide direct services to beneficiaries, such as a
homeless shelter. It also included checklists that focused on compliance
with program requirements, such as the grantee’s progress in achieving
project objectives, compliance with national objectives for the Community
Development Block Grant Program, grant administration, citizens’
participation, and property rehabilitation activities, among others. Some of
these activities were reviewed by CPD representatives, while others were
reviewed by specialists such as financial analysts. Staff had to report on
the results of the review in the form of a letter to the grantee and other
relevant officials. According to one field office director we spoke with, a
comprehensive on-site review would usually take about a week or two to
complete.

Under the Grants Management System, however, CPD has no assurance
that such comprehensive on-site monitoring will occur. The Grants
Management System Policy Notebook does not ensure that field offices
will conduct comprehensive monitoring of the grantees that they do visit
because it does not provide specific procedures that have to be carried out
during such a visit. Two field office directors and the Director of CPD’s
Field Management Division said that the principles in the monitoring
handbook still applied but that field offices are not required to follow
them. Field offices have significantly curtailed the actions they take during
on-site monitoring.

Instead, monitoring under the Grants Management System targets the
specific aspects of grants administration in which the grantee needs
improvement. For example, one field office focused its monitoring visits
only on the grantees’ monitoring of subrecipients. Of the five offices that
we visited, only one office had conducted a comprehensive on-site
monitoring of a grantee in 1998. According to the field office director, the
field office no longer routinely conducts comprehensive on-site
monitoring, but did so in this instance in response to a citizen’s allegation
of fraud in the use of federal funds.

The lack of specific monitoring guidance thus allows for significant
variation in the way HUD field offices oversee almost $6 billion in formula
grant funds. While one field office we visited focused its half-day
monitoring visits only on the grantees’ monitoring files for subrecipients,
another office conducts complete multiday reviews of one of a grantee’s
programs. In a third field office, the complete fiscal year 1998 on-site
monitoring for one grantee that receives $28 million annually in CPD




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                           System Does Not Ensure That Grantees Are
                           Managing Their Funds Appropriately to
                           Achieve Program Objectives




                           formula allocations consisted of a one-day visit to one HOME project by a
                           single HUD employee, who had never before conducted a monitoring visit.

                           According to HUD, the Grants Management Policy Notebook will be revised
                           to provide detailed guidance to field offices on ensuring compliance with
                           program laws and regulations. This guidance is scheduled to be made final
                           and distributed at the end of July 1999.


Tools Other Than On-Site   The directors of the five CPD field offices we visited generally agreed that
Monitoring Are Not         comprehensive on-site reviews provide a higher level of assurance of
Providing Accurate and     program compliance and proper use of funds than other available
                           tools—IDIS reports, consultations, technical assistance visits, and audits
Complete Information       performed by independent public accounting firms. These other tools do
                           not provide the detailed information that field offices need to effectively
                           monitor program performance, according to the directors. As we discuss
                           in chapter 3, we found during our visits to field offices that grantees were
                           not always entering complete and accurate information into IDIS and that
                           the system cannot provide timely and accurate information on grantees’
                           performance. In addition, some CPD representatives were not using IDIS to
                           retrieve information on grantees’ performance. Furthermore, field offices’
                           consultations with grantees are primarily geared to providing local
                           officials with an evaluation of the grantees’ performance and to identifying
                           technical assistance needs and resources, rather than reviewing projects
                           and activities and documentation supporting those activities. Similarly,
                           technical assistance visits are made to provide the grantees with
                           information to help them operate their programs more effectively. One
                           director acknowledged that field office staff can make observations on
                           grantees’ financial and performance matters during these visits, but the
                           visits’ primary purpose is not monitoring. Moreover, technical assistance is
                           often performed by contractors who do not have a monitoring role.
                           Finally, according to the Director of the Field Management Division and all
                           five field office directors, independent public accounting audits do not
                           provide enough detailed program performance information.6




                           6
                            The Single Audit Act, 31 U.S.C. 7501-750, provides uniform audit requirements for all federal
                           assistance programs, that award funds to states, local governments, or nonprofit organizations. Rather
                           than being a detailed review of individual grants or programs, a single audit is an organizationwide
                           financial and compliance audit that focuses on accounting and administrative controls. A single audit
                           is designed to advise federal and grantee officials and program managers on whether an organization’s
                           financial statements are fairly presented and to provide reasonable assurance that federal financial
                           assistance programs are managed in accordance with applicable laws and regulations. It is not
                           intended to provide detailed performance information.



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The Grants Management     The latitude allowed in evaluating the level of grantees’ performance is
System Does Not Provide   another problem for monitoring under the Grants Management System.
Uniform Criteria for      The field offices have considerable discretion in setting their annual work
                          plans—including deciding on which grantees are poor performers and
Evaluating Grantees’      what type of oversight they may need. The Grants Management Policy
Performance               Notebook, which describes how to manage a grantee’s performance,
                          provides only general criteria for evaluating this performance. These
                          criteria include the adequacy of the grantee’s consolidated plan and the
                          grantee’s efforts to (1) address the continuing needs of the homeless
                          population, (2) provide affordable housing to all populations and income
                          groups, (3) increase economic opportunity, (4) provide a suitable living
                          environment for its recipients, and (5) meet program requirements. The
                          policy notebook leaves it to the individual field office to determine which
                          of these factors to weigh more heavily in targeting grantees for review. On
                          the basis of these criteria, the field office is to determine which grantees
                          are performing exceptionally well, performing adequately, or needing
                          more oversight or assistance.

                          While these criteria include an important focus on results in the
                          community, they do not provide assurance that field offices will
                          consistently emphasize the factors that will target grantees on the basis of
                          compliance with internal controls designed to protect against fraud or
                          abuse. According to two field office directors, in determining which
                          grantees need to be monitored more closely in the coming year, the Grants
                          Management System shifted the focus from the factors that could result in
                          the inappropriate use of federal funds to the more performance-based
                          factors presented in the Grants Management Policy Handbook.
                          Furthermore, in reviewing the Community Development Block Grant
                          Program, an independent accounting firm noted the need to identify at-risk
                          grantees by using more traditional risk factors, such as unresolved audit or
                          monitoring findings, the number of subgrantees and subrecipients
                          receiving funds, the amount of program income, the size of the grant, the
                          last date of monitoring, and staff turnover.7 In response to this report, on
                          September 29, 1998, HUD promulgated risk analysis guidance that included
                          most of these risk factors.




                          7
                           Soza & Company Ltd. U.S. Department of Housing and Urban Development Office of Audit
                          Resolution, Verification Review of Material Weakness 91-02, Community Development Block Grant
                          “CDBG”, March 19, 1998.



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                         Our visits to 11 grantees and 11 reports by HUD’s Inspector General, while
Reviews Have             not generalizable to all block grant programs, identified significant
Identified Significant   problems that could have been identified if field offices were conducting
Financial and            comprehensive on-site monitoring. Specifically, at several grantees, we
                         found problems in the monitoring of subrecipients that ranged from a lack
Performance              of records showing that such monitoring had been done, although the
Problems at Grantees     grantees said monitoring had occurred, to an acknowledgement by one
                         grantee that no monitoring had occurred during the 1998 program year.
                         Without subrecipient monitoring, HUD has no assurance that subrecipients
                         are complying with program requirements and are achieving their intended
                         objectives.

                         For other grantees, in examining the project files, we found inadequate
                         documentation to support payments to contractors, payment vouchers
                         that were unrelated to the project, and a lack of documentation to justify
                         project overruns. For example, at one grantee, the project files were
                         missing so much information that we could not determine if we had
                         identified all of the problems. This grantee had incomplete or missing
                         information—on such key data as the qualifications of recipients served,
                         such as certifications that recipients are of low or moderate-income,
                         statements of work, and contracts—in the nine project files we reviewed.
                         Although this grantee received a monitoring visit in the 1998 program year,
                         the monitoring was targeted to specific program areas, and the monitoring
                         report did not disclose the problems we identified. For example, for one
                         project budgeted for $30,000, the file included two contracts indicating
                         that it had received $40,000 and then another $60,000. We were told that
                         the latter $60,000 contract was cancelled, but the file included no
                         documentation of this. For another project budgeted for $135,000, the file
                         included weekly progress reports, but payment vouchers (justifying the
                         payments made to contractors) and other important documents, such as a
                         statement of work, were missing. And for still another project, the file
                         indicated that the project was budgeted at $145,000 and internal
                         accounting records indicated that over $300,000 was spent, but neither of
                         these figures could be reconciled with the withdrawal of approximately
                         $240,000 that was recorded in IDIS. The file did not include any justification
                         or support for the discrepancies and the overrun. This grantee was not
                         alone in poorly accounting for its use of funds. For example, at another
                         grantee, we could not reconcile payment vouchers with project totals for a
                         street-paving project that cost $259,200.

                         Our reviews also showed problems with reporting accomplishments and
                         determining whether grantees were following regulations. For example, at



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another grantee, we observed the double-counting of accomplishments
from one project. In particular, the project file supported only half as
many demolitions as were reported in IDIS.

In 11 reports based on reviews of some grantees, HUD’s Inspector General
found that grantees are not complying with financial and performance
requirements and consequently has questioned the expenditure of about
$26 million in grant funds since HUD began using the Grants Management
System. For example, the Inspector General reported that a grantee had
improperly charged over $2 million in administrative costs to prior
program years. Since the costs were transferred before the end of the
program year, the grantee did not disclose these costs in its annual
performance report. Without on-site validation of the information in the
report, the CPD field office could not determine that improper transfers had
been made. According to the CPD representative who was responsible for
this grantee, the limited monitoring that was done during this period could
not have identified the conditions the Inspector General had uncovered.

In another audit, the Inspector General found significant weaknesses in a
grantee’s internal controls for its housing rehabilitation program under its
Community Development Block Grant Program. For example, the
Inspector General identified 11 houses that had recently been
rehabilitated, inspected, and approved by the grantees’ inspectors.
However, the Inspector General’s inspectors said these houses should not
have passed inspection. According to the Inspector General’s report, the
deficiencies identified by the Inspector General’s inspectors had been
allowed to go uncorrected because the grantee’s inspectors were not
specifically trained to perform inspections and were pressured to perform
cursory inspections in order to meet production goals. In addition, the
Inspector General reported that because the grantee did not have any
procedures for collecting payments on rehabilitation loans, the grantee
had a delinquent loan balance of over $100,000. Some of these loans had
been delinquent for over 8 years. The Inspector General reported that this
audit was initiated by the grantee, not CPD, following up on an audit
conducted by an independent accounting firm.

HUD’s Inspector General has also specifically faulted CPD’s monitoring of
grantees. For example, in its audit of HUD’s fiscal year 1997 financial
statement,8 the Inspector General focused on whether the Grants
Management System had been implemented and whether the system was

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



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                      providing adequate oversight of grantees. For some of the grantees, the
                      Inspector General could not determine the extent of CPD’s monitoring of
                      grantees’ performance because it could not find documentation of
                      monitoring in CPD’s files. It also found that CPD had not done annual
                      community assessments for some grantees. Though these required
                      assessments are needed in order to reach an opinion on the grantees’
                      performance for the year, CPD officials explained that staff shortages
                      resulting from HUD’s downsizing during fiscal year 1997 had prevented
                      them from conducting the assessments. The Inspector General concluded
                      that CPD could not ensure that all grantees were expending funds only on
                      eligible activities and individuals.

                      In addition, the independent accounting firm assigned to the verification
                      review of CPD’s actions to correct material weaknesses in the Community
                      Development Block Grant Program faulted CPD’s practices for monitoring
                      grantees. Its report indicated that four of the six field offices visited had
                      not conducted significant on-site monitoring visits for fiscal years 1996 and
                      1997.


                      In addition to the problems in CPD’s monitoring of grantees, CPD
Little Oversight by   headquarters is not adequately monitoring the field offices’ operations.
CPD Headquarters of   According to representatives of an independent accounting firm that
Field Offices’        reviewed CPD’s actions to correct material weaknesses in the Community
                      Development Block Grant Program (which represents almost
Operations            three-quarters of the funding for the four block grant programs examined),
                      CPD headquarters’ oversight of the field offices is almost nonexistent. The
                      March 1998 report states the following:

                      “CPD had conducted Field Office Reviews in the past, however these reviews have been
                      discontinued. We were unable to identify any procedures being performed by Headquarters
                      that would be adequate for evaluating the quality and sufficiency of procedures being
                      applied by the Field Offices.”


                      In addition, the representatives of the accounting firm said that the lack of
                      headquarters oversight represents a material weakness in internal
                      controls. The report recommended that CPD headquarters design a
                      methodology for determining the adequacy of field offices’
                      compliance-monitoring procedures. HUD is still reviewing the report to
                      determine how it will respond to the recommendations.




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Headquarters staff infrequently visit the 42 field offices—making fewer
than five visits in the last 2 years—according to the Director of the Field
Management Division. When they do visit, headquarters staff do not have
to formally report their findings. These limited visits to field offices reflect
a change in headquarters’ oversight in recent years. One desk officer told
us that headquarters had moved away from field office monitoring in an
attempt to improve relationships with the field offices—headquarters
believed that these visits antagonized the field offices. However, he
believed that monitoring visits helped bring headquarters closer to the
problems and realities that the field offices faced. In the past, he
explained, these visits always generated findings, and the field offices
welcomed the feedback and suggestions for improvement that resulted.
But now, he stated, he does not have enough information to assess the
field offices’ performance.

In addition, the desk officers’ primary monitoring tool—the Grants
Management Process information system—yields incomplete and
inconsistent data. Consequently, headquarters staff do not know if field
offices are fulfilling their program responsibilities. Our review of a Grant
Management Process report on the field offices’ compliance with the time
requirement for approving or disapproving grantees’ annual action plans
showed that the field offices are interpreting the requirement differently
and consequently entering different, sometimes misleading, approval dates
into the system.9 For example, one field office we visited believed that the
approval date was the day the CPD representative approved the plan;
another, that it was the date the field office director approved the plan;
and a third, that it was the date the local Congressman notified the grantee
that the grant had been approved. Moreover, the desk officer responsible
for one of these offices could not explain an apparently significant number
of late approvals. However, in our visit to this field office, we learned that,
for many of the plans reviewed, field office staff had either incorrectly
entered the data or had found deficiencies in the plans but failed to reject
them while they waited a resolution of the deficiencies. On-site
monitoring, or even more questioning of the field offices, would have
identified this problem and allowed the headquarters staff to resolve it.

Finally, while the Grant Management Process’s information system is
supposed to be the headquarters staff’s principal monitoring tool, it has
not been useful for recording information about field offices’ monitoring
of grantees. At the time of our review, it did not contain a clear data entry

9
 Field offices are required to review and approve or disapprove grantees’ annual action plans within 45
days after receiving the plan. If the field office does not act on the plan within 45 days, the plan is
automatically approved.



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              point for field offices to record the results of their monitoring activities in
              the database. Therefore, field offices entered these results in different
              locations in the system. In order to determine where field offices were
              recording this information, HUD hired a contractor to peruse the system
              and identify all recorded information that appeared to be related to
              monitoring. The contractor’s report—covering the third and fourth
              quarters of fiscal year 1997—showed that the field offices were entering
              monitoring data in three of the system’s eight data entry points, and no
              monitoring information was entered for more than 75 percent of the
              grantees that were scheduled for on-site monitoring. Without a specific
              area in which field offices can record monitoring activities, headquarters
              staff cannot be assured that they have access to all pertinent monitoring
              information to oversee field offices’ operations.

              We were told by HUD that a process for tracking on-site monitoring
              activities was implemented. This includes the addition of Grants
              Management Process screens to allow field offices to describe their on-site
              monitoring activities in terms of the program monitored, program issues
              covered, the number of days spent with the grantee, issues identified and
              sanctions imposed. According to HUD, this addition to the system was
              implemented on March 29, 1999.


              As it is currently implemented, CPD’s Grants Management System provides
Conclusions   little assurance that four block grant programs, funded at nearly $6 billion
              annually, are meeting their objectives and that the funds are being
              managed appropriately. While the Grants Management System’s approach
              to monitoring seems logical, it has not been effective. The field offices we
              visited are conducting limited on-site monitoring of grantees, although
              such monitoring is all the more important because of the shortcomings of
              IDIS. And when on-site monitoring does occur, it does not focus on the
              grantees who are the poorest performers, and it is not uniform or
              comprehensive. These problems are caused in part by a lack of uniform
              criteria on how to assess the level of performance for each grantee and the
              lack of specificity in the broad criteria that do exist to determine grantees’
              compliance with program requirements, although such requirements are
              intended to encourage the safeguarding of funds. According to the
              directors of the field offices, the level of on-site monitoring is also lower
              because of a combination of a lack of staff resources and travel funds and
              increased responsibilities.




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                         While we found these problems with field offices’ monitoring of grantees,
                         we also found that the headquarters staff’s oversight of the field offices
                         was problematic. Headquarters staff rarely visit the field offices, and while
                         the Grants Management Process information system is intended to be
                         headquarters’ staff primary tool to oversee the field offices’ monitoring of
                         grantees, at the time of our review, the information system did not contain
                         a specific data entry point for field offices to enter data on their
                         monitoring activities.

                         In all, HUD has no assurance that program requirements are being fulfilled.
                         These requirements are critical to its goal of restoring the public trust in
                         its management of billions of dollars in formula grant funds. Until HUD
                         strengthens its monitoring of the financial operations of and results
                         achieved by program grantees and its field office operations, the integrity
                         of its formula grant programs is at risk.


                         In order to ensure that the Grants Management System identifies problems
Recommendations to       in achieving program objectives and safeguarding grant funds and protects
the Secretary of         the integrity of the block grant programs, we recommend that Secretary of
Housing and Urban        Housing and Urban Development direct the Assistant Secretary for
                         Community Planning and Development to take the following actions to
Development              improve oversight by field offices and headquarters:

                     •   Emphasize the importance of on-site monitoring by specifying the level of
                         grantee performance that requires on-site monitoring and the steps that
                         should be taken in conducting such monitoring.
                     •   Conduct analyses to determine the staffing and travel funds that may be
                         required to better support the monitoring of grantees and direct available
                         resources to the field offices as needed.
                     •   Direct desk officers within the Office of Community Planning and
                         Development at headquarters to visit their field offices to better assess
                         how well the field offices are monitoring their grantees, to determine what
                         problems the field offices are experiencing, and to provide technical
                         assistance.
                     •   Improve the Grants Management Process information system by providing
                         guidance to the field offices to ensure that they are entering information
                         consistently.


                         While HUD did not comment on our recommendations, it commented that
Agency Comments          our report did not recognize its recent improvements to internal controls
and Our Evaluation

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and that our report focused too much on on-site monitoring. Specifically, it
commented that its revamped approach to grants management ensures
basic program compliance through a continuing, on-going process that
includes on-site monitoring along with other elements. HUD commented
that the majority of its monitoring activities can be done remotely,
including review of key documents, the high risk assessment process, the
grantee consultation, and the effective use of the Grants Management
Process information system and IDIS. HUD also stated that it conducts
on-site monitoring when conditions require it. Furthermore, HUD
commented that it has distributed guidance adding more traditional risk
factors to its annual comparative review and is in the process of updating
its Grants Management Policy Notebook and Grants Management Process
information system to better account for on-site monitoring.

We disagree that the majority of monitoring activities can be done
remotely. Our report shows that the tools other than on-site monitoring
are not, at this time, providing the accurate and complete information HUD
needs to effectively monitor program performance. We believe the
questionable quality of the data from remote monitoring sources such as
IDIS increases the need for on-site monitoring at this time. Additionally, for
the field offices we visited, we found that HUD did not conduct on-site
visits to many of the grantees it regarded as the poorest performers in
1998. Consequently, we continue to believe that HUD’s approach to
managing the programs, as implemented, provides little assurance that the
four grant programs are meeting their objectives and that the funds are
being managed appropriately.

In a draft of this report, we proposed that HUD provide clearer and more
detailed guidance on the factors that should be considered in evaluating
grantee performance, with a heavier emphasis on the factors that ensure
compliance with program requirements. In view of the fact that HUD has
distributed guidance adding more traditional risk factors to its annual
comparative review, we deleted our proposed recommendation from the
report. Furthermore, GAO proposed that HUD improve the Grants
Management Process information system so that field offices have a single
data entry point for information on their monitoring activities. In view of
the fact that on March 29, 1999 HUD added Grants Management Process
screens to allow field offices to describe their monitoring activities, GAO
has deleted that proposed recommendation from the report. In addition,
we added information to our report to reflect HUD’s new guidance on
conducting its annual comparative review and its plans to update the
Grants Management Policy Notebook.



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                        CPD’s chief monitoring tool for the Grants Management System—the
                        Integrated Disbursement and Information System (IDIS)—does not produce
                        the complete, accurate, and timely information that the Department
                        should obtain from a computerized database to effectively manage and
                        monitor almost $6 billion in block grants. The first of nine new standard
                        integrated systems deployed by HUD to manage and monitor the programs,
                        IDIS has major design flaws that make it difficult for grantees to enter
                        information accurately and for field office officials and grantees to use the
                        information to monitor performance.10 Furthermore, CPD cannot ensure
                        that IDIS is safe from fraud and abuse because it has not put into place the
                        security controls needed to safeguard the formula block grant funds. CPD
                        has not developed a security plan to control and monitor access to the
                        system to minimize opportunities for unauthorized or inappropriate
                        transactions. In addition, CPD has not ensured that the security officer in
                        charge of the system has clearly defined duties and the technical expertise
                        and staff needed to oversee the system. HUD is now developing an
                        agencywide information system that manages all 51 grant programs for the
                        agency, and it plans to use IDIS, along with a grants management system
                        being developed by the Department of Health and Human Services, as the
                        basis for the new system.


                        Although IDIS was designed to provide CPD with accurate, complete, and
IDIS’ Design Flaws      timely information on grantees’ expenditures and program performance,
Make the System         these goals are not being achieved because of four significant problems.
Difficult to Use, and   Specifically, (1) the process for establishing and maintaining grant activity
                        information is time-consuming and cumbersome and provides ample
Information Is Not      opportunity for major data entry problems, (2) correcting major data entry
Always Complete,        problems in IDIS is difficult, (3) IDIS does not readily enable grantees to
                        accurately report income generated by grant-funded revolving funds
Accurate, and Timely    (program income), and (4) grantees find it difficult to produce
                        comprehensive and timely reports using IDIS.




                        10
                          In 1991, HUD initiated the Financial Systems Integration effort to develop and deploy an integrated
                        financial and management information system that would provide timely and accurate information to
                        managers and enable HUD to properly manage its financial resources. IDIS is 1 of 9 standard
                        integrated systems approved under the system integration effort that would replace about 100 financial
                        and mixed systems. See, HUD Information Systems: Improved Management Practices Needed to
                        Control Integration Cost and Schedule (GAO/AIMD-99-25, Dec. 18, 1998).



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IDIS’ Design Makes        IDIS information is critically important in managing and monitoring
Establishing and          grantees’ performance given CPD’s emphasis on remote monitoring (as
Maintaining Project and   discussed in ch. 2). Nevertheless, the system is so cumbersome that
                          grantees, even though trained on IDIS, find it difficult to use to set up
Activity Accounts         project and activity accounts and to maintain those accounts. For most of
Unnecessarily Difficult   the grantees we visited, grantees had to enter data two or more times,
                          found accessing and using IDIS to be time consuming, and had to work
                          through a complicated series of steps to enter or retrieve information.

                          To set up project and activity accounts, grantees have to enter much of the
                          same information into two separate HUD information systems—IDIS and
                          HUD’s Community 2020 system11 (or its precursor, Consolidated Planning
                          Software). These systems are not automatically linked so that entering
                          data into one system would automatically update both systems. In addition
                          to the errors that grantees could make simply because they have to enter
                          the data twice, other types of errors could occur that reduce the quality of
                          the information produced by these systems. For example, one grantee we
                          visited numbered projects differently between the two systems;
                          consequently, it was difficult to compare the grantees’ project plan with
                          the actual use of grant funds. While this initial set of double data entries is
                          time-consuming and cumbersome, IDIS’ design provides yet another
                          opportunity for redundancy. For example, for some projects grantees must
                          enter nearly exactly the same information a third time to describe the
                          projects’ activity. In one field office, the IDIS focal point told us that for
                          98 percent of the office’s projects, data had to be entered three times.

                          Redundant data entry problems also occurred for most of the grantees we
                          visited because they must enter activity information into their own
                          automated accounting systems, as well as HUD’s systems, to comply with
                          their city’s requirements. At the time of our review, CPD had not developed
                          a reliable method to electronically transfer data between grantees’ systems
                          and IDIS. This problem is especially troublesome for states that must enter
                          data for all small cities under their program. For example, Texas—which
                          at the time of our review had not yet started using IDIS—has the largest
                          state community development program—287 subrecipient cities for which
                          it must enter data. According to HUD, as of mid-February 1999, grantees
                          had access to a batch file transfer process, referred to as Electronic Data



                          11
                            HUD’s Community 2020 software contains information on HUD projects, such as housing and
                          community development projects; funding sources; performance indicators; and neighborhood
                          locations. It combines this information with U.S. Bureau of the Census’ geographic and demographic
                          information to provide a means for community constituents to understand where and how HUD
                          resources are being spent.



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                         Interchange, which allows grantees to automatically extract data from
                         their own information systems and pass it to IDIS.

                         Another difficulty for grantees is simply the amount of time it can take to
                         access and use IDIS. Each time grantees enter information into IDIS, they
                         use their desktop computers to link to a communications system, dial into
                         IDIS, and enter a user identification number and password to obtain access
                         to IDIS at authorized levels. We observed that it took up to 40 minutes to
                         obtain access to IDIS. Remaining connected to IDIS is also difficult. One
                         grantee estimates that it loses its connection to IDIS prematurely 50 percent
                         of the time.

                         Once they have obtained access, IDIS’ design forces grantees to work
                         through a complicated series of steps to enter or retrieve information. The
                         grantees must use designated function keys on the computer keyboard to
                         take required actions at various points in this process, but the meaning of
                         the function keys sometimes changes from screen to screen, causing some
                         confusion and missteps for the grantees and prolonging the time it takes to
                         enter data. In addition, a grantee must work through and exit two separate
                         series of screens in order to enter both financial and performance data for
                         the same activity.


Opportunities for        When grantees enter incorrect data, IDIS does not easily allow them to
Significant Data Entry   rectify the errors. Five of the 11 grantees we visited reported having
Errors Exist, and        multiple, significant errors in IDIS data entries that they could not readily
                         correct. To address these problems, the IDIS technical assistance staff
Corrections Are Not      instructed grantees to open accounts for nonexistent activities (“dummy
Always Possible          accounts”) in some instances, which in effect reverse the incorrect data. In
                         one case, a grantee had incorrectly entered program income funds and had
                         to open multiple dummy activity accounts and charge false amounts
                         against them to rectify its error. Some grantees we spoke to were reluctant
                         to create dummy accounts because these accounts would appear
                         inaccurate or fraudulent to outside observers.

                         Some of these problems were so severe that they made CPD’s monitoring
                         activities through IDIS impossible. For example, one grantee had
                         incorrectly entered all of its 1997 program year activities as occurring in
                         the 1996 program year, thereby mixing activities for both years. To further
                         complicate matters, this grantee had not expended all grant funds for 1996.
                         As a result, CPD field and headquarters officials could not determine the
                         amount of funds drawn down or the performance of program activities for



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                           either year without actually auditing the grantee’s documents. We brought
                           this matter to CPD’s and the grantee’s attention in October 1998, and as of
                           January 1999, it had still not been resolved.

                           At 8 of the 11 grantees we visited, we compared data shown in IDIS with
                           the information in the grantee’s files on the same activities. Although we
                           only looked at a small number of randomly selected activities, we found a
                           wide variety of significant data problems, ranging from a complete lack of
                           performance data at one grantee to double-counting of accomplishments
                           at another. For example, one grantee set up an activity to cover five types
                           of services for senior citizens, ranging from home maintenance to
                           transportation to a recreational center. The grantee then lumped all
                           accomplishment data for these widely varying services together as one
                           total number of elderly people served, even though individuals might
                           participate in more than one of the services or be multiple users of the
                           same service. These types of problems would not only make reports on
                           individual grantees inaccurate but also make reports that combined data
                           at a regional or national level meaningless or misleading.


IDIS’ Flaws Preclude the   In addition to its overall design problems, IDIS also does not enable
Tracking of Program        grantees to link program income—income produced by projects they have
Income From Revolving      funded or repayments into revolving loan accounts—to the activity that
                           generated it, such as economic development loans.
Funds
                           HUD  has instructed formula grantees not to enter program income from
                           revolving fund programs into IDIS when they are received, as is done with
                           other types of program income. This is because the design of IDIS does not
                           allow grantees to segregate revolving fund income from other types of
                           program income. IDIS operates on the assumption that all program income
                           is depleted before grant funds are used, regardless of the type of grant
                           activity being funded. Handling program revenues in this manner does not
                           create a problem unless the income is associated with a revolving fund.
                           However, CPD regulations provide grantees with specific permission to
                           reserve program income from revolving fund programs for re-use
                           exclusively in the revolving fund. According to a HUD official, 3,230
                           revolving funds were created in the Community Development Block Grant
                           Program in 1994.12


                           12
                             The last year for which HUD could provide a complete number of revolving funds for the Community
                           Development Block Grant Program was 1994. Twenty-one percent of the data for 1995 was missing.
                           Subsequent years’ data are stored in IDIS, and HUD officials have not yet determined how to aggregate
                           the data on revolving funds.



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                           To ensure that the program income from revolving funds is recycled into
                           the revolving fund, HUD instructs grantees to only enter the income in IDIS
                           at the moment they redistribute the money. However, HUD’s recommended
                           remedy is flawed. It requires grantees to keep two sets of books: the actual
                           amount of the revolving fund and the amount entered into IDIS. Entering
                           program income only when it is needed for another loan shields the true
                           amount from CPD representatives that monitor the project remotely
                           through IDIS. It also makes it very difficult to ensure that the grantee is
                           meeting its regulatory requirements. For example, because CPD cannot use
                           IDIS to determine how much program income is being generated from
                           revolving funds and therefore what a grantee’s total program income is,
                           CPD cannot use IDIS to determine if a grantee is meeting a requirement to
                           spend grant money in a timely manner. In addition, interest produced by
                           revolving funds should not be recycled into the revolving fund for future
                           use but should instead be returned to CPD, which is responsible for
                           overseeing interest repayments—and forwarding the interest to the U.S.
                           Treasury. Given the lack of information about revolving fund balances in
                           IDIS, CPD will have trouble determining if a grantee is repaying interest as
                           required. One regional CPD office, for example, received large interest
                           repayment checks that resulted from revolving fund balances, but the
                           office had not expected these repayments because it had been unaware of
                           the balances. One grantee sent a check for $10,728.03 for interest earned
                           by a revolving fund balance during a 13-month period.


IDIS Does Not Provide      While IDIS was intended to allow CPD to track grantees’ performance on a
Timely and Accurate        real-time basis, it does not do so for several reasons. First, a grantee can
Information and Makes It   withdraw all funds for an activity without entering any performance
                           information for that activity, as was often the case with the grantees we
Difficult to Produce       visited. Most did not enter any performance data until the end of the
Reports on Grantees’ Use   program year, when such data were required to complete annual reports.
of Funds and Performance   Second, three grantees that did try to enter performance data were
                           hindered from doing so because IDIS requires grantees to enter financial
                           and performance data separately. Third, even when grantees enter
                           information more frequently, the information may not be useful for
                           tracking performance because IDIS does not identify when the performance
                           data were entered. IDIS has only one entry field for entering performance
                           data for the year, so that additional data entries erase previous entries.

                           In addition to these overall problems, IDIS does not enable grantees to
                           always record exact information on the outcomes of activities.
                           Specifically, IDIS provides 12 choices for describing benefits, such as the



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                       number of youth, households, or businesses benefiting from projects.
                       However, this list is not comprehensive enough to cover the wide range of
                       benefits that occur in program activities. For example, one grantee had
                       demolished four blighted buildings and to record this information in IDIS
                       had to describe the work as four “public facilities” because there was no
                       better option. At the field office level, then, real-time inquiries to IDIS for
                       information on grantees’ performance are unreliable.

                       Equally important, creating reports at the end of the program year or at
                       any time is difficult. To create and print a report, the user—either the
                       grantee or field office staff—must work through a series of IDIS
                       screens—as many as 70 at one field office we visited—to begin to create a
                       report. Problems can occur during this process. For example, at one field
                       office, the staff could not produce any of the reports we had requested for
                       3 days because the IDIS software for producing reports was not
                       functioning. In another field office, the staff could create reports for only
                       one grantee—the first on the list of choices—and it took 24 hours to
                       correct the problem. Furthermore, IDIS’ error messages can be difficult to
                       decipher, making the task of fixing the problem even more
                       time-consuming. Once the report is produced in IDIS’ mainframe computer,
                       the user still has to transfer it to a desktop computer and edit it before it
                       can be printed. Because of these difficulties, many of the grantees we
                       visited did not produce any more reports from IDIS than were necessary for
                       the end of program year reporting to HUD. In addition, at the time of our
                       review, CPD had removed the function for the consolidated annual
                       performance and evaluation report—a report all grantees must submit to
                       HUD at the end of the program year—because IDIS was generating reports
                       with errors. For example, we found that one grantee had entered correct
                       information into IDIS, but the system produced a report with incorrect
                       information. Besides reporting to HUD, grantees use the end of the year
                       report to communicate information about the use of block grant funds to
                       their citizens. This problem also frustrated the ability of CPD field office
                       staff to provide headquarters with some progress reports. In January 1999,
                       HUD was still attempting to correct the reporting capability within IDIS.



                       Although grantees use IDIS to initiate the transfer of approximately
Security Controls Do   $6 billion a year in grant funds, CPD has not established a secure method
Not Provide            for setting up and maintaining access rights for using IDIS. While HUD
Assurance That IDIS    cannot select which grantee staff should have access rights—that is the
                       grantee’s responsibility—it can take actions to ensure that designated
Is Safe From Fraud     grantee staff have appropriate levels of access and that staff who leave the
and Abuse              grantee’s employment do not retain access. To provide security against the


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    inappropriate use of funds, for example, grantee staff should have limited,
    or segregated, access to the computer system.13 In such a case, the
    individual who could establish activity accounts would not also be able to
    approve the withdrawal of funds for those activities. However, HUD has not
    taken these actions to safeguard federal grants, either at headquarters or
    in the field offices.

    Furthermore, according to the HUD official responsible for IDIS security, at
    a basic level the staff resources devoted to this task are strained. He
    explained that the thousands of requests for new user accounts,
    reinstatement of expired user accounts, and revocation of accounts are
    handled only by himself, an assistant, and one contract employee. As a
    result, assigning access rights to a new user takes a month or more and
    there are no staff to catalogue the forms requesting access, making it
    difficult to review original access rights or retrieve forms when necessary.

    Additionally, neither the security official nor his staff review these
    requests for appropriateness, to determine whether the requested access
    rights are necessary to perform the duties assigned to the user or whether
    access rights ensure segregation of tasks such as setting up activities and
    approval of drawdowns. Instead, their main function has been to assign
    access rights to IDIS or to reinstate rights when passwords have expired.
    Even when notified by grantees that IDIS access rights should be revoked
    because the person with those rights is no longer employed by the grantee,
    the security official told us that removing the person’s rights is not a high
    priority. Once IDIS accounts have been established, grantees have the
    authority to change access levels for their staff without any level of
    oversight by CPD. At the time of our review, CPD did not periodically
    produce any reports for the grantees’ IDIS focal points or field office staff
    that showed the current access rights of the grantees’ staff.

    Not surprisingly, given this absence of oversight, we found multiple
    problems with access rights at five of the eight grantees with whom we
    discussed access rights. Specifically:

•   Duties among authorized users were not adequately segregated at three of
    the grantees, so these users could both set up activity accounts and draw

    13
      According to GAO Internal Control: Standards for Internal Control in the Federal Government
    Exposure Draft (GAO/AIMD-98-21.3.1), page 21, “Key duties and responsibilities should be divided or
    segregated among different people to reduce the risk of error or fraud. This should include separating
    the responsibilities for authorizing transactions, processing and recording them, reviewing the
    transactions, and handling the related assets. To reduce the risk of error, waste, or fraud or to reduce
    the risk of their going undetected, no one individual should control all key aspects of a transaction or
    event.”



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    down funds for those activities. Consequently, one individual could
    control key aspects of grant funding, increasing the opportunities for
    undetected error or fraud.
•   IDIS user accounts for terminated employees or those on extended leave
    had not been revoked at two grantees. Furthermore, at one grantee, the
    terminated former IDIS system administrator continued to have all rights to
    the system, including the right to change access rights for other users.
•   HUD had erroneously assigned three individuals who had never been
    employees of one grantee a variety of access rights to the grantee’s data. In
    combination, the access rights for these individuals would have allowed
    them to set up activities as well as approve and draw funds.
•   Accounts were shared or used by individuals other than the authorized
    individual at two grantees.

    We also found a key control—passwords that cannot be easily
    replicated—was not in place to ensure that access to grantees’ IDIS
    resources is restricted to authorized users. Authorized access rights are
    circumvented when an authorized user’s account is used by another
    individual. We found that the combination of user account identifications
    and passwords to gain access to IDIS could be easily duplicated by
    knowledgeable users, making it hard to detect error, fraud, and
    abuse—including malicious tampering.

    The security official’s lack of basic knowledge about computer security
    generally, and security for IDIS in particular, presents another problem. The
    security officer told us that, although he is familiar with networks and
    desktop computers, his background does not include any security work,
    and he has not had any training in security methods for information
    systems since becoming a security officer for IDIS. He also does not have a
    working knowledge of the security software that contractors use to grant
    access and therefore cannot properly oversee them. Moreover, it is unclear
    whether CPD expects this official to oversee the contractor staff and what
    the scope of his duties should be in general. The officer could not provide
    us with a clearly defined position description that included his specific IDIS
    duties. Finally, he explained he views himself more as an “access
    facilitator” than a security person.

    HUD’s Inspector General’s report on HUD’s fiscal year 1998 consolidated
    financial statements also noted the need to improve IDIS’ security. The HUD
    Inspector General expressed concern that until the software for access
    controls is fully implemented, the mainframe system on which IDIS resides
    will not be protected against accidental or intentional damage. The



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                  Inspector General also reported that there is no consistent method of
                  controlling changes in HUD’s applications system software, of which IDIS is
                  a part. This creates an unnecessary risk to the software integrity of HUD’s
                  mainframe application systems, according to HUD’s Inspector General.


                  HUD  officials told us they are in the process of developing a new
HUD Plans Major   Department-wide information system that manages all of its 51 grant
Changes           programs. In September 1998, HUD completed a feasibility study on using
                  existing information systems, such as IDIS, as the basis for that system. The
                  study, performed by two HUD officials and a group of contractors, included
                  interviews with a variety of HUD officials and other federal government
                  officials, but none with users of IDIS. The study recommended that HUD
                  develop a new system, called the Departmental Grants Management
                  System, modeled on IDIS and the Grants Administration Tracking and
                  Evaluation System, a grants management system being developed by the
                  Department of Health and Human Services. The Grants Administration
                  Tracking and Evaluation System, which uses a Windows environment,
                  would provide the user interface for the Departmental Grants Management
                  System.14 IDIS, converted for use in the new environment, would be used as
                  the basis for withdrawing grant funds and reporting performance.

                  On the basis of this recommendation, HUD is proceeding with development
                  of the Departmental Grants Management System, which will rely on
                  Windows and therefore be more user-friendly than the system we
                  reviewed. In November 1998, HUD informed us that it is moving forward
                  with the project, and HUD plans to have a pilot test of the converted IDIS in
                  September 1999.


                  With billions of dollars and the needs of millions of people at stake in the
Conclusions       formula grant programs, HUD has recognized that it needs effective systems
                  for overseeing the handling of program funds and the achievement of
                  program objectives. While we agree that a tool providing timely and
                  accurate data about grantees’ financial activities and performance would
                  be greatly beneficial in overseeing the grant programs, the current system,
                  IDIS, is not capable of serving as such a tool. IDIS has not provided the
                  complete, accurate, and timely information field offices need for such
                  monitoring. IDIS’ design makes grantees’ efforts unnecessarily difficult;
                  affords multiple opportunities for incorrect data entry that grantees
                  cannot then readily rectify; does not provide grantees with a

                  14
                    The current version of IDIS does not use Windows.



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                     straightforward method for managing program income from revolving
                     funds, which results in an inaccurate portrayal of grantees’ financial
                     activities; and does not require grantees to provide performance
                     information when they draw down funds. In addition, without adequate
                     security controls to prevent unauthorized access to the system, CPD cannot
                     ensure that information in the system is reliable and that funds are
                     safeguarded.

                     Although HUD is in the process of developing the Departmental Grants
                     Management System, it plans to convert IDIS and use it as a basis for the
                     new system, which is to be used by all 51 of HUD’s grant programs. We
                     agree that a more user-friendly system would be an improvement; but
                     given the extent and nature of problems with IDIS, we question the use of
                     IDIS as a model for the Department-wide system. To address the problems
                     we identified, IDIS will need to be modified extensively or replaced,
                     whichever is more cost effective. Of immediate concern, IDIS is not secure,
                     and while it continues to be insecure, federal funds will not be protected
                     appropriately.


                     Because IDIS has not proven to be a useful tool in managing grantees, we
Recommendations to   recommend that the Secretary of Housing and Urban Development direct
the Secretary of     the Assistant Secretary for Community Planning and Development to
Housing and Urban    consider whether it is more cost-effective to modify IDIS or replace it. After
                     this determination is made and before IDIS is used as the base for
Development          developing the new grants management information system for all of HUD’s
                     51 grant programs, the problems we identified with IDIS should be
                     corrected. HUD should ensure that the new system does not require
                     redundant data entry, reduces the time needed to enter information,
                     readily allows timely corrections of data, provides a straightforward
                     method of accounting for program income from revolving funds, provides
                     timely and accurate information on grantees’ performance, and readily
                     produces reports.

                     We also recommend that the Secretary—regardless of the decision on the
                     future of IDIS—immediately take steps to ensure that access to IDIS is
                     limited to authorized users and that those users have access levels
                     appropriate to the duties they perform. Steps should also be taken to
                     ensure that the security officer for IDIS is fully aware of the responsibilities
                     that must be carried out and has the appropriate training and staff for
                     those responsibilities.




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                     While HUD did not comment on our recommendations, it commented that
Agency Comments      our assessment of IDIS fails to consider recent efforts to improve IDIS. HUD
and Our Evaluation   commented that several of the weaknesses we identified did not take into
                     account compensating factors. For instance, HUD commented that our
                     assessment of IDIS’ inability to accurately track program income from
                     revolving funds did not account for the quarterly Federal Cash Transaction
                     Report (SF 272), which includes information on program income.
                     Similarly, HUD commented that limitations in IDIS security are less
                     important because accounts automatically expire after a period of nonuse.
                     For other weaknesses we identified, HUD pointed out recent or planned
                     changes to IDIS that it believed will correct the problems we identified.

                     We continue to believe that IDIS’ untimely, inaccurate, and incomplete data,
                     as well as its inability to track program income, hinder HUD’s ability to
                     remotely monitor its grantees. While the Federal Transaction Report
                     provides quarterly information on program income, as does IDIS, that
                     information can be used only to track program income from nonrevolving
                     funds. Furthermore, HUD is right that automatic account expirations
                     resulting from nonuse have a security benefit, but the system is still
                     vulnerable to unauthorized access until the account expires, and the
                     account will not expire if someone continues to access the system
                     inappropriately. We believe that HUD’s recent and planned changes could,
                     if properly implemented, improve the integrity of IDIS. Training the IDIS
                     security officer and providing periodic reports to field offices that show
                     the current access rights of the grantees’ staff will improve security.
                     Additionally, the data quality review effort could improve the quality of the
                     data currently in IDIS, but future data quality may be impaired by the
                     unresolved system design problems we noted. We also believe that the
                     numerous additional problems in usability, accuracy, and security detailed
                     in our report still compromise HUD’s ability to ensure the integrity of the
                     four formula block grant programs. Therefore, we did not make any
                     changes to the recommendations.




                     Page 49                                   GAO/RCED-99-98 Community Development
Appendix I

Comments From the Department of Housing
and Urban Development

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




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Page 51                                   GAO/RCED-99-98 Community Development
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Now on p. 23.




See comment 2.




See comment 3.




See comment 4.




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See comment 5.




Now on p. 24.




See comment 6.




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Now on p. 24.




See comment 7.




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Now on p. 27.




Now on p. 27.




See comment 8.




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Now on p. 28.




                Page 56                                   GAO/RCED-99-98 Community Development
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See comment 9.




See comment 10.




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See comment 11.




See comment 12.




Now on p. 30.




See comment 13.




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Now on p. 31.




See comment 14.




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Now on p. 32.




See comment 15.




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Now on p. 34.




See comment 16.




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Now on p. 39.




See comment 17.




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See comment 18.




Now on p. 40.



See comment 19.




Now on p. 40.




See comment 20.




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Now on p. 5.




See comment 21.




See comment 22.




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Now on p. 6.




See comment 23.




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Now on p. 6.


See comment 24.




p. 6.




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Now on p. 6.


See comment 25.




Now on p. 6.




Now on p. 39.




Now on p. 44.




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See comment 26.




Now on p. 45.




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See comment 27.




Now on p. 45.




Now on p. 45.




See comment 27.




Now on p. 46.




See comment 28.




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Now on p. 46.




Now on p. 46.




Now on p.46.




See comment 29.




Now on p. 46.




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See comment 30.




Now on p. 5.




                  Page 72                                   GAO/RCED-99-98 Community Development
                 Appendix I
                 Comments From the Department of Housing
                 and Urban Development




                 The following are GAO’s comments on the Department of Housing and
                 Urban Development’s letter dated March 26, 1999.


                 1. Our report recognizes that HUD has undertaken important changes to
GAO’s Comments   improve program management and accountability. It notes, among other
                 things, that HUD has revamped its approach to managing the four formula
                 block grant programs by requiring grantees to develop a consolidated plan
                 that lays out how they will use all four programs, changed its monitoring
                 of grantees to reflect a collaborative relationship, and developed the
                 Integrated Disbursement and Information System (IDIS) so that grantees
                 could, among other things, enter information describing their planning and
                 projects and draw federal funds. Our report also concludes that HUD’s
                 revamped system provides a logical, structured approach to managing the
                 formula grant programs and that HUD has recognized the need for effective
                 systems for overseeing the handling of program funds and the
                 achievement of program objectives. In addition, we added to our report a
                 description of management improvements made to the program. These
                 were reported to us by HUD after we had gathered information for this
                 report and after HUD had distributed additional instructions for
                 incorporating more traditional risk elements into the field offices’ annual
                 comparative review process. We agree that HUD has taken a more ongoing,
                 continuous approach to monitoring grantees. We also believe that this
                 approach can provide useful insights into the problems and achievements
                 of program grantees. However, we question whether approaches other
                 than significant levels of on-site monitoring of grantees can, at this time,
                 ensure that program objectives are being met and that funds are being
                 managed appropriately given the shortcomings of IDIS and other
                 monitoring tools such as consultations, technical assistance visits, and
                 audits performed by independent public accounting firms. Moreover,
                 several grantees we visited and officials of two associations that represent
                 grantees—the National Community Development Association and the
                 National Association for County Community and Economic
                 Development—supported more on-site monitoring because monitoring
                 ensures that they are generally on the right track in implementing the
                 program. This is not to say that on-site visits should be made to every
                 grantee each year; but rather, we believe periodic visits to grantees
                 needing improvements are essential.

                 2. We do not believe that the other steps in the Grants Management System
                 provide the same level of assurance as on-site monitoring that grantees are
                 managing their funds appropriately to achieve program objectives. While



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consultations provide a forum for discussing how well the grantee
performed during the preceding program year and areas for improvement
that should be factored into the next year’s operations, they are not
intended to be a substitute for on-site monitoring. This is because
consultations sometimes involve a discussion between HUD and senior
program and elected officials and sometimes are handled over the
telephone. They provide no assurance that a grantee is meeting program
requirements because HUD does not review the grantee’s files or visit
projects or subrecipients to determine compliance with program
requirements. In fact, the consultation is usually based on the results of
other monitoring efforts, such as on-site monitoring. During the
consolidated plan review and assessment, HUD primarily reviews the plan
for completeness, acceptability, and its usefulness as a future assessment
tool. HUD does not review the individual projects and activities to
determine whether they qualify for grant funding. In addition, our report
mentions that other monitoring tools—such as IDIS reports, technical
assistance visits, and audits by independent public accounting firms—do
not provide the same level of assurance of program compliance and the
proper use of federal funds as does on-site monitoring. Finally, the other
stages of the Grants Management System—such as the annual community
assessment, the annual comparative review, and best practices—are
generally done at the end of the year and depend on results of on-site as
well as other forms of monitoring.

3. The report does not state that the Grants Management System was
intended to obviate the need for on-site monitoring. It states that the
Grants Management System deemphasized compliance monitoring and
promoted a more collaborative approach to grants management.

4. While CPD estimates that in fiscal year 1997 approximately 160 intensive
on-site monitoring visits were made by the CPD field offices, our work
focused on the performance of five field offices in fiscal year
1998—accounting for approximately 20 percent of formula grant
funds—and did not reflect this level of on-site monitoring. In addition, it is
not clear what HUD means by intensive on-site monitoring, since the Grants
Management Policy Notebook does not specify the activities field offices
are to conduct during a monitoring visit.

5. We added information to the report stating that HUD has implemented a
process for tracking on-site monitoring activities, which include the
addition of Grants Management Process screens to allow field offices to
describe their on-site monitoring activities in terms of programs



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monitored, issues covered, days spent at the grantee, issues identified, and
sanctions imposed.

6. As we indicated in comment 2, we do not believe that the other steps in
the Grants Management System provide as much assurance as on-site
monitoring that grantees are managing their funds appropriately to
achieve program objectives. In addition, we disagree that most monitoring
can be done remotely at this time because of design flaws in IDIS and the
shortcomings of other monitoring tools. However, we mistakenly reported
that the Grants Management System does not ensure that monitoring
occurs; therefore we changed our report to reflect that the Grants
Management System does not ensure that on-site monitoring occurs.

7. Contrary to HUD’s comment, our report did not state that the HUD offices
did not conduct on-site visits to grantees in 1997. Rather, our review
focused on the most recent program year—1998. For 1998, we found that
the Boston Field Office conducted four monitoring visits and that six
planned visits were cancelled. In addition, during 1998, the Ft. Worth Field
Office conducted four monitoring visits and cancelled seven others. In
total, the five field offices we visited conducted 33 on-site monitoring
visits, or only 14 percent of their grantees in 1998. Moreover, our report
stated that monitoring was not always targeted to the poorest performing
grantees. Only 15 of the 38 poorest performing grantees were visited.

8. We agree that the reductions in on-site monitoring are based on
management decisions by the directors of the five field offices we visited,
but as our report indicates, these decisions were necessary because of
reductions in resources and increased workload. Furthermore, as
discussed in our report, the five field offices we visited cancelled 52
on-site monitoring visits in 1998 because of inadequate time, staff, and
budget resources, according to the directors of those offices.

9. HUD states that its field offices initiate comprehensive on-site monitoring
when conditions require, and in fiscal year 1998, these offices made 162
comprehensive on-site monitoring visits. We disagree that field offices
initiate comprehensive on-site monitoring when conditions require. As our
report stated, at the five field offices we visited, only 38 of the 85 grantees
that were scheduled for on-site monitoring visits were among the poorest
performers, and only 15 of these grantees were actually visited. It should
also be noted that the 162 on-site monitoring visits that HUD said were done
represent a small portion of the approximately 1,000 local and state
grantees. Furthermore, although the Grants Management Policy Notebook



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does not define what constitutes comprehensive on-site monitoring, our
review of the five field offices, representing 20 percent of all grant funds,
showed that of the 33 on-site visits made in 1998 only 1 was considered
comprehensive—as defined by the five field office directors.

10. The lack of specific monitoring guidance in the Grants Management
Policy Notebook allows for significant variation in the way HUD field
offices oversee almost $6 billion in formula grant funds. As our report
stated, prior to the Grants Management System, field offices were required
to follow the CPD Monitoring Handbook. This handbook specified the level
of monitoring warranted for high-risk grantees and the scope and intensity
of the on-site review.

11. HUD indicated that its field offices had conducted “Comprehensive
On-site Monitoring” at several grantees and the results of these visits were
shared with us. The results of the 33 on-site visits conducted by the five
HUD field offices we visited were the only on-site monitoring information
provided to us. We could not determine whether these were
comprehensive visits.

12. We changed our report to reflect that on September 29, 1998, HUD
promulgated risk analysis guidance that included traditional risk factors,
such as unresolved audit or monitoring findings, subrecipient activity, the
amount of program income received by the grantee, the size of the grant,
staff turnover, and the last date of monitoring.

13. Our report states that on-site monitoring is an essential tool to ensuring
that program objectives are being met and funds are being managed
appropriately because of the shortcomings of IDIS and other monitoring
tools, such as consultations, technical assistance visits, and audits by
independent public accounting firms. HUD’s program guidance also
indicates that on-site monitoring is a critical tool to determine whether
program requirements are being met. In addition, we did not state that
independent audits by public accounting firms do not provide benefits.
Our report states that HUD headquarters and field officials do not believe
that independent audits by public accounting firms produce enough
detailed program performance information. Our report also states that
these audits are not intended to provide detailed performance information
but are designed to advise federal and grantee officials and program
managers on whether an organization’s financial statements are fairly
presented and provide reasonable assurance that federal financial




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assistance programs are managed in accordance with applicable laws and
regulations.

14. We believe that standard criteria are necessary to ensure that the
riskiest grantees are identified for on-site monitoring, and once this
occurs, to establish and carry out a monitoring schedule in accordance
with the resources and workload available. The current criteria provide no
assurance that field offices will consistently emphasize factors that will
target grantees on the basis of compliance with internal controls designed
to protect against fraud and abuse.

15. HUD is right that visiting every grantee would be unrealistic. However,
our report does not state that every grantee should receive an on-site
monitoring visit. In fact, our recommendation asks HUD to emphasize the
importance of on-site monitoring by specifying the level of grantee
performance that requires on-site monitoring.

Furthermore, HUD pointed out that $26 million in Inspector General audit
findings represents only a fraction of the amount of grant funds that had
been made available between fiscal years 1996 and 1998. While this is true,
we were told by the Assistant Inspector General for Audits that the
Inspector General does not generally audit CPD programs because the
flexible nature of the block grant programs make almost any activity
eligible for program funding. Therefore, the Inspector General
concentrates its efforts on programs that produce a greater return from
the resources invested. In addition, while we agree that the amount that
will ultimately be disallowed may be less than what was questioned, it
does not negate the fact that the Inspector General found significant
problems to question $26 million in grant funding.

16. The Grants Management Process—the CPD headquarters desk officers’
primary monitoring tool—produces inconsistent and inaccurate data, as
outlined in our report. Therefore, periodic visits to field offices are
essential to ensuring that they are adequately accomplishing their annual
work plans. In addition, two field office directors told us that the level of
understanding by desk officers of field office operations is questionable.
One director said that he gets very little feedback from his desk officer.
Another said that headquarters has unrealistic expectations of the field
office because his desk officer does not understand his workload and how
time consuming it is. We received desk officer file documents as an exhibit
with HUD’s official comments on our report. After a review of these
documents, we continue to believe that CPD headquarters is not adequately



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monitoring field office operations. Specifically, the majority of the
documents provided by HUD did not concern the field offices we visited;
many of the documents were prepared after our work was completed and
we had discussed our findings with CPD headquarters; the documents
included many e-mail messages that did not appear to be related to
monitoring; the documents provided little support for field office
performance evaluations; and for all but one desk officer’s files, there was
little evidence of the use of the Grants Management Process information
system for field office remote monitoring. Additionally, in the one
complete file for a field office we visited, the desk officer concluded that
an end of the year assessment for that field office could not be done
efficiently without an on-site visit.

17. We agree that the grantees that use CPS/Community 2020 to create
their consolidated plans can send a disk to HUD for conversion into IDIS.
However, a field office IDIS focal point and several grantees told us that the
conversion process was disappointing because only four project fields are
converted. Therefore, the majority of the data have to be reentered
manually. Additionally, converting Community 2020 data to IDIS takes time,
and conversion errors occur. For these reasons, one HUD field office we
visited recommended that its grantees not send Community 2020 disks to
HUD for conversion into IDIS.


18. HUD indicates that grantees can download IDIS information into an
ASCII file (a text file with no formatting information) and write a program
to post the information to their systems. However, HUD provided no
evidence that grantees have the technical expertise to do this. In addition,
HUD indicates that grantees are recording only about 60 percent of the data
IDIS requires in their own computer systems. We believe that the burden on
the grantees is significant. For example, one grantee initially spent 8
weeks manually inputting its data into IDIS. Another grantee told us that
double entries between its local accounting system and IDIS are wasteful
and lead to mistakes.

19. HUD’s comment appears to state that CPD has a monthly report that
compares actual to planned project information. HUD did not provide this
report during our review, and we have not had a chance to evaluate it.
Nevertheless, our report stated that one grantee we visited numbered
projects differently between Community 2020 and IDIS; consequently it was
difficult to compare the grantee’s project plan with the actual use of grant
funds. We do not know whether CPD’s report addresses this problem.




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20. See comments 17 and 18.

21. We changed our report to clarify that HUD cannot use IDIS to determine
how much program income is being generated from revolving funds,
rather than stating that HUD has no way of knowing how much program
income is being generated from revolving funds. However, we disagree
that the “Federal Cash Transactions Report,” SF 272, can be used to track
program income from revolving funds. Like IDIS, it can only be used to
track program income from nonrevolving funds. In addition, on March 29,
1999, the HUD Inspector General reported on HUD’s fiscal year 1998
financial statements, stating that grantees were not submitting the
quarterly cash transaction report. This problem was accentuated by the
fact that, because of the way IDIS processes program income, some
grantees were not entering this information. As a result, CPD staff did not
know how much program income was being produced by grantees who
were not entering this information into IDIS and did not submit the report.

22. Our report does not indicate that IDIS was intended to replace grantees’
accounting systems.

23. While a positive step to improving the data already in IDIS, the data
quality review effort HUD describes will not alter grantees’ ability to draw
funds without entering performance data.

24. We disagree. We believe that the survey results support our finding that
it is difficult and cumbersome to use the IDIS reporting functions. For
example, the survey results show that the reports module is not
user-friendly. Specifically, the survey report states, “The process to
print/download reports is considered cumbersome, time-consuming and
not user-friendly.”

25. We agree that the grantee has the first level of responsibility for
notifying HUD to remove IDIS access rights for former grantee employees.
However, as our report indicates, HUD has not placed a high priority on
fulfilling grantees’ requests to remove IDIS access rights for former
employees. Also see comment 28.

26. While we agree that it is not practical to segregate responsibilities for a
small number of grantees, this does not justify HUD’s lack of action to
ensure that grantee staff members have limited or segregated access to
IDIS.




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27. Our report does not indicate that HUD should contact the local
authorizing official prior to assigning access rights. Our report states that
at the time of our review, HUD had not produced any periodic reports for
grantee and field office staff that showed the current access rights of
grantee staff.

28. While we agree that automatic suspensions are beneficial, the system is
still susceptible to unauthorized access until the automatic suspension
takes place. Additionally, access to the system will not automatically
expire if someone continues to use the account. According to the Federal
Information Processing Standards Publication Standards for Password
Usage (FIPS PUB 112), 3.3.4, “Passwords shall be deleted or replaced with
an invalid password as quickly as possible but at least within 3 working
days from the time that an owner is no longer an authorized ADP system
user or any one of a set of owners is no longer authorized access to the
data.”

29. We have agreed with HUD not to print this comment and not respond to
it because of concerns over IDIS security.

30. We believe that security requirements should be developed by staff
who have a basic knowledge of computer security issues. Guidance for
establishing appropriate security is given in the Federal Information
Processing Standards Publication Guidelines for Security of Computer
Applications (FIPS PUB 73).




Page 80                                   GAO/RCED-99-98 Community Development
Appendix II

Major Contributors to This Report


                        Keith Cunningham
Resources,              Barbara Johnson
Community and           Frank J. Minore
Economic                Robert Procaccini
                        Carol Herrnstadt Shulman
Development Division    John H. Skeen, III


                        Howard M. Williams Jr.
Office of Information
Management and
Communications




(385731)                Page 81                    GAO/RCED-99-98 Community Development
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